OBLICON NOTES FOR LECTURE:

TITLE 1 – OBLIGATIONS
CHAPTER 1
General Provisions
Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
OBLIGATIONS is a juridical relation whereby a creditor may demand from the debtor the
observance of a determinate conduct, and, in case of breach, may obtain satisfaction from the
assets of the debtor.
Essential requisites of an obligation –
a) An active subject, who has the power to demand the prestation, known as the creditor or
obligee;
b) A passive subject, who is bound to perform the prestation, known as debtor or obligor.
c) An object or the prestation which may consist in the act of giving, doing or not doing
something.
d) The vinculum juris or the juridical tie between the two subjects by reason of which the
debtor is bound in favor of the creditor to perform the prestation. It is the legal tie which
constitutes the source of obligation—the coercive force which makes the obligation
demandable. It is the legal tie which constitutes the devise of obligation… the coercive
force which makes the obligation demandable.
Example:
Thonyx enters into a contract of sale with Skaei who paid the purchase of a Yamaha Mio.
Thonyx did not deliver the Yamaha Mio. Thonyx is the passive subject or debtor and Skaei is the
active subject or creditor. The object or prestation is the Yamaha Mio and the obligation to
deliver is the legal tie or the vinculum juris which binds Thonyx and Skaei.

Art. 1157. Obligations arise from:

(1) Law;
Law: Example is the duty to pay taxes and to support one’s family. Refer to Art. 1158.

(2) Contracts;
Contracts: Example is the duty to pay a loan by virtue of an agreement. Refer to Art.
1159.

(3) Quasi-contracts;
Quasi-contracts: Example is the duty to refund an “over charge” of money because of
solutio indebiti or negtiorum gestio. Refer to Art. 1160.

(4) Acts or omissions punished by law;

Acts or omissions punished by law or Delict: Example is the duty to return a stolen
carabao. Refer to Art. 1161.

(5) Quasi-delicts
Quasi-delicts: Example is the duty to repair damages due to negligence. Refer to Art.
1162.
Art. 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be regulated by the
precepts of the law which establishes them; and as to what has not been foreseen, by the
provisions of this Book.
Example: It is the duty of the Spouses to support each other. (Art. 291, New Civil
Code)

And under the National Internal Revenue Code, it is the duty of every person having
an income to pay taxes.

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
Example:
Tonix borrowed from Sky P1,000,000 and agreed that in case of non-payment on the
date stipulated, Tonix’s house and lot would be sold to Sky for the amount of
P1,000,000. Is the stipulation valid? Yes. If Tonix does not pay, he should sell the
house and lot for P1,000,000 to Sky. The agreement is not contrary to law.

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book.
Quasi-contract is the juridical relation resulting from a lawful, voluntary and unilateral
act which has for its purpose the payment of indemnity to the end that no one shall
unjustly enrich or benefited at the expense of another. (Art. 2142, NCC)

Solutio Indebiti (Payment by mistake)

It is the juridical relation which arises when a person is obliged to return something
received by him through error or mistake.
 
Example-
Sky owed Tonix the sum of P1, 000.00. By mistake, Sky paid P2, 000.00. Tonix has the
obligation to return the P1, 000.00 excess because there was payment by mistake.

 Negotiorum gestio (management of another’s property)

It is the voluntary management or administration by a person of the abandoned business
or property of another without any authority or power from the latter. (Art. 2144, NCC)

  Example-
Clint, a wealthy landowner suddenly left for abroad leaving his livestock farm
unattended. John, a neighbor of Clint managed the farm thereby incurring expenses.
When Clint returns, he has the obligation to reimburse John for the expenses incurred by
him and to pay him for his services. It is bases on the principle that no one shall enrich
himself at the expense of another.

Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal
laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2,
Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating
damages.
While an act or omission is felonious because it is punished by law, the criminal act gives
rise to civil liability as it caused damage to another.

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 Civil liability arising from delicts:
 Restitution – which is the restoration of or returning the object of the crime to the injured
party.
 Reparation – which is the payment by the offender of the value of the object of the crime,
when such object cannot be returned to the injured party.
 Indemnification – the consequential damages which includes the payment of other
damages that may have been caused to the injures party.

Example: Bowser was convicted and sentenced to imprisonment by the Court for the crime
of theft, the gold necklace, of Luigi. In addition to whatever penalty that the Court may
impose, Bowser may also be ordered to return (restitution) the gold necklace to Luigi. If
restitution is no longer possible, for Bowser to pay the value (reparation) of the gold wrist
watch. In addition to either restitution or reparation, Bowser shall also pay for damages
(indemnification) suffered by Luigi.

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws.
Quasi-delict is one where whoever by act or omission causes damage to another, there
being fault of negligence, is obliged to pay for the damage done. Such fault of
negligence, if there is no pre-existing contractual relation between the parties. (Art. 2176)
Example:
If Andrew drives his car negligently and because of his negligence hits Soriano, who is
walking on the sidewalk of the street, inflicting upon him physical injuries. Then Andrew
becomes liable for damages based on quasi-delict.

CASES:
Article 1156: ASJ Corporation and Antonio San Juan vs Spouses Efren and Maura
Evangelista

G.R. No. 158086 Feb. 14, 2008

FACTS

This case is a petition for review on certiorari on the decision of the Court of Appeals affirming
the decision of the Regional Trial Court of Malolos, Bulacan Branch 9 in Civil Case No. 745-M-
93.

Respondents Efren and Maura Evangelista are owners of R.M. Sy Chicks, a business engaged in
selling chicks and egg by-products. For hatching and incubation of eggs, they availed the
services of ASJ Corp., owned by San Juan and his family.

After years of doing business with the ASJ Corp., the respondents delayed payments for the
services of ASJ Corp, prompting owner San Juan to refuse the release of the hatched egg. The
respondents tendered Php 15,000 to San Juan for partial payment which San Juan accepted but
he still insisted on the full settlement of respondents’ accounts before releasing the chicks and
by-products. He also threated the respondents that he would impound their vehicle and detain

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them at the hatchery compound if they should come back unprepared to fully settle their
accounts with him.

The parties tried to settle amicably before police authorities but failed. The respondents then
filed with the RTC an action for damages based on the retention of the chicks and by-products by
the petitioners.

The RTC held ASJ Corp. and San Juan solidarily liable for the actual and moral damages and
attorney’s fees. On appeal, the Court of Appeals affirmed the decision and added exemplary
damages. Hence, this petition.

ISSUE

Whether or not the petitioner’s retention of the chicks and by-products on account of
respondents’ failure to pay the corresponding fees justified.

HELD

Yes. The retention has legal basis, although the threats had none. Under Article 1248 of the Civil
Code, the creditor cannot be compelled to accept partial payments from the debtor, unless there
is an express stipulation to that effect. It was the respondents who violated the reciprocity in
contracts, hence, the petitioners have the right of retention. This case is a case on non-
performance of reciprocal obligation.

Reciprocal obligations are those which arise from the same cause, wherein each party is a debtor
and a creditor of the other such that the performance of one is conditioned upon the simultaneous
fulfillment of the other.

Since respondents are guilty of delay in the performance of their obligations, they are liable to
pay petitioners actual damages.

The petition was partly granted. The respondents were ordered to pay petitioners for actual
damages. The actual, exemplary and moral damages laid down by the Court of Appeals were
retained.

Article 1158: Jaravata vs. Sandiganbayan (127 SCRA 363)

G.R. No. 158086 Feb. 14, 2008

FACTS

This case is a petition for review on certiorari on the decision of the Court of Appeals affirming
the decision of the Regional Trial Court of Malolos, Bulacan Branch 9 in Civil Case No. 745-M-
93.

Respondents Efren and Maura Evangelista are owners of R.M. Sy Chicks, a business engaged in
selling chicks and egg by-products. For hatching and incubation of eggs, they availed the
services of ASJ Corp., owned by San Juan and his family.

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After years of doing business with the ASJ Corp., the respondents delayed payments for the
services of ASJ Corp, prompting owner San Juan to refuse the release of the hatched egg. The
respondents tendered Php 15,000 to San Juan for partial payment which San Juan accepted but
he still insisted on the full settlement of respondents’ accounts before releasing the chicks and
by-products. He also threated the respondents that he would impound their vehicle and detain
them at the hatchery compound if they should come back unprepared to fully settle their
accounts with him.

The parties tried to settle amicably before police authorities but failed. The respondents then
filed with the RTC an action for damages based on the retention of the chicks and by-products by
the petitioners.

The RTC held ASJ Corp. and San Juan solidarily liable for the actual and moral damages and
attorney’s fees. On appeal, the Court of Appeals affirmed the decision and added exemplary
damages. Hence, this petition.

ISSUE

Whether or not the petitioner’s retention of the chicks and by-products on account of
respondents’ failure to pay the corresponding fees justified.

HELD

Yes. The retention has legal basis, although the threats had none. Under Article 1248 of the Civil
Code, the creditor cannot be compelled to accept partial payments from the debtor, unless there
is an express stipulation to that effect. It was the respondents who violated the reciprocity in
contracts, hence, the petitioners have the right of retention. This case is a case on non-
performance of reciprocal obligation.

Reciprocal obligations are those which arise from the same cause, wherein each party is a debtor
and a creditor of the other such that the performance of one is conditioned upon the simultaneous
fulfillment of the other.

Since respondents are guilty of delay in the performance of their obligations, they are liable to
pay petitioners actual damages.

The petition was partly granted. The respondents were ordered to pay petitioners for actual
damages. The actual, exemplary and moral damages laid down by the Court of Appeals were
retained.

Article 1160: Perez vs Pomar 2 Phil. 682 (1903)

FACTS

Perez filed in the Court of First Instance of Laguna a complaint asking the Court to determine the
amount due him for services rendered as an interpreter for Pomar and for judgement to be
rendered in his favor.

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Pomar, on his part, denied having sought the services of Perez, contending that, Perez being his
friend, he only accepted the services for they were rendered in a spontaneous, voluntary and
officious manner.

ISSUE

Whether or not consent has been given by the other party.

HELD

Yes. It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was entered into,
but whether the plaintiff’s services were solicited or whether they were offered to the defendant
for his assistance, inasmuch as these services were accepted and made use of by the latter, there
was a tacit and mutual consent as to the rendition of services. This gives rise to the delegation
upon the person benefited by the services to make compensation thereof, since the bilateral
obligation to render services as interpreter, on the one hand, and on the other to pay for the
services rendered is thereby incurred.

As was held in the Supreme Court of Spain in its decision of February 12, 1889, it stated that
“not only is there an express and tacit consent which produces real contract but there is also a
presumptive consent which is the basis of quasi-contracts this giving rise to the multiple judicial
relations which result in obligations for the delivery of a thing or the rendition of a service.

Article 1162: Gutierrez vs Gutierrez

G.R. NO. 34840

FACTS

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on a bridge. The truck was driven by the chauffeur Abelardo
Velasco, and was owned by saturnine Cortez. The automobile was being operated by Bonifacio
Gutierrez, a lad 18 years of age, and was owned by Bonifacio’s father and mother, Mr. and Mrs.
Manuel Gutierrez. At the time of the collision, the father was not in the car, but the mother,
together with several other members of the Gutierrez family were accommodated therein.

The collision between the bus and the automobile resulted in Narciso Gutierrez suffering a
fractured right leg which required medical attendance for a considerable period of time.

ISSUE

Whether or not both the driver of the truck and automobile are liable for damages and
indemnification due to their negligence. What are the legal obligations of the defendants?

HELD

Bonifacio Gutierrez’s obligation arises from culpa aquiliana. On the other hand, Saturnino
Cortez’s and his chauffeur Abelardo Velasco’s obligation rise from culpa contractual.

The youth Bonifacio was na incompetent chauffeur, that he was driving at an excessive rate of
speed, and that, on approaching the bridge and the truck, he lost his head and so contributed by

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his negligence to the accident. The guaranty given by the father at the time the son was granted a
license to operate motor vehicles made the father responsible for the acts of his son. Based on
these facts, pursuant to the provisions of Art. 1903 of the Civil Code, the father alone and not the
minor or the mother would be liable for the damages caused by the minor. The liability of
Saturnino Cortez, the owner of the truck, and his chauffeur Abelardo Velasco rests on a different
basis, namely, that of contract.

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CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
Art. 1163. Every person obliged to give something is also obliged to take care of it with the
proper diligence of a good father of a family, unless the law or the stipulation of the parties
requires another standard of care. (1094a)
To preserve or take care of the thing, with proper diligence of a good father to a family. It
means the ordinary diligence that a prudent man would exercise in taking care of his own
property taking into consideration the nature of the obligation, of the time and of the place.
Example:
Richard obliged to give to Laila a wedding ring five days from now. When the promise was
due, Richard, for being too busy, lost the wedding ring he promised to Laila. Richard is liable
to Laila for being negligent in loosing the ring he promised. He should have properly taken
care of it with proper diligence of a good father of a family.

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to
deliver it arises. However, he shall acquire no real right over it until the same has been
delivered to him. (1095)
Kinds of Rights:
Personal right – is power demandable by one person of another.

Real right – is a power over a specific thing and is binding on the whole world only when
the thing is actually delivered to him.

Example:
Leo obliged to give to Escorido a certain parcel of land on December 25. Before
December 25, Escorido do not have the right to the fruits of the parcel of land Leo
promised. After December 25, Escorido poseses the right to the fruits from the parcel of
Land. Upon actual delivery of the property to Escorido, only then he becomes the owner
of said fruit and land on the day of delivery.

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Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to
the right granted him by Article 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at
the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons who
do not have the same interest, he shall be responsible for any fortuitous event until he has
effected the delivery. (1096)
Determinate thing – a thing is determinate when it is particularly designated or physically
segregated from all others from the same class. (Art. 1460, NCC)
Example:
Patrick promised to give to Ivy a Gucci Necklace Emperador model five days from now.
If after 6 days, Patrick has not yet delivered the said necklace because he was robbed
early in the morning on the 6th day, even after consistent demand of Ivy for the necklace
since the day before, Ivy can compel Patrick to deliver the item since the object was
determinate or specific.
Indeterminate or generic thing – A thing is generic when it refers to a class or thing or genus
and cannot be designated with particularity. (Art. 1460, NCC)
Example:
Amy promised to give to Andrew a gun, five days from now. If after five days, Amy has
not yet delivered the gun since she lost it on her way home, Andrew can ask Amy to
comply with her obligation at her own expense.
Fortuitous Events – those events which could not be foreseen or which though foreseen were
inevitable. (Art. 1174, NCC)

Art. 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned. (1097a)
Accessories – those joined to or included with the principal object for the latter’s better
use, perfection, or enjoyment. (like the keys to a house and the dishes in the restaurant)

Example:
Lleina promised to give Jack a particular pickup truck. Lleina should also deliver the
tools and the spare tire of the said pickup truck.
Accessions – additions to or improvements upon a thing.

Example:
Jack obliged to give Lleina a certain piece of land. Jack should also deliver including the
accessions in the said piece of land, like the building attached to it and all other
infrastructure constructed.

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at
his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone. (1098)
This provision mainly focuses on Positive Personal Obligation, or an obligation to do.
Remedies if the debtor fails to do

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 > To have the obligation performed at his expense and to demand damages.
If a thing may be ordered undone
> If poorly made and if requires a negative obligation (not to do) for the debtor.
Example:
Antonio promised to construct a two-storey house for Comique. Few hours after
constructing the house of Comique, the roofing system of the garage fell down. Comique
can demand Antonio to undo the defect and reconstruct the garage roof at his expense
since it was made poorly.
Art. 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense. (1099a)
This provision mainly focuses on Negative Personal Obligation or an obligation not to
do.
Remedies if the debtor fails to do
> Is the undoing of the prohibited thing plus damages.
Example:
Roniel promised to Inot not to use Inot’s money for gambling in Casinos but only for
schooling, if in case Roniel does what he promised not to do, he will be liable to return
the money he used in gambling in the Casino and to pay Inot the same amount as penalty.
If in case Roniel goes to the Casino and use Inot’s money in gambling, he will be liable
for the return of the money, the penalty and damages.

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was
a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. (1100a)
Mora means a legal delay or default and it consists of failure discharge a duty resulting to
one’s own disadvantaged.
The debtor incurred delay if:
 The debtor fails to perform his obligation when it falls due; and
 A demand has been made by the creditor judicially or extra judicially.
Example –
Ria obliged herself to deliver a Siberian Husky Puppy to Lleina on June 20, this year. Ria
failed to delivered on the agreed date, is Ria already on delay on June 20? Only when
Lleina makes a judicial or extra-judicial demand and from such date of demand when Ria
still fails to deliver the said puppy, she is on default or delay.
Exceptions for the requirement of demand

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 When the obligation expressly so provides – An agreement to the effect that fulfillment or
performance is not made when the obligation becomes due, default or delay by the debtor
will automatically arise.

When the law so provides – The express provision of law that a debtor is in default. For
instance, taxes must be paid on the date prescribed by law, and demand is not necessary in
order that the taxpayer is liable for penalties.

When time is of the essence – Because time is the essential factor in the fulfillment of the
obligation. Example, Vicky binds herself to sew the wedding gown of Laila to be used by the
latter on her wedding date. Vicky did not deliver the wedding gown on the date agreed upon.
Even without demand, Vicky will be in delay because time of the essence.

When demand would be useless – When the debtor cannot comply his obligation as when it
is beyond his power to perform. Like when the object of the obligation is lost or destroyed
through the fault of the debtor, demand is not necessary.

In a reciprocal obligation, from the moment one of the parties fulfills his obligation, delay to
the other begins – For instance, in a contract of sale between Jack and Jamero, if Jack, the
seller, delivers the object to Jamero, the buyer, and Jamero does not pay, then delay by
Jamero begins and vice versa, if Jamero pays and Jack did not deliver the object, then Jack is
on delay.

Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable
for damages. (1101)
Fraud (dolo) – is the intentional deception made by one person resulting in the injury of
another. The fraud referred to is incidental fraud, that is, fraud incident to the performance of
a pre-existing obligation. Refer to Article 1171.
Negligence (culpa) – consists in the omission by the obligor of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the
person, of the time and of the place. Refer to Article 1173.
Delay (Mora) – like when there has been judicial or extra-judicial demand and the debtor
does not comply his obligation, delay will occur. Also refer to Article 1169.
In contravention of the tenor of the obligation – refers to the violation of the terms and
conditions or defects in the performance of the obligation, like when a landlord fails to
maintain a legal and peaceful possession of a tenant being leased by the latter because the
landlord was not the owner and the real owner wants to occupy the land, there is
contravention of the tenor of the obligation.

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of
an action for future fraud is void. (1102a)
Fraud may be either past or future. Meaning of fraud may be classified as
a. Fraud in obtaining consent

Example:
Jack violently forced Jamero to sign a gratuitous contract in favor of Jack which he also
accepted. The means employed in order to obtain consent was vitiated, thus the contract
is considered void and inexistent.

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 b. Fraud in performing the contract.
 Dolo causante (causal fraud)
 Dolo incidental (incidental fraud)

Example:
Lleina and Canoy entered into a contract of sale wherein Lleina will buy a certain scooter
of Canoy and in turn deliver the scooter upon payment of Lleina which is five days after
the birth of the contract. It is also stipulated in their contract that if ever Canoy cannot
deliver for any reason, she will not be responsible for it. Canoy sold and delivered the
scooter to Jack, thus never delivered the scooter to Lleina. Canoy is still liable for
damages since the stipulation in the contract waiving any act of future fraud is deemed
void, so Lleina can still claim damages against Canoy.

Art. 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according
to the circumstances. (1103)
Kinds of Culpa classified as to source of obligations
 Culpa Contractual – that which results in a breach of a contract.

Example: Emi, proprietor of Emi Taxi Company, hired Parekoy as one of her driver
of her taxi units. Tonix was able to chance upon Emi’s taxi, Parekoy being the driver.
Parekoy drove negligently fast on a barangay road and accidentally hit a lamp post
while turning a curb. The accident resulted to some bruises on Tonix. However, Emi
is liable for the negligence acted by Parekoy, and is subject for damages for breach of
contract of carriage.

 Culpa Aquiliana – also referred to as civil negligence or tort or quasi-delict

Example: Referring to the same problem stated above. If Parekoy while driving Tonix
to his place, drove negligently fast and accidentally hit a lamp post while turning a
curb, and at the same time caused physical injuries to a Sky, a bystander in the curb.
Sky can file a case against Emi, the owner of Emi Taxi Company and her driver
parekoy.

 Culpa Criminal – also called as criminal negligence, or that which results in the
commission of a crime or a delict.

Example: Referring to the same problem stated above. Sky can also file an criminal
action against Parekoy for reckless imprudence resulting to physical injuries.

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances
of the persons, of the time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required. (1104a)
Degrees of Culpa
 Grave Negligence is required – slight negligence will make the debtor liable.

 Ordinary Negligence is required – ordinary negligence will make the debtor liable.

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  Slight Negligence is required – grave negligence will make the debtor liable

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared
by stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which, though
foreseen, were inevitable. (1105a)
Fortuitous even – is an event which cannot be foreseen which though foreseen is inevitable.
Fortuitous event proper are acts of God such as volcanic eruption, earthquake, lightning, etc.
is now similar with force majuere or acts of man such as conflagration, war, robbery, etc.
Requisite necessary to constitute fortuitous event
 The failure of the debtor to comply with the obligation must be independent from
the human will;
 The occurrence makes it impossible for the debtor to fulfill the obligation on a
normal manner, and the obligor did not take part as to aggravate the injury of the
creditor. (Vasquez v.C.A. G.R. 42926)
As a general rule, no person shall be held responsible for fortuitous events
Example – Lyka obliged herself to deliver a determinate car to Dockie on Dec. 30,
2012. Before the arrival of the period, the car was struck by lightning and was totally
destroyed. Lyka cannot be held responsible for the destruction of the car, hence her
obligation to deliver is extinguished.
Exceptions (when the person is responsible despite the fortuitous even).
a. When the law expressly so provides, such as:
 The debtor is guilty of fraud, negligence or in contravention of the tenor of the
obligation. Refer to Article 1170.
 The debtor has proved to deliver the same thing to two or more persons who do
not have the same interest. Refer to Article 1165.
 The thing to be delivered is generic.
 The debtor is guilty of default or delay. Refer to Article 1169.
 The debtor is guilty of concurrent negligence.

b. When declared by stipulation;

c. When the nature of obligation requires the assumption of risk. An example of this is a
contract of insurance.

Art. 1175. Usurious transactions shall be governed by special laws. (n)

Art. 1176. The receipt of the principal by the creditor without reservation with respect to
the interest, shall give rise to the presumption that said interest has been paid.
The receipt of a later installment of a debt without reservation as to prior installments,
shall likewise raise the presumption that such installments have been paid. (1110a)
Example: Dong Juan, creditor of P 1M, with 8% interest, received P1,000,000 in payment
of the principal. Interest was not referred to in the payment. It is presumed that the 8% interest

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had already been previously paid. This is because under Article 1253 of this code, payment of
the interest as a rule precedes payment of the principal.

Art. 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the acts
which the debtor may have done to defraud them. (1111)
Rights of Creditors – In order to satisfy their claims against the debtor, creditors have the
following successive rights:
1. to levy by attachment and execution upon all the property of the debtor, except such as
are exempt by law from execution;
2. to exercise all the rights and actions of the debtor, except, such as are inherently personal
to him; and
3. to ask for the rescission of the contracts made by the debtor in fraud of their rights.

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary. (1112)
As a rule, all rights acquired in virtue of an obligation are transmissible, except in the
following cases:
When the law so provides.
When the parties stipulate otherwise – by agreement of parties that the rights acquired by
them will not be transmitted to any other person.
When the obligation is purely personal in nature.

CASES:
Article 1163: The Roman Catholic Bishop of Jaro vs. Gregorio De La PeÑa

G.R. No. L-6913            November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEÑA, administrator of the estate of Father Agustin de la Peña, defendant-
appellant.

Lopez Vito, for appellant.

Arroyo and Horrilleno, for appellee.
MORELAND, J.:

FACTS: In 1898 Fr. De la Peña assigned as trustee of the sum of P6,641, collected by him for
the charitable purposes he deposited in his personal account P19,000 in the Hongkong and
Shanghai Bank at Iloilo. During the war of the revolution, Father De la Peña was arrested by the
military authorities as a political prisoner. The arrest of Father De la Peña and the confiscation of
the funds in the bank were the result of the claim of the military authorities that he was an
insurgent and that the funds deposited had been collected by him is for revolutionary purposes.

12
The money was taken from the bank by the military authorities by virtue of such order, was
confiscated and turned over to the Government.

ISSUES: Whether or not Father De la Peña is liable for the loss of the funds?

RULLING: No, he is not liable because there is no negligent act on the part of Fr. De la Peña. It
was so happened that during that time the money was taken from him by the U.S. military forces
which is unforeseen event. Although the Civil Code states that “a person obliged to give
something is also bound to preserve it with the diligence pertaining to a good father of a family”,
it also provides, following the principle of the Roman law that “no one shall be liable for events
which could not be foreseen, or which having been foreseen were inevitable, with the exception
of the cases expressly mentioned in the law or those in which the obligation so declares.”

Article 1164: Addison vs. Felix, 38 Phil 404 (August 3, 1918)

G.R. No. L-6913            November 21, 1913

FACTS 

Petitioner Addison sold four parcels of land to Defendant spouses Felix and Tioco located in
LucenaCity. Respondents paid P3,000.00 for the purchase price and promised to pay the
remaining by installment. The contract provides that the purchasers may rescind the contract
within one year after the issuance of title on their name.

The petitioner went to Lucena for the survey designaton and delivery of the land but only 2
parcels were designated and 2/3 of it was in possession of a Juan Villafuerte.

The other parcels were not surveyed and designated by Addison.

Addison demanded from petitioner the payment of the first installment but the latter contends
that there was no delivery and as such, they are entitled to get back the 3K purchase price they
gave upon the execution of the contract.

ISSUE

WON there was a valid delivery.

HELD

The record shows that the plaintiff did not deliver the thing sold. With respect to two of the
parcels of land, he was not even able to show them to the purchaser; and as regards the other
two, more than two-thirds of their area was in the hostile and adverse possession of a third
person.

It is true that the same article declares that the execution of a public instruments is equivalent to
the delivery of the thing which is the object of the contract, but, in order that this symbolic
delivery may produce the effect of tradition, it is necessary that the vendor shall have had such
control over the thing sold that, at the moment of the sale, its material delivery could have been
made. It is not enough to confer upon the purchaser the ownership and the right of possession.
The thing sold must be placed in his control. When there is no impediment whatever to prevent

13
the thing sold passing into the tenancy of the purchaser by the sole will of the vendor, symbolic
delivery through the execution of a public instrument is sufficient. But if there is an impediment,
delivery cannot be deemed effected.

Article 1170: International Corporate Bank vs. Sps. Gueco

G.R. No.141968

February 12, 2001

FACTS

Spouses Gueco obtained a loan from petitioner International Corporate Bank (now Union Bank
of Philippines) to purchase a car. Respondent spouses executed a promissory note in
consideration, which were payable in monthly installment and chattel mortgage over the car.

The spouses however, defaulted payment. The car was detained by the bank. When Dr. Gueco
delivered the manger’s check of P150,000, the car was not released because of his refusal to sign
the Joint Motion to Dismiss (JMD).

The bank insisted that the JMD is a standard operating procedure to effect a compromise and to
preclude future filing of claims or suits for damages. Gueco spouses filed an action against the
bank for fraud, failing to inform them regarding JMD during the meeting & for not releasing the
car if they do not sign the said motion.

ISSUE

Whether or not International Corporate Bank was guilty of fraud.

HELD

No. Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects
which naturally and necessarily arise from such act or omission. The fraud referred to in Article
1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of
obligation. The court fails to see how the act of the petitioner bank in requiring the respondent to
sign the joint motion to dismiss could constitute as fraud.

The joint motion to dismiss cannot in any way have prejudiced Dr. Gueco. The motion to dismiss
was in fact also for the benefit of Dr. Gueco, as the case filed by petitioner against it before the
lower court would be dismissed with prejudice.

The joint motion to dismiss was but a natural consequence of the compromise agreement and
simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case.
Petitioner’s act of requiring Dr. Gueco to sign the joint motion to dismiss cannot be said to be a
deliberate attempt on the part of petitioner to renege on the compromise agreement of the parties.

Article 1172: Cangco vs. Manila Road Company1181Parks vs Province of Tarlac

No. 12191, October 14, 1918

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FISHER, J.: (Negligence by employee attributable to employer even in contractual breach)

FACTS

Jose Cangco was an employee of Manila Railroad Company as clerk. He lived in San Mateo
which is located upon the line of the defendant railroad company. He used to travel by trade to
the office located in Manila for free. On January 21, 1915, on his way home by rail and when the
train drew up to the station in San Mateo, he rose from his seat, making his exit through the door.
When he stepped off from the train, one or both of his feet came in contact with a sack of
watermelons causing him to slip off from under him and he fell violently on the platform. He
rolled and was drawn under the moving car. He was badly crushed and lacerated. He was
hospitalized which resulted to amputation of his hand. He filed the civil suit for damages against
defendant in CFI of Manila founding his action upon the negligence of the employees of
defendant in placing the watermelons upon the platform and in leaving them so placed as to be a
menace to the security of passengers alighting from the train. The trial court after having found
negligence on the part of defendant, adjudged saying that plaintiff failed to use due caution in
alighting from the coach and was therefore precluded from recovering, hence this appeal.

ISSUE

Is the negligence of the employees attributable to their employer whether the negligence is based
on contractual obligation or on torts?

HELD

YES. It cannot be doubted that the employees of defendant were guilty of negligence in piling
these sacks on the platform in the manner stated. It necessarily follows that the defendant
company is liable for the damage thereby occasioned unless recovery is barred by the plaintiff’s
own contributory negligence. It is to note that the foundation of the legal liability is the contract
of carriage. However Art. 1903 relates only to culpa aquiliana and not to culpa contractual, as the
Court cleared on the case of Rakes v. Atlantic Gulf. It is not accurate to say that proof of
diligence and care in the selection and control of the servant relieves the master from liability fro
the latter’s act. The fundamental distinction between obligation of this character and those which
arise from contract, rest upon the fact that in cases of non-contractual obligations it is the
wrongful or negligent act or omission itself which creates the vinculum juris, whereas in
contractual relations the vinculum exists independently of the breach of the voluntary duty
assumed by the parties when entering into the contractual relation. When the source of obligation
upon which plaintiff’s cause of action depends is a negligent act or omission, the burden of proof
rest upon the plaintiff to prove negligence. On the other hand, in contractual undertaking, proof
of the contract and of its nonperformance is suffient prima facie to warrant recovery. The
negligence of employee cannot be invoked to relieve the employer from liability as it will make
juridical persons completely immune from damages arising from breach of their contracts.
Defendant was therefore liable for the injury suffered by plaintiff, whether the breach of the duty
were to be regarded as constituting culpa aquiliana or contractual. As Manresa discussed,
whether negligence occurs as an incident in the course of the performance of a contractual
undertaking or is itself the source of an extra-contractual obligation, its essential characteristics
are identical. There is always an act or omission productive of damage due to carelessness or
inattention on the part of the defendant. The contract of defendant to transport plaintiff carried
with it, by implication, the duty to carry him in safety and to provide safe means of entering and
leaving its trains. Contributory negligence on the part of petitioner as invoked by defendant is
untenable. In determining the question of contributory negligence in performing such act- that is
to say, whether the passenger acted prudently or recklessly- age, sex, and physical condition of
the passenger are circumstances necessarily affecting the safety of the passenger, and should be
considered. It is to be noted that the place was perfectly familiar to plaintiff as it was his daily

15
routine. Our conclusion is there is slightly underway characterized by imprudence and therefore
was not guilty of contributory negligence. The decision of the trial court is REVERSED.

Article 1175: Medel et. al. vs Court of Appeals 299 SCRA 481 (1998)

Petitioners: LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO

Respondents: COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO
G. GONZALES, JR., doing lending business under the trade name and style “GONZALES
CREDIT ENTERPRISES”

FACTS

Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and
executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and
retained P3, 000.00 as advance interest for 1 month at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2
months, at 6% interest per month. They executed a promissory note to evidence the loan and
received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00,
maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in
favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the
proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from
Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of
P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500,
000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional
amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the
Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including
interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly
proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on
the loans was unconscionable and “revolting to the conscience” and ordered the payment of the
amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law
has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and the borrower could agree on any interest that may be charged on the loan,
and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month
interest and 2& service charge per annum , and 1% per month as penalty charges.

16
Defendants filed the present case via petition for review on certiorari.

ISSUE

WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is
usurious.

HELD

No.

A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous,
unconscionable and exorbitant, but it cannot be considered “usurious” because Central Bank
Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and
that the Usury Law is now “legally inexistent.”

Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but
simply suspended the latter’s effectivity (Security Bank and Trust Co vs RTC).   Usury has been
legally non-existent in our country’s jurisdiction. Interest can now be charged as lender and
borrower may agree upon.

Hence, the decision of the Court of Appeals was reversed. The decision dated December 9, 1991,
of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-
90, was revived and affirmed.

Article 1178: Marcelino Galang, Guadalupe Galang vs. Court of Appeals, Ramon R.
Buenaventura, et.al.

G.R. No. 80645 August 3, 1993

FACTS

On July 16, 1976, Ramon Buenaventura on his own behalf and as attorney-in-fact of Angeles,
Corazon, Amparo, and Maria Luisa, all surnamed Buenaventura, sold to Guadalupe Galang and
Marcelino Galang two (2) parcels of land situated in Tagaytay City. The agreement was
embodied in a Deed of Sale which stated the following:

“I, RAMON R. BUENAVENTURA, Filipino, of legal age, married, and residing at 2111 M.
Adriatico, Malate, Manila, in his own behalf and as attorney in fact of Angeles, Corazon,
Amparo and Maria Luisa, all surnamed Buenaventura as per the special powers of attorney
already registered and annotated at the back of the certificate of title, for and in consideration of
the sum of One Hundred Ninety Two Thousand Seven Hundred Ninety Five (P192,795.00)
Pesos, Philippine Currency, hereby SELL, TRANSFER AND CONVEY UNTO MARCELINO
GALANG and GUADALUPE GALANG, Filipino, of legal age, spouses and residents of 72 4th
St., New Manila, Quezon City those parcels of land situated at Tagaytay City, inherited by us
from our parents and our exclusive paraphernal property, of which we are the absolute owners
xxx”

Under the following terms:

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(a) 25% of the purchase price upon signing of this instrument;(b) 25% within three months, or
upon removal of the “encargado” from the premises, with the delivery of the owner’s duplicate
certificate of title;(c) 50% balance within one (1) year from date hereof upon which the title will
be transferred to the buyers but 12% interest per annum will be charged after said one year in the
event full payment is not made. 

Petitioners (sps.) Marcelino and Guadalupe Galang, paid to the sellers the first 25% of the
purchase price as stated in the deed. Thereafter, they allegedly demanded from private
respondents failed to do so despite the willingness of petitioners to pay the second 25% of the
purchase price. Consequently, Marcelino and Guadalupe Galang filed on March 18, 1977 a
complaint for specific performance with damages.

They filed on July 21, 1978, a third-party complaint against the “encargado” for subrogation and
reimbursement in case of an adverse judgment against third-party plaintiff. Upon the
“encargado’s” motion, the complaint was dismissed on the ground that it did not state a cause of
action for the ejectment of the tenant — the “encargado.”

After trial, the lower court rendered a decision ordered the defendants to pay jointly and
severally, the plaintiffs P50,000.00 with interest at 12% per annum from July 16, 1976;
P5,000.00 by way of nominal damages; and P3,000.00 as attorney fees and the costs. 

In rendering the decision, the trial court reasoned that:

There is no question that, because the defendants had not complied with their obligation to
remove the “encargado,” the plaintiffs, as injured parties, may choose between the fulfillment of
the contract of sale and its rescission, in accordance and (sic) Article 1191 of the Civil Code.
They chose enforcement of the contract which, however is legally impossible. The lands sold to
the plaintiff are agricultural, planted to coffee, among other plants, not only by the “encargado”
but also by his deceased parents. The law prohibits, under pain of damages, fine and
imprisonment, and landlord from dispossessing his agricultural tenant without the court’s
approval and on grounds fixed by the law, not one of which is shown to exist in respect
defendants’ “encargado.” (Section 31 and 36, The Agricultural Land Reform Code, RA 3844 as
amended).

Impossible conditions, those contrary to good customs or public policy and those prohibited by
law shall annul the obligation which depends upon them. (Article 1183, Civil Code). Since the
consummation of the sale between the parties is dependent upon the ouster of an
agricultural lessee, which cannot be done because it is against good custom, public policy
and the law, the sale is a nullity. . . . 

Agreeing that the “encargado” was an agricultural tenant who could not be ejected without
cause, the Court of Appeals affirmed the decision.

In their petition, Marcelino and Guadalupe Galang argued that respondent Court erred in
ordering; the rescission instead of specific performance of the contract of sale on the ground that
the ejectment of the “encargado” -tenant was a legally impossible condition that prevented the
fulfillment of the contract. Contrary to the reason advanced by the Court of Appeals and the trial
court, petitioners averred that the removal of the “encargado” was not a condition precedent to
the fulfillment of the contract as paragraph two (2) thereof provides for an alternative period
within which petitioners would have to pay the second 25% of the purchase price and
concomitantly, private respondents would deliver the owner’s duplicate certificate of title. Thus,
whether or not the “encargado” was removed, the amount would still be due and private
respondents would still have to deliver the duplicate title.

18
ISSUE

Was the removal of the “encargado” a condition precedent to the fulfillment of the contract of
sale such that finding that it was a legally impossible condition would entitle the buyers to the
rescission of the contract?

The trial court and the Court of Appeals based their decision on Art. 1183 of the Civil Code
which provides “Impossible conditions, those contrary to good customs or public policy and
those prohibited by law shall annul the obligation which depends upon them. . . .”

Both courts declared the “encargado” a tenant. This being the case, it follows that he may not be
removed from the subject land without just cause, as provided by Presidential Decree No. 1038.
Since the Galangs, then plaintiffs demanded the removal of the “encargado” which, being legally
impossible, could not be met, the contract of sale was rescinded by the courts.

Reviewing the terms of the Deed of Sale , it is clear that the parties had reached the stage of
perfection of the contract of sale, there being already “a meeting of the minds upon the thing
which is the object of the contract and upon the price,”  and on the basis of which both parties
had the personal right to reciprocally demand from the other the fulfillment of their respective
obligations. But contracts of sale may either be absolute or conditional.  One form of conditional
sales, is what is now popularly termed as a “Contract to Sell,” where ownership or title is
retained until the fulfillment of a positive condition, normally the payment of the purchase
price in the manner agreed upon. The breach of that condition can prevent the obligation to
convey title from acquiring a binding force. Where the condition is imposed, instead, upon the
perfection of the contract, the failure of such condition would prevent such perfection. What we
have here is a contract to sell for it is the transfer of ownership, not the perfection of the contract
that was subjected to a condition. Ownership was not to vest in the buyers until full payment of
the purchase price and the transfer of the title to the buyers. Apart from full payment of the
purchase price, we find no other condition which would affect the obligations of the parties, i.e.,
to pay, on the part of the buyer and to convey ownership, on the part of the seller.

The alleged condition precedent, the removal of the “encargado,” was simply an alternative
period for payment of the second 25% of the purchase price given by the seller to the buyer.
Assuming that the removal of the “encargado” could not be brought about, the buyers, petitioners
herein, could have nonetheless demanded the delivery of the owner’s duplicate certificate of title
by paying the second 25% of the sale price within three months. In this case, the filing of the
complaint for specific performance of the seller’s obligation was the root of the errors
committed first, by the trial court and later, by the Court of Appeals. Both courts
overlooked the obvious fact that only the time for paying the second 25% of the purchase price
was qualified and that the entire paragraph reads: “25% within three months or upon removal
of the “encargado” from the premises . . .” and not simply 25% upon removal of the
“encargado.”

SC discern no reversible error in the finding and conclusion of the trial court that the unnamed
“encargado” on the lands in question is actually a tenant or agricultural lessee. The bases of this
ineluctable conclusion are not hard to see. As succinctly pointed out by the court a quo, the
“encargado” is staying in his own existing house thereon, and subject agricultural land is planted
to coffee and other plants not only by the “encargado” but also his deceased parents. Indeed, if
the “encargado’s” parents were not tenants or agricultural lessees, the present “encargado” could
not have continued occupying and working thereon, without facing ejectment proceedings;
considering that one of the landowners, defendants-appellees here, is a lawyer himself. In fact, as
can be gleaned from the decision under scrutiny, defendants-appellees filed a third-party
complaint against the “encargado” but they did not pursue such a course of action because they
did not have a clearance from the then Ministry, now the Department of Agrarian Reform, to
proceed against such “encargado.” Then, too, if the said “encargado” did not have the status of a

19
tenant or agricultural lessee entitled to protection under the agrarian reform laws, he would not
have been given the attention and importance as to be brought before the court a quo twice, just
for a possible amicable settlement, and he would not have had the firmness to reject an offer for
him to continue working half the area under controversy.

HELD

The petition is hereby GRANTED and the decision of the Court of Appeals is REVERSED and
SET ASIDE. Petitioners Marcelino and Guadalupe Galang are hereby ordered to pay the full
75% balance of the purchase price (P144,596.25) within thirty (30) days from notice, with
interest upon default. Private respondents Ramon Buenaventura, Corazon Buenaventura and
Maria Luisa Buenaventura are hereby ordered to transfer the title to petitioners upon full
payment of the purchase price.

There was no basis for rescinding the contract because the removal of the “encargado” was not a
condition precedent to the contract of sale. Rather, it was one of the alternative periods for the
payment of the second installment given by the seller himself to the buyers. Secondly, even
granting that it was indeed a condition precedent rendering necessary the determination of the
legal status of the “encargado,” the lower courts were rash in holding that the “encargado” was a
tenant of the land in question.

Specific performance by the parties of their respective obligations is proper. Accordingly,

petitioners Marcelino and Guadalupe Galang are ordered to pay private respondents the second
25% of the purchase price. Considering, however, the time that has lapsed since the parties
entered into the contract, payment of the full balance, that is, 75% of the purchase price,
P192,795.00 is in order. However, the 12% interest per annum that was stipulated in paragraph 3
of the contract of sale should not be assessed against petitioners. On the other hand, private
respondents Ramon Buenaventura, Angeles Buenaventura, Corazon Buenaventura, and Maria
Luisa Buenaventura are obliged to deliver the owner’s duplicate certificate of title and to transfer
the title to the land in question upon payment of the purchase price by petitioners.

xxxxx-------------------------------xxxxxx
xxxxx-------------------------------xxxxxx

CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
SECTION 1. - Pure and Conditional Obligations
Art. 1179. Every obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable, without
prejudice to the effects of the happening of the event. (1113)
Pure Obligation – when the obligation contains no term or condition whatever upon which
depends the fulfillment of the obligation contracted by the debtor. It is immediately
demandable and there is nothing to exempt the debtor from compliance therewith.
Example – Ivy obliged herself to pay her loan of P1,000 to Sky on demand.

20
Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of Article 1197.
(n)
Example: Tonix promised to pay Jack his P50,000.00 loan when his means permit. This
is an obligation with an indefinite period. Jack’s remedy to insure and schedule the
payment of Tonix is to go to let the court fix a period.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening of the event which
constitutes the condition. (1114)
Suspensive condition – the happening of the condition gives rise to an obligation.
Example: Lyka binds herself to deliver a determinate car to Tonix if he marries Guno. The
obligation is only demandable upon the happening of the condition that is, if Tito marries
Guno. The obligation is suspended and not yet demandable.
Resolutory condition – the happening of the condition extinguishes the obligation already
existing.
Example: Sky binds himself to lend his only car to Ivy until the latter passes the Bar Exam.
The obligation to lend is immediately demandable. Ivy’s right over the car is extinguished
upon his passing the Bar exam. Ivy is now obliged to return the car.

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor,
the conditional obligation shall be void. If it depends upon chance or upon the will of a
third person, the obligation shall take effect in conformity with the provisions of this Code.
(1115)
Potestative – is one the fulfillment of which depends upon the sole will of the debtor.
This kind of condition is void.
Example: Andrew Promised to give his only parcel of land to Amy if he decides
to leave for the United States.
 
Casual – is one the fulfillment of which depends upon chance.
Example: Marianne agrees to give Lila a determinate car if Marianne’s only
racing horse will win the sweepstake race.
Mixed – is one which depends partly upon the will of third person and partly upon
chance.
Example: Tonix promise to give Sky a new Toyota Car if Sky will be able to play
with and beat Dominic in a game of chess. This is mixed condition, that is
Dominic’s willingness to play chess with Sky and the latter’s winning over
Dominic.

Art. 1183. Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them. If the obligation is
divisible, that part thereof which is not affected by the impossible or unlawful condition
shall be valid.

21
The condition not to do an impossible thing shall be considered as not having been agreed
upon. (1116a)
Impossible condition is divided into 2:
a) Physical Impossibility – the condition imposed is not capable of being performed
physically.
Example: Lleina will give Jack an Ipad if he can bring a dead man alive.
b) Illegal Impossibility – when the condition imposed is contrary to law, good custom
or public policy.
Example:
1. Contrary to law – Pedro agrees to give Paulino P100,000 if
Paulino will kill Maria.
2. Contrary to good custom – Andrew binds himself to give Marianne
a gold bracelet if she will cohabit with Mr. Abing without benefit
of marriage.
3. Contrary to public policy – Marianne agrees to employ Guno in
her company if Guno will not join a labor union.
Effects of Impossible conditions:
If the condition is Positive and Impossible = the condition and obligation
is void
Example: Andrew obliged to pay Jack P1,000,000 if Jack kills Andrew’s
business competitor.
If the condition is Negative and Impossible = the condition is void but the
obligation remains.
Example: Lleina obliged to give Jack a condominium unit if he does not raise a
dead man alive. In this case the obligation still subsists.

Art. 1184. The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not
take place. (1117)
This article contemplates on a positive obligation, or an obligation to do. Example: I’ll
give you my land if you marry Amy this year. If before the end of the year Amy died, and
you have not yet married her, the obligation is extinguished.
Art. 1185. The condition that some event will not happen at a determinate time shall render
the obligation effective from the moment the time indicated has elapsed, or if it has become
evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have
probably been contemplated, bearing in mind the nature of the obligation. (1118)
This article contemplates on a negative obligation, or an obligation to not to do. Example:
I’ll give you my land if you will not marry Amy this year. If before the end of the year
Amy died, and you have not yet married her, the obligation is effective.

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (1119)

22
 Requisites:
Voluntary – intent to prevent the fulfillment of the condition must be present.
Actually Prevents – the intention has been fully acted

Example: Lleina promised Jack that she will give him an 8-string guitar if he passes the
bar exam. On the day of the bar exam, Lleina poisoned Jack. Jack missed some of the
exams as a result and flunked the bar exam. Lleina is still bound to give Jack an 8-string
guitar.

Art. 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when
the obligation imposes reciprocal prestations upon the parties, the fruits and interests
during the pendency of the condition shall be deemed to have been mutually compensated.
If the obligation is unilateral, the debtor shall appropriate the fruits and interests received,
unless from the nature and circumstances of the obligation it should be inferred that the
intention of the person constituting the same was different.
In obligations to do and not to do, the courts shall determine, in each case, the retroactive
effect of the condition that has been complied with. (1120)
Once the condition is fulfilled, the effects of the conditional obligations shall retroact to the
day of the constitution of the obligation and not on the date when the condition was fulfilled.
Example: On Jan. 1, 2015 Jack agreed to give Lleina a parcel of land if she passes the
May, 2015 bar exams. If Lleina passes the bar exams in May, 2015, she is entitled to the
land effective Jan. 1, 2015 because Lleina’s right over the land retroacts to the date when
the obligation was constituted.
As to the fruits and interest – The effect of conditional obligation to give, as a rule, do not
retroact to the date of the constitution of the obligation. The following rules shall govern:
In reciprocal obligation (like a contract of sale) – the fruits and interest during the
pendency of the condition shall be deemed to have been mutually compensated.
Example: Abing agrees to sell and Baring agrees to buy Abing’s parcel of land if
Baring passes the May, 2013 Bar exams. If Baring passes the May, 2013 bar, the
obligation becomes demandable. Baring is entitled to all the interests that his
money (with which to pay Abing) may earn while Abing is entitled to the fruits
which the parcel of land may have produced during the pendency of the condition.
In unilateral obligation – the debtor shall appropriate the fruits and interests received
during the pendency of the condition unless a contrary intention appears.
Example: Xam agreed to give Yuri a parcel of land if Yuri passes the CPA Board
in May, 2012 exams. Pending the happening of the condition, Xam is entitled to
the fruits which the land may produce, Xam will deliver only the parcel of land if
the condition is fulfilled, unless a contrary intention appears.
Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case of a
suspensive condition. (1121a)
Preservation of Creditor’s Right –
The action for the preservation of the creditor’s right may have for their objectives:
To prevent the loss or deterioration of the things which are the objects of the
obligation by enjoining or restraining acts of alienation or destruction by the debtor
himself or by third person;

23
 Paragraph I of the above article authorizes the creditor to take any appropriate actions for
the preservation of creditor’s right during the pendency of the condition:
Example: On Jan. 1, 2012, Paul obliged himself to sell a parcel of land to Densyo if
he passes the CE Board exams in December, 2012. From the time the obligation was
constituted and pending the happening of the condition (passing the CE Board
Exams) Densyo may cause the annotation of the condition in the certificate of title in
the Register of Deeds where the land is located, to preserve his right over the parcel
of land.
Paragraph II in order that debtor may recover what he has paid by mistake, during the
pendency of the condition, the following requisites may be present:
1. The debtor paid the creditor before the fulfillment of the condition;
2. Payment made by debtor was through mistake and error;
The action to recover what was paid by mistake should be made before the fulfillment of
the condition.
Example: Patrick obliged himself to pay Sky P20,000 if a PAL plane crashes at
Cebu before Dec. 30, 2012. After the obligation was constituted and before
December 30, 2012, a plane crushed in Cebu. Patrick honestly and believing that
the condition was fulfilled paid the P20,000 to Santos. It turned out however that
it was a Cebu airline that crushed. Thus, Pedro may recover the amount paid to
Santos by mistake for the reason that the condition has not yet been fulfilled.

Art. 1189. When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it
is understood that the thing is lost when it perishes, or goes out of commerce, or disappears
in such a way that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be
borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the
rescission of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the
benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that
granted to the usufructuary. (1122)
These rules apply only to obligation to give a determinate or specific thing subject to a
suspensive condition in case of loss, deterioration or improvement of the thing.
1. In case of loss of the thing without the fault of the debtor, the obligation shall be
extinguished. If the thing is lost through the fault of the debtor, he shall be obliged
to pay damages. If in the example above, the specific car was lost through the
fault of Reyes, he shall be liable for damages upon the fulfillment of the
condition.
Example: Jack obliged himself to give Lleina a determinate car if he passes the
CE Board Exams in Oct. the current year. If during the pendency of the condition
the car was lost through fortuitous event without the fault of Jack, the obligation
to deliver the car is extinguished even if the condition is fulfilled later.

24
 It is understood that the thing is lost:
When it perishes (as when a house is burnt to ashes)
When it goes out of commerce (as when the object before is unprohibited becomes
prohibited)
When disappears in such a way that its existence is unknown (as when a particular car
has been missing for some time)
When it disappears in such a way that it cannot be recovered (as when a particular
diamond ring is dropped in the middle of the Atlantic Ocean).

2. When the thing deteriorates -

a) When the thing deteriorates during the pendency of the condition, without
the fault of the debtor, the impairment is to be borne by the creditor.
Example: Jack obliged himself to give Tonix a determinate Toyota car if
Tonix passes the October CPA Exams. During the pendency of the
condition, the car was partially damaged by flood, without the fault on the
part of Jack. If the condition is fulfilled, Ian will bear the impairment.
b) If the thing deteriorates, during the pendency of the condition, through the
fault of the debtor, the creditor may choose, after the fulfillment of the
condition, between the rescission of the obligation or its fulfillment, with
indemnity for damages in either case.

3. When the thing improved –

a) If the thing improved during the pendency of the condition, by its nature,
or by time, the improvement shall inure to the benefit of the creditor. The
reason for this is to compensate the creditor who would suffer in case,
instead of improvement, there would be deterioration without the fault of
the debtor.
b) If the thing is improved at the expense of the debtor, he have no other right
than that granted to the usufructuary. By us usufruct is meant the right to
enjoy the property of another which includes the right to enjoy and use the
fruits of the property.
In summary:
Creditor's Not thru
Debtor's Fault Nature
Rights Debtor's Fault
Lost Pay Damages Extinguished -
Recission or
Fulfillment, Impairment to
Deteriorate -
both with the Creditor
damages
Inure to the
Improve Usufructuary -
Creditor

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation
to give, the parties, upon the fulfillment of said conditions, shall return to each other what
they have received.
In case of the loss, deterioration or improvement of the thing, the provisions which, with
respect to the debtor, are laid down in the preceding article shall be applied to the party
who is bound to return.

25
As for the obligations to do and not to do, the provisions of the second paragraph of Article
1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123)
Effects when resolutory condition is fulfilled:
1. The obligation is extinguished. (Art. 1181, NCC)
2. Because the obligation is extinguished and considered to have had no effect, the parties
should restore to each other what they have received.
3. The fruits and interests thereon should also be returned after deducting of course the
expenses made for the production, gathering and preservation, if any.
4. The rules given in Art. 1189, N CC will apply to whoever has the duty to return in case
of loss, deterioration or improvement of the thing.
5. The courts are given power to determine the retroactivity of the fulfillment of a resolutory
conditions.
Example : Abing gave Ivy a parcel of land on condition that Ivy will pass the Bar Exams
on May, this year. Ivy did not pass the Bar Exams. The obligation is extinguished and
therefore, it is as if there was never an obligation at all. Ivy will therefore have to return
both the land and the fruits he had received there from the moment Abing has given him
the land.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)
The right to rescind means the right to cancel or to resolve in case of reciprocal obligation
in case of non-fulfillment on the part of one.
Example: In a contract of sale, the buyer can rescind if the seller does not deliver or
the seller can rescind if the buyer does not pay.
The power to rescind is given to the injured party and the injured party has the following
alternative remedies:
1. Demand fulfillment of the obligation plus damages; or
2. Demand rescission of the obligation plus damages.

Art. 1192. In case both parties have committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the courts. If it cannot be determined
which of the parties first violated the contract, the same shall be deemed extinguished, and
each shall bear his own damages. (n)

26
 Rules if Both Parties Have Committed a Breach: The above rules are deemed just. The
first one is fair to both parties because the second infract or, though they would derive
some advantage by his own act or neglect. The second rule is likewise just, because it is
presumed that both parties at about the same time tried to reap some benefits. (Report of
the Code Commission)
Example: Jack agreed with Richard that he will sell his brand new 8-string guitar to
Richard. Jack delivered to Richard the 8-string guitar, not mentioning to Richard that it is
defective. Richard also paid Jack with half of the amount with fake money. In this case,
the remedy is to let the courts temper each liability to the other.

SECTION 2. - Obligations with a Period

Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the
day certain.
A day certain is understood to be that which must necessarily come, although it may not be
known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional,
and it shall be regulated by the rules of the preceding Section. (1125a)
A period is a future and certain length of time which determines the effectivity or the
extinguishment of obligation. Obligation with a period is one whose consequences are
subject in one way or another to the expiration of said period or term. A day certain is
understood to be that which must necessarily come, although it may not be known when.
Period and Condition Distinguished:
As to fulfillment - A period is a certain event which must happen sooner or later while a
condition is an uncertain event.
As to time – a period refers only to the future while a condition may refer to a past unknown
event.
As to influence or effect on the obligation – the period fixes the time of the effectivity of the
obligation while a condition may cause the demandability of the obligation to arise or to
terminate.
Example: Lleina promised to Jack that she will buy and give him an Ibanez 8-string
guitar on June 1, 2012. When June 1, 2012 come, Lleina’s obligation to give will be
demandable.

Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of
the day certain, the rules in Article 1189 shall be observed. (n)
Effect of loss, deterioration, or improvement before the arrival of period.
Also refer to Article 1189, NCC.
Example: If Andrew was suppose to deliver to Brian a particular car on Dec. 19,
2011 but the car was destroyed by fortuitous event in July 1, 2011, the obligation is
extinguished.

27
Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being
unaware of the period or believing that the obligation has become due and demandable,
may be recovered, with the fruits and interests. (1126a)
Effect Of Payment Before Arrival of Period
This article which is similar to Article 1188, NCC, in an obligation to give, allows the
recovery of what has been paid by mistake before the fulfillment of a suspensive
condition.
Example: Erin owes Grant P20,000.00, which was supposed to be paid on December 25
this year. By mistake, Erin paid his obligation on December 25 last year. Assuming that
today is only June 30, Erin can recover the amount plus interest therein. But Erin cannot
recover, except the interest, if the debt had already matured or if Erin had knowledge of
the period.

Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been

established for the benefit of both the creditor and the debtor, unless from the tenor of the
same or other circumstances it should appear that the period has been established in favor
of one or of the other. (1127)
Presumption as to benefit of a Period: The general rule is that when a period is fixed by
the parties, the period is presumed to be for the benefit of both creditor and debtor. Which
means that before the expiration of the period, the debtor may not fulfill the obligation
and neither the creditor demands its fulfillment?
By way of exceptions, however, if the tenor of the obligation or other circumstances may
indicate that a period is have been established for the benefit of either the creditor or
debtor:
1. For the benefit of both creditor and debtor
Example: Jack obtained a loan of P10, 000 at 12% interest per annum from
Leo for one year. Jack has a period of one year within which to use the
money, while Leo will benefit from the interest which the money will earn.

2. For the benefit of the creditor

Example: Jack executes a promissory note in favor of Leo which reads: “I
promise to pay Leo for order the amount of P10,000 on demand. Thus, Leo
can demand payment from Jack anytime.
 
3. For the benefit of debtor
Example: Jack executes a promissory note which reads: “I promise to pay Leo
for order the amount of P 10,000 or before December 31, 2001. Jack can pay
her obligation on or before Dec. 31, 2001.

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them. (1128a)
Court Generally is Without Power to Fix a Period

28
 If an obligation does not state a judicial period and no period is intended, the court is not
authorized to fix a period. The courts have no right to make contracts for the parties.
Exceptions:
1. If the obligation does not fix a period but it can be inferred from its nature and
circumstances that a period is intended.
Example: Steff sold a parcel of land to Abing with a right of repurchase. No term is
specified in the contract for the exercise of the right. Then, the court is authorized to fix
the period to repurchase.
2. If the duration of the period depends upon the sole will of the debtor
Example: I will pay you as soon as possible. Here, the period is not fixed, so the court
may fix the same because if this is not so the obligation may never be complied with by
the debtor.

Art. 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;
(5) When the debtor attempts to abscond. (1129a)
The general rule is that the obligation is not demandable before the lapse of the period. The
exceptions are based on the fact that the debtor might not be able to comply with his
obligation:
  When debtor becomes insolvent:
The insolvency need not be judicially declared. It is sufficient that the debtor has less
assets than his liabilities or if debtor is unable to pay his debts as they mature. It is noted
that the insolvency of the debtor must occur after the obligation has been contracted.
When debtor does not furnish guaranties or securities promised:
Example: Green borrowed loan from Tonix which loan was secured by a chattel
mortgage of Green’s car as a guaranty. After obtaining the loan, Green fails or
does not execute a chattel mortgage, the loan becomes demandable or the debtor
loses her right to make use of the period.
  When by his own acts he has impaired said guaranties or securities:
Example: Green borrowed P50, 000 from Tito which loan was secured by a
chattel mortgage on Green‘s car. Later, Green’s fault, the car was damaged or she
causes the impairment of the car, Green loses her right to make use of the period,
unless she gives another one equally satisfactory.
When by fortuitous event, the guaranty or security was lost.

29
 Example: Green borrowed P50,000 from Tonix which loan was secured by a
chattel mortgage on Green’s car. After obtaining the loan, the car was lost by
fortuitous event. Green loss his right to make use of the period unless he gives
another guaranty or security equally satisfactory.
 
When debtor violates an undertaking –
Example: Arthur secured a loan from Arnel on condition that Art will paint the
house of Arnel. If after the proceeds of the loan were given to Arthur, he did not
pant the house of Arnel, Arthur loses his right to make use of the period.
When the debtor attempts to abscond.
Abscond means a depart or escape from creditor’s knowledge to avoid payment of his
debt. Mere attempt on the part of debtor will entitle the creditor to demand payment of
the obligation without waiting for the period to expire.

SECTION 3. - Alternative Obligations

Art. 1199. A person alternatively bound by different prestations shall completely perform
one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
(1131)
Meaning of Alternative Obligation: It means an obligation where two or more prestations are
due but the delivery of one is sufficient to extinguish the obligation.
Example: Lleina binds herself to give Jack either a determinate refrigerator or a TV set. If
Lleina chooses and delivers the TV set, the obligation is extinguished. Thus, Lleina
cannot compel Jack to accept part of one and the part of the other prestations.

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful
or which could not have been the object of the obligation. (1132)
Rule on who makes the choice:
As a general rule, the right of choice or to select the prestation belongs to the debtor,
unless the right to choose is expressly granted to the creditor. But the right of the debtor
is subject to the following:
The debtor cannot choose those prestations which are:
a) Impossible – Example: Lleina promised to deliver to Jack 100 sacks of rice or a
stone from Uranus. Lleina cannot chose to deliver the stone coming from Uranus
as it is physically impossible.
b) Unlawful – Example: Jack obliged herself to deliver to Lleina a kilo of shabu or a
parcel of land. Jack can choose only the delivery of parcel of land.
c) Could not have been the object of the obligation – Example: Lleina borrowed from
Jack P50,000. It was agreed that Lleina would give Jack her horse or her German
Piano. Now, Lleina has two horses, a race horse worth P50,000 and an ordinary

30
 horse which is worth for only P5,000. Gaya cannot choose the ordinary horse,
since it is not the horse which Lleina promised.
d) Only one prestation is practicable (Art. 1202) – Example: Lleina will deliver to
Jack her carabao, or her horse or her refrigerator. Through no fault of Lleina, the
horse and the carabao were lost by fortuitous event. Lleina can only delivery the
refrigerator which is the only one practicable.

Art. 1201. The choice shall produce no effect except from the time it has been
communicated. (1133)
Right of Choice Must be communicated –
Until the choice is made and communicated, the communicated, the obligation remains
alternative. Once the notice to the effect that a choice is made, the obligation ceases to be
alternative and becomes a simple obligation.
Where the choice has been expressly given to the creditor, such choice shall likewise
produce legal effects upon being communicated to the debtor. (Art. 1205, par. 1)
Example: Lleina promised to give to Jack her Netbook, or her Ipad or her mountain bike
5 days from now. She’s told some of Jack’s friend that she will give the netbook. When
the obligation was due, Lleina expressly communicated to Jack to give the mountain
bike. The choice of giving the mountain bike is binding to Lleina.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he
is alternatively bound, only one is practicable. (1134)
Example: Xander obliged to give Yuri either object A or object B or object C. If objects
A and B are lost by fortuitous event before choice can be made, Xander can deliver only
object C, because the obligation has become a simple one. If later, object C is also
destroyed by a fortuitous event, the obligation is extinguished, and Xander would not be
liable in any way.

Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages. (n)
When debtor may rescind contract: If through the creditor’s fault, the debtor cannot made
a choice according to the terms of the obligation the debtor is given the right to rescind
and recover damages.
Example: Guno borrowed from Tonix P5, 000.00. It was agreed that instead of P5, 000,
Guno could deliver a TV set or a refrigerator or a piano. If through the fault of Tonix, the
TV set was destroyed, Guno can rescind the contract if she wants. In case of rescission,
the amount of P 5, 000.00 must be returned by Guno with interest. Tonix, in turn, must
pay Guno the value of the TV set plus damages.

Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault
of the debtor, all the things which are alternatively the object of the obligation have been
lost, or the compliance of the obligation has become impossible.

31
The indemnity shall be fixed taking as a basis the value of the last thing which disappeared,
or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded. (1135a)
When right of choice is with debtor and all prestations were lost –
This article entitles the creditor to indemnity for damages when all the alternative objects
are lost through the fault of the debtor before he has made his choice. The indemnity for
which the creditor is entitled shall be based on the value of the last thing which
disappeared or lost or the compliance of the obligation has become impossible.
Example: Xander obliged to give Yuri either object A or object B or object C. If all
objects were lost through the acts of the debtor event before choice can be made, Xander
is liable to pay Yuri an amount equal to the last thing lost to be paid with damages.

Art. 1205. When the choice has been expressly given to the creditor, the obligation shall
cease to be alternative from the day when the selection has been communicated to the
debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by
delivering that which the creditor should choose from among the remainder, or that which
remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may
claim any of those subsisting, or the price of that which, through the fault of the former,
has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall
fall upon the price of any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case one, some or all of
the prestations should become impossible. (1136a)
When Right of Choice is With Creditor and All Prestations Were Lost
This article provides for the rules to be observed when the right of choice is expressly
granted to the creditor, the rules are as follows:
1. When a thing is lost through a fortuitous event
Example: Ivy obliged herself to deliver to Skai a TV set, or a refrigerator, or a
piano. If the TV set was lost through fortuitous event, Skai can choose from
among the remainder or that which remains if only one subsists.
2. When a thing is lost through debtor’s fault
Example: If the loss of the TV set occurs through the fault of Ivy, Skai may claim
the refrigerator or the piano with a right of damages or the price of the TV set
with a right of damages.
3. When all the things were lost through debtor’s fault
Example: If all the items are lost through the fault of Ivy, then Skai can demand
the payment of the price of any one of them with a right to indemnity for
damages.
4. When all the thing are lost through a fortuitous event

32
 Example: The obligation of Ivy shall be extinguished if all the items which are
alternatively the object of the obligation are lost through a fortuitous event (Art.
1174 will apply).

Art. 1206. When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the negligence of the
obligor, does not render him liable. But once the substitution has been made, the obligor is
liable for the loss of the substitute on account of his delay, negligence or fraud. (n)
Meaning of Facultative Obligation –
A facultative obligation is one where only one prestation has been agreed upon but
the obligor may render another in substitution.
Example: I will give you my piano but I may give my television set as a
substitute.
SECTION 4. - Joint and Solidary Obligations
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and
the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestation. There
is a solidary liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity. (1137a)
Art. 1208. If from the law, or the nature or the wording of the obligations to which the
preceding article refers the contrary does not appear, the credit or debt shall be presumed
to be divided into as many shares as there are creditors or debtors, the credits or debts
being considered distinct from one another, subject to the Rules of Court governing the
multiplicity of suits. (1138a)
Joint Obligation – It is an obligation where there is a concurrence of two or more debtors
or two or more creditors or of several debtors and creditors, by virtue of which each of
the debtors is liable for a proportionate part of the credit.
Example of different instances
1.) Patrick, Leo, and Roniel borrowed P9,000 for Lyka. The presumption is that
Patrick, Leo, and Roniel are jointly liable. Lyka demand only P3,000 from each or
a total of P9,000.
2.) Abing borrowed from Leo, Roniel and Lyka P9,000. There is one debtor and
three creditors. Each creditor can demand only P3,000 from A.
3.) Abing and Leo are liable to Roniel and Lyka for P9,000. There are two debtors
and two creditors. Each creditor can demand only P4,500 from each debtor.
There are solidary liability when:
1.) The obligation expressly so states, or
2.) The law requires solidarity or
3.) The nature of the obligation requires solidarity.
Kinds of Solidary Obligation
1. Passive – solidarity on the part of the debtors, where anyone of them can be made liable
for the fulfillment of the entire obligation.

33
 Example – Tonix and Skai are solidary debtors of Jack in the amount of P 10,000
2. Active – solidarity on the part of the creditors, where anyone of them can demand the
fulfillment of the entire obligation.
Example – Tonix is liable to Skai and Jack for the amount of P10,000. Skai and Jack
are solidary creditors.
3. Mixed Solidarity – solidarity on the part of the debtors and creditors where each one of
the debtors is liable to render and each one of the creditors has a right to demand, entire
compliance with the obligation.
Example – Tonix and Skai are solidarity debtors to Jack and Dann, solidary creditors
in the amount of P 10,000.
Solidarity not presumed – The presumption, where there are two or more persons in the same
obligation, is that it is joint. The reason is that solidary obligations are very burdensome for
they create unusual rights and liabilities. Solidarity between debtors increases their
responsibility while solidarity between creditors presuming that they are bound jointly and
not solidarily.

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by
their collective acts, and the debt can be enforced only by proceeding against all the
debtors. If one of the latter should be insolvent, the others shall not be liable for his share.
(1139)
Indivisible Joint Obligation – The object is indivisible and the T/E between the parties are
merely proportionately liable.
Example – Lleina and Ria are jointly liable to give Emi a particular car. The obligation is
joint but since the object is indivisible, the creditor must proceed against all the joint debtor.
If any of the joint debtors be insolvent, the others shall not be liable for others.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility. (n)
Indivisibility as Distinguished from Solidarity – Indivisibility refers to the subject matter
while solidarity refers to the Tie between the parties.
Examples:
Joint divisible obligation – Abing and Roniel are jointly liable to Canoy for P10, 000.
Joint indivisible obligation – Lleina and Ria are jointly liable to give Canoy their car.
Solidary divisible obligation – Emi and Lleina are solidarily liable to give Ria P10, 000.
Solidary indivisible obligation – Saj and Emi are solidarily liable to give Dean their car.

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in
the same manner and by the same periods and conditions. (1140)
The solidary character of the obligation is not destroyed even if the creditors and debtors
are bound by different terms and conditions. The solidarity is still preserved by
recognizing in the creditor the power of claiming from any or all debtors the payment of
the entire obligation.

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 Example: Jack and Lleina solidarily bound themselves to pay a total of P10,000 to
Ria, and Emi and Saj to the following conditions. Ria’s share will be due at the end of
the year; Emi will get her share only after she passes the CPA exams and Saj will get
his share only after he painted the house of Ria.

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others,
but not anything which may be prejudicial to the latter. (1141a)
Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)
Solidary Creditors May Do Useful Act; Not Prejudicial Acts – A solidary creditor may do
any act beneficial or useful to the others but he cannot act prejudicial to them.
Example of Beneficial Acts – To interrupt the running of prescription, the act of one
solidary creditor in making a judicial demand upon any of the solidary debtors is
sufficient. (Art. 1155, NCC)
Example of Prejudicial Acts – Should not be performed, otherwise, there will be
liability for damages. However, in the case of remission or condonation, the solidary
creditor is allowed to so remit, and the obligation is extinguished.

Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand,
judicial or extrajudicial, has been made by one of them, payment should be made to him.
(1142a)
Payment to Any of the Solidary Creditors: The rule is that the debtor may pay any one of
the creditors. But when a demand is made by any of the creditors, payment should be
made to him who made the demand, judicially or extra-judicially.
Example: A is liable to B and C P5, 000. A may pay either B or C But if B made a
demand then payment should only be made to him. If A paid C, B is still entitled
to his share from A in case C does not turn over to B his share.

Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation,
without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt,
shall be liable to the others for the share in the obligation corresponding to them. (1143)
Liability of Solidary Creditor in case of Novation, Compensation, Confusion or Remission –
When a creditor who executed any of these acts, it is logical that he is liable to the
other solidary creditors for their corresponding shares considering that such acts are
prejudicial to them. (Art. 1212, NCC)

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all
of them simultaneously. The demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not
been fully collected. (1144a)
Creditor May Proceed Against Any Solidary Debtor – In a solidary obligation, the creditor
may proceed against any, some or all of the solitary creditors simultaneously so long as it has
not been fully collected.

35
 Example: Apatrick, Batonix and Cajack solidarily owe Daleo the amount of P9,000.
Daleo can collect from Apatrick or Batonix or Cajack alone or from any two of them or
all of them simultaneously. If demand is made on Apatrick, the latter cannot require
Daleo to make a demand also on Batonix and Cajack or to include them as party
defendants as Daleo has the right to proceed against any one of them.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two
or more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to
the debtor paying the obligation, such share shall be borne by all his co-debtors, in
proportion to the debt of each. (1145a)
Effects of Payment by a Solidary Debtor – Payment is one of the ways by which an
obligation is extinguished and consist in the delivery of the thing or the rendition of the
service which is the object of the obligation.
Example – Alleina, Baria and Calila are solidarily liable to Dann and Etonix in the
amount of P9,000 due on Dec. 31. If both Alleina and Baria offer to pay Dann on
Dec. 31, the latter may choose which offer to accept. If Alleina pays the entire
amount of P9,000 on Dec. 31, the obligation is extinguished.
The payment of A gives him the right of reimbursement from B and C P3, 000 each with
interest from the date of payment. However, if C is insolvent, both A and B shall bear the
insolvency in proportion to their shares.

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or become illegal.
(n)
Effect of Payment After Obligation Has Prescribed or Become Illegal –
Prescription – is one where one acquires ownership and other rights through the lapse
of time in the manner and under the conditions laid down by law.
Example – Ajack and Batonix are solidarily indebted to Calliena in the amount of
P 10,000. The debt prescribed. If Ajack paid the debt, he cannot collect form
Batonix his share of the debt. Neither can Ajack can recover from Calleina.
Becomes Illegal – Ajack and Batonix are solidarily bound to deliver medical drugs to
Calliena. the transaction of such medical drugs were later prohibited by law.
Notwithstanding the prohibition, Batonix performed the obligation by delivering the
prohibited drugs. Batonix is not anymore entitled to reimbursement from Ajack.

Art. 1219. The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case
the debt had been totally paid by anyone of them before the remission was effected. (1146a)
Example: Jack and Lleina solidarily owe Ria P1,000,000. Jack paid Ria the whole
amount. Later Ria remitted Lleina’s share. Can Jack still recover reimbursement of
P500,000 from Lleina? Yes.

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Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors,
does not entitle him to reimbursement from his co-debtors. (n)
Remission by Creditor –
1.) If payment if made first, the remission is of no effect. There is no more to remit.
2.) If remission is made prior to the payment and payment is made, then there is payment
by mistake.
3.) If one of the solidary debtors obtained remission on the whole obligation, he is not
entitled to reimbursement from his co-debtors because remission is essentially gratuitous.

Art. 1221. If the thing has been lost or if the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the creditor, for
the price and the payment of damages and interest, without prejudice to their action
against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become impossible
after one of the solidary debtors has incurred in delay through the judicial or extrajudicial
demand upon him by the creditor, the provisions of the preceding paragraph shall apply.
(1147a)
Rules in Case thing has Been Lost or Prestation Has Become Impossible –
If the thing is lost or has become impossible to perform through a fortuitous event without
the fault of the debtor, the obligation is extinguished.
Example: A, B and C are solidarily bound to deliver a determinate car to D. Without
any fault on the part of any one of the debtors, the car was lost through the fortuitous
event. The obligation is extinguished.
If in the preceding paragraph, the car was lost through the fault of anyone of the solidary
debtors, anyone of them may be held liable by D for the price of the car plus damages.
The debtors who did not any fault on the lost of the car have the right to recover from the
co-debtor who is at fault.
The solidary debtors are likewise liable even if the thing is lost through fortuitous event if
the loss occurs after anyone of the solidary debtors has been in delay. The debtors,
however who were not in delay have the right to recover from their co-debtors who was
responsible due to his delay.

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which are
personal to him, or pertain to his own share. With respect to those which personally belong
to the others, he may avail himself thereof only as regards that part of the debt for which
the latter are responsible. (1148a)
Defenses available to a Solidary Debtor – The defenses available to the solidary debtors if the
creditor proceeds against him alone for the payment of the entire obligation
1. The defenses derived from the nature of the obligation, such as fraud prescription,
remission illegality or absence of consideration, payment or performance.
Example: Jack and Lleina are solidarily liable to Canoy in the among to
P6,000. The entire debt was paid by Jamero. In an action by Canoy against

37
 Jack, the latter can raise the defense of payment by virtue of which the
obligation was extinguished.
2. Defenses personal to him or pertaining to his own share, such as minority,
insanity and vitiated consent.
3. Defenses which are personal to others, such as minority, insanity and vitiated
consent.

SECTION 5. - Divisible and Indivisible Obligations

Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in
which there is only one debtor and only one creditor does not alter or modify the provisions
of Chapter 2 of this Title. (1149)
1. A divisible obligation is one the object of which in its delivery or performance is capable
of partial fulfillment.
Example: Antonio agreed to pay Sky P10,000 in five monthly installments. The
obligation of Antonio is divisible because it is payable in partial payments.
2. An indivisible obligation is one the object which in its delivery or performance is not
capable of partial fulfillment.
Example: Antonio agreed to deliver a determinate car to Sky on Dec. 31. This is an
indivisible obligation because it is not subject to partial performance.

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. The debtors who may have
been ready to fulfill their promises shall not contribute to the indemnity beyond the
corresponding portion of the price of the thing or of the value of the service in which the
obligation consists. (1150)
Art. 1225. For the purposes of the preceding articles, obligations to give definite things and
those which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work,
the accomplishment of work by metrical units, or analogous things which by their nature
are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the character of
the prestation in each particular case. (1151a)
Obligations Deemed Indivisible – The general rule of determining the divisibility or
indivisibility of an obligation depend on the purpose of the obligation.
1. Obligation to give definite things
Example: To give a particular house. Here the obligation is indivisible because of the
nature of the subject matter.
2. Obligations which are not susceptible of partial performance
Example: Saj is obliged to sing a song. Here the obligation is indivisible by reason
its purpose which requires the performance of all the parts.

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 3. Obligation provided by law to be indivisible even if thing or service physically divisible.
Example: Taxes should be paid within a definite period. Although money is
physically divisible, the amount of tax payable must be delivered in Toto, not
partially.
4. Obligations intended by the parties to be indivisible even if thing or service is physically
divisible.
Example: The obligation of Lleina to give P10,000 to Jack on a certain date. Money
is physically divisible by the clear intention here for Lleina to deliver the amount at
on time and as a whole.
Obligations Deemed divisible
1. Obligations which have for their object the execution of a certain number of days of work.
Example – Jack obliged himself to paint the house of Lleina to be finished in 10 days.
The obligation is divisible because it will not be finished in one time.
  2. Obligations which have for their object the accomplishment of work by metrical units.
Example – Jack obliged himself to deliver 25 cubic meter of sand.
3. Obligations which by their nature are susceptible of partial performance
Example – The obligation of Jack to pay a debt of P10,000 to Lleina in ten (10)
monthly installments.

SECTION 6. - Obligations with a Penal Clause

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty
or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code. (1152a)

Meaning of Penal Clause – An obligation with a penal clause is one which contains an
accessory undertaking to pay a previously stipulated indemnity incase of breach. It is
attached to obligations in order to insure their performance.
Purpose of the penal clause:
1.) To insure the performance of the obligation.
2.) To substitute for indemnity for damages and the payment of interest in case of non-
compliance of the principal obligation.
3.) To penalize the obligor in case of breach of the principal obligation.

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for him.
Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the
penalty at the same time, unless this right has been clearly granted him. However, if after
the creditor has decided to require the fulfillment of the obligation, the performance
thereof should become impossible without his fault, the penalty may be enforced. (1153a)

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 Debtor Cannot Substitute Penalty For the Principal Obligation – The general rule is that
the debtor is not allowed to just pay the penalty instead of fulfilling the obligation. He
can do so if the right has been expressly reserved. The reason is that if he can just pay,
fulfillment of the obligation will be considered an alternative one. The word expressly
means that any implied reservation is not allowed.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded. (n)
Example: Arthur was obliged under a contract with Brad, not to sell shares of stock for
one year. A penal clause was provided. But Arthur sold shares of stock within the period
specified but damages were not proved by Brad to have been suffered by him. May Brad recover
the penalty? Yes, Brad may lawfully recover the penalty.

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable. (1154a)
When Penalty May be Reduced by the Court –
1) When the obligation has been partly complied with by the debtor;
2) When the obligation has been irregularly complied with by the debtor
3) When the penalty is iniquitous or unconscionable, even if there has been no
performance at all.

Art. 1230. The nullity of the penal clause does not carry with it that of the principal
obligation.
The nullity of the principal obligation carries with it that of the penal clause. (1155)
Effect of Nullity of Penal Clause – The general principle that the accessory follows the
principal. If only the penal clause is void, the principal obligation remains valid and
demandable. The penal clause may be disregarded.
Example: Arthur agreed to sell merchandise to Brad. It is provided in their agreement that
in case of default, Arthur will deliver a prohibited drug as penalty. Here, the obligation to
sell merchandise is valid by the penalty to deliver the prohibited drug is void. For failure
of Arthur to comply with the obligation, Brad may recover damages.

CASES:
Article 1186: Labayen vs Talisay-Silay Milling Co. Inc. G.R. No. L-29298 (1928)

FACTS

Reynaldo Labayen and Teodoro Labayen are the owners of Dos Hermanos, a hacienda in
Talisay, Negros Occidental. They entered into a contract with Talisay-Silay Milling Company
Incorporated, also called the Central, for the milling of sugar canes from their hacienda.

40
Stipulated in the contract is the construction of a railroad with three and a half meters right of
way and maintenance of such railroad by the central. However, the central was only able to
construct a railroad reaching hacienda Esmeralda No. 2, four kilometers away from hacienda
Dos Hermanos. For a railroad to extend to hacienda Dos Hermanos, the construction would
require a gradual elevation of 4.84% to 7%, would necessitate 26 curves and would cost
Php80,000.00. A civil engineer testifying in behalf of the defendants allege that to construct such
would be possible but it would be very dangerous.

This led to an action for damages in the amount of Php 28,620.00 by the petitioners for the
alleged breach of contract to grind sugar canes at the Court of First Instance of Negros
Occidental. The court ruled against the petitioners and on the cross-complaint of the defendants,
condemned the petitioners to pay the sum of Php 12, 114.00.

Hence, this petition.

ISSUE

Whether or not the action for damages should prosper.

HELD

No. If the obligor voluntarily prevented the fulfillment of the condition of the obligation, such
condition shall be deemed fulfilled (article 1186 of the New Civil Code). The path of the railroad
has to pass through the haciendas of Esteban de la Rama. Since he would not grant permission to
use his land, therefore preventing the compliance of the obligation to grind, the action cannot
prosper.

Article 1187: Rodrigo Enriquez Et. Al. vs. Soccoro Ramos

G.R. No. L-23616 September 30, 1976 

Facts:

On November 24, 1958 Enriquez and spouses Dizon sold to Ramos 20 subdivision lots in
Quezon City for the sum of P235,056 of which only P35,056 had been paid. The balance of
P200,000 was to be liquidated within 2 years from the date of the execution of the deed of sale,
with interest at 6% for the 1st year and 12%  thereafter until fully paid. To secure the payment of
that balance, Ramos executed in the same document a deed of mortgage in favor of the vendors
on several parcels of land variously situated in Quezon City, Pampanga and Bulacan. The deed
of mortgage embodies certain stipulations which Ramos invoked. But according to the appellants
the defendant violated the terms of their agreement in the following respects:

The defendant refuse to pay the sum of P200,000 within the stipulated period.
The mortgage on Bulacan property was never registered and,
The realty tax for 1959 on the lots mortgage were not paid by the defendant.
Ramos admit that she has not paid the realty taxes and has not registered the mortgage on
Bulacan property but argues that it was a minor ones and still her obligation to pay the sum of
P200,000 has not arisen as no previous notice and demand for payment has been made and
according to her the road is not completed because the appellants have not yet planted trees nor
put up water facilities as required by the ordinance.

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The court held that the non-payment of 1959 realty taxes as well as the non-registration of the
mortgaged on Bulacan estate by the defendant were minor matters. On the issue of the
completion of road the appellant adduced the testimonies of 2 witnesses that the road was
completed on May 9, 1960 in accordance with the ordinances of Quezon City and there is
nothing in Ordinance 2969 which would indicate that a street may be considered completed with
water facilities are built on the subdivision and these activities are definitely segregable. As to be
alleged lack of previous notice completion and demand for payment, the filling of the case is
sufficient notice to the defendant of the completion of the roads in question and of the appellee’s
desire to be paid the purchase price of the questioned lots.

Issue: Whether or not Ramos should pay her balance to Enriquez and spouses Dizon even though
she is not yet fully satisfied with her demand?

Ruling: Yes, the effect of such demand retroacts to the day of the constitution of the defendant
obligation as it was stated in Art. 1187 provides that “THE EEFECTS OF A CONDITIONAL
OBLIGATION TO GIVE, ONCE THE CONDITION HAS BEEN FULFILLED, SHALL
RETROACT TO THE DAY OF THE CONSTITUTION OF THE OBLIGATION.” her demand
on the road is already considered completed and the filling of the case against her is sufficient
notice to her therefore she is obligated to pay her balance of P200,000 to the appellant’s within 2
years from the date the roads in question are completed.

Artcile 1189: YHT Realty Corporation, Erlinda Lainez & Anicia Payam vs. The Court of
Appeals & Maurice McLoughlin

G.R. No. 126780

FACTS

Respondent McLoughlin would always stay at Tropicana Hotel every time he is here in
thePhilippines and would rent a safety deposit box. The safety deposit box could only be
openedthrough the use of 2 keys, one of which is given to the registered guest, and the other
remaining inthe possession of the management of the hotel.McLoughlin allegedly placed the
following in his safety deposit box – 2 envelopes containingUS Dollars, one envelope containing
Australian Dollars, Letters, credit cards, bankbooks and acheckbook.On 12 December 1987,
before leaving for a brief trip, McLoughlin took some items from thesafety box which includes
the ff: envelope containing Five Thousand US Dollars (US$5,000.00), theother envelope
containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports and hiscredit cards.
The other items were left in the deposit box. Upon arrival, he found out that a fewdollars were
missing and the jewelry he bought was likewise missing.Eventually, he confronted Lainez and
Paiyam who admitted that Tan opened the safetydeposit box with the key assigned to him.
McLoughlin went up to his room where Tan was stayingand confronted her. Tan admitted that
she had stolen McLouglin’s key and was able to open thesafety deposit box with the assistance
of Lopez, Paiyam and Lainez. Lopez also told McLoughlinthat Tan stole the key assigned to
McLouglin while the latter was asleep.McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss hesuffered. Lopez refused to accept responsibility relying on
the conditions for renting the safetydeposit box entitled “Undertaking For the Use of Safety
Deposit Box”

ISSUE

WON the “Undertaking for the Use of Safety Deposit Box” admittedly executed by
privaterespondent is null and void.

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HELD

YES Article 2003 was incorporated in the New Civil Code as an expression of public
policyprecisely to apply to situations such as that presented in this case. The hotel business like
thecommon carrier’s business is imbued with public interest. Catering to the public, hotelkeepers
arebound to provide not only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the business. The law in turn does not allow
such duty tothe public to be negated or diluted by any contrary stipulation in so-called
“undertakings” thatordinarily appear in prepared forms imposed by hotel keepers on guests for
their signature.In an early case (De Los Santos v. Tan Khey), CA ruled that to hold hotelkeepers
orinnkeeper liable for the effects of their guests, it is not necessary that they be actually delivered
tothe innkeepers or their employees. It is enough that such effects are within the hotel or inn.
Withgreater reason should the liability of the hotelkeeper be enforced when the missing items
aretaken without the guest’s knowledge and consent from a safety deposit box provided by the
hotelitself, as in this case.Paragraphs (2) and (4) of the “undertaking” manifestly contravene
Article 2003, CC for theyallow Tropicana to be released from liability arising from any loss in
the contents and/or use of thesafety deposit box for any cause whatsoever. Evidently, the
undertaking was intended to bar anyclaim against Tropicana for any loss of the contents of the
safety deposit box whether or notnegligence was incurred by Tropicana or its employees. The
New Civil Code is explicit that theresponsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of theguests even if caused by servants or employees of the
keepers of hotels or inns as well as bystrangers, except as it may proceed from any force
majeure.

Article 1191: Adelfa S. Rivera, Cynthia S. Rivera, and Jose S. Rivera vs. Fidela del Rosario
(deceased and substituted by her co-respondents), and her children, Oscar Rosita, et.al.

FACTS

Respondents Fidela (now deceased), Oscar, Rosita, Violeta, Enrique Jr., Carlos, Juanito and
Eloisa, all surnamed Del Rosario, were the registered owners of Lot No. 1083-C, a parcel of land
situated at Lolomboy, Bulacan. This lot spanned an area of 15,029 square meters and was
covered by TCT No. T-50.668 (M) registered in the Registry of Deeds of Bulacan.

On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr., Juanito, and Eloisa, executed a Special
Power of Attorney in favor of their mother and co-respondent, Fidela, authorizing her to sell,
lease, mortgage, transfer and convey their rights over Lot No. 1083-C. Subsequently, Fidela
borrowed P250,000 from Mariano Rivera in the early part of 1987. To secure the loan, she and
Mariano Rivera agreed to execute a deed of real estate mortgage and an agreement to sell the
land. Consequently, on March 9, 1987, Mariano went to his lawyer, Atty. Efren Barangan, to
have three documents drafted: the Deed of Real Estate Mortgage, a Kasunduan (Agreement to
Sell), and a Deed of Absolute Sale. The Kasunduan provided that the children of Mariano
Rivera, the petitioners, would purchase Lot No. 1083-C for a consideration
of P2,141,622.50. This purchase price was to be paid in three installments: P250,000 upon the
signing of the Kasunduan, P750,000 on August 31, 1987, and P1,141,622.50 on December 31,
1987. It also provided that the Deed of Absolute Sale would be executed only after the second
installment is paid and a postdated check for the last installment is deposited with Fidela. As
previously stated, however, Mariano had already caused the drafting of the Deed of Absolute
Sale. But unlike the Kasunduan, the said deed stipulated a purchase price of only P601,160, and
covered a certain Lot No. 1083-A in addition to Lot No. 1083-C. This deed, as well as
the Kasunduan and the Deed of Real Estate Mortgage, was signed by Marianos children,
petitioners Adelfa, Cynthia and Jose, as buyers and mortgagees, on March 9, 1987.

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March 10, 1987,  Mariano Rivera returned to the office of Atty. Barangan, bringing with him the
signed documents with him Fidela and her son Oscar del Rosario to sign the mortgage and
the Kasunduan there. Hoever, Fidela  inadvertently affixed her signature on all the three
documents in the office of Atty. Barangan . Mariano then gave Fidela the amount of P250,000.

On October 30, 1987, he also gave Fidela a check for P200,000. In the ensuing months, also,
Mariano gave Oscar del Rosario several amounts totaling P67,800 upon the latters demand for
the payment of the balance despite Oscars lack of authority to receive payments under
the Kasunduan.While Mariano was making payments to Oscar, Fidela entrusted the owners copy
of TCT No. T-50.668 (M) to Mariano to guarantee compliance with the Kasunduan.

When Mariano unreasonably refused to return the TCT, one of the respondents, Carlos del
Rosario, caused the annotation on TCT No. T-50.668 (M) of an Affidavit of Loss of the owners
duplicate copy of the title on September 7, 1992. This annotation was offset, however, when
Mariano registered the Deed of Absolute Sale on October 13, 1992, and afterwards caused the
annotation of an Affidavit of Recovery of Title on October 14, 1992. Thus, TCT No. T-50.668
(M) was cancelled, and in its place was issued TCT No. 158443 (M) in the name of petitioners
Adelfa, Cynthia and Jose Rivera.

Meanwhile, the Riveras, representing themselves to be the new owners of Lot No. 1083-C, were
also negotiating with the tenant, Feliciano Nieto, to rid the land of the latters tenurial right. When
Nieto refused to relinquish his tenurial right over 9,000 sq. m. of the land, the Riveras offered to
give 4,500 sq. m. in exchange for the surrender. Nieto could not resist and he
accepted. Subdivision Plan No. Psd-031404-052505 was then made on August 12, 1992 and was
inscribed on TCT No. 158443 (M), and Lot No. 1083-C was divided into Lots 1083 C-1 and
1083 C-2.

February 18, 1993, respondents filed a complaint in the RTC of Malolos, asking that
the Kasunduan be rescinded for failure of the Riveras to comply with its conditions, with
damages. They also sought the annulment of the Deed of Absolute Sale on the ground of fraud,
the cancellation of TCT No. T-161784 (M) and TCT No. T-161785 (M), and the reconveyance to
them of the entire property with TCT No. T-50.668 (M) restored.

Respondents claimed that petitioners acquired possession of the TCT through fraud and
machination.Fidela never intended to enter into a deed of sale at the time of its execution and that
she signed the said deed on the mistaken belief that she was merely signing copies of
the Kasunduan. The position where Fidelas name was typed and where she was supposed to sign
her name in the Kasunduan  was roughly in the same location where it was typed in the Deed of
Absolute Sale. The documents were stacked one on top of the other at the time of signing, Fidela
could have easily and mistakenly presumed that she was merely signing additional copies of
the Kasunduan.

Petitioners denied the allegations and averred that the Deed of Absolute Sale was validly entered
into by both parties. According to petitioners, Fidela del Rosario mortgaged Lot No. 1083-C to
their predecessor in interest, Mariano Rivera, on March 9, 1987. But on the following day Fidela
decided to sell the lot to petitioners for P2,161,622.50. When Mariano agreed (on the condition
that Lot No. 1083-C will be delivered free from all liens and encumbrances), the Kasunduan  was
consequently drawn up and signed. After that, however, Fidela informed Mariano of the
existence of Feliciano Nietos tenancy right over the lot to the extent of 9,000 sq. m. When
Mariano continued to want the land, albeit on a much lower price of only P601,160, as he had
still to deal with Feliciano Nieto, the parties drafted the Deed of Absolute Sale on March 10,
1987, to supersede the Kasunduan.

Petitioners also filed a counterclaim asking for moral and exemplary damages and the payment
of attorneys fees and costs of suit.

44
 After trial, the RTC ruled in favor of RESPONDENTS:

1. Declaring the Deed of Absolute Sale dated March 10, 1987 as null and void;
2. Annulling TCT No. T-158443 (M) and TCT No. T-161785 (M) both in the names of Adelfa,
Cynthia and Jose, all surnamed Rivera;
3. Declaring the plaintiffs to be the legitimate owners of the land covered by TCT No. T-161785
(M) and ordering defendant Adelfa, Cynthia, and Jose, all surnamed Rivera, to reconvey the
same to the plaintiffs;
4. Ordering the Register of Deeds of Bulacan to cancel TCT No. T-161785 (M) and to issue in its
place a new certificate of title in the name of the plaintiffs as their names appear in TCT No. T-
50.668;
5. Declaring TCT No. T-161784 (M) in the name of Feliciano Nieto as valid;
6. Ordering the defendant Riveras to pay the plaintiffs solidarily P191,246.98 as balance for the
4,500 square-meter portion given to defendant Feliciano Nieto, P200,000.00 as moral
damages, P50,000.00 as exemplary damages, P50,000.00 as attorneys fees  and costs of the suit.
7. Dismissing the counterclaim of the defendant Riveras;
8. Dismissing the counterclaim and the crossclaim of defendant Feliciano Nieto.

The trial court ruled that Fidelas signature in the Deed of Absolute Sale was genuine, but found
that Fidela never intended to sign the said deed. Noting the peculiar differences between
the Kasunduan and the Deed of Absolute Sale, the trial court concluded that the Riveras were
guilty of fraud in securing the execution of the deed and its registration in the Registry of
Deeds. This notwithstanding, the trial court sustained the validity of TCT No. T-161784 (M) in
the name of Feliciano Nieto since there was no fraud proven on Nietos part. The trial court found
him to have relied in good faith on the representations of ownership of Mariano Rivera. Thus,
Nietos rights, according to the trial court, were akin to those of an innocent purchaser for value.

The trial court rescinded the Kasunduan  but ruled that the P450,000 paid by petitioners be
retained by respondents as payment for the 4,500 sq. m. portion of Lot No. 1083-C that
petitioners gave to Nieto.

On appeal to the Court of Appeals, the trial courts judgment was modified and the judgment
appealed from was AFFIRMED with the MODIFICATION that the Deed of Absolute Sale dated
March 10, 1987 is declared null and void only insofar as Lot No. 1083-C is concerned, but valid
insofar as it conveyed Lot No. 1083-A, that TCT No. 158443 (M) is valid insofar as Lot No.
1083-A is concerned and should not be annulled, and increasing the amount to be paid by the
defendants-appellants to the plaintiffs-appellees for the 4,500 square meters of land given to
Feliciano Nieto to P323,617.50.

Contrary to the ruling of the Court of Appeals that the Deed of Absolute Sale is void only insofar
as it covers Lot No. 1083-C, we find that the said deed is void in its entirety. Noteworthy is that
during the oral arguments before the Court of Appeals, both petitioners and respondents admitted
that Lot No. 1083-A had been expropriated by the government long before the Deed of Absolute
Sale was entered into.Whats more, this case involves only Lot No. 1083-C. It never involved Lot
1083-A. Thus, the Court of Appeals had no jurisdiction to adjudicate on Lot 1083-A, as it was
never touched upon in the pleadings or made the subject of evidence at trial.

Respondents counter that Article 1383 of the New Civil Code applies only to rescissible
contracts enumerated under Article 1381 of the same Code, while the cause of action in this case
is for rescission of a reciprocal obligation, to which Article 1191 of the Code
applies. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should
be distinguished from rescission of contracts under Article 1383 of the same Code.

Through this case it was again emphasize that rescission of reciprocal obligations under Article
1191 is different from rescissible contracts under Chapter 6 of the law on contracts under the

45
Civil Code. While Article 1191 uses the term rescission, the original term used in Article 1124 of
the old Civil Code, from which Article 1191 was based, was resolution. Resolution is a principal
action that is based on breach of a party.

The Kasunduan does not fall under any of those situations mentioned in Article

1381. Consequently, Article 1383 is inapplicable. Hence, It was ruled in favor of the
respondents.

ISSUE

May the contract entered into between the parties, however, be rescinded based on Article 1191?

HELD

The decision of the Court of Appeals is MODIFIED. The Deed of Absolute Sale in question is
declared NULL and VOID in its entirety. Petitioners are ORDERED to pay
respondents P323,617.50 as actual damages, P30,000.00 as moral damages, P20,000.00 as
exemplary damages and P20,000.00 as attorneys fees. No pronouncement as to costs.

A careful reading of the Kasunduan reveals that it is in the nature of a contract to sell, as

distinguished from a contract of sale. In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to the vendee until full payment of the
purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive
condition the failure of which is not a breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory force.

Respondents in this case bound themselves to deliver a deed of absolute sale and clean title
covering Lot No. 1083-C after petitioners have made the second installment. This promise to sell
was subject to the fulfillment of the suspensive condition that petitioners pay P750,000 on
August 31, 1987, and deposit a postdated check for the third installment
of P1,141,622.50.Petitioners, however, failed to complete payment of the second
installment. The non-fulfillment of the condition rendered the contract to sell ineffective and
without force and effect. It must be stressed that the breach contemplated in Article 1191 of the
New Civil Code is the obligors failure to comply with an obligation already extant, not a failure
of a condition to render binding that obligation. Coming now to the matter of
prescription. Contrary to petitioners assertion.

On the matter of damages, the Court of Appeals awarded respondents P323,617.50 as actual

damages for the loss of the land that was given to Nieto, P200,000 as moral damages,P50,000 as
exemplary damages, P50,000 as attorneys fees and the costs of suit.

Respondents were amply compensated through the award of actual damages, which should be
sustained. The other damages awarded total P300,000, or almost equivalent to the amount of
actual damages. Practically this will double the amount of actual damages awarded to
respondents. To avoid breaching the doctrine on enrichment, award for damages other than
actual should be reduced. Thus, the amount of moral damages should be set at only P30,000, and
the award of exemplary damages at only P20,000. The award of attorneys fees should also be
reduced to P20,000, which under the circumstances of this case appears justified and reasonable.

Article 1193: Compañia General De Tabacos De Filipina vs. Araza

46
FACTS

The plaintiff brought this action in the court below to foreclose a mortgage for 8,000 pesos upon
certain land in the Province of Leyte. The contract send upon was executed on the 11th day of
June, 1901. By terms thereof the defendant promised to pay the plaintiff 8,000 pesos as follows:
500 pesos on the 30th of June, 1901, and the remainder at the rate of 100 pesos a month, payable
on the 30th day of each month, until the entire 8,000 pesos was paid. The defendant paid 400
pesos and no more.  The suit was commenced on the 12th day of June, 1903.

ISSUE

Whether or not the creditor can recover the said installment and the entire indebtedness.

HELD

There was no provision in the contract by which, upon failure to pay one installment of the debt,
the whole debt should thereupon become at once payable. We are of the opinion that the
obligation can be enforced in this action for only the amount due and payable on the 12th day of
June, 1903.

The court below gave no credit for the payment of 400 pesos admitted by the complaint to have
been received by the plaintiff. It is allowed interest upon the entire debt from the 1st day of July,
1901. The contract does not provide for the payment of any interest. There is no provision in it
declaring expressly that the failure to pay when due should put the debtor in default. There was
therefore no default which would make him liable for interest until a demand was made. (Civil
Code, art. 1100; Manresa, Com. on Civil Code, vol 8, p. 56.) The transaction did not constitute a
mercantile loan and article 316 of the Code of Commerce is not applicable. There was no
evidence any demand prior to the presentation of the complaint. The plaintiff is therefore entitled
to interest only from the commencement of the action.

The judgment is set aside and the case is remanded to the court below with directions to
determine the amount due in accordance with the views hereinbefore expressed and to enter
judgment for such amount. No costs will be allowed to either party in this court.

Article 1199: Felipe Agoncillo, and his wife, Marcela Mariño vs. Crisanto Javier, Florencio
Alana, and Jose Alano

G.R. No. L-12611            August 7, 1918

FELIPE AGONCILLO, and his wife, MARCELA MARIÑO, plaintiff-appellees,

vs.
CRISANTO JAVIER, administrator of the estate of the late Anastasio Alano.
FLORENCIO ALANO and JOSE ALANO, defendants-appellants.

FACTS

On February 27, 1904, Anastasio Alano, Jose Alano, and Florencio Alano executed in favor of
the plaintiff, Da. Marcela Mariño, a document of the following tenor:

47
 We, the undersigned, Jose Alano and Florencio Alano (on our own behalf), and Anastasio Alano
(on behalf of his children Leonila, Anastasio and Leocadio), the former and the latter
testamentary heirs of the Rev. Anastasio C. Cruz, deceased, hereby solemnly promise under
oath:

1. We will pay to Da. Marcela Mariño within one year from this date together with interest thereon
at the rate of 12 per cent per annum, the sum of P2,730.50, Philippine currency, this being the
present amount of indebtedness incurred in favor of that lady on the 20th of April 1897, by our
testator, the Rev. Anastasio C. Cruz;
2. To secure the payment of this debt we mortgage to the said Da. Marcela Mariño the house and
lot bequeathed to us by the deceased, situated in this town, on calle Evangelista, formerly
Asturias, recorded in the register of deeds on the twenty-second of April, 1895, under number
730;
3. In case of insolvency on our part, we cede by virtue of these presents the said house and lot to
Da. Marcela Mariño, transferring to her all our rights to the ownership and possession of the
lot; and if the said property upon appraisal at the time of the maturity of this obligation should
not be of sufficient value to cover the total amount of this indebtedness, I, Anastasio Alano, also
mortgage to the said lady my four parcels of land situated in the barrio of San Isidro, to secure
the balance, if any; the title deeds of said property, as well as the title deeds of the said house
and lot are this day delivered to Sr. Vicente Ilustre, general attorney-in-fact of Da. Marcela
Mariño.

In witness whereof we have signed these presents in Batangas, this twenty-seventh day of
February, 1904. (Signed  Jose Alano Jose Alano, and Florencio Alano) xxx.

No part of the interest or of the principal due indicated above has been paid, except  P200 paid in
the year 1908 by the late Anastasio Alano.

In 1912, Anastasio Alano died intestate. At the instance of one of his creditors, proceedings upon
the administration of his estate were had in the Court of First Instance of Batangas. By order
dated August 8, 1914, the court appointed an administrator and a committee to hear claims.
Notices were published, as required, in a newspaper of general circulation, to inform the
creditors of the time and place at which they might appear to present their claims against the
estate of the deceased  The time designated in the notice for the presentation of claims expired on
March 24, 1915. It appears that no claims whatever were presented to the committee, and it
having been shown to the court, by the statement of the administrator, that the claim of the
creditor at whose instance the administration proceeding was commenced, had been settled by
the heirs, the administrator was discharged and the proceeding terminated by order dated
November 8, 1915.

On April 27, 1916, Dra. Marcela Mariño, and upon the statement, made on her behalf, that she
was a creditor of the deceased and that her claim was secured by mortgage upon real estate
belonging to the said deceased, the court reopened the intestate proceeding, and appointed one
Javier to be administrator of the estate. No request was made for a renewal of the commission of
the committee on claims. The appellants Jose and Florencio Alano objected to the appointment
of Javier, but their objection was overruled by the court.

On March 17, 1916, the plaintiffs filed the complaint in this action against Javier, as
administrator of the estate of Anastasio Alano and against Florencio Alano and Jose Alano
personally. The action is based upon the execution of the document of February 27, 1904, which
is transcribed literally in the complaint that defendants have paid no part of the indebtedness
therein acknowledged, with the exception of the P200 paid on account in 1908.

On April 22, 1910, the debtors promised in writing that they would pay the debt in 1911, but that
they had failed to do so. The prayer of the complaint is that, unless defendants pay the debt for

48
 the recovery of which the action was brought, they be required to convey to plaintiffs the house
and lot described in paragraph two of the said document; that this property be appraised; and that
if its value is found to be less than the amount of the debt, with the accrued interest at the
stipulated rate, judgment be rendered in favor of the plaintiffs for the balance. No relief is
requested with respect to the undertaking of Anastasio Alano expressed in the third paragraph of
the document in suit, as guarantor for the payment of the difference, if any, between the value of
the said house and lot and the total amount of the indebtedness.

The defendants answered denying the facts alleged in the complaint, and setting up, as special
defenses that (1) any cause of action which plaintiff might have had against the estate of
Anastasio Alano has been barred by failure of the plaintiff to present her claim to the committee
on claims for allowance; (2) that the document upon which plaintiff relies does not constitute a
valid mortgage; and (3) that as to all of the defendants, the action is barred by the general statute
of limitations.

The findings of the trial court upon the evidence were substantially as follows:

1. That the document set forth in paragraph two of plaintiffs’ complaint was executed by the
deceased, Anastasio Alano, and by the defendants Javier and Jose Alano, as alleged;
2. That one year after the execution of the document, plaintiffs made a demand upon Anastasio
Alano, deceased, and the other two defendants herein, to comply with the terms of the agreement
by the execution of the conveyance of the house and lot, but that they requested an extension of
time for the payment of the debt, which was granted them;
3. That on March 27, 1908, the defendants paid P200 on account of the debt.

Upon these findings the court gave judgment for plaintiffs, and from that judgment the
defendants have appealed to his court.

Appellants contend that the contract evidenced by that instrument is merely a loan coupled with
an ineffectual attempt to create a mortgage to effect the payment of debt. The court regarded it as
a conveyance of the house and lot described in the contract, which took effect upon the failure of
the debtors to pay the debt.

The principal undertaking evidenced by the document is the payment of money. The attempt to
create a mortgage upon the house and lot described in the second clause of the contract is invalid,
as it is admitted that the so-called mortgage was never recorded.

The agreement to convey the house and lot at an appraised valuation in the event of failure to pay
the debt in money a t its maturity is, however, in our opinion, perfectly valid. It is simply an
undertaking that if the debt is not paid in money, it will be paid in another way.  It is not an
attempt to permit the creditor to declare a forfeiture of the security upon the failure of the debtor
to pay the debt at maturity, simply provided that if the debt is not paid in money it shall be paid
in another specific was by the transfer of property at a valuation.

The contract now under consideration is not susceptible of the interpretation that the title to the
house and lot in question was to be transferred to the creditor ipso facto upon the mere failure of
the debtors to pay the debt at its maturity. The obligations assumed by the debtors were
alternative, and they had the right to elect which they would perform (Civil Code, art. 1132).

Under the terms of the contract, the liability of the defendants as to the conveyance of the house
and lot is subsidiary and conditional, being dependent upon their failure to pay the debt in
money. It must follow, therefore, that if the action to recover the debt has prescribed, the action
to compel a conveyance of the house and lot is likewise barred, as the agreement to make such

49
conveyance was not an independent principal undertaking, but merely a subsidiary alternative
pact relating to the method by which the debt might be paid.

ISSUE

Is the failure of the plaintiff to present her claim for allowance to the committee on claims barred
her action so far as this defendant is concerned.

HELD

The judgment of the lower court is reversed and the action is dismissed as to all the defendants.
No costs will be allowed.

This conclusion makes it unnecessary to consider the effect of the payment made by Anastasio
Alano in 1908 as regards the interruption of the period of prescription with respect to him. In this
connection, however, we feel constrained to remark that a careful reading of the document makes
it extremely doubtful whether Anastasio Alano was ever personally bound by its terms. It will be
noted that he purports to have signed it only as the representative of his children, Leonina,
Anastasio, and Leocadio, who are not parties to this suit.

With respect to the defendants Florencio and Jose Alano, their original liability admits of no
dispute and the only question open for consideration is that presented by their plea of
prescription. The debt matured February 27, 1905, and as the complaint was not filed within ten
years from that date (Code of Civil Procedure, sec. 43), it is obvious that the plea of prescription
is well-taken, unless the running of the statute was interrupted.

While it appears that some verbal and written demands for payment were made upon these
defendants, it has been recently decided, upon mature consideration, that an extrajudicial demand
is not sufficient, under the law as it now stands, to stop the running of the statute. There must be
either (1) a partial payment, (2) a written acknowledgment or (3) a written promise to pay the
debt. It is not contended that there has been any written acknowledgment or promise on the part
of the defendants Jose and Florencio Alano, or either of them — plaintiff relies solely upon the
payment made in 1908 by Anastasio Alano. But there is not the slightest foundation in the
evidence for the belief that the payment made by Anastasio was for the benefit of Jose or
Florencio or that it was authorized by either of them. Bearing in mind the express declaration of
article 1138 of the Civil Code that joint (mancomunada) obligations are, as regard each of the
debtors, to be reputed as separate debts with respect to each of the debtors, it follows of
necessity that a payment or acknowledgment by one of such joint debtors will not stop the
running of the period of prescription as to the others. That such is the law may be demonstrated
by ample authority.

The statement that Florencio Alano was with Anastasio at the time is not in itself sufficient to
constitute proof that the payment was made for his benefit.

Plaintiff argues that the undertaking to convey the house and lot constitutes an indivisible
obligation, and that even where the promise is not in solidum, the concurrence of two or more
debtors in an obligation whose performance is indivisible creates such a relation between them
that the interruption of prescription as to one of necessity interrupts it as to all. The distinction is
one which is well-established, although the authorities cited do not fully support plaintiffs’
contentions, but in this particular case the question is academic, for the undertaking is in the
alternative to pay a sum of money — an essentially divisible obligation — or to convey the
house. As the alternative indivisible obligation is imposed only in the event that the debtors fail
to pay the money, it is subject to a suspensive condition, and the prescription of the obligation

50
whose non-performance constitutes the condition effectively prevents the condition from taking
place.

The evidence in this case shows that plaintiff has been extremely lenient with defendants and has
refrained from pressing her claim against them when it fell due, and for a long period of years
thereafter, purely out of consideration for them. The defense of prescription interposed,
particularly as regards Jose and Florencio Alano, is an indefensible from the standpoint of fair
dealing and honesty as it is unassailable from the standpoint of legal technicality.

Article 1201: Ong Guan Can vs. The Century Insurance Co. (40 Phil. 192)

G.R. No. L-21196             February 6, 1924

ONG GUAN CAN, plaintiff-appellee,

vs.
THE CENTURY INSURANCE COMPANY, LTD., defendant-appellant.

Eiguren and Razon for appellant.

Montinola, Montinola and Hontiveros for appellee.

JOHNSON, J.:

FACTS

The defendant failed to make the appearance within the time prescribed by law due to a fact over
which the defendant had no control.  The defendant mailed its appearance at a time when in the
ordinary course of events it would have reached the hand of the clerk of the court on or before
the expiration of the time within which it was obliged to make its appearance.

ISSUE

Whether or not the lower court erred in holding that the purpose of notice to the other party is to
give him the opportunity to express his consent or to impugn the selection made.

HELD

It has been frequently decided that, if pleadings or other papers essential to a case are entrusted
to the mails in due season and under proper precaution and are lost or miscarried, it will be
ground for vacating a judgment by default. (Boyd vs. Williams and Overbaugh, 70 N.J. Law,
185; Corning vs. Tripp, 1 Howard’s Practice [N.Y.], 14; Williams vs. Richmond, etc. Railroad
Co., 110 N. C., 466; Chicago, etc. Railway Co. vs. Eastham, 30 L.R.A. [N.S.], 740; 23 Cyc., 943;
15 Ruling Case Law, 708.)

A delay of mail, such as occurred in the present case, in our opinion amounts to accident or
surprise for which judgments by default may be set aside, especially when the defendant shows
by affidavit or otherwise that he has a valid and meritorious defense. The time fixed for filing
papers in a cause is generally directory and the court always has it in its power, in the exercise of
a proper discretion, to extend the time fixed by law whenever the ends of justice would seem to
demand such an extension. (Wood vs. Fobes and Farnham, 5 Cal., 62.)

51
 Considering the causes which prevented the defendant from making its appearance within the
time prescribed by subparagraph 2 of article 392 of Act No. 190 and considering its showing
that, if permitted to answer, it has a meritorious defense, we are of the opinion, and so decide,
that the judgment by default rendered by the lower court should be and is hereby set aside, and it
is hereby ordered and decreed that the defendant’s appearance be admitted and that it be given
ten days in which to answer from notice of this decision. And without any findings as to costs, it
is so ordered.

Article 1207: Salvador P. Escaño and Mario M. Silos vs. Rafael Ortigas Jr.G.R. No. 151953
(2007)

Ponente: J. Tinga

Facts:

1. On April 28, 1980, Private Development Corp. of the Philippines (PDCP) entered into a loan
agreement with the Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to male available and
lend to Falcon the amount of US $320, 000.00 for specific purposes and subject to certain terms
and conditions.
2. Three stockholder officers of the Falcon assumed solidary liability, in their individual capacity,
with Falcon for the due and punctual payment of the loan.
3. Two years later, control of Falcon was ceded to Escaño, Silos and Matti, and the shares of
deceased Scholey, through his heirs Ortigas, Scholey and Inductivo, were assigned to the three
new stock-holders, as well as all of their guaranteed to PDCP and PAIC.
4. On April 28, 1989, PDCP filed a complaint for sum of money with the RTC of Makati. A
counterclaim was filed by Ortigas.
5. The other parties entered into compromise agreement with PDCP. Ortigas pursued his claim
against Escaño, Silos and Matti, and filing a motion for Summary Judgement in his favor against
Escaño, Silos and Matti.
6. The RTC ruled in favor of Ortigas, ordering the three to pay jointly and severally the amount of
P1,300,000.00 as well as P20,000.00 in attorney’s fees.
7. On appeal, the Court of Appeals affirmed the Summary Judgement. Hence, the present petition
for review.

Issue: Whether or not there was solidary obligation.

Ruling:

No. The obligation was joint.

In this case, there is a concurrence of two or more creditors or of two or more debtors in one and
the same obligation. Article 1207 of the Civil Code states that among them, there is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. Article 1210 supplies further caution against the broad
interpretation of solidarity by providing that the indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.

These Civil Code provisions establish that in case of concurrence of two or more creditors or of
two or more debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption is that the obligation
is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.

52
 The Undertaking does not contain any express stipulation that the petitioners agreed to bind
themselves jointly and severally in their obligations to the Ortigas group, or any such terms to
that effect. Hence, such obligation established in the Undertaking is presumed only to be joint.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome
the presumption of jointness of obligations. The SC ruled that he failed to discharge such burden.

Article 1210: Escaño and Silos vs Ortigas Jr.

G.R. No. 151953 (2007)

Ponente: J. Tinga

Facts:

1. On April 28, 1980, Private Development Corp. of the Philippines (PDCP) entered into a loan
agreement with the Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to male available and
lend to Falcon the amount of US $320, 000.00 for specific purposes and subject to certain terms
and conditions.
2. Three stockholder officers of the Falcon assumed solidary liability, in their individual capacity,
with Falcon for the due and punctual payment of the loan.
3. Two years later, control of Falcon was ceded to Escaño, Silos and Matti, and the shares of
deceased Scholey, through his heirs Ortigas, Scholey and Inductivo, were assigned to the three
new stock-holders, as well as all of their guaranteed to PDCP and PAIC.
4. On April 28, 1989, PDCP filed a complaint for sum of money with the RTC of Makati. A
counterclaim was filed by Ortigas.
5. The other parties entered into compromise agreement with PDCP. Ortigas pursued his claim
against Escaño, Silos and Matti, and filing a motion for Summary Judgement in his favor against
Escaño, Silos and Matti.
6. The RTC ruled in favor of Ortigas, ordering the three to pay jointly and severally the amount of
P1,300,000.00 as well as P20,000.00 in attorney’s fees.
7. On appeal, the Court of Appeals affirmed the Summary Judgement. Hence, the present petition
for review.

Issue: Whether or not there was solidary obligation.

Ruling:

No. The obligation was joint.

In this case, there is a concurrence of two or more creditors or of two or more debtors in one and
the same obligation. Article 1207 of the Civil Code states that among them, there is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. Article 1210 supplies further caution against the broad
interpretation of solidarity by providing that the indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.

These Civil Code provisions establish that in case of concurrence of two or more creditors or of
two or more debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption is that the obligation

53
is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the petitioners agreed to bind
themselves jointly and severally in their obligations to the Ortigas group, or any such terms to
that effect. Hence, such obligation established in the Undertaking is presumed only to be joint.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome
the presumption of jointness of obligations. The SC ruled that he failed to discharge such burden.

Article 1215: Great Asian Sales Center Corporation and Tan Chong Lin vs. The Court of
Appeals and Bancasia Finance and Investment Corporation

G.R. No. 105774            April 25, 2002

GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN, petitioners,

vs.
THE COURT OF APPEALS and BANCASIA FINANCE AND INVESTMENT
CORPORATION, respondents.

FACTS

Great Asian is engaged in the business of buying and selling general merchandise, in particular
household appliances. On March 17, 1981, the board of directors of Great Asian approved a
resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr. (“Arsenio” for
brevity) to secure a loan from Bancasia in an amount not to exceed P1.0 million. The board
resolution also authorized Arsenio to sign all papers, documents or promissory notes necessary to
secure the loan. On February 10, 1982, the board of directors of Great Asian approved a second
resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not
exceeding P2.0 million. The second board resolution also designated Arsenio as the authorized
signatory to sign all instruments, documents and checks necessary to secure the discounting line.

On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee,
solidarily, the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin signed a
Comprehensive and Continuing Surety Agreement in favor of Bancasia to guarantee, solidarily,
the debts of Great Asian to Bancasia. Thus, Tan Chong Lin signed two surety agreements
(“Surety Agreements” for brevity) in favor of Bancasia.

Great Asian, through its Treasurer and General Manager Arsenio, signed four (4) Deeds of
Assignment of Receivables (“Deeds of Assignment” for brevity), assigning to Bancasia fifteen
(15) postdated checks. Nine of the checks were payable to Great Asian, three were payable to
“New Asian Emp.”, and the last three were payable to cash. Various customers of Great Asian
issued these postdated checks in payment for appliances and other merchandise.

Great Asian and Bancasia signed the first two Deed of Assignments on January 12, 1982
covering four postdated checks  each with a total face value of P244,225.82 and  P312,819.00,
with maturity dates not later than April 1, 1982. All these four checks were dishonored. Great
Asian and Bancasia signed the third Deed of Assignment on February 11, and the 4th on March
5, 1982 respectively covering postdated checks and similarly, none of the checks were honored.

Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the checks.
Eight of the dishonored checks bore the endorsement of Arsenio below the stamped name of

54
“Great Asian Sales Center”, while the rest of the dishonored checks just bore the signature of
Arsenio. The drawee banks dishonored the fifteen checks on maturity when deposited for
collection by Bancasia, with any of the following as reason for the dishonor: “account closed”,
“payment stopped”, “account under garnishment”, and “insufficiency of funds”.Bancasia
referred the matter to its lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan Chong
Lin a letters dated March 18, 1982 and June 16, 1982 , notifying him of the dishonored checks
and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the
dishonored checks.

On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition for
insolvency, verified under oath by its Corporate Secretary, Mario Tan. Attached to the verified
petition was a “Schedule and Inventory of Liabilities and Creditors of Great Asian Sales Center
Corporation,” listing Bancasia as one of the creditors of Great Asian in the amount of
P1,243,632.00.

On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great
Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety
Agreements he signed in favor of Bancasia. In its answer, Great Asian denied the material
allegations of the complaint claiming it was unfounded, malicious, baseless, and unlawfully
instituted since there was already a pending insolvency proceedings, although Great Asian
subsequently withdrew its petition for voluntary insolvency. Great Asian further raised the
alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absence of
consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin.

The trial court rendered its decision on January 26, 1988 rendered in favor of the plaintiff and
against the two (2) defendants ordering the latter, jointly and severally, to pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the filing of the
complaint until the same is fully paid;

(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount due; and

(c) The costs of suit.

On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the
award of attorney’s fees. As against appellants’ bare denial of it, the Court is more inclined to
accept the appellee’s version, to the effect that the subject deeds of assignment are but individual
transactions which — being collectively evidentiary of the loan accommodation and/or credit
line it granted the appellant corporation — should not be taken singly and distinct therefrom. In
addition to its plausibility, the proposition is, more importantly, adequately backed by the
documentary evidence on record. Aside from the aforesaid Deeds of Assignment and the Board
Resolutions of the appellant corporation’s Board of Directors , the appellee — consistent with its
theory — interposed the Surety Agreements the appellant Tan Chong Lin executed , as well as
the demand letters it served upon the latter as surety . It bears emphasis that the second
Resolution of the appellant corporation’s Board of Directors  even closely coincides with the
execution of the February 11, 1982 and March 5, 1982 Deeds of Assignment . Were the
appellants’ posturings true, it seems rather strange that the appellant Tan Chong Lin did not even
protest or, at least, make known to the appellee what he — together with the appellant
corporation — represented to be a corporate larceny to which all of them supposedly fell prey. In
the petition for voluntary insolvency it filed, the appellant corporation, instead, indirectly
acknowledged its indebtedness in terms of financing accommodations to the appellee, in an
amount which, while not exactly matching the sum herein sought to be collected, approximates
the same.

55
The appellants contend that the foregoing warranties enlarged or increased the surety’s risk, such
that appellant Tan Chong Lin should be released from his liabilities. Without saying more, the
appellants’ position is, however, soundly debunked by the undertaking expressed in the
Comprehensive and Continuing Surety Agreements to the effect that the “surety/ies, jointly and
severally among themselves and likewise with the principal, hereby agree/s and bind/s himself to
pay at maturity all the notes, drafts, bills of exchange, overdrafts and other obligations which the
principal may now or may hereafter owe the creditor.” With the possible exception of the fixed
ceiling for the amount of loan obtainable, the surety undertaking in the case at bar is so
comprehensive as to contemplate each and every condition, term or warranty which the principal
parties may have or may be minded to agree on. The Court sees little or no reason to go into the
appellants’ remaining assignments of error, save the matter of attorney’s fees. For want of a
statement of the rationale therefore in the body of the challenged decision, the trial court’s award
of attorney’s fees should be deleted and disallowed

The decision appealed from is MODIFIED, to delete the trial court’s award of attorney’s fees.
The rest is AFFIRMED in toto.

ISSUE

Whether Tan Chong Lin is liable to Great Asian under the Surety Agreements.

HELD

The Decision of the Court of Appeals was AFFIRMED with MODIFICATION. Petitioners are

ordered to pay, solidarily, private respondent the following amounts: (a) P1,042,005.00 plus 3%
penalty thereon, (b) interest on the total outstanding amount in item (a) at the legal rate of 12%
per annum from the filing of the complaint until the same is fully paid, (c) attorney’s fees
equivalent to 25% of the total amount in item (a), including interest at 12% per annum on the
outstanding amount of the attorney’s fees from the finality of this judgment until the same is
fully paid, and (c) costs of suit.

Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the
Surety Agreements he signed wherein he solidarily held himself liable with Great Asian for the
payment of its debts to Bancasia.

Indisputably, Tan Chong Lin unconditionally bound himself to pay Bancasia, solidarily with
Great Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan
Chong Lin’s obligation hinged had happened. As surety, Tan Chong Lin automatically became
liable for the entire obligation to the same extent as Great Asian. Tan Chong Lin maintains that
these warranties in the Deeds of Assignment materially altered his obligations under the Surety
Agreements, and therefore he is released from any liability to Bancasia.

Under Article 1215 of the Civil Code, what releases a solidary debtor is a “novation,
compensation, confusion or remission of the debt” made by the creditor with any of the
solidary debtors. These warranties, however, are the usual warranties made by one who
discounts receivables with a financing company or bank. The Surety Agreements, written on the
letter head of “Bancasia Finance & Investment Corporation,” uniformly state that “Great Asian
Sales Center has obtained and/or desires to obtain loans, verdrafts, discounts and/or other forms
of credits from” Bancasia. Tan Chong Lin was clearly on notice that he was holding himself as
surety of Great Asian which was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of
Great Asian’s business activities or discounting transactions with Bancasia. Thus, the warranties
do not increase or enlarge the risks of Tan Chong Lin under the Surety Agreements. There is,
moreover, no novation of the debt of Great Asian that would warrant release of the surety.

56
The PRINCIPAL should fail to pay at maturity any of the obligations or amounts due to the
CREDITOR, or if for any reason the PRINCIPAL fails to promptly respond to and comply with
any other lawful demand made by the CREDITOR, or if for any reason whatsoever any
obligation of the PRINCIPAL in favor of any person or entity should be considered as defaulted,
then both the PRINCIPAL and the SURETY/IES shall be considered in default under the terms
of this Agreement. The SURETY/IES agree/s to pay jointly and severally with the PRINCIPAL,
all outstanding obligations of the CREDITOR, whether due or not due, and whether owing to the
PRINCIPAL in its personal capacity or as agent of any person, endorsee, assignee or transferee.

Article 1217: Joseph vs. Bautista (170 SCRA 540)

February 23, 1989

LUIS JOSEPH, petitioner
vs.
HON. CRISPIN V. BAUTISTA, PATROCINIO PEREZ, ANTONIO SIOSON, JACINTO
PAGARIGAN, ALBERTO CARDENO and LAZARO VILLANUEVA, respondents.

Jose M. Castillo for petitioner.

Arturo Z. Sioson for private respondent, Patrocinio Perez.

Cipriano B. Farrales for private respondents except P. Perez.

REGALADO,  J.:

FACTS

Respondent Patrocinio Perez is the owner of a cargo truck with route from Dagupan City to
Manila. On January 12, 1973, said cargo truck driven by defendant Domingo Villa was on its
way to Valenzuela, Bulacan from Pangasinan. Petitioner, Luis Joseph, with a cargo of livestock,
boarded the cargo truck at Dagupan City after paying the sum of P 9.00 as one way fare to
Valenzuela, Bulacan. Meanwhile, along the National Highway going to Manila, defendant
Domingo Villa tried to overtake a tricycle.  At that time, a pick-up truck, supposedly owned by
respondents Antonio Sioson and Jacinto Pagarigan, then driven by respondent Lazaro
Villanueva, tried to overtake the cargo truck which was then trying to overtake the tricycle,
consequently forcing the cargo truck to veer towards the shoulder of the road and to ram a
mango tree. As a result, petitioner sustained a bone fracture in one of his legs.

Petitioner filed a complaint for damages against respondent Patrocinio Perez, as owner of the
cargo truck, and against respondents Antonio Sioson and Lazaro Villanueva, as owner and
driver, respectively, of the pick-up truck.  However, respondent Sioson filed his answer alleging
that he is not and never was an owner of the pick-up truck and neither would he acquire
ownership thereof in the future.  On September 24, 1971, the petitioner filed his amended
complaint impleading respondents Jacinto Pagarigan and a certain Rosario Vargas as additional
alternative defendants. Petitioner apparently could not ascertain who the real owner of said cargo
truck was, whether respondents Patrocinio Perez or Rosario Vargas, and who was the real owner
of said pick-up truck, whether respondents Antonio Sioson or Jacinto Pagarigan.

57
Respondent Perez filed her amended answer with crossclaim against her co-defendants for
indemnity and subrogation in the event she is ordered to pay petitioner’s claim, and therein
impleaded cross-defendant Alberto Cardeno as additional alternative defendant.

On September 27, 1974, respondents Lazaro Villanueva, Alberto Cardeno, Antonio Sioson and
Jacinto Pagarigan, thru their insurer, Insurance Corporation of the Philippines, paid petitioner’s
claim for injuries sustained in the amount of P 1,300.00. By reason thereof, petitioner executed
a release of claim releasing from liability the following parties, viz: Insurance Corporation
of the Philippines, Alberto Cardeno, Lazaro Villanueva, Antonio Sioson and Jacinto
Pagarigan.

On December 2, 1974, respondents Lazaro Villanueva, Alberto Cardeno and their insurer,
the Insurance Corporation of the Philippines, paid respondent Patrocinio Perez’ claim for
damages to her cargo truck in the amount of P 7,420.61.

Consequently, respondents Sioson, Pagarigan, Cardeno and Villanueva filed a “Motion to

Exonerate and Exclude Defs/ Cross defs. Alberto Cardeno, Lazaro Villanueva, Antonio Sioson
and Jacinto Pagarigan on the Instant Case”, alleging that respondents Cardeno and Villanueva
already paid P 7,420.61 by way of damages to respondent Perez, and alleging further that
respondents Cardeno, Villanueva, Sioson and Pagarigan paid P 1,300.00 to petitioner by way of
amicable settlement.

Thereafter, respondent Perez filed her “Opposition to Cross-defs.’ motion dated Dec. 2, 1974 and
Counter Motion” to dismiss. The so-called counter motion to dismiss was premised on the fact
that the release of claim executed by petitioner in favor of the other respondents inured to the
benefit of respondent Perez, considering that all the respondents are solidarity liable to herein
petitioner.

ISSUE

Whether or not the respondents were solidarity liable to the petitioner and that the release of the
paying solidary debtor results in the simultaneous release from the same liability of the other co-
debtors.

HELD

There is no question that the respondents herein are solidarily liable to petitioner. On the
evidence presented in the court below, the trial court found them to be so liable. It is undisputed
that petitioner, in his amended complaint, prayed that the trial court hold respondents jointly and
severally liable. Furthermore, the allegations in the amended complaint clearly impleaded
respondents as solidary debtors.

The respondents having been found to be solidarity liable to petitioner, the full payment made by
some of the solidary debtors and their subsequent release from any and all liability to petitioner
inevitably resulted in the extinguishment and release from liability of the other solidary debtors,
including herein respondent Patrocinio Perez.

Article 1218: Diamond Builders Conglomeration vs Country Bankers Insurance

Corporation

G.R. No. 171820 (2007)

58
 Ponente: J. Nachura

Facts:

1. A civil case was filed by Borja against Acidre, the owner of the Diamond Builders
Conglomeration for a breach of his obligation to construct a residential and commercial building.
2. A compromise agreement was entered into, and was approved by the RTC.
3. In accordance with the agreement, Acidre obtained a Surety Bond from Country Bankers in
favor of Borja.
4. Country Bankers received a Motion for Execution of the surety bond filed by Borja with the
RTC. Coutry Bankers advised the petitioners that in the event it is constrained to pay under the
surety bond of Borja, it shall proceed against the petitioners for reimbursement. The petitioners
informed Country Bank of the Opposition to Borja’s Motion for Execution which they filed.
Subsequently, the RTC ruled in favor of Borja. Petitioners then filed a motion for
reconsideration.
5. Country Banks payed Borja, and demanded for reimbursement from the petitioners. The
petitioners refused. The Coutry Bankers filed a complaint for sum of money. The RTC dismissed
the complaint. The CA reversed it.

Issue:

Whether or not the payment was voluntary and thus  absolves petitioner from reimbursing.

Held:

NO.

Article 2047 of the civil code specifically calls for the application of the provisions on solidary
obligations to surety-ship contracts. In particular, article 1217 of the Civil Code recognizes the
right of reimbursement from a co-debtor in favor of the one who paid.

In contract, article 1218 of the Civil Code is definitive on when reimbursement is unavailable
such that only those payments made after the obligation has prescribed or became illegal shall
not entitle a solidary debtor to management.

Article 1222: Braganza vs. Villa Abrille

(Minor Signing Contract)November 11, 2010

FACTS

Rosario Breganza together with her two sons loaned from De Villa Abrille on the amount of
P70,000.00 in Japanese war notes and in consideration thereof, promised in writing to pay him
P10.oo + 2% per annum. After two years they have not paid Abrille, so they were sued.

ISSUE

Whether or not the boys who were 16 and 18 respectively bound to sign a contract?

HELD

59
The boys who were 16 and 18 respectively are bound to sign a contract, but the Supreme Court
still found they were liable to pay the amount loaned since they did not disclose their real age
during signing of the contract neither did the mother Breganza.

Article 1225: Angel Jose Warehousing Co. Inc. vs. Chelda Enterprises (23 SCRA 119)

G.R. No. L-25704             April 24, 1968

ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee,

vs.
CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants.

Luis A. Guerrero for plaintiff-appellee.

Burgos and Sarte for defendants-appellants.

BENGZON, J.P., J.:

FACTS

Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against
the partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of
alleged unpaid loans in the total amount of P20,880.00, with legal interest from the filing of the
complaint, plus attorney’s fees of P5,000.00. Alleging that post dated checks issued by
defendants to pay said account were dishonored, that defendants’ industrial partner, Chellaram I.
Mohinani, had left the country, and that defendants have removed or disposed of their property,
or are about to do so, with intent to defraud their creditors, preliminary attachment was also
sought.

Answering, defendants averred that they obtained four loans from plaintiff in the total amount of
P26,500.00, of which P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff
charged and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per
month, and, consequently, plaintiff has no cause of action against defendants and should not be
permitted to recover under the law. A counterclaim for P2,000.00 attorney’s fees was interposed.

Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.

Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the
rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring
action against each other. Said rule, however, appellants add, is modified as to the borrower, by
express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover
interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is
made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil

60
Code provisions must be upheld as against the Usury Law, under which a loan with usurious
interest is not totally void, because of Article 1961 of the New Civil Code, that: “Usurious
contracts shall be governed by the Usury Law and other special laws, so far as they are not
inconsistent with this Code.” (Emphasis ours.)

ISSUE

Whether or not the illegal terms as to payment of interest likewise renders a nullity the legal
terms as to payments of the principal debt.

HELD

Article 1420 of the New Civil Code provides in this regard: “In case of a divisible contract, if the
illegal terms can be separated from the legal ones, the latter may be enforced.”

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable,
the latter only should be deemed void, since it is the only one that is illegal.

Article 1227: Santiago Navarro, Et. Al., vs. Felix Mallari, Et. Al.

G.R. No. 20586 October 13, 1923

Santiago Navarro, ET AL,

vs.

Felix Mallari, ET AL,

Street, J.:

Facts:

On June 11, 1920, Santiago Navarro (one of the trustees) and Felix Mallari (contractor) came to
an agreement and signed a contract for the construction of the chapel in their barrio in San
Vicente, Macabebe, Pampanga. Navarro demand that first-class iron should be used, for the roof,
that the best of cement should also be used, and that the woods should be of molave, dungon,
guiho, and nothing else for the price of Php 12,000.00 plus Php 4,000.00 to be paid to Mallari
when the work is finished. But some of the residents of municipality stated that Mallari is not a
contractor or builders by profession and knows nothing about constructing houses. In fact the
one who  knows little about construction was his son Jose Mallari but since Jose is not able to do
the job because he is a government employee he appointed his father which is Felix Mallari
(Felix Mallari was a mere figurehead). The chapel was made but one of the engineer said the
work was done with complete want of knowledge and the plans were drawn by a person
completely ignorant (lack of technical knowledge) that the building threatens ruin for want of
proper foundation and that upon the slightest tremor of earth it might come down.

Issue:  Whether or not Navarro can confiscate the sum of Php 4,000.00 which is yet unpaid upon
the purchase price and at the same time to claim the stipulated damages?

61
Ruling: The answer is No, the general rule is that the creditor cannot demand the fulfillment of
the principal obligation and stipulated penalty at the same. The balance of Php 4,000.00 is not
yet paid so Navarro cannot reimburse the said amount and claim the stipulated damages at the
same time.

Article 1229: The Bacharach Motor Co. Inc. vs. Faustino Espiritu, Rosario Espiritu

Nov. 6, 1928

FACTS

a.) July 28, 1925-The defendant (Faustino Espiritu)purchased plaintiff corp. a two-ton white
truck for P11,983.50,  paying P1,000.00 down to apply on account of this price and obligating
himself to pay the remaining P10,983.50 within the period agreed upon.

b.) The defendants mortgaged the purchased trucks and three others which are numbered 77197
and 92744 respectively to secure the payments.

c.) The defendant failed to pay P10,477.82 of the price secured bu mortgage.

d.) In case 28498 dated Feb. 18, 1925-defendant bought a one-ton white truck of the plaintiff
corporation for the sum of P7,136.50 and the P500 cash deducted and 12 percent annual interest
on the unpaid principal, obligated himself to make payment within the periods agreed upon and
mortgage truck 77197 and 92744 respectively in purchased of the other truck.

e.)The defendant failed to pay P4,208.28 if the sum.

f.) In both sales, it was agreed that 12 percent to be paid upon portion of the unpaid at execution
of contracts, if failed to non-payment in its maturity, 25 percent thereon as penalty.

g.) The defendant signed a promissory note solidarily with his brother Rosario Espiritu for
several sums secured by the two mortgages.

ISSUE

Whether or not that the plaintiff has the right to impose higher interest as penalty twice the fixed
rate by law.

HELD

No, Article 1152 of the civil code permits the agreement upon a penalty apart from the
interest.Should there be such agreement, penalty, does not include the interest; and which may be
demanded separately (as was held in case of Lopez vs. Hernaez-32 phil 631), but considering
that the obligation was partly performed and making use of the power given to the court by
article 1154 of the civil code, the penalty is reduced to 10 percent of the unpaid debt.

The judgment appealed from is affirmed.

62
Article1230: The Municipality of Hagonoy vs. Teofilo Evangelista

FACTS

The Municipality of Hagonoy filed a complaint against Teofilo Evangelista for not complying
With the contract and the penal clause attach to it. This related to fishpond lease to him by the
said municipality for a period of ten years. Said penal clause mentioned that he has to pay
surcharge (cargo) of 20%. Actually the original leases were Jose Evangelista,He transferred it to
Josefa Evangelista without the Municipality approving it as well as the non-payment of the
agreement. On the 9th year Josefa died and it was transferred to Teofilo Evangelista who then
requested for an extension of the lease and the partial payment so that he could pay the amount
required. An ordinance was passed granting him his request.

ISSUE

Whether or not the leasee has the right to request for the extension and for the partial payment?

HELD

Yes, in as much as the Municipal Council has given the defendant his request as well as the
partial payment in two basis, then let it be so. Therefore, the judgment of the lower court
dismissing the complaint should be and is hereby affirmed, with costs against the plaintiff. So
ordered. (Yulo, C.J., Moran, Ozaeta, and Paras, JJ., concur).

xxxxx-------------------------------xxxxxx
xxxxx-------------------------------xxxxxx

CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
  
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of
a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a) 

SECTION 1. - Payment or Performance

63
  
Art. 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation. (n)
Payment- it should be the delivery of money and the performance in any other manner of
an obligation.
Ex. Ria is indebted to Emi P1,000.00. Her obligation is to deliver to Emi the amount and
to perform his obligation which is to pay Emi the said amount.

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case may
be. (1157)
The general rule is that, to be considered a valid payment, the thing or service
contemplated must be paid and fulfillment must be complete.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered
by the obligee. (n)
This is the exception to the general rule in Art. 1233, that if there is substantial
performance in good faith by the debtor, the obligation is deemed to be fulfilled.

Art. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with. (n)
Another exception to the general rule in Art. 1233, that when the creditor accepts the
performance knowing its incompleteness and irregularities and without expressing any
protest, the obligation is deemed complete.
Ex. Karl agreed to paint the house of Jack. According to their stipulation, Karl
would use a particular brand of paint. If Jack accepted the performance of Karl,
knowing that the paint used was another brand and without expressing any protest
or objection, the obligation is deemed fully complied with.

Art. 1236. The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor. (1158a)
The general rule is that, you cannot compel the creditor to accept payment by a third
person whom he may dislike or distrust. However, if it is paid by the guarantor and
mortgagors, creditor can accept it if is stipulated in their contract.
Persons from whom creditor must accept payment:
1. Debtor
2. Any person who has an interest in the obligation (like guarantor).
3. A third person who has no interest in the obligation when there is stipulation that he
can make payment.
Effect of payment by a third person:

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 1. If made without the knowledge or against the will of the debtor, the person who paid
can recover only insofar as the payment beneficial to him.
Ex. Laila is indebted to Andrew P1,000.00. Richard, a third person paid the whole
amount without the knowledge and consent of Laila, and did not know that Laila
already paid P400.00, Richard is entitled to be reimbursed only on the amount of
P600.00 from Laila since it is the only amount Laila benefited. Richard can recover
P400.00 from Andrew who should not have accepted it. If Andrew acted in bad faith,
he is liable also for interest in lieu of damages.
2. If made with the knowledge of the debtor, the third person shall have the rights of
reimbursement and subrogation, that is to recover what he has paid.
Full reimbursement-full amount down to the single centavo the third person has paid.
Subrogation- the right to step on the shoes of the creditor.
Ex. In the above case, if the payment of Richard was made with the knowledge or
consent of Laila, Richard can recover from Laila the full reimbursement of P1,000.00
and the rights of subrogation.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will
of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty, or penalty. (1159a)
Subrogation- the act of putting somebody into the shoes of the creditor, hence, enables
the former to exercise all the rights and actions that could have been exercised by the
latter.
Rights arising from:
1. A mortgage
2. A guaranty
3. A penalty or penal clause

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor's consent. But the payment is
in any case valid as to the creditor who has accepted it. (n)
Donation, in order to be valid it must be accepted. Since, no one should be compelled to
accept the generosity of another. (Report of the Code of Commission, p. 132). However,
if the creditor accepts the payment, it shall be valid as to him and the payor although the
debtor did not give his consent to the donation.
Ex. Jack owes Tonix P1,000.00. without the intention of being reimbursed, Sky, a
third person paid Jack’s obligation. Jack had previously accepted Sky’s
generosity.
In this case, Jack is not liable to Sky and his obligation is extinguished. But if
Jack did not consent to the donation, Sky may recover from Jack since there has
been no donation, although originally Sky did not tend to be reimbursed.
Nevertheless, the obligation of Jack to Tonix is extinguished because the payment
is valid and he accepted it.

Art. 1239. In obligations to give, payment made by one who does not have the free disposal
of the thing due and capacity to alienate it shall not be valid, without prejudice to the
provisions of Article 1427 under the Title on "Natural Obligations." (1160a)
Free disposal of the thing due- means that the thing to be delivered must not be subject to
any claim or lein or encumbrance of a third person.

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 Capacity to alienate- that the person is not incapacitated to enter into contracts.
General rule in obligations to give, payment by one who does not have the free
disposition and capacity to alienate is not valid.
EXC. Is provided in ART. 1427. The creditor cannot be compelled to accept payment
where the person paying it has no capacity to make it.
Ex. Ria agreed to sell to Lleina a refrigerator. If the refrigerator to be delivered to
Lleina belongs to Emi, the same can be recovered by Emi because the payment is
not valid. Ria does not have free disposal of the refrigerator. The same right of
recovery exist although the refrigerator belongs to Ria if she is a minor and
therefore, has no capacity to alienate it.

Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it. (1162a)
Person to whom payment shall be made:
1. The creditor or oblige (person in whose favor obligation has been constituted).
2. His successor in interest (like an heir or assignee).
3. Any person authorized to receive it.
Ex. Ria owes Emi P1,000.00. Ria must pay Emi or any person authorized by Emi or in
case of his death, his heirs or any person authorized by law. Payment to any other person
is not valid except as provided in Art. 1241, par. 2. If Ria acted in good faith in paying to
the wrong party is not an excuse.

Art. 1241. Payment to a person who is incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar as the payment has been beneficial to
him.
Payment made to a third person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the following
cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the third person had
authority to receive the payment. (1163a)
If the creditor is incapacitated to accept the payment, in order to be valid :
1. If the incapacitated person kept the thing delivered.
2. And if it is beneficial to the incapacitated person.
Ex. Laila delivers P1,000.00 to Richard, a minor. Richard loses the P700.00 of the
money in gambling, or due to negligence or ignorance. In this case, the payment
should be considered as made only to the extent of P300.00. On the other hand, if
Richard kept the money paid or spent it for purposes useful to him, the payment
shall be valid; otherwise, and Richard would unduly enrich himself at the expense
of Laila.
The debtor is relieved from proving benefit to the creditor in case of:
1. Subrogation of the payer in the creditor’s right.
2. Ratification by the creditor.
3. Estoppel on the part of the creditor.

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Art. 1242. Payment made in good faith to any person in possession of the credit shall
release the debtor. (1164)
This is another instance of a valid payment.
Requisites:
1. Payment by payor must be made in good faith (this is presumed)(but payee may be
good or bad faith).
2. The payee must be in possession of the credit itself (not merely the document
evidencing the credit)
Ex. Jack is indebted to Lleina the amount of P1,000.00 which is evidenced by a
promissory note signed by Jack in favor of Lleina. Lleina lost the promissory note
which was later found by Ria who demanded payment from Jack. Payment to Ria
is not valid because Ria is the possessor merely of the document evidencing the
credit and not of the credit itself.

Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid. (1165)
When payment to creditor not valid:
In an action against the debtor who is the creditor of another, the latter (the debtor-
stranger), during the pendency of the case, may be ordered by the court (or by any
competent authority though it be administrative) to retain the debt until the right of the
plaintiff, the creditor in the main litigation is resolved.
Ex. Nico owes Ria P1,000.00. Emi, in turn owes Nico P1,000.00. In action by Ria against
Nico, Emi, upon petition of Ria, may be ordered by the court not to pay Nico and to
retain the debt in the meantime. In this case, the debt of Emi is said to be garnished or is
subjected to payment to Ria.
Garnishment- the proceeding by which a debtor’s creditor is subjected to the payment of
his own debt to another.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act
or forbearance against the obligee's will. (1166a)
The debtor cannot compel creditor to accept a different object.
Ex. Richard is obliged to give to Laila a Toyota car. Not having a Toyota car, Richard
wants to deliver a Honda car, more expensive. Richard cannot compel Laila to receive the
Honda car even though it commands a higher price. Because, the subject matter of the
contracting parties which is stipulated in their contract, cannot be changed without the
consent of Laila.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction
of a debt in money, shall be governed by the law of sales. (n)
This is one of the special forms of payment.
Dation in payment (dacion en pago) - it is the mode of extinguishing an obligation
whereby the debtor alienates in favor of the creditor, property for the satisfaction of
monetary debt.
Ex. Sky owes Ivy P50,000.00. to fulfill his obligation, Sky with the consent of Ivy,
delivers a piano. If the piano, however, is worth less than P50,000.00, the conveyance

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 must be deemed to extinguish the obligation to the extent only of the value agreed upon
unless it is stipulated in their contract that the piano is considered full payment.

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a thing
of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose
of the obligation and other circumstances shall be taken into consideration. (1167a)
It is a principle of equity in that it supplies justice in cases where there is lack of precise
declaration in the obligation. It is always hard to find one thing that is exactly similar to
another. If there is disagreement between the parties, the law steps in and determines
whether the contract has been complied with or not according to the circumstances. (8
Manresa 280-281).
The benefit is that it may be waived by the creditor or by accepting a thing of inferior
quality, and by the debtor by delivering a thing of superior quality.
Ex. If Tonix promised to deliver to Lance a horse. Lance cannot compel Tonix to
deliver a price-winning race horse. Neither can Tonix require Lance to accept an
old sickly horse.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, the Rules of
Court shall govern. (1168a)
General rules the debtor has to pay for the extrajudicial expenses incurred during the
payment.
Exception: When there is a stipulation to the contrary.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither may
the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may
demand and the debtor may effect the payment of the former without waiting for the
liquidation of the latter. (1169a)
General rule: the performance should be generally complete, delivered or rendered, as the
case may be.
Exceptions:
1. When there is an express stipulation to that effect.
2. When the debt is in part liquidated (definitely and determined or computed) and in part
unliquidated.
3. When the different prestations in which the obligation consists are subject to different
terms or conditions which affect some of them.
4. When a joint debtor pays his share or the creditor demands the same.
5. When a solidary debtor pays only the part demandable because the rest are not yet
demandable on account of their being subject to different terms and conditions.
6. In case of compensation, when one debt is larger than the other, it follows that a balance
is left.
7. When work is to be done by parts.

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Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if
it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the
abeyance. (1170)
Legal Tender- is that currency which a debtor can legally compel a creditor to accept in
payment of a debt in money when tendered by the debtor in the right amount. (Black Law
Dictionary)
In the Philippines, all coins and notes issued by the Bangko Sentral Ng Pilipinas (BSP)
constitute legal tender for all debts, both public or private.
Unless otherwise fixed by Monetary Board of the BSP, coins are legal tender for amounts
not exceeding P50.00 for denomination of P0.25 and above, and those of amounts not
exceeding P20.00 for denominations of P0.10 or less.
All coins and bills above P1.00 are, therefore, valid, legal tenders for any amount.
Ex. Richard owes Laila P1,000.00 which is due today. Laila can refuse to accept
check from Richard. If Laila accepts, there is no payment yet until the check has
been cashed or when through his fault, it has been impaired as when he has
delayed in presenting the check for payment for an unreasonable length of time
and the check has lost its value by reason of the insolvency of the bank.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary. (n)
Inflation- it is a sharp sudden increase of money or credit or both without a corresponding
increase in business transactions. (Webster’s Dictionary). It causes a drop in the value of
money, resulting in the rise of the general price level.
Deflation- is the reduction in volume and circulation of the available money or credit,
resulting in a decline of the general price level; it is the opposite of inflation.
Ex. Ria borrowed from Emi P5,000.00 payable after five years. On the maturity
of the obligation, the value of P5,000.00 dropped to P2,500.00 because of
inflation (or increased to P10,000.00 because of deflation).
In this case (assuming there is extraordinary inflation or deflation), the basis of
payment shall be equivalent value of the currency today to that five years ago.
Hence, Ria is liable to pay Emi P5,000.00 (or P2,500.00) unless there is an
agreement to the contrary.

Art. 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a determinate thing,
the payment shall be made wherever the thing might be at the moment the obligation was
constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.

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These provisions are without prejudice to venue under the Rules of Court. (1171a) 
 Places where obligation shall be paid:
1. If there is stipulation, the payment shall be made in the palce designated. (par. 1, Art
1306)
2. If there is a stipulation and the thing to be delivered is specific, the payment shall be
made at the place where the thing was, at the perfection of the contract. (par. 2)
3. If there is no stipulation and the thing to be delivered is generic, the place of payment
shall be the domicile of the debtor.
Venue- is the place where a court suit or action must be filed or instituted. (Secs. 1-4, Rule 4,
rules of Court)
Domicile- is the palce of a person’s habitual residence (Art. 50), the place where he has his
true fixed permanent home and to which place he, whenever he is absent, has the intention of
returning. (17 Am. Jur. 588).
Residence- is only an element of domicile. It simply requires bodily presence as an inhabitant
in a given place.
Ex. Lleina is obliged himself to deliver to Karl a specific car. It was agreed that the car
should be delivered at Karl’s house. The house of Karl shall be the place of delivery.

SUBSECTION 1. - Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of them the same must be
applied. Unless the parties so stipulate, or when the application of payment is made by the
party for whose benefit the term has been constituted, application shall not be made as to
debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the
contract. (1172a)
Application of payments- is the designation of the debt to which should be applied a payment
made by a debtor who owes several debts in favor of the same creditor. (Art. 1252,par. 1)
It is important to know the rules on application of payments because otherwise, we may not
know which one, of two or more debts, has been extinguished.
Requisites of Application of Payments:
1. One debtor and one creditor
2. Two or more debts
3. Debts must be of the same kind
4. Debts to which payment made by the debtor has been applied must be due
5. Payment made must not be sufficient to cover all debts
The application of payments as to debts not yet due cannot be made unless:
1. There is a stipulation that the debtor may so apply.
2. It is made by the debtor or creditor, as the case may be, for whose benefit the period has
been constituted. (Art. 1196, also Art. 1792)
Rules on application of payments:
1. The debtor makes the designation.
2. If not, the creditor makes it, by so stating in the receipt that he issues”unless there is
cause for invalidating the contract. ” (Art. 1251, Par. 2)
3. If neither the debtor nor the creditor has made the application, or if the application is not
valid, then application is made by operation of law. (Arts. 1253 and 1254, Civil Code)

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 4. If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered. (1173)
This rule is mandatory. Hence, the debtor cannot insist that his payment be credited to the
principal instead of the interest. However, if the creditor agrees, this is all right. (8
Manresa 317)
Ex. Richard owes Laila P1,000.00 with P100.00 as accrued interest. Richard pays
P1,000.00. The P1,000.00 will first applied to the interest earned by debt. Then
the balance of P900.00 will be credited to the amount. Therefore, Richard will
still owe Laila P100.00 of the principal.

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or
if application can not be inferred from other circumstances, the debt which is most onerous
to the debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.(1174a)
In case no application is made, the following rules shall be observed:  
1. Apply it to the most onerous (in case the due and demandable debts are of different
natures).
2. If the debts are of the same nature and burden, application shall be made proportionately.

SUBSECTION 2. - Payment by Cession

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his
debts. This cession, unless there is stipulation to the contrary, shall only release the debtor
from responsibility for the net proceeds of the thing assigned. The agreements which, on
the effect of the cession, are made between the debtor and his creditors shall e governed by
special laws. (1175a)
Payment by cession- is another special form of payment. It is the assignment or abandonment
of all the properties of the debtor for the benefit of his creditors in order that the latter may
sell the same and apply the proceeds thereof to satisfaction of their credits.
Requisites:
1. Must be two or more creditors
2. Debtor must be (partially) insolvent
3. Cession must be accepted by the creditors
DACION EN PAGO CESSION
Does not affect all the properties In general, affects all the properties of the
debtor
Does not require plurality of creditors Requires more than one creditor
Only the specific or concerned creditor’s Requires the consent of all the creditors
consent is required
May take place during the solvency of the Requires full or partial insolvency
debtor
Transfers ownership upon delivery Does not transfer ownership

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This is really an act of novation Not an act of novation
Ex. Jack is indebted to several creditors in the total amount of P2 million. His assets are
not sufficient to pay all his debts. With the consent of his creditors, Jack may assign his
property to them to be sold to satisfy their credits. If the net proceeds of the sale amount
only to P1.5 million, Jack is still liable for the balance of P500,000.00 unless there is
stipulation that the assignment shall be in full satisfaction of all his debts.

SUBSECTION 3. - Tender of Payment and Consignation

Tender of payment- the act of offering the creditor what is due him together with a
demand that the creditor accept the same.
Consignation- the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment. It generally requires a
prior tender of payment.
 

Art. 1256. If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
Consignation is sufficient even without a prior tender:
1. When the creditor is Absent or Unknown or Does Not Appear at the place of payment.
(the creditor need not be judicially declared absent).
2. When the creditor is Incapacitated to receive payment at the time it is due. (The rule does
not apply if the creditor has a legal representative and this fact is known to the debtor).
3. When, without just cause, the creditor Refuses to give a receipt.
4. When two or more persons claim the same right to collect. (An action in Interpleader
would be proper here).
5. When the title (written document) of the obligation has been Lost.
6. When the debtor had previously been notified by the creditor that the latter would not
accept any payment.
Ex. Sky owes Ivy a sum of money. On the due date, Sky offers to pay but Ivy refuses to
accept the payment without any justifiable reason. In this case, Sky’s obligation will not
be extinguished until he has made a valid consignation.
Requirements for a valid tender of payment:
1. Tender of payment must comply with the rules on payment. (Arts. 1256-1258). The
tender, even if valid, does not by itself produce legal payment, unless it is completed by
consignation. (PNB vs Relativo, 92, Phil. 203).
2. It must be unconditional and for the whole amount. (Joe’s Radio Electrical Supply vs.
Alto Electronics Corp. 104 Phil 333).
3. It must be actually made. The manifestation of a desire or intention to pay enough.
(Catangcatng vs. Legayada, 84 SCRA 51)
Art. 1257. In order that the consignation of the thing due may release the obligor, it must
first be announced to the persons interested in the fulfillment of the obligation.

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The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment. (1177)
Requisites of a valid consignation:
1. Existence of a valid debt which is due (Art. 1256, par. 1).
2. Tender of payment by the debtor and refusal without justifiable reason by the creditor to
accept. (Ibid)
3. Previous notice of consignation to persons interested in the fulfillment of the obligation.
(Art. 1257, par 1).
4. Consignation of the thing or sum due. (Art. 1258, par. 1).
5. Subsequent notice of consignation made to the interested persons. (Ibid, par. 2)

Art. 1258. Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a proper case,
and the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof.
(1178)
Consignation, by depositing the thing or sum due with the proper judicial authority, is
necessary to effect payment.
How consignation is actually made:
1. The things must be deposited with the proper judicial authorities (while ordinarily cashier
or the cash officer should be the person to issue the receipt for the money consigned, a
temporary receipt issued by the clerk of court said deposit would suffice). (Yap vs
Tingin, L-18943, May 31, 1963).
2. There must be proof that:
a.) Tender has previously been made. (General rule)
b.) That the creditor has previously notified the debtor that consignation will be made (in
case tender is not required.)

Art. 1259. The expenses of consignation, when properly made, shall be charged against the
creditor. (1178)
The consignation is made necessary because of the fault or unjust refusal of the creditor to
accept payment. That being the case, it is but just that the expenses should be charged against
him. Charge to the debtor if the consignation is not properly made.
When consignation deemed properly made:
1. When the creditor accepts the thing or sum deposited, without objection, as payment of
the obligation (Art. 1260, par. 2).
2. When the creditor questions the validity of the consignation, and the court, after hearing,
declares that it has been properly made. (Ibid)
3. When the creditor neither accepts nor questions the validity of the consignation, and the
court after hearing, orders the cancellation of the obligation. (Art. 1260, par.1, Salaria vs
Buenviaje, 81 SCRA 722).

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.

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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 sum
deposited, allowing the obligation to remain in force. (1180)

Effects if consignation is properly made:

1. The debtor may ask the judge to order the cancellation of the obligation.
2. The running of interest is suspended.
3. However, it should be observed that before the creditor accepts, or before the judge
declares that consignation has been properly made, the obligation remains. (Padua vs
Rizal Surety, 47 O.G. Supp. No 12 p. 308).

The debtor however, may withdraw as a matter of right the thing or sum deposited:
1. Before the creditor accepted the consignation.
2. Before a judicial declaration that the consignation has been properly made, as he still the
owner of the same.
3. When after the consignation had been properly made (the creditor having accepted or the
court having declared it proper), the creditor authorizes the debtor to withdraw the thing.
(Art. 1261)

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor
to withdraw the same, he shall lose every preference which he may have over the thing. The
co-debtors, guarantors and sureties shall be released. (1181a) 
The consignation has been already made (that is, the creditor has accepted; or the court has
approved the consignation.) The withdrawal by the debtor is a matter of privilege.
Effects:
1. The obligation remains.
2. The creditor loses any preference (priority) over the thing.
3. The co-debtors, guarantors, and sureties are released (unless they consented).
Ex. Richard is indebted to Laila the sum of P10,000.00 with Sky as the guarantor. On the
due date, Richard offered payment but Laila refused to accept the same. So, Richard
made a consignation. Subsequently, Richard withdrew the deposit after securing the
consent of Laila.
Under this article, Laila loses whatever preference she may have over the amount and
Sky, the guarantor, shall be released.

SECTION 2. - Loss of the Thing Due

Loss includes impossibility of performance. There is a loss when:
1. When the object perishes (physically, it is destroyed).
2. When it goes out of commerce
3. When it disappears in such way that the existence is unknown or it cannot be recovered.
(Art. 1189, No. 2, Civil Code).
Impossibility of performance includes:
1. Physical
2. Legal, which is either directly caused as when prohibited by law or indirectly caused as
when the debtor is required to enter a military draft
3. Moral (impracticability) (Art. 1267)

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Art. 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he
has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the
thing does not extinguish the obligation, and he shall be responsible for damages. The same
rule applies when the nature of the obligation requires the assumption of risk. (1182a)
In order that an obligation may be extinguished by the loss of the thing, requisites:
1. Obligation is to deliver a specific or determinate thing.
2. Loss of the thing occurs without the fault of the debtor.
3. Debtor is not guilty of delay.
Will not extinguished liability due to fortuitous event:
1. The law so provides
2. The stipulation provides
3. The nature of the obligation requires the assumption of risk
4. Obligation to deliver arises from a crime

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation. (n)
The obligation continues to exist because a generic thing does not really perish.
However, exceptions are:
1. if the generic thing is delimited (like 20 kilos of sugar from mu 1999 harvest, when such
harvest is completely destroyed).
2. If the generic thing has already been segregated or set aside, in which case, it has become
specific.
Ex. Karl promised to deliver 100 cavans of rice to Vladimir. The 100 cavans of rice
which Karl intended to deliver were lost in a flood. Karl is liable to Vladimir because his
obligation is to deliver a generic thing, and it can still be paid from other sources.

Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of
the object of the obligation is so important as to extinguish the obligation. (n)
Partial loss may indeed be equivalent to a complete loss, such as the loss of specific car.
In other cases, the loss may be insignificant. Hence, judicial determination of the effect is
needed.
Ex. Lleina obliged to deliver to Ria a specific race horse. The horse met an accident as a
result of which it suffered a broken leg. The injury is permanent. Here, the partial loss is
so important as to extinguish the obligation. If the loss is due to the fault of Lleina, she
shall be obliged to pay the value of the horse with indemnity for damages.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed
that the loss was due to his fault, unless there is proof to the contrary, and without
prejudice to the provisions of article 1165. This presumption does not apply in case of
earthquake, flood, storm, or other natural calamity. (1183a)
Presumption that loss was due to debtor’s fault, is that the debtor is presumed to be at
fault.

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 Ex. If a person is entrusted with several heads of cattle and he cannot account for some
missing ones, he is presumed to be at fault. (Palacio vs Sudario, 7 Phil. 275).
Presumption of fault does not does not apply in the case of a natural calamity.
Ex. Although the fire is not a natural calamity, if a tenant is able to prove that the fire
caused in his apartment is purely accidental, he is not liable. (Lizares vs Hernaez &
Alunan, 40 Phil. 981).

Art. 1266. The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor. (1184a)
Without the debtor’s fault, the obligation becomes legally or physically impossible. The
impossibility of performance will result in the extinction of the obligation. The impossibility
must take place after the constitution of the obligation.
Kinds of Impossibility:
1. Physical- takes place when, for example the obligor dies or becomes physically
incapacitated to perform the obligation.
Ex. Richard obliged to paint a picture for Laila to be finished within a month. One week
after the obligation was constituted, Richard met an accident, as a result of which, his
arms were amputated. The obligation of Richard has become physically impossible.
Richard is released from the obligation.

2. Legal- occurs when the obligation cannot be performed because it is rendered impossible
by provision of law, although physically it may be possible of performance.
Ex. Karl agreed to construct a commercial building for Vladz. The government refused to
issue a building permit because the area has been declared by law as a residential zone.
The obligation of Karl is extinguished because it has become legally impossible. The
performance of the prestation is directly prohibited by law.

Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part. (n)
General rule is that impossibility of performance releases the obligor. However, it is
submitted that when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the obligor in
whole or in part. The intention of the parties should govern and if it appears that the
service turns out to be so difficult as to have been beyond their contemplation, it would
be doing violence to that intention to hold the obligor still responsible. (Report of the
Code Of Commission, p. 133)
Ex. Laila agreed to construct a road near a mountain. A very strong typhoon caused an
avalanche making the construction of the road dangerous to human lives, which was not
foreseen or contemplated by the parties. Laila may release, in whole or in part, from his
obligation to continue with the construction.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever may be
the cause for the loss, unless the thing having been offered by him to the person who should
receive it, the latter refused without justification to accept it. (1185)
This article gives one instance where a fortuitous event does not extinguished the
obligation. However, it is exempted if the creditor is in mora accipiende.

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 Ex. A stole the jeep of B. here, A has the obligation to return to B. The obligation of A
arises from an act punishable by law. (Art. 1157). Even if the jeep is destroyed without
the fault of A, he shall be liable for the payment of its price. The exception to the rule is
when B is in mora accipiende. (Art. 1169). In either case, A is liable if the loss is due to
his fault.

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by
reason of the loss. (1186) 
The creditor is given the right to proceed against the third person responsible for the loss.
There is no need for an assignment by the debtor. The rights of action of the debtor are
transferred to the creditor from the moment the obligation is extinguished, by operation
of law to protect the interest of the latter because of the loss.
Ex. Sky is obliged to deliver to Ivy a specific car. The car is lost through the fault of
Tonix. The obligation of Sky is extinguished and he is not liable to Ivy. Such being the
case, Sky would not be interested in going after Tonix. The law, however, protects Ivy by
giving him the right to bring an action against Tonix to recover the price of the specific
car with damages.

SECTION 3. - Condonation or Remission of the Debt

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance
by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation. (1187)
Remission- is an act of liberality by which the obligee, without receiving any price or
equivalent, renounces the enforcement of the obligation, as a result his right against the
debtor. (4 Sanchez Roman 422)
Requisites of Condonations OR Remissions:
1. it must be gratuitous;
2. it must be accepted by the debtor;
3. the parties must have capacity;
4. must not be inofficious; and
5. if made expressly, it must comply with the forms
Effect of inofficious Remission
While a person may make donations, no one can give more than that which he can give by a
testamentary will, otherwise, the excess shall be inofficious and shall be reduced by the Court
accordingly.
Like for example, a part of the testator’s property called legitimate cannot be disposed of
because the law has reserved it from certain heirs called the compulsory heirs.
Ex. Richard owes Laila P1,000.00. When the debt matured Laila told Richard that he not pay
the debt since he was condoning it. Richard, in turn, expressed his gratitude. Here, the debt
has been extinguished by remission.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation of the action which the former had against
the latter.

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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. (1188)
Art. 1272. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily,
unless the contrary is proved. (1189)
Presumption In Case Document Found In the Possession Of Debtor:
If the document is found in the hands of the debtor and it is not known how he came into
possession of the same, the presumption is that there was payment by virtue of the
payment of the debt. Or it was voluntarily delivered to the debtor, which gives rise to the
remission of the obligation.
Ex. Richard owes Laila P10, 000 evidenced by a promissory note. The note as signed by
Richard was given to Laila. If the promissory note is voluntarily delivered to Richard,
the presumption is that the debt must have been paid by Richard.
It is known that Richard has not yet paid Laila, it must be presumed that the obligation
has been remitted. Suppose it is not known how Richard came into possession of the
promissory note, the presumption is that it was voluntarily delivered by Laila unless Laila
proves to the contrary.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force. (1190)
Of Effect Renunciation Of the Principal Debt:
The above provision follows the rule that the accessory follows the principal. The
accessory cannot exist without the principal obligation.
Ex. Jack owes Sky P10, 000 with Tonix as guarantor. The principal debt here is
the P10, 000 while the accessory obligation is the guaranty of Tonix. The
remission of the debt of Jack by Sky extinguishes the guaranty of Tonix. But if
only the guaranty of Tonix is condoned, the obligation of Jack shall remain in
force.

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession of the debtor,
or of a third person who owns the thing. (1191a) 
Pledged- is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable or instrument evidencing incorporeal rights for the purpose of securing
the fulfillment of a principal obligation with the understanding that when the obligation is
fulfilled, the thing delivered shall be returned with all its fruits and accessions.
If the thing pledged is found in the hands of debtor or the third person, only the accessory
obligation of pledge is presumed remitted, not the obligation itself.
Ex. Sky delivers to Ivy his diamond ring in pledge to guarantee the payment of loan. If
later on the ring is found in the possession of Sky, the presumption is that Ivy has agreed
to the loan without the pledge. Ivy may prove that she returned the ring to Sky upon the
latter’s request to be delivered back to him.

SECTION 4. - Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person. (1192a)

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 Confusion is the meeting in one person of the qualities of creditor and debtor with respect
to the same obligation. (4Sanchez Roman 421)
Requisites of A Valid Confusion
1. The merger of the qualities of creditor and debtor must be in the same person;
2. It must take place in the person of either the principal debtor and principal creditor;
and
3. It must be complete, clear and definite; and
4. The very obligation must be the same.
Ex. Lleina issued a promissory note for P10, 000 in favor of Emi payable 30 days after
sight. Before the maturity of the note, Emi indorsed it to Ria; Ria indorsed it to Jack;
Jack indorsed it to Lleina. The obligation of Lleina to Emi is extinguished because there
is here a merger of the qualities of the debtor and creditor in one and the same person
with respect to one and the same obligation cannot demand and collect payment from
himself.

Art. 1276. Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the latter does
not extinguish the obligation. (1193)
Effect of Merger
This article reiterates the principles established in Articles 1176, 1274, NCC, that
accessory follows the principal.
The extinguishment of the principal obligation extinguishes the accessory obligation; but
the extinguishment of the accessory does not extinguish the principal obligation
Ex. Richard obtains P10, 000 loan from Laila which loan was guaranteed by
Rhorie. Later, Laila assigned the credit to Tonix, who in turn assigned it to
Richard. The principal debt is extinguished and Rhorie is released from his
obligation as guarantor.
If, in this same example, the credit was assigned by Laila to Tonix and Tonix to
Rhorie. The contract of guaranty is extinguished but the principal obligations
remains. Richard has now the obligation to pay Rhorie.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur. (1194)
Effect of Merger in Joint Obligation
In a joint obligation, the debts are distinct and separate from each other. In case there is
merger in a joint obligation, it affects only the share corresponding to the creditor or
debtor in whom the two characters concur. The co-debtor will not owe his corresponding
share to this former joint co-debtor.
Ex. Jack, Sky and Tonix are jointly indebted to Lance in the amount of P15, 000. Lance
assigns his credit to Tony who in turn assigned it to Jack. There is here a merger between
Jack and Lance but Sky and Tonix would now owe Jack P5, 000 each.

SECTION 5. - Compensation
  
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (1195)

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 Compensation- shall take place when two persons, in their own rights are creditors and
debtors of each other.
Compensation Confusion
As to number of persons there must be two persons there is only one person in
whom the quality of creditor
and debtor is merged
As to number of obligation there must be two obligations there is only one obligation

Kinds of Compensation:
1. As to cause
a. Legal – takes effect by operation of law provided all the requisites prescribed by law
are present.
b. Voluntarily – takes place by virtue of the agreement of the parties.
c. Judicial – takes place only through court orders.
2. As to effect
a. Total – when both debts are completely extinguished because the debt are the same
amount
b. Partial – the debts are not the same amount hence after compensation, a balance
remains outstanding.
Ex. Richard owes Laila the amount of P10,000. Laila owes Richard the amount of
P7,000.00. Both debts are due and demandable today. Here, the compensation takes place
partially, that is, to the concurrent amount of P7,000.00. So, Richard is liable to Laila for
only P3,000.00.

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

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (1196)
Requisites of a Proper Compensation or Legal Compensation:
1. The parties are principal creditor and principal debtor of each other;
Ex. Lleina owes Jack P10, 000 payable on Dec. 20, 2000. Jack on the other hand owes
Lleina P10, 000 also due and payable on Dec. 30, 2000. These two obligation become
due on Dec. 30, 2000 compensation takes place because both Lleina and Jack are
principal creditor and principal debtor of each other.
2. Both debts consists in a sum of money or of consumable things of the same kind and
quality;
Ex. Sky obliged himself to deliver to Ivy 100 sacks of rice on October 30, 2000. Ivy, on
the other hand, has an obligation to deliver 100 sacks of rice to Sky on October 20, 2000.
There is compensation because they are consisting of consumable things.
3. The two debts are due and demandable;
Ex.Richard owes Laila P10, 000 payable on October 30, 2000. Laila owes richard P10,
000 payable also on October 30, 2000. There is compensation when the obligation
becomes due on October 30, 2000.

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 4. The two debts liquidated; and the liquidated means that the amount of debt has already
been fixed and determined, while the word demandable means when it is due;
5. There be no retention or controversy means a third person who is claiming to be a
creditor.
Ex. Jack woes Sky P10, 000 and Sky owes Jack P10, 000 but Jack’s credit of P10, 000
has been garnished by Tonix who claims to be an unpaid creditor of Jack. Sky has been
duly notified of the controversy. Any possible compensation is in the meantime
suspended. If Tonix wins her claim, there can be no compensation. If he loses, the
controversy is resolved, and then compensation can take place.

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set
up compensation as regards what the creditor may owe the principal debtor. (1197)
Guarantor May Set Up Compensation
This is an exception to Article 1279, part. 1 because the article allows setting up
compensation as regard what the creditor may owe to the principal debtor.
Ex. Lance owes Tony P10, 000. Inot is the guarantor of lance. tony owes Lance P10,
000. When Lance sues Tony for P 4,000 and Tony cannot pay, Inot will be liable for only
P6, 000 because he can set the P4, 000 credit of Toni as the basis of partial compensation.

Art. 1281. Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation. (n)
Total compensation- is when the amount due are equal or of the same amount, hence both
obligations are extinguished.
Ex. Karl is indebted to Vladz the amount of P10, 000 due on Dec. 19, 2000. Vladz is
likewise indebted to Karl in the amount of P10, 000 due on Dec. 19, 2000. There is here a
total compensation; hence, both debts will be extinguished.
Partial compensation- is when the amount are not the same after compensation took
place, there is a balance remains.
Ex. Karl owes Vladz P10, 000 due on Dec. 19, 2010. On the other hand, Vladz owes
Karl P6,000 due also on Dec. 19, 2010 and when the due date arrives, there is a balance
of P4, 000 that will remain after compensation takes place.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
Compensation by Agreement Of the Parties
This is a voluntary compensation as an execution to the general rule that only debts
which are due and demandable can be compensated.(Art.1279)
Ex. Jack owes Lleina P10, 000 due on Nov. 30, 2001. On the other hand, Lleina owes
Jack P10, 000 due on Dec. 30, 2011. There can be no compensation since the debt of
Lleina is not yet due, however by voluntary agreement that there will be compensation
between the two of them, then compensation will take place.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount
thereof. (n)
Judicial Compensation

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 A judicial compensation- is one whereby a money debt of a person may be allowed by
the court to be compensated with a claim of damages by another.
Ex. Richard owes Ronniel P1, 000. When Richard demanded payment, Ronniel failed to
pay. In anger, Richard damaged the property of Ronniel to the extent of P800. Ronniel
can set off the obligation of Richard to pay him damages in the amount of P800 against
his debt of P1, 000.

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided. (n)
Compensation Of Rescissible or Voidable Debts
Rescissible and voidable obligations are valid until they are judicially rescinded or
avoided and prior rescission or annulment, the debts may be compensated.
Ex. Lleina owes Ria P 10, 000. Subsequently, Lleina, through fraud was able to make
Ria sign a promissory note that Ria is indebted to Lleina for the same amount. The debt
of Lleina is valid, but that of Ria is voidable. Before the debt of Ria is nullified, both
debts may be compensated against each other if all the requisites for legal compensation
are present.
If suppose the debt of Ria is later annulled by the court, Lleina is still liable considering
compensation had already taken place because the effect of annulment is retroactive, it is
as if there was no compensation.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent
ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge of
the assignment. (1198a)

When Compensation has taken place before assignment:

If an extinguished obligation has been assigned by the creditor to third person, the debtor can
raise the defense of compensation with respect to the debt. The remedy of the assignee is
against the assignor.
Ex. Sky owes Ivy P5, 000 due yesterday. Ivy owes Sky P3, 000 due also yesterday. Both
debts are extinguished up to amount of P3, 000. Hence, Sky still owes Ivy P2, 000 today. If
Ivy assigns his right to Tonix, latter can collect only P2, 000 from Sky. However, if Sky
gave his consent to the assignment before it was made on he will be liable to Tonix for P5,
000 but he can still collect the P2, 000 owed by Ivy. It is as if no compensation took place.
Where Compensation has taken place after assignment:
There are three cases of compensation which take place after an assignment of rights made
by the creditor. They are:
1. Assignment with consent of debtor
Ex. Sky owes Ivy P5, 000 due Dec. 19. Ivy owes Sky P3, 000 due Dec. 19. Ivy assigned
his right to Tonix, the assignee, the compensation which would pertain to him against
Ivy, the assignor. Sky is still liable to Tonix for P5, 000 but he can still collect the P2,

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 000 debt from Ivy. However, if Sky while consenting to the assignment, reserved his
right to the compensation, he would be liable only P2, 000 to Tonix.
2. Assignment with the knowledge but without the consent of debtor
Ex. Sky owes Ivy P1, 000 due Dec. 1. Ivy owes Sky P2, 000 Dec. 10. Sky owes Ivy P1,
000 due Dec. 15. Ivy assigned his right to Tonix on Dec. 12. Sky notified Ivy but the
latter did not give his consent to the assignment, how much can Tonix collect from Sky?
Ivy can set up the compensation of debts on Dec. 10 which was before the cession on
Dec. 12. There being partial compensation, the assignment is valid only up to the amount
of P1, 000 but Ivy cannot raise the defense of compensation with respect to the debt of
Sky due on Dec. 15 which has not yet matured. So, on Dec. 12, Ivy is liable to Tonix for
P1, 000. Come Dec. 15, Sky will liable for his debt of P1, 000 to Ivy.
3. Assignment without the knowledge of the debtor
Ex. In the preceding example, let us suppose that the assignment was made without the
knowledge of Ivy who learned of the assignment only on Nov. 16. In this case, Ivy can
set up the compensation of credits before and after the assignment. The crucial time is
when Ivy acquired knowledge of the assignment and not the date of the assignment. If
Ivy learned of the assignment after the debts had already matured, he can raise the
defense of compensation, otherwise, he cannot.

Art. 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of payment. (1199a)

Compensation where debts payable at different places

This legal compensation does not refer to the difference in the value of the things in their
respective places but to the expenses of monetary exchange and expenses of monetary
exchange and expenses in transportation. Once these expenses are liquidated, the debts
also become compensated. The indemnity shall be paid by the person who raises the
defense of compensation.
Ex. Ricahrd owes Laila $1, 000 payable in Manila. Laila owes Richarcd P38,
000(equivalent amount) payable in Manila. If Sky claim compensation, he must pay for
the expenses of exchange.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum
or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)

Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense. (n)
Instances when legal compensation is not allowed by law:
1. Where one of the debts arises from a depositum- a deposit constituted from the moment a
person receives a thing belonging to another with the obligation of safely keeping it and
of returning it the same. (Art. 1962)
Ex. Richard owes Laila P1,000. Laila in turn owes Richard P1,000 representing the value
of a diamond ring deposited by Richard with Laila which failed to return.
In this case, Laila, who is the depository, cannot claim legal compensation even if
Richard fails to pay his obligation. The remedy of Laila is to file an action against
Richard for the recovery of the amount of P1,000.

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 2. Where one of the debts arises from a commodatum – Commodatum is a gratuitous
contract whereby one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it. (Art. 1993)
Ex. In the preceding case, if Laila borrowed the ring of Richard, Laila cannot refuse to
return the ring on the ground for compensation because no compensation can take place
when one of the debts arises from a commodatum.
3. Where one of the debts arises from a claim for support by gratuitous title- Support
compromises everything that is indispensable for sustenance, dwelling, clothing, medical
attendance, education and transportation, in keeping with the financial capacity of the
family. (Art. 194, FC)
Ex. Sky donates to Ivy an allowance of P2,000 a month for five years for the latter’s
support. However, previous to the donation, Ivy already owed Sky P10,000 which was
due and unpaid.
In this case, Sky cannot say that Ivy “In as much as you owe me P10,000, I will not pay
your allowance from ten months.” (Memorandum Of the Code of Commision, March 8,
1951, pp 13-14).
4. Where one of the debts consists in civil liability arising from a penal clause. “If one of the
debts consists in civil liability arising from a criminal offense, compensation would be
improper and inadvisable because the satisfaction of such obligation is imperative.”
(Report of the Code Commision, p. 134)
Ex. Tonix owes Sky P1,000. Sky stole the ring of Tonix worth P1,000. Here,
compensation by Sky is not proper.
But Tonix, the offended party, can claim the right of compensation. The prohibition in
Art. 1288 pertains only the accused but not to the victim of the crime.

Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation. (1201)
Rules on application of payments apply to order of compensation
Compensation is similar to payment. If a debtor has various debts which are susceptible of
compensation, he must inform the creditor which of them shall be the object of
compensation. In case he fails to do so, then the compensation shall be applied to the most
onerous obligation. (Arts. 1252, 1254)
Ex. Jack is indebted to Lleina in the amount of:
a. P1, 000 without interest due today;
b. P1,000 with interest of 18% due also today;
c. P1,000 with interest of 16% due yesterday.
Lleina owes Jack P1,000 due today.
For purposes of the application of payment, Jack is the debtor. He must specify to Lleina
which of the three debts should be compensated. If he fails to inform Lleina, then Lleina
should apply the compensation to the second obligation of Jack which the obligation bearing
the 18% interest because it is the most onerous obligation.

Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation. (1202)
Consent of parties not required in legal compensation:

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 1. Compensation takes place automatically by mere operation of law- from the moment all
the requisites mentioned in Art. 1279 concur, compensation takes place automatically
even in the absence of agreement between the parties, and extinguishes reciprocally both
debts to the amount of their respective sums. It takes place by operation of law from the
day all the necessary requisites concur, without need of consent on the part of the parties,
and even without their knowledge.
2. Full legal capacity of parties not required- As it takes place by operation of law and
without any act of the parties, it is not required that the parties have full legal capacity
(see Art. 37) to give or to receive, as the case may be.

SECTION 6. - Novation
  
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Novation- is the extinction of an obligation through the creation of a new one which
substitutes it.
Dual function of novation:
Is a contract containing two stipulations; one to extinguish or modify existing obligation, the
other to substitute a new one in its place.
Kinds of novation:
A. According to its object or purpose
1. Real or objective- (changing the object or the principal conditions of the obligation).
(Art. 1291, par. 1)
2. Personal or Subjective- (change of persons)
a. Substituting the person of the debtor (Expromision or Delegacion)
b. Subrogating a third person in the rights of the creditor (change of creditor may be by
agreement- “conventional subrogation,” or by operation of law- “legal subrogation”).
3. Mixed (Change of object and parties)
B. According to the form of its constitution
1. Express
2. Implied (when the two obligations are essentially incompatible with each other)
C. According to its extent or effect
1. Total or extinctive novation ( when the old obligation is completely extinguished)
2. Partial or modificatory- (this is also termed imperfect or improper novation)
Ex. Richard agreed to deliver to Laila a car. Later, they entered into anther contract
whereby, instead of Richard delivering a car, he would deliver ten air conditioners. The
obligation to deliver the car is extinguished by the obligation to deliver the ten air
conditioners. The change may involve the principal terms of the obligation.

Art. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other. (1204)
Requisites of novation:
1. A previous valid obligation

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 2. Capacity and intention of the parties to modify or extinguish the obligation
3. The modification or extinguishment of the obligation
4. The creation of a new valid obligation
Novation is not presumed. It must be clearly and unmistakably established either by the
express agreement of the parties or acts of equivalent import (Aboitiz vs De Silva, 45 Phil.
883) or by the incompatibility of the two obligations with each other in every material aspect.
Ex. Suppose the obligation of Sky is to construct a house on a certain parcel of land.
Subsequently, Sky agreed t construct an apartment on the same parcel of land. The area of
the land is such both the house and the apartment as per the building plans cannot be
constructed on the same site.
There is novation in this case even in the absence of an express agreement to that effect
because the two obligations are absolutely incompatible with each other.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (1205a)
Kinds of personal novation:
1. Substitution- when the person of the debtor is substituted. (Art. 1291, par. 2)
2. Subrogation- when a third person is subrogated in the rights of the creditor. (Ibid, {3};
Art. 1300.)
Substitution of Debtor:
1. Expromision (where the initiative comes from a third person)(Art. 1294)
2. Delegacion (where the initative comes from the debtor, for it is he who delegates another
to pay the debt, and thus, he excuses himself. Here the 3 parties concerned- the old
debtor, the new debtor,and the creditor- must agree).(Art. 1295)
Ex. Jack tells Sky that Tonix will pay Jack’s debt. Sky agrees. It does not necessarily mean
that there is delegacion here. But if Jack tells Sky that Tonix will pay his debt and he asks
Sky to release him from his obligation, to which Sky agrees, delgacion results.

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the
new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any
liability on the part of the original debtor. (n)
In expromision, the new debtor’s insolvency or non-fulfillment of the obligation will not
revive the action of the creditor against the old debtor whose obligation whose obligation
is extinguished by the assumption of the debt by the new debtor. In expromision, the
replacement of the old debtor is not made to his own initiative.

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original
obligor, except when said insolvency was already existing and of public knowledge, or
known to the debtor, when the delegated his debt. (1206a)
General rule: Is that old debtor is not liable to the creditor in case of the insolvency of the
new debtor.
Exceptions:
1. The said insolvency was already existing and of public knowledge (although it was not
known to the old debtor) at the time of the delegacion.

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 2. The insolvency was already existing and known to the debtor (although it was not of
public knowledge) at the time of the delegacion.
The exceptions are intended to prevent fraud on the part of the old debtor.
Ex. Richard owes Laila P1,000. Richard proposed to Laila that Jack would substitute him as
debtor. Laila agreed to the proposal. If ,at the time of the delegacion, jack was already
insolvent but his insolvency was neither of public knowledge nor known to Richard, then
Richard is not liable. Neither is Richard liable if the insolvency of Jack took place after he
delegated his debt.
It is believed that Richard is also not liable if Laila had knowledge that Jack was insolvent at
the time the debt was delegated to him.

Art. 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons who did
not give their consent. (1207)
It follows the general rule that the extinguished of the principal obligation carries with it
that of the accessory obligations. (Arts. 1230,1273,1280).
It provides, however, an exception in the case of an accessory obligation created in favor
of a third person which remains in force unless said third person gives his consent to the
novation. (Art. 1311, par.2 ). This is so because a person should not be prejudiced by the
act of another without his consent.
Ex. Sky owes Ivy P2,000 with interest at 14 %. Ivy owes Tonix P280.00. It was agreed
among the parties that Sky would pay the interest of P280 to Tonix. In this case, besides
the principal obligation of Sky, there is a stipulation in favor of Tonix, a third person.
(see Art. 1311, par. 2). Later on, Sky and Ivy executed another contract whereby they
agreed that Sky would deliver to Ivy a television set in payment of the loan.
Inspite of yhr novation, the accessory obligation to pay the interest of P280 to Tonix will
subsist unless Tonix gives his consent to the novation.

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relation should be extinguished in any event. (n)
One of the essential requisites of a valid novation, namely, the new obligation must be
valid and effective. Thus, if the new obligation is void, there is no novation, and the old
obligation generally will subsist.
If the new obligation is only voidable, novation can be take place. But the moment it is
annulled, the novation must be considered as not having taken place, and the original one
can be enforced, unless the intention of the parties is otherwise.

Art. 1298. The novation is void if the original obligation was void, except when annulment
may be claimed only by the debtor or when ratification validates acts which are voidable.
(1208a)
If the obligation is void- there is no valid novation.
If the old obligation was voidable and has already been annulled, there is no more
obligation. Therefore, the novation is also void.
Ex. Sky agreed to deliver prohibited drugs to Ivy. Later on, it was agreed that Sky would
pay Ivy P100,000 instead of delivering the drugs. The obligation is void because the
original obligation is void.

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Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the
new obligation shall be under the same condition, unless it is otherwise stipulated. (n)
General rule: The conditions attached to the old obligation are also attached to the new
obligation.
Exceptions: If there is a contrary stipulation.
Reason for the general rule: If, for example, the suspensive condition attached to the
obligation is not fulfilled, the old obligation never arose. Therefore, there would be
nothing to novate, since novation requires the existence of a previous valid and effective
obligation.
Ex. Richard to give Laila a car if Laila should pass the bar exams. Later, both agreed that
what should be given would be a diamond ring. Nothing was mentioned in the second
contract regarding the condition. Is the new obligation also subject to a suspensive
condition?
Yes, unless it was otherwise stipulated in the new contract. The delivery of the diamond
ring would, therefore, be due only after Laila has passed the bar exams.

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it may take effect. (1209a)
Subrogation is the transfer to a third person of all the rights appertaining to the creditor,
including the right to proceed against guarantors, possessors of mortgages, subject to any
legal provision.
Kinds of subrogation:
From the viewpoint of cause or origin:
 Conventional or voluntary subrogation – this requires an agreement and the
consent of the original parties and of the creditor.
 Legal subrogation – takes place by operation of law
From the viewpoint of extent:
 Total subrogation
 Partial subrogation

Art. 1301. Conventional subrogation of a third person requires the consent of the original
parties and of the third person. (n)
For conventional or legal subrogation, the consent of all the parties is required:
The debtor – because he becomes liable under the new obligation and because his old
obligation ends
The old creditor – because his credit affected
The new creditor – because he becomes a party to the obligation

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

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(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the latter's share.
(1210a)
In the three cases enumerated, subrogation takes place by operation of law even without
the consent of the parties.
When a creditor pays another creditor who is preferred.
Example: Arthur owes Brad P1,000 secured by a first mortgage on the land of
Arthur. Arthur also owes Carl P2,000. This debt is unsecured. Under the law,
Brad is a preferred creditor, has preference to payment with respect to the land as
against Carl who is merely an ordinary creditor. If Carl pays the debt of Arthur to
Brad, Carl will be subrogated in Brad’s right so that he can have the mortgage
foreclosed in case Arthur fails to pay the P1,000 debt.

When a third person without interest in the obligation pays with the approval of the
debtor.
Example: Arthur owes Brad P1,000. Carl pays Brad with the express or implied
consent of Arthur. Carl will be subrogated in all the rights of Brad.

When a third person with interest in the obligation pays even without the knowledge of
the debtor.
Example: Arthur and Brad are joint debtors of Carl for the amount of P1,000.
Without the knowledge of Arthur, Brad pays the debt of P1,000. In this case, Brad
becomes a creditor of Arthur for P500, the latter’s share of the debt but not for the
remaining P500, the portion of the debt which corresponds to Brad, which is
extinguished by confusion or merger of rights.

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third person, be they guarantors
or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a)
Credit and all the appurtenant rights, either against the debtor, or against third persons are
transferred.
Example: Jamero owes Canoy P1,000,000. Gene is the guarantor. A stranger
Steve paid Canoy the P1,000,000 with the consent of Jamero and Canoy. Steve is
now subrogated in the place of Canoy. If Jamero cannot pay the P1,000,000,
Steve can proceed against the guarantor Gene.
It is understood that if the transferred credit is subject to a suspensive condition, the new
creditor cannot collect until after said condition is fulfilled.

Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for
the remainder, and he shall be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit. (1213)
Partial Subrogation
1.) The old creditor, who still remains a creditor as to balance

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 2.) The new creditor who is a creditor to the extent of what he had paid the creditor.
Example: Andrew owes Bobby P500,000. With the consent of both, Carl pays Bobby
P250,000. Now Bobby and Carl are the creditor of Andrew to the amount of P250,000.
Suppose Andrew has only P250,000 who should be preferred? Bobby, the original
creditor, should be preferred inasmuch as he is granted by the law preferential right to
recover the remainder, over the person subrogated in his place by virtue of the partial
payment of the same credit.

CASES:
Article 1233: Toribio vs. Foz (34 Phil. 913)

FACTS

On August 22, 1914, counsel for Felisa Toribio filed a complaint in the said court alleging as a
cause of action, that the plaintiff sold to the defendant Dolores Foz and to her husband
Buenaventura Toribio his rights to redemption and lease in the property having certificate of title
No. 2263, issued by the register of deeds of the city of Manila, for the sum of P2,200, less that of
P700 which the plaintiff owed to the defendant spouses.

The record shows, it to have been duly proven that the plaintiff, Felisa Toribio, was the owner of
a parcel of urban property situated at the intersection of Calles Raon and Sales of the district of
Santa Cruz, Manila, having certificate of title No. 2263; that said parcel was sold under right of
repurchase to Carlos Rodriguez Pomar, the plaintiff retaining, however, the right to continue to
occupy the house thereon on the condition of her paying to the purchaser sa monthly rental of
P38 and, of course, on that of her redeeming the property.

The plaintiff admitted that the defendant Dolores Foz had paid P307 on account, as proven by
the receipt in defendant’s possession signed by the plaintiff on April 18, 1914, but she denied
that she had received the price of the sale, P2,200, as set forth in the instrument Exhibit 2, signed
by herself on June 30, 1914.

The defendants, however, swore that they paid the whole of the said amount of P2,200 before the
deed of sale, Exhibit 2, was made out; that this is shown by the plaintiff’s own statement
contained therein of having received to her entire satisfaction from the defendant Buenaventura
Toribio the price of the sale P2,200. Dolores Foz also testified that, after deducting the P700
which the plaintiff owed her, the remainder still due for the purchase of the rights in the property
in question was only P1,500, which entire sum was paid prior to the execution of the proper deed
of sale in the following manner: P307 on April 18, 1914, according to the receipt issued by the
plaintiff and marked as Exhibit 1; P693 on a subsequently date; and finally, the additional sum of
P500, which she delivered the plaintiff before the execution of the said deed of sale, Exhibit 2.
The defendant Dolores Foz further testified that as the said partial payments were made to the
plaintiff in the presence of the notary Ramon Muyot, she, Dolores, being in a hurry, forgot to
require receipts for the sums delivered, and also through thoughtlessness she failed to require the
return of her certificate of indebtedness of the P1,500 that she had delivered to the plaintiff on
January 26, 1914. However, the notary Ramon Muyot, having been called to the stand for the
purpose of explaining the point in controversy, denied having seen the defendant Dolores Foz
made any payment of money to the plaintiff Feliza Toribio.

ISSUE

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Whether the sum of P1,500, which the defendant spouses owed to the plaintiff from January 26,
1914, was or was not wholly paid to her.

HELD

The defendants, in view of the certainty of the debt mentioned in the receipt of January 26, 1914,
were in duty bound to prove that not only had they paid P307 on account on April 18th of the
same year as they did by Exhibit 1, but also that they had paid the whole of the balance of the
amount claimed by presenting the receipt or receipts of the payments made, which they did not
do, when it was their strict duty to furnish such proof. (Sec. 297, Code of Civ. Proc.; Behn,
Meyer & Co. vs. Rosatzin, 5 Phil. Rep., 660; and Miller, Sloss & Scott vs. Jones, 9 Phil. Rep.,
648.)

If it is true that the whole sum specified in the said certificate of indebtedness was paid, no
explanation has been offered why the receipt of January 26, 1914, remained in possession of the
creditor and was not canceled in the deed of sale, if the debt, as well as the price of the sale, was
really paid. The existence in the hands of the creditor of an instrument of credit, is evidence that
the debt is still unpaid, unless the contrary be fully proven. (Sec. 334, No. 8, Code of Civ. Proc.;
Bantug vs. Del Rosario, 11 Phil. Rep., 511; Ramos vs. Ledesma, 12 Phil. Rep., 656; and
Ormachea Tin-Congco vs. Trillana, 13 Phil. Rep., 194.)

For the foregoing reasons, whereby the errors assigned by the appellants to the judgment
appealed from have been refuted, we hereby affirm the said judgment with the costs against the
defendant-appellant. So ordered.

Article 1235: Julian Naval vs. Hermogenes Benavides

Facts:       

On July 1904, the plaintiff entered into a written contract with the defendant for the construction
of a house worth P5,730.00. Due to certain changes they agreed that the plaintiff will expend
additional labor and materials in the construction of the house and the defendant should pay for
the said additional labor and materials. The additional expenses amounted to P1,663.70 but the
defendant insist that it was only a matter of two or three hundred pesos. The court made a
judgement in favor of the plaintiff and against the defendant for the sum of P270 with 6%
interest from the date of the decision (February 19,1906) and for the cost. Both plaintiff and
defendant presented an exception to the decision of the lower court. The plaintiff presented a bill
of exceptions while the defendant presented an exception to the decision of the lower court but
the court said that they cannot consider his assignment of error because the defendant has not
also presented a bill of exceptions. During the trial the defendant attempted to show the material
used in the construction of said house was not in accordance with the plans and specifications.
But the judgement of the lower court is hereby affirmed, with interest at the rate of 6% from the
date of said judgment and cost.

Issue: Whether or not the defendant is right in attempting to show the material used in the
construction?

Ruling: No, the court said that the evidence shows, however, that after the house was completed,
he accepted the same without objection like it was stated on this Article that “When the obligee
accepts the performance knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.” The court has decided that

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the acceptance and occupation of a building by the owner amounts to an acknowledgement that
the work has been performed substantially as required by the contract.

Article 1241: Panganiban vs. Cuevas (7 Phil. 477)

FACTS

The defendant, Agustin Cuevas, was ordered to return the said property to the plaintiff,
Panganiban, the owner of a camarin (a bamboo nipa construction) and lot.  He sold and
transferred the same to one Francisco Gonzales for the sum of 1,300 pesos.

On August, 1900, Francisco Gonzales sold the property to Agustin Cuevas for the same price,
and on the said 13th of August, 1900, Cuevas asked for and was granted, in ex
parte proceedings, the judicial possession of the property on the 14th of the said month.
Subsequently, on the 10th of August, he attempted to pay Panganiban the sum of 200 pesos,
which he deposited in court,

On the 1st of October of the same year, 1900, Cuevas brought an action for ejectment against
Panganiban, and on the 12th of the same month Panganiban filed a complaint in this action for
the recovery of possession, the proceedings in the action for ejectment having been suspended.

Panganiban attempted to effect the repurchase of the property, but the creditor, Gonzales, being
absent from his place of residence on account of the war, he was unable to do so, nor was he able
to deposit the purchase price with the clerk of the court for the same reason; the revolution broke
out that time and the land and improvements in question were seized by the Filipino government
from Francisco Gonzales, the property having been redeemed by Panganiban from the Filipino
government on the 12th of November, 1898. These facts the plaintiff attempted to prove by the
records of the proceedings relating to the said seizure and repurchase, which records he attached
to his complaint and made a part thereof, and further by the receipt of the purchase price paid to
the revolutionary government which had seized the land from Gonzales.

ISSUE

Whether or not the payment to a third person is valid.

HELD

Article 1164 of the Civil Code provides that “a payment made in good faith to the person who is
in possession of the credit shall release the debtor,” and article 1163, paragraph 2, reads as
follows: “A payment made to a third person shall also be valid in so far as it may have been
beneficial to the creditor.”

If the revolutionary government, by reason of the seizure or the embargo, did not acquire the title
to the property or vested in the vendee, neither could the purchaser have acquired from the latter,
even though an embargo, the credit which the said vendee had under the right of redemption in
case such redemption should take place; the property of the vendee thus seized had included the
right to demand the stipulated price for the repurchase, perhaps the payment of such price to the
person rightfully entitled to it under the embargo would have been proper. But there was nothing,
it is alleged, but an embargo of the real estate of the vendee including the property in question.
So that article 1164 of the Civil Code is not applicable to the case at bar, nor is paragraph 2 of
article 1163 applicable to this case, because their is nothing in the record to show that a payment
made by Panganiban to the revolutionary government was for the benefit of Gonzalez. “That the
creditor was benefited by the payment made to a third person by his debtor can not be presumed,

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and must, therefore, be satisfactorily established by the person interested in proving this fact.”
Manresa, 8 Civil Code, 257.)

Article 1243: The Tayabas Land Company vs. Sharruf

Facts:

On December 10, 1914, one Salvador Farre recovered a joint and several judgment against
Salomon M. Sharruf and Farham M. Sharruf in the Court of First Instance of the city of Manila
for the sum of P1,300, with legal interest from September 5, 1914, and with costs. This judgment
having remained unsatisfied, and execution was upon April 3, 1916, issued thereon at the
instance of the plaintiff. Moreover, the garnishment was effective for the purpose of conferring
upon the Tayabas Land Company the right to pay off the judgment which Farre had obtained
against Sharruf. This right is not only recognized in section 481 of the Code of Civil Procedure
but also in subsection 3 of article 1210 of the Civil Code; and by satisfying Farre’s claim,
regardless of the manner in which it was accomplished, the Tayabas Land Company absolved
itself pro tanto from its indebtedness to Sharruf. It results that, although the judgment against the
Tayabas Land Company has not yet been satisfied in full, said company is entitled to be credited
with the sum of P1,588.24, said by it, through Francisco Alvarez, to Farre on October 6, 1917,
with interest. In the view we take of the case it becomes unnecessary to consider at length the
fact that Sharruf’s judgment against the Tayabas Land Company was appealed to the Supreme
Court after the process of garnishment had been served on the company. Suffice is to say that
this circumstance would at most merely postpone the realization of the results without defeating
the garnishment.

Issue: Whether or not the case must be reversed?

Ruling: The judgment must be reversed, and the defendants will be absolved from the
complaint. It is so ordered, without express pronouncement as to costs of either instance.

Article 1245: Lim Tay vs. Court of Appeals

FACTS

Sy Guiok and Sy Lim secured a loan from Lim Tay in the amount of P40,000.  This was secured
by a contract of pledge whereby the former pledged their 300 shares of stock each in Go Fay &
Company to the latter.  However, they failed to pay their respective loans.  Hence, Lim Tay filed
a petition for mandamus against Go Fay & Company with the SEC praying that an order be
issued directing the corporate secretary of the said corporation to register the stock transfers and
issue new certificates in favor of Lim Tay.

Go Fay & Company filed its answer contending that SEC had no jurisdiction to entertain the
complaint on the ground that since Lim Tay was not a stockholder of the company, no intra
corporate controversy took place; and furthermore, that the default of payment of Sy Guiok and
Sy Lim did not automatically vest in Lim Tay the ownership of the pledged shares.

SEC dismissed the complaint.  On appeal to the CA, it affirmed SEC’s decision.  Hence, this
petition for certiorari with the SC.

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ISSUE

Whether or not SEC had jurisdiction.

HELD

No.  The registration of shares in a stockholder’s name, the issuance of stock certificates, and the
right to receive dividends which pertain to the said shares are all rights that flow from
ownership.  The determination of whether or not a shareholder is entitled to exercise the above
mentioned rights falls within the jurisdiction of the SEC.  However, if ownership of the shares is
not clearly established and is still unresolved at the time the action for mandamus is filed, then
jurisdiction lies with the regular courts.

In the case at bar, reading into the contract of pledge, the stipulation shows that Lim Tay was
merely authorized to foreclose the pledge upon maturity of the loans, not to own them.  Such
foreclosure was not automatic, for it must be done in a public or private sale.  Nowhere was it
mentioned that he exercised his right of foreclosure.  Hence, his status was still a mere pledgee,
and under civil law, this does not entitle him to ownership of the shares of stock in question.

Article 1249: Belisario vs. Natividad (60 Phil. 156)

FACTS

It appears from Exhibit A that the plaintiff sold the lands (Nos. 3357 and 3358) to the defendant
fo  P37,000, which was duly paid, and the agreement on the part of the grantee to assume an
indebtedness secured by a lien for 4, 500, which was likewise duly paid. The deed bears the date
of April 29, 1927.

On the same date the defendant executed and delivered in favor of the plaintiff an option to
repurchase the lands on or before the end of May, 1931, for the sum of P37,000.

On the 28th of May, 1931, the plaintiff tendered to the defendant a check in the sum of P37,000,
drawn by Rosendo Santiago against his account in the Peoples Bank and Trust Company.

ISSUE

Whether or not the checks made would produce the effect of payment.

HELD

At the time said check was tendered to the defendant the drawer thereof had on deposit in the
said bank subject to check the sum of P5.85. Even if the check had been good, the defendant was
not legally bound to accept it because such a check does not satisfy the requirements of a legal
tender.

Finding no merit in this appeal, the judgment of the court below is affirmed with costs against
the appellant.

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Article 1251: Lucia Gomez, Et. Al. vs. Ng Fat, Et. Al.

Facts:

In these two cases, Dee Choy Pio Lee and Ng Fat failed to settle their payment in rental to the
plaintiff from February 1945 up to the date of the complaint. The two answered the complaint
that the plaintiff had stopped sending their collector. The court of First Instance of Manila
rendered judgement in favor of the plaintiffs from which the defendants have appealed. The
appellants defense is meritorious. That during that time there was acute house shortage in Manila
and it is hard to believe that they would either desire or afford to lose their leaseholds at that
time. It may also be remarked that appellants’ alleged default cannot give way to their ejectment,
since it is attributable in part to plaintiffs’ omission or neglect to collect. The place of the
payment of the rent is the domicile of the lessees. The judgment appealed from is hereby
reversed, and the complaints dismissed, with costs against the plaintiffs.

Issue: Whether or not the court is right in reversing its judgment?

Ruling: Yes, it was shown here that it was not the fault of the defendant that they are not able to
pay their payment for the rentals because it is the full responsibility of the plaintiffs to collect the
rents to the place where the obligation made and it was stated on this article that “In any other
case the place of payment shall be the domicile of the debtor.”

Article 1252: Traders Insurance and Surety Company vs Dy Eng Giok, Pedro Lopez Dee
and Pedro E. Dy-Liacco

FACTS
1. 1948 – 1952, “Destilleria Lim Tuaco & Co., Inc.” had Dy Eng Giok as its provincial sales
agent, with the duty of turning over the proceeds of his sales to the principal, the distillery
company.

2. As of August 3, 1951, Dy Eng Giok had an outstanding running account in favor of his
principal in the sum of P12,898.61.

3. On August 4, 1951, a surety bond was executed by Dy Eng Giok, as principal and Traders
Insurance and Surety Co., as solidary guarantor, whereby they bound themselves, jointly and
severally, in the sum of P10,000.00 in favor of the Destilleria Lim Tuaco & Co., Inc., under the
following terms:

THE CONDITION OF THIS OBLIGATION Is SUCH THAT: Whereas, the above bounden
principal has entered in to a contract with the aforementioned Company to act as their provincial
sales agent and to receive goods or their products under the said Principal’s credit account. The
proceeds of the sales are to be turned over to the Company.

WHEREAS, the contract requires the above bounden principal to give a good and sufficient
bond in the above stated sum to secure the full and faithful fulfillment on its part of said contract;
namely, to guarantee the full payment of the Principal’s obligation not to exceed the above stated
sum.

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NOW THEREFORE, if the above bounden principal shall in all respects duly and fully observe
and perform all and singular the aforesaid covenants, conditions, and agreements to the true
intent and meaning thereof, then this obligation shall be null and void; otherwise, to remain in
full force and effect.

LIABILITY of surety on this bond will expire on August 4, 1952 and said bond will be cancelled
TEN DAYS after its expiration, unless surety is notified in writing of any existing obligations
thereunder or otherwise extended by the surety in writing.

4. On the same date, by Eng Giok, as principal, with Pedro Lopez Dee and Pedro Dy-Liacco, as
counterbondsmen, subscribed an indemnity agreement in favor of Surety Company, whereby, in
consideration of its surety bond, the three agreed to be obligated to the surety company —

INDEMNITY: — To indemnify the COMPANY for any damage, prejudice, loss, costs,
payments, advances and expenses of whatever kind and nature, including counsel or attorney’s
fees, which the Company may, at any time, sustain or incur, as a consequence of having executed
the abovementioned bond, its renewals, extensions or substitutions, and said attorney’s fee shall
not be less than (15%) per cent of the amount claimed by the Company in each action, the same
to be due and payable, irrespective of whether the case is settled judicially or extrajudicially.

5. August 4, 1951 – August 3, 1951, Dy Eng Giok contracted obligations in favor of the
Destilleria Lim Tuaco & Co., in the total amount of P41,449.93; and during the same period, he
made remittances amounting to P41,864.49. The distillary company, however, applied said
remittances first to Dy Eng Giok’s outstanding balance prior to August 4, 1951 (before the
suretyship agreement was executed) in the sum of P12,898.61; and the balance of P28,965.88 to
Dy’s obligations between August 4, 1951 and August 3, 1952. It then demanded payment of the
remainder (P12,484.05) from the agent, and later, from the appellant Surety Company. The latter
paid P10,000.00 (the maximum of its bond) on July 17, 1953,

6. Apparently, without questioning the demand; and then sought reimbursement from Dy Eng
Giok and his counter guarantors, appellees herein. Upon their failure to pay, it began the present
action to enforce collection.

7. After trial, the Court of First Instance of Manila absolved Pedro Lopez Dee and Pedro Dy-
Liacco, on the theory that in so far as they are concerned, the payments made by Dy Eng Giok
from August 4, 1951 to August 3, 1952, in the sum of P41,864.49, should have been applied to
his obligations during that period, which were the ones covered by the surety bond and the
counter-guaranty; and as these obligations only amounted to P41,449.93, so that the payments
exceeded the obligations, the court concluded that the Surety Company incurred no liability and
the counterbondsmen in turn had nothing to answer for.

8. Not satisfied with the decision, the Traders Insurance & Surety Company appealed to this
Court on points of law.

ISSUE
Whether or not the remittances of Dy Eng Giok first be applied to the obligation first contracted
by him and covered by the surety agreement.

HELD
Yes, the court ruled that in the absence of express stipulation, a guaranty or surety operates
prospectively and not retroactively. It only secures the debts contracted after the guaranty takes
effect. To apply the payment to the obligations contracted before the guaranty would make the
surety answer for debts outside the guaranty. The surety agreement did not guarantee the
payment of any outstanding balance due from the principal debtor but only he would turn out the

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sales proceeds to the Distileria and this he has done, since his remittances exceeded the value of
the sales during the period of the guaranty.
Since Dy Eng Biok’s obligations prior to the guaranty were not covered, and absence of any
express stipulation, any prior payment made should be applied to the debts that were guaranteed
since they are to be regarded as the more onerous debts.
ART. 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application cannot be inferred from other circumstances, the debt which is most onerous to the
debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
It is legally unimportant that the creditor should have applied the payment to the prior
indebtedness. Where the debtor has not expressly elected any particular obligation to which the
payment should be applied, the application by the creditor, in order to be valid and lawful,
depends:
1. upon his expressing such application in the corresponding receipt; and

2. upon the debtor’s assent, shown by his acceptance of the receipt without protest. This is the
import of paragraph 2 of Art. 1252 of the New Civil Code:
“If the debtor accepts from the creditor a receipt in which an application of the payment is made,
the former cannot complain of the same, unless there is a cause for invalidating the contract.”

Article 1253: Magdalena State v   Antonio& Herminia Rodriguez   (JNR)18 Scra 967 Dec
17, 1966

FACTS

Antonio & Herminia  bought 2,191 SQM lot in Quezon City  from Magdalena State. In view of
the unpaid balance of 5,000  on account of purchase price, they executed promissory note for
5,000 which promised to pay with out any demand and with interest of 9 %  that payment be
made within 60 days from Jan 1957.

On the same day, Antonio & Herminia executed also a bond on favor of Magdalena State which
embodied bonding company Luzon Surety Company to pay the 5,000 balance to Magdalena, but
the bonding company be notified in writing within 10 days from the moment there was default
otherwise the undertaking become null and viod.

June 1957 the obligation becomes due and demandable the surety company paid Madalena State
the 5,000, shortly thereafter, Magdalena demanded payment of 6.55.89 for accumulated interest
on principal which was refused, therefore sued respondent with MTC to enforced collection, the
MTC rules in favor of the Magdalena. MTC ordered  Rodriguez and Luzon Surety to pay jointly
not contented went to CFI and the CFI rules that it waived or condoned the interest due based on
Art 1235 and Art 1253.

ISSUE/S        

Whether Magdalena State was entitle to penalty after the bonding company paid the entire
amount  timely.

LAWS

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Article 1253  If the debt produces interests, payment of the principal shall not be deemed to have
been made until the interest have been covered.

HELD

1. It affirmed the CA ruling that, when there is  no agreement that the first debtor shall have been
released from responsibilities does not constitute Novation and the creditor can still enforce the
obligation against the original debtor.2. The surety company is not a new and separate contract
but an accessory of the promissory note.

2. Obligation to ay sum of money is not novated in a new instrument wherein the old is ratified
by changing the terms of payments and adding other obligations not incompatible with the old
one.

3. In Novation, presumption is never favored to be sustained, it needs to be established that the

old and the new contract ,s are incompatible in all point or that the will to novate appears by
express agreement of the parties.

Article 1255: Development Bank of the Philippines vs. Court of Appeals and Lydia Cuba

FACTS

These two consolidated cases stemmed from a complaint  filed against the Development Bank of
the Philippines (DBP) and Agripina Caperal filed by Lydia Cuba (CUBA) on 21 May 1985 with
the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration
of nullity of DBP’s appropriation of CUBA’s rights, title, and interests over a 44-hectares
fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code;
(2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBP’s sale of the subject fishpond to Caperal; (4) the restoration of her rights, title,
and interests over the fishpond; and (5) the recovery of damages, attorney’s fees, and expenses of
litigation.

After the joinder of issues following the filing by the parties of their respective pleadings, the
trial court conducted a pre-trial where CUBA and DBP agreed on the facts, which were
embodied in the pre-trial order wherein Defendant Caperal admitted only the facts stated in
paragraphs 14 and 15  : 

14.That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina
Caperal on August 16, 1984;

15.Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on
December 28, 1984 by the Ministry of Agriculture and Food.

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBA’s
leasehold rights over the fishpond in question without foreclosure proceedings was contrary to
Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative
resolution. DBP stressed that it merely exercised its contractual right under the Assignments of
Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.

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 The trial court resolved the issue in favor of CUBA by declaring that DBP’s taking possession
and ownership of the property without foreclosure was plainly violative of Article 2088 of the
Civil Code.

The trial court also concluded that since DBP never acquired lawful ownership of CUBA’s
leasehold rights, all acts of ownership and possession by the said bank were void. Accordingly,
the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the
Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of Leasehold
Rights executed by Caperal in favor of DBP, were also void and ineffective.

The trial court found “ample evidence on record” that in 1984 the representatives of DBP ejected
CUBA and her caretakers not only from the fishpond area but also from the adjoining big house;
and that when CUBA’s son and caretaker went there on 15 September 1985, they found the said
house unoccupied and destroyed and CUBA’s personal belongings, machineries, equipment,
tools, and other articles used in fishpond operation which were kept in the house were missing.
The missing items were valued at about P550,000. It further found that when CUBA and her men
were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000
pieces of bangus fish (milkfish), all of which died because the DBP representatives prevented
CUBA’s men from feeding the fish. At the conservative price of P3.00 per fish, the gross value
would have been P690,000, and after deducting 25% of said value as reasonable allowance for
the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual
damages sustained by CUBA at P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely representing to the
Bureau of Fisheries that it had foreclosed its mortgage on CUBA’s leasehold rights. The trial
court also held that CUBA was entitled to P100,000 attorney’s fees in view of the considerable
expenses she incurred for lawyers’ fees and in view of the finding that she was entitled to
exemplary damages.

In its decision of 31 January 1990, the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant Development Bank
of the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiff’s leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff  and the acts of notarial rescission
of the Development Bank of the Philippines relative to said sale  void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the
Development Bank of the Philippines and defendant Agripina Caperal , the Fishpond Lease
Agreement No. 2083-A dated December 28, 1984 of defendant Agripina Caperal and the
Assignment of Leasehold Rights dated February 12, 1985 executed by defendant Agripina
Caperal in favor of the defendant Development Bank of the Philippines as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal,
jointly and severally, to restore to plaintiff the latter’s leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:
6. a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS
(P1,067,500.00), as and for actual damages;
7. b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;
8. c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;

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9. d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorney’s
fees;
10. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS
(P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to defendant
Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The
former sought an increase in the amount of damages, while the latter questioned the findings of
fact and law of the lower court.

In its decision of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in
declaring that the deed of assignment was null and void and that defendant Caperal could not
validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the
assignment was not a cession under Article 1255 of the Civil Code because DBP appeared
to be the sole creditor to CUBA — cession presupposes plurality of debts and creditors ; (3)
the deeds of assignment represented the voluntary act of CUBA in assigning her property rights
in payment of her debts, which amounted to a novation of the promissory notes executed by
CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the
leasehold rights, since she agreed to repurchase the said rights under a deed of conditional sale;
and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for
DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to
loss of profits for lack of evidence, but agreed with the trial court as to the actual damages of
P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of
moral damages from P100,000 to P50,000 and attorney’s fees, from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating
Cuba’s leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of
assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA
and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease
Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in
favor of DBP. It then ordered DBP to turn over possession of the property to Caperal as lawful
holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorney’s fees.

Since their motions for reconsideration were denied, DBP and CUBA filed separate petitions for
review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and
attorney’s fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of
Appeals erred (1) in not holding that the questioned deed of assignment was a pactum
commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the deed of
assignment effected a novation of the promissory notes; (c) in holding that CUBA was estopped
from questioning the validity of the deed of assignment when she agreed to repurchase her
leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral
damages and attorney’s fees, in deleting the award of exemplary damages, and in not increasing
the amount of damages.

We find no merit in DBP’s contention that the assignment novated the promissory notes in that
the obligation to pay a sum of money the loans (under the promissory notes) was substituted by
the assignment of the rights over the fishpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely complemented or supplemented the notes;

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both could stand together. The former was only an accessory to the latter. Contrary to DBP’s
submission, the obligation to pay a sum of money remained, and the assignment merely served
as security for the loans covered by the promissory notes. Significantly, both the deeds of
assignment and the promissory notes were executed on the same dates the loans were granted.
Also, the last paragraph of the assignment stated: “The assignor further reiterates and states all
terms, covenants, and conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof.”

Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code
for the plain and simple reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the assignment of all the
debtor’s property.

Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which
reads: “Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law on sales.” It bears stressing that the assignment, being in
its essence a mortgage, was but a security and not a satisfaction of indebtedness. 

SC did not, buy CUBA’s argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. DBP, however, exceeded the authority vested by condition
no. 12 of the deed of assignment. As admitted by it during the pre-trial, it had “[w]ithout
foreclosure proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold
[r]ights of plaintiff Lydia Cuba over the fishpond in question.” Its contention that it limited itself
to mere administration by posting caretakers is further belied by the deed of conditional sale it
executed in favor of CUBA. The deed stated:

Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should
have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26
October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed
through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it
“had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21,
1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations.” This only goes
to show that DBP was aware of the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already foreclosed the mortgage, the
Bureau of Fisheries cancelled CUBA’s original lease permit, approved the deed of conditional
sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false
representation, as well as the subsequent acts emanating from DBP’s appropriation of the
leasehold rights, should therefore be set aside. To validate these acts would open the floodgates
to circumvention of Article 2088 of the Civil Code.

Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the requirements laid down by law, such as
Act No. 3135, as amended. 15With more reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior fore closure proceeding.

Hence, DBP should render an accounting of the income derived from the operation of the
fishpond in question and apply the said income in accordance with condition no. 12 of the deed
of assignment which provided: “Any amount received from rents, administration, . . . may be
applied to the payment of repairs, improvements, taxes, assessment, and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then on the
capital of the indebtedness. . .”

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HELD

The 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby
REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained.
The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil
Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of
assignment constituted pactum commissorium  and the award of actual damages; and by reducing
the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from
P50,000 to P25,000; and the attorney’s fees, from P100,000 to P20,000. The Development Bank
of the Philippines is hereby ordered to render an accounting of the income derived from the
operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income statement of DBP,
as well as the statement of the account of Lydia P. Cuba, and for the determination of each
party’s financial obligation to one another.

Article 1259: Amadeo Matute vs. Cheong Boo

Facts:

On January 14, 1915, a contract was made between Amadeo Matute and Cheong Boo that the
former should deliver and the latter should receive within the month of February of the same
year a quantity of more than 300 and less than 500 piculs of mastic (almaciga) at the price of
P8.50/picul. Matute performed his part and delivered on February 22, 1915 the almaciga to the
defendant but he refused to accept delivery. The plaintiff thereupon stored the almaciga in a
warehouse and he go to the court to file a case claiming for damages plus interest for not
accepting the almaciga and the expenses of storing the almaciga in a warehouse.

Issue: Whether or not should the plaintiff can claimed for the damages?

Ruling: Yes, the defendant should comply with their contract and all the expense which brought
by consignation will be given against him and it was stated on article 1259 “The expense of
consignation, when properly made, shall be charged against the creditor.”

Article 1260: Eugenio Bravo vs Ciriano Barreras

FACTS

June 8, 1946, Eugnio Bravo (plaintiff) sold to Ciriano Barreras (defendant) a parcel of land for
P200 with the right to repurchase it within five years from the date of sale.

September 14 and 15, 1950, the palintiff attempted to exercise his right of repurchase by
tendering to the defendant the payment of the sum of P200 as agreed upon, but said defendant
refused to accept the payment without any valid reason.

In view of said refusal, plaintiff deposited said sum of P200 with the court, and filed the present
action as required by the Civil Code.

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In his answer, the defendant avers that, “the trouble between the parties is the fact that the
plaintiff wants to get from the defendant a parcel of land distinct from what the said plaintiff
delivered to the defendant after the execution of the pacto de retro contract.”

After holding a pre-trial at which both parties were heard, the court rendered an order of the
following tenor:

At today’s pre-trial the parties have agreed that the land sought to be repurchased is also the
subject-matter of another litigation between the same parties in case which is now before the
Court of Appeals on appeal. The herein defendant does not deny the right of the plaintiff to
repurchase the property but maintain that it is now impossible to execute the deed of repurchase
because the identity of the property is still undecided and will not be decided until after the Court
of Appeals has finally disposed of the case before it.

In as much as it will take about two more years before said appeal could be decided and the
plaintiff, on the other hand, has already made a consignation of the purchase price with the clerk
of court which amply protects his right to repurchase the property, the court hereby order the
dismissal of this case without cost and without prejudice.

ISSUE

Whether or not the consignation is proper

HELD

The ground on which the court on its own accord dismissed this case after hearing the parties on
a pre-trial has no legal basis nor justification. Such action is only contrary to the Rules of Court.
But it impairs a right which the law grants to the plaintiff in connection with his right to
repurchase the property in litigation. Under section 3, Rule 30, of the Rule, an action can only be
dismissed upon motion of a defendant or upon the initiative of the court, (1) when plaintiff fails
to appear at the time of trial, (2) when plaintiff fails to prosecute his action for an unreasonable
length of time, and (3) when he fails to comply with any rule or order of the court. In other cases,
the case can only be dismissed upon petition of the plaintiff (section 1, Rule 30). The grounds
given by the court in its order of dismissal is not one of those recognized by the Rules of Court.

Article 1261: San Miguel Brewery vs La Union and Rock Insurance Co (40 Phil. 674)

FACTS

During the negotiations regarding the application for an insurance policy, it was agreed that the
insurance applied for shall protect both the interest of the mortgage and the residuary interest of
the owner of the property. Due to mistake, the insurance contract was written, failed to cover the
interest of the owner.

ISSUES

Can the instrument be reformed?

HELD

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Yes, the instrument can be reformed to give effect to the real agreement of the parties.

Article 1265: Bunge Corporation and Universal Commercial Agencies vs. Elena
Camenforte and Company

FACTS

Plaintiffs brought action against the defendants to recover certain damages they have allegedly
sustained in view of the failure of the latter to deliver to the former the amount of Philippine
copra which they had agreed to deliver within the time and under the conditions specified in the
contract celebrated between them on October 22, 1947.

Plaintiffs claim that on October 22, 1947, in the City of Cebu a contract was entered into
between the Visayan Products Company and Bunge Corporation (represented by the Universal
Commercial Agencies) whereby the former sold to the latter 500 long tons of merchantable
Philippine copra in bulk at the prices of $188.80, U.S. currency, per ton, less 1 per cent
brokerage per short ton of 2,000 pounds, C & F Pacific Coast, U.S.A.; that, according to the
terms and conditions of the contract, the vendor should ship the stipulated copra during the
month of November or December 1947, to San Francisco, California, U.S.A. for delivery to the
vendee; that, notwithstanding repeated demands made by the vendee, the vendor failed to ship
and deliver the copra during the period agreed upon; that believing in good faith that the vendor
would ship and deliver the copra on time, the vendee sold to El Dorado Oil Works the quantity
of copra it had purchased at the same price agreed upon; and that because of the failure of the
vendor to fulfill its contract to ship and deliver the quantity of copra agreed upon within the
period stipulated, the vendee has suffered damages in the amount of P180,00.

Vicente Kho,  avers that the contract was concluded with the Visayan Products Company which
had its office in Tacloban, Leyte, and not with the Visayan Products Company established in
Cebu, which is not a party to the transaction; They aver that if a contract of that tenor has ever
been entered into between said company and the plaintiffs, the truth is that Vicente Kho who
signed for and in behalf of the company never had any authority to act for that company either
expressly or impliedly, inasmuch as the only ones who had the authority to do so are Elena
Camenforte, the general manager, Tan Se Chong, the manager, and Tiu Kee, the assistant
manager.

The contract was entered into believing that the company he was representing was the one
recently organized in Cebu; that he, Vicente Kho, did his best to comply with the contract, but he
failed because of  force majeure as follows: he informed the plaintiffs sometime in December,
1947, that he would have all the copra covered by the contract ready for shipment somewhere in
the port of San Ramon, Samar, in order that they may make an arrangement for the booking of a
ship, but before the arrival of the ship, a strong storm visited the place causing the bodega where
the copra was stored to be destroyed and the copra washed away into the sea; and that, because
of this force majeure, he cannot now be held liable for damages.

After trial, the court rendered decision ordering defendant Elena Camenforte & Company to pay
to the plaintiffs the sum of P79,744, with legal interest thereon from the filing of the complaint,
and the costs of action. The court ordered that, in case said company be unable to pay the
judgment because of total or partial insolvency, the same be paid by its co-defendants, jointly
and severally, either in full or such part thereof as may be left unpaid. Defendants interposed the
present appeal.

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Appellants admit, contrary to their stand in the lower court, that a contract of purchase and sale
of copra was in effect entered into between the plaintiffs and the defendants under the terms and
conditions embodied in the contract quoted in the complaint, and the only defense on which they
now rely is that the copra they had gathered and stored for delivery to the appellees in Samar was
destroyed by force majeure which under the law has the effect of exempting them from liability
for damages now contend that the lower court erred in condemning them for damages due
to force majeure.

The sale is to be made by weight, — 500 long tons. It does not refer to any particular or specific
lot of copra, nor does it mention the place where the copra is to be acquired. No portion of the
copra has been earmarked or segregated. The vendor was at liberty to acquire the copra from any
part of the Philippines. The sale simply refers to 500 long tons of the Philippine copra. The
subject-matter is, therefore, generic, not specific.

ISSUE

Is the copra contemplated in the contract is generic and not specific?

HELD

The decision appealed from is affirmed, with costs against appellants.

It appearing that the obligation of appellant is to deliver copra in a generic sense, the obligation
cannot be deemed extinguised by the destruction or disappearance of the copra stored in San
Ramon, Samar. Their obligation subsists as long as that commodity is available. A generic
obligation is not extinguished by the loss of a thing belonging to a particular genus. Genus
nunquan perit.

Article 1265: Atlantic Mutual Ins. Co. vs, Macondray & Co., Inc. (112 Phil 502)

FACTS

On or about April 20, 1956, the American Bible Society of New York shipped to Manila 312
cartons and cases of Holy Scriptures, on board the “S.S. Leoville” of the Barber Steamship
Lines, Inc., consigned to the order of the Philippine Agency, Bible House, Manila; that said
shipment was insured by the shipper with the plaintiff; that as shown by good order tally sheets,
out of said cargo, 309 cases and cartons were discharged “complete and in good order” at the
Port of Manila from May 29 to June 2, 1956, into the possession and custody of defendant
Manila Port Service in its capacity as arrastre contractor; that the remaining three (3) cases were
discharged on June 1, 1956, apparently in bad order, but examination by marine surveyors
showed that their contents were in good order, except that the cover of one copy of Holy
Scripture was slightly torn and pressed on the edge and another copy slightly soiled on the edge;
that on June 6, 1956, the consignee requested for the inspection of 162 other cases, whereupon it
was revealed that all were in apparent good condition but with signs of having been wet; that
upon subsequent examination requested on June 9, 1956, the surveyors discovered that another
five (5) cases and contents showed signs of having been wet with fresh water and injured.

The damage was placed at P532.86. It is likewise admitted that the responsibility of the Manila
Port Service over the damaged goods started on the dates they were respectively unloaded into
its custody, i.e., from May 29 to June 2, 1956.

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ISSUE

Whether or not the lower court erred in rendering judgment, ordering defendants Manila Port
Service and Manila Railroad Company to pay the plaintiff the sum of P532.86, with legal interest
thereon from the filing of the complaint until fully paid, and absolving defendant Macondray &
Co., Inc. from the complaint.

HELD

There is no merit in the appeal. Here and below, the only issue raised revolves around the
question as to when the damage arose to the cases received in good order by appellants; for if it
occurred while the goods were still on board the vessel, then the liability should attach to the
carrier; but if the damage happened when said goods were already discharged by and taken into
the custody of the Manila Port Service, then the latter should answer for the loss.

Resolving the question solely upon the stipulation of facts of the parties, there is no alternative
but to hold the appellants liable. It was admitted that, except for three cases noted as received in
bad order (and which are not now in question), the entire shipment was received from the carrier
by the appellant Port Service “complete and in good order” (Stip., par. 2 [a]) and not merely
in apparent good condition, as it now urges.

Later examination of these goods upon request of the consignee before taking delivery having
showed that contents of some of the cases were actually damaged, but without any showing
when such damage occurred, the inference obviously is that it happened while in the appellants’
possession, since the cases in question were received by it in good order with unloaded from the
ship.

It may be noted that the questioned shipment was in the possession of the appellants for about
ten days, more or less, prior to its delivery to the, consignee. By law, loss or damage while in the
possession of an obligor is presumed due to its fault in the absence of contrary proof (Civil Code,
Art. 265). It was incumbent upon appellant Port Service to rebut this legal presumption, and it
failed to do so.

The terms of the management contract entered into by and between the Bureau of Customs and
the appellants have nothing to do with this case, because they were not properly presented in the
court low and therefore cannot be considered for the first time on appeal.

The judgment appealed from is affirmed, with costs against the appellants.

Article 1266: Asia Bed Factory vs. Kapok Industrial Workers Union

EMPLOYER AND EMPLOYEE; COLLECTIVE BARGAINING AGREEMENT; IMPOSSIBLE

OF PERFORMANCE, BLUE SUNDAY LAW. — Where the collective bargaining agreement
between employer and employee provides among other things for mutual prestation in that
employees now paid in the monthly basis shall be paid under said agreement on the daily basis
at rates based on their present compensation plus the additional increase of (P0.30) thirty
centavos a day, with the understanding that these employees shall be provided with work on
Sundays at time and one-half and that in the event no work on Sundays is available through no
fault of the employees, they shall be entitled to payment of the equivalent of their wages as if they
had performed work on that day. However, when the Blue Sunday Law which prohibits the
opening of commercial and industrial establishments on Sunday was enforced, prestation

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became impossible of performance. Held: That the employer is relieved from complying with its
agreement to pay laborers Sunday wages.

FACTS:

The Asia Bed Factory entered into a collective bargaining agreement with the Kapok Industrial
Workers Union to pay their employees on a daily basis at 30 centavos a day, including Sundays,
and that in the event that there will be no work on Sundays through no fault of the employees,
the employees will still be entitled to payment.

When Republic Act No. 946 otherwise known as Blue Sunday Law was enacted, prohibiting the
opening of any commercial, industrial or agricultural enterprises on Sundays, the Asia Bed
Factory was forced to comply.

Because some of the employees allege that the Asia Bed Factory did not comply with the
agreement, the Factory filed a petition in the Court of First Instance of Manila for a declaratory
judgement. By way of answer, the Union filed a motion for a summary judgement declaring that
the employees were entitled to Sunday wages. The lower court rendered judgment in favor of the
Asia Bed Factory. Reconsideration of the judgement having been denied, the Union appealed to
the Supreme Court on pure question of law.

ISSUE: Whether or not the approval of the Blue Sunday Law relieved petitioner from complying
with its agreement to pay its employees Sunday wages.

RULING:

Yes. The bargaining agreement gives the employer the right to provide work on Sundays.
However, it would be an injustice if the employer is deprived of this right, by virtue of the Blue
Sunday Law, without at the same time relieving him of the obligation to pay the employees.

The Blue Sunday Law rendered it legally impossible for the Asia Bed Factory to comply with the
agreement. Hence, the Factory is released of its obligation to pay Sunday wages.

Article 1267: Occeña vs. Jabson

Facts:

The court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the
release of an obligor when the service has become so difficult as to be manifestly beyond the
contemplation of the parties but does not authorize the courts to modify or revise the subdivision
contract between the parties or fix a different sharing ratio from that contractually stipulated with
the force of law between the parties. Private respondent’s complaint for modification of the
contract manifestly has no basis in law and must therefore be dismissed for failure to state a
cause of action.

On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for
modification of the terms and conditions of its subdivision contract with petitioners, making the
following allegations: “That due to the increase in price of oil and its derivatives and the
concomitant worldwide spiraling of prices, which are not within the control of plaintiff…”.
Petitioners moved to dismiss the complaint principally for lack of cause of action. Respondent
court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously

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issued by it and dismissed petition on the ground that under Art.1267 “When the service has
become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.”

Issue: Whether or not the court is right in reversing its decision?

Ruling: Yes, for failure to state a sufficient cause of action.

Article 1272: Lopez Vito vs Tambunting

FACTS

A owed B a sum of money. B sent a receipt signed by him to A through a collector, who was
supposed to collect a debt. A did not pay, however, although he kept the receipt. The creditor (B)
was able to prove that the only reason he had sent the receipt was to collect the money.

ISSUE

Is there remission here?

HELD

No, there is no remission here; the creditor has been able to prove the real reason why the debtor
had in his possession the receipt. Hence, the presumption of remission has been overcome.

Article 1275: Yek Tong Lin Fire and Marine Insurance Co. vs. Pelagio Yusingco, ET AL.

Facts:

The plaintiff, Yek Tong Lin Fire & Marine Insurance Co., Ltd and defendant Vicente Madrigal.
appealed from the judgment of Court of First Instance of Manila, ordering a. the defendant
Pelagio Yusingco to pay to the plaintiff the sum of P17,590.85 with interest thereon at
12%/annum for August 10, 1932, until fully paid plus the sum of P4,500 as attorney’s fees and
the cost of the suit; b. the defendant Vicente Madrigal to turn over to the plaintiff the amount of
money received by him in October 1932 from his codefendant provincial sheriff of Surigao, and
c. absolving said sheriff from the complaint. The appealed judgment is modified, reversing it in
so far as it orders the defendant and appellant Vicente Madrigal to turn over to the plaintiff the
amount of money paid him by the provincial sheriff of Surigao from the proceeds of the sale of
the steamship Yusingco, and affirming it in so far as it absolves said sheriff from the complaint
with the costs to the plaintiff-appellant.

Issue:  Whether or not the plaintiff can claim for any even if they made a merge?

Ruling: No, obligations are extinguished by the merger of the rights of the creditor and debtor
according to article 1275 “The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person.”

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Article 1279: Metropolitan Bank and Trust Company vs. Joaquin Tonda and Ma. Cristina
Tonda

FACTS

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision of the Court of Appeals dated June 29, 1998 in CA-G.R. SP No. 38113 which:
(1) reversed Resolution No. 417, s. 1994, dated June 1, 1994 of the Department of
Justice directing to file the appropriate Information against herein respondents Joaquin P. Tonda
and Ma. Cristina V. Tonda for violation of P.D. 115 in relation to Article 315 (1) (b) of the
Revised Penal Code; and (2) effectively set aside the Resolutions dated April 7, 1995 and July 12
1995 of the Department of Justice denying the motions for reconsideration.

Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, applied for and were granted commercial
letters of credit by petitioner Metropolitan Bank and Trust Company, (METROBANK) for a
period of eight (8) months beginning June 14, 1990 to February 1, 1991 for their importation of
raw textile materials to be used in the manufacturing of garments. The TONDAS acting both in
their capacity as officers of Honey Tree Apparel Corporation (HTAC), executed eleven (11) trust
receipts to secure the release of the raw materials to HTAC. The imported fabrics with a
principal value of P2,803,000.00 were withdrawn by HTAC under the 11 trust receipts executed
by the TONDAS. Due to their failure to settle their obligations under the trust receipts upon
maturity, METROBANK through counsel, sent a letter dated August 10, 1992, making its final
demand upon the TONDAS to settle their past due TR/LC accounts on or before August 15,
1992. They were informed that by said date, the obligated amount is P4,870,499.13. Despite
repeated demands , the TONDAS failed to comply with their obligations stated in the trust
receipts agreements.

On November 9, 1992, Metrobank, through its account officer Eligio Labog, Jr., filed with the
Provincial Prosecutor of Rizal a complaint/affidavit against the TONDAS for violation of P.D.
No. 115 (Trust Receipts Law) in relation to Article 315 (1) (b) of the Revised Penal Code. On
February 12, 1993, the assigned Assistant Prosecutor of Rizal submitted a Memorandum to the
Provincial Prosecutor recommending that the complaint in I.S. No. 92-8703 be dismissed on the
ground that the complainants had failed to establish “the existence of the essential elements of
Estafa as charged.” The recommendation was approved by Rizal Provincial Prosecutor Mauro
Castro on May 18, 1993.

METROBANK then appealed to the Department of Justice (DOJ). On June 1, 1994, The
Undersecretary reversed the findings of the Provincial Prosecutor of Rizal and ordered the latter
to file the appropriate information against the TONDAS as charged in the complaint.

The TONDAS immediately sought a reconsideration of the DOJ Resolution but their motion was
denied by the then acting Justice Secretary Demetrio G. Demetria in a Letter-Resolution dated
April 7, 1995. A second motion for reconsideration by the TONDAS was likewise denied by
then Justice Secretary Teofisto Guingona on July 12, 1995.

Subsequently, the TONDAS filed with the Court of Appeals a special civil action
for certiorari and prohibition with application for a temporary restraining order or a writ of
preliminary injunction,. They contended therein that the Secretary of Justice acted without or in
excess of jurisdiction in issuing Resolution dated July 12, 1995 denying with finality their
motion for the reconsideration of the Resolution dated April 7, 1995 of the Acting Secretary of
Justice, which in turn denied their motion for the reconsideration of Resolution No. 417, s. 94,
dated June 1, 1994, directing to file the appropriate Information against the TONDAS.

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The Court of Appeals granted the TONDAS’ petition and ordered the criminal complaint against
them dismissed. The Court of Appeals held that METROBANK had failed to show a prima
facie case that the TONDAS violated the Trust Receipts Law in relation to Art. 315 (1) (b) of the
Revised Penal Code in the face of convincing proof that “that the amount of P2.8 Million
representing the outstanding obligation of the TONDAS under the trust receipts account had
already been settled by them in compliance with the loan restructuring proposal; and that in the
absence of a loan restructuring agreement, METROBANK could still validly apply the amount
as payment thereof.” The relevant portions of the Court of Appeals decision are quoted as
follows:

“Petitioners admitted that in 1991 their company, the Honey Tree Apparel Corporation (HTAC),
had some financial reversals making it difficult for them to comply with their loan obligations
with Metrobank. They were then constrained to propose a loan restructuring agreement with the
private respondent to enable them to finally settle all outstanding obligations with the latter. In a
letter dated 23 September 1991, petitioner Joaquin Tonda submitted a proposed Loan
Restructuring Scheme to Metrobank. In said letter, petitioner Tonda proposed to immediately
pay in full the outstanding principal charges under the trust receipts account and the remaining
obligations under a separate schedule of payment. Petitioners attached with said letter an
itemized proposal  part of which reads:

1. Trust Receipts – The new management and. Mr. Joaquin G. Tonda will pay immediately the
entire principal of the outstanding Trust Receipts amounting to P2,803,097.14. While the interest
accrued up to September 13, 1991 amounting to P409,601.57 plus the additional interest shall be
re-structured together with item no. 2 below. A joint sharing account in the name of Joaquin G.
Tonda and Wang Tien En equal to Trust Receipt amount of 1.8 Million will be opened at
Metrobank Makati. (emphasis supplied)

It would appear that the aforestated amount of 1.8 Million was erroneously written since the
intention of the petitioners was to open an account of P2.8 Million to pay the entire principal of
the outstanding trust receipts account. In fact, also on 23 September 1991, petitioner Joaquin
Tonda and Wang Tien En deposited four different checks with a total amount of P2,800,000.00
with Metrobank. The checks were received by a certain Flor C. Naanep. Notably, the petitioners
had obtained a written acknowledgement of receipt of the checks totaling P2.8 Million from the
Metrobank officer in order to show proof of compliance with the loan restructuring proposal. If
the petitioners had intended it to be a simple deposit, then a deposit slip with a machine
validation by the private respondent bank would have otherwise been sufficient.

Negotiations took place,however, the succeeding negotiations between petitioners and

Metrobank, after the initial offer of 23 September 1991 was made, dealt with the other
outstanding obligations while the matter regarding the trust receipts account remained
unchanged; therefore, it was settled between the parties that the amount of P2.8 Million should
be paid to cover all outstanding obligations under the trust receipts account. Despite the inability
of both parties to reach a mutually agreeable loan restructured agreement, the amount of P2.8
Million which was deposited on 23 September 1991 by the petitioners appears to remain intact
and untouched as Metrobank had failed to show evidence that the money has been withdrawn
from the savings account of the petitioners.

Moreover, the deposit made by the petitioners was made known to Metrobank clearly as a
compliance with the proposed loan restructuring agreement. As shown in the correspondence
made by the petitioners on 28 February 1992 to Metrobank, after the latter had made a formal
demand for payment of all outstanding obligations, the deposit was mentioned.

The contention of Metrobank that the money had not been actually applied as payment for
petitioners’ outstanding obligation under the trust receipts account is absolutely devoid of merit,
considering that the petitioners were still in the process of negotiating for a reasonable loan

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restructuring arrangement with Metrobank when the latter abruptly abandoned all efforts to
negotiate and instantly demanded from the petitioners the fulfillment of all their outstanding
obligations.

On the basis of all the evidence, this Court is convinced that the amount of P2.8 Million
representing the outstanding obligation of the petitioners under the trust receipts account had
already been settled by the petitioners. The money remains deposited under the savings account
of the petitioners awaiting a final agreement with Metrobank regarding the loan restructuring
arrangement. Meanwhile, Metrobank has the right to use the deposited amount in connection
with any of its banking business.

With convincing proof that the amount of P2.8 Million deposited under petitioners’ savings
account with Metrobank was indeed intended to be applied as payment for the outstanding
obligations of HTAC under the trust receipts, Metrobank, therefore, had failed to show a prima
facie case that the petitioners had violated the Trust Receipts Law (P.D. No. 115) in relation to
Art. 315 of the Revised Penal Code. Besides, there is absolutely no evidence suggesting that
Metrobank has been damaged by the proposal and the deposit made by the petitioners.

ISSUES

I.WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION OF THE TRUST

RECEIPTS LAW IN RELATION TO ART. 315 OF THE REVISED PENAL CODE

II.WHETHER AN AGREEMENT WAS FORGED BETWEEN THE PARTIES THAT THE 2.8
MILLION DEPOSITED IN THE JOINT ACCOUNT OF JOAGUIN G. TONDA AND WANG
TIEN EN WOULD BE CONSIDERED AS PAYMENT FOR THE OUTSTANDING
OBLIGATIONS OF THE SPOUSES TONDA UNDER THE TRUST RECEIPTS

III.WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO AGREE UPON A

RESTRUCTURING AGREEMENT, METROBANK CAN STILL APPLY THE P2.8
MILLION DEPOSIT AS PAYMENT TO THE PRINCIPAL AMOUNT COVERED BY THE
TRUST RECEIPTS

IV.WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK BECAUSE OF THE

PROPOSAL AND OF THE DEPOSIT

V.WHETHER METROBANK HAS THE STANDING TO PROSECUTE THE CASE A QUO

VI. WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR CERTIORARI FILED

WITH THIS HONORABLE COURT RAISES PURELY QUESTIONS OF FACTS

In response to the foregoing, the TONDAS maintain that METROBANK has no legal standing
to file the present petition without the conformity or authority of the prosecutor as it deals solely
with the criminal aspect of the case, a separate action to recover civil liability having already
been instituted; that the issues raised in the present petition are purely factual; and that the
subject trust receipts obligations have been extinguished by payment or legal compensation.

We find for petitioner bank.

Preliminarily, we shall resolve the issues raised by the TONDAS regarding the standing of
METROBANK to file the instant petition and whether the same raises questions of law.

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Main Issue: In the main, the issue is whether or not the dismissal by the Court of Appeals of the
charge for violation of the Trust Receipts Law in relation to Art. 315(1) (b) of the Revised Penal
Code against the TONDAS is warranted by the evidence at hand and by law.

The Court of Appeals gravely erred in reversing the Department of Justice on the finding of
probable cause to hold the TONDAS for trial. The documentary evidence presented during the
preliminary investigation clearly show that there was probable cause to warrant a criminal
prosecution for violation of the Trust Receipts Law.

The relevant penal provision of P.D. 115 provides:

SEC. 13. Penalty Clause. – The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to
the entruster or as appears in the trust receipt or to return said goods, documents or instruments if
they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute
the crime of estafa, punishable under the provisions of Article Three Hundred and Fifteen,
Paragraph One (b), of Act Numbered Three Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other judicial entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

Section 1 (b), Article 315 of the Revised Penal Code under which the violation is made to fall,
states:

“x x x Swindling (estafa). – Any person who shall defraud another by any of the mans mentioned
herein below x x x:

x x x           x x x          x x x

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other

personal property received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of or to return the same, even
though such obligation be totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property.”

Based on the foregoing, it is plain to see that the Trust Receipts Law declares the failure to turn
over the goods or the proceeds realized from the sale thereof, as a criminal offense punishable
under Article 315 (1) (b) of the Revised Penal Code. The law is violated whenever the entrustee
or the person to whom the trust receipts were issued in favor of fails to: (1) return the goods
covered by the trust receipts; or (2) return the proceeds of the sale of the said goods. The
foregoing acts constitute estafa punishable under Article 315 (1) (b) of the Revised Penal Code.
Given that various trust receipts were executed by the TONDAS and that as entrustees, they did
not return the proceeds from the goods sold nor the goods themselves to METROBANK, there is
no dispute that that the TONDAS failed to comply with the obligations under the trust receipts
despite several demands from METROBANK.

Finding favorably for the TONDAS, however, and ordering the dismissal of the complaint
against them, the Court of Appeals held that: (1) the TONDAS opened a savings account of P2.8
Million to pay the entire principal of the outstanding trust receipts account; (2) the TONDAS
obtained from a METROBANK officer a written acknowledgement of receipt of checks totaling
P2.8 Million in order to show proof of compliance with the loan restructuring proposal; (3) it
was settled between the parties that the amount of 2.8 Million should be paid to cover all

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outstanding obligations under the trust receipts account; (4) the money remains deposited under
the savings account of petitioners awaiting a final agreement with METROBANK regarding the
loan restructuring arrangement; and that (5) there is no evidence suggesting that
METROBANK has been damaged by the proposal and the deposit or that the TONDAS
employed fraud and deceit in their dealings with the bank.

The foregoing findings and conclusions are palpably erroneous.

First, the amount of P2.8 million was not directly paid to METROBANK to settle the trust
receipt accounts, but deposited in a joint account of Joaquin G. Tonda and a certain Wang Tien
En. In a letter dated February 28, 1992, signed by HTAC’s Vice President for Finance,
METROBANK was informed that the amount “may be applied anytime to the payment of the
trust receipts account upon implementation of the parties of the terms of the restructuring.” The
parties failed to agree on the terms of the loan restructuring agreement as the offer by the
TONDAS to restructure the loan was followed by a series of counter-offers which yielded
nothing. It is axiomatic that acceptance of an offer must be unqualified and absolute to perfect a
contract. The alleged payment of the trust receipts accounts never became effectual on account
of the failure of the parties to finalize a loan restructuring arrangement.

Second, the handwritten note by the METROBANK officer acknowledging receipt of the checks
amounting to P2.8 Million made no reference to the TONDAS’ trust receipt obligations, and we
cannot presume that it was anything more than an ordinary bank deposit. The Court of Appeals
citing the case of Tan Tiong Tick vs. American Apothecories implied that in making the deposit,
the TONDAS are entitled to set off, by way of compensation, their obligations to
METROBANK. However, Article 1288 of the Civil Code provides that “compensation shall not
be proper when one of the debts consists in civil liability arising from a penal offense” as in the
case at bar. Theraison d’etre  for this is that, “if one of the debts consists in civil liability arising
from a penal offense, compensation would be improper and inadvisable because the satisfaction
of such obligation is imperative.”

Third, reliance on the negotiations for the settlement of the trust receipts obligations between the
TONDAS and METROBANK is simply misplaced. The negotiations pertain and affect only the
civil aspect of the case but does not preclude prosecution for the offense already committed. It
has been held that “[a]ny compromise relating to the civil liability arising from an offense does
not automatically terminate the criminal proceeding against or extinguish the criminal liability of
the malefactor.”17 All told, the P2.8 Million deposit could not be considered as having settled
the trust receipts obligations of the TONDAS to the end of extinguishing any incipient criminal
culpability arising therefrom.

As to the statement of the Court of Appeals that there is no evidence that METROBANK has
been damaged by the proposal and the deposit, it must be clarified that the damage can be traced
from the non-fulfillment of an entrustee’s obligation under the trust receipts.

HELD

The petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE.

The finding that there was no fraud and deceit is likewise misplaced Considering that the offense
is punished as amalum prohibitum regardless of the existence of intent or malice. A mere failure
to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that
causes prejudice not only to another, but more to the public interest.

Finally, it is worthy of mention that a preliminary investigation proper – whether or not there is
reasonable ground to believe that the accused is guilty of the offense and therefore, whether or

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not he should be subjected to the expense, rigors and embarrassment of trial – is the function of
the prosecutor. Preliminary investigation is an executive, not a judicial function. Such
investigation is not part of the trial, hence, a full and exhaustive presentation of the parties’
evidence is not required, but only such as may engender a well-grounded belief that an offense
has been committed and that the accused is probably guilty thereof.

Section 4, Rule 112 of the Rules of Court recognizes the authority of the Secretary of Justice to
reverse the resolution of the provincial or city prosecutor or chief state prosecutor upon petition
by a proper party.Judicial review of the resolution of the Secretary of Justice is limited to a
determination of whether there has been a grave abuse of discretion amounting to lack or excess
of jurisdiction considering that the full discretionary authority has been delegated to the
executive branch in the determination of probable cause during a preliminary investigation.
Courts are not empowered to substitute their judgment for that of the executive branch; it may,
however, look into the question of whether such exercise has been made in grave abuse of
discretion.

Verily, there was no grave abuse of discretion on the part of the Secretary of Justice in directing
the filing of the Information against the TONDAS, end the Court of Appeals overstepped its
boundaries in reversing the same without basis in law and in evidence. We emphasize that for
purposes of preliminary investigation, it is enough that there is evidence showing that a crime
has been committed and that the accused is probably guilty thereof. By reason of the abbreviated
nature of preliminary investigations, a dismissal of the charges as a result thereof is not
equivalent to a judicial pronouncement of acquittal, a converso, the finding of a prima facie case
to hold the accused for trial is not equivalent to a finding of guilt.

Article 1282: Traders Royal Bank vs. Norberto Castañares and Milagros Castañares

FACTS

Spouses Castanares are exporters of shell crafts and handicrafts. To sustain their business, they
obtained loans and credit accommodations from Traders Royal Bank, mortgaging their real
estates (REMs). As evidenced by a promissory note, petitioner released only the amount of
P35,000.00 although the mortgage deeds indicated the principal amounts asP 86,000.00 andP
60,000.00. Respondents were further granted additional funds on various dates under promissory
notes they executed in favor of the petitioner.
Petitioner transferred the amount of P1,150.00 from respondents current account to their savings
account. The loans began to mature and the letters of credit against which the packing advances
were granted started to expire. Petitioner, without notifying the respondents, applied to the
payment of respondents outstanding obligations the sum of P30,930.49 which was remitted to
the respondents thru telegraphic transfer from AMROBANK, Amsterdam.

For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded
with the extrajudicial foreclosure of the real estate mortgages. Thereafter, a Certificate of Sale
covering all the mortgaged properties was issued by in favor of petitioner as the lone bidder.

Petitioner instituted a Civil Case for deficiency judgment, claiming that after applying the
proceeds of foreclosure sale to the total unpaid obligations of respondents (P200,397.78),
respondents were still indebted to petitioner for the sum ofP83,397.68. Respondents filed a Civil
Case for the recovery of the sum debited from their savings account passbook and the equivalent
amount of telegraphic transfer, and in addition, the damage suffered by the respondents from

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letters of credit left un-negotiated.
The RTC consolidated the cases and ruled in favor of the petitioner but was overturned by the
CA.

ISSUE

Whether or not the payment of $4,220.00 by the Bank by way of compensation is valid.

HELD

Yes. Agreements for compensation of debts or any obligations when the parties are mutually
creditors and debtors are allowed under Art. 1282 of the Civil Code even though not all the legal
requisites for legal compensation are present. Voluntary or conventional compensation is not
limited to obligations which are not yet due. The only requirements for conventional
compensation are (1) that each of the parties can fully dispose of the credit he seeks to
compensate, and (2) that they agree to the extinguishment of their mutual credits. Consequently,
no error was committed by the trial court in holding that petitioner validly applied, by way of
compensation, the $4,220.00 telegraphic transfer remitted by respondents foreign client through
the petitioner.

Article 1283: Yap Unki vs. Chua Jamco

Facts:

On November 10, 1906, plaintiff and defendant executed a written agreement whereby the
business partnership then existing between them was dissolved, and plaintiff sold and defendant
bought plaintiff’s interest in the partnership for the sum of P1,728.94, payable in three
installments, as set out in the agreement. The amended complaint alleged that the total
indebtedness thus contracted by the defendant had become due and payable and had not been
paid in whole or in part at the time when that complaint was filed. Judgment was rendered in the
court below in favor of the plaintiff and against the defendant for P1,728.94 together with
interest upon the various installments from the date when they fell due. From this judgment
defendant appealed, and the case is now before us on his bill of exceptions.

Issue: Whether or not all of the deferred payments had become due and payable when the
original complaint was filed in this action?

Ruling: Appellant having made no assignment of error on this ground we are not called upon to
review the action of the court in this regard. The judgment already rendered will be modified or
not in accordance with defendant’s success or failure in establishing the damages alleged in this
counterclaim.

Article 1287: Paulino Gullas vs. The Philippine National Bank

Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal
interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the
defendant to be absolved totally from the amended complaint. As it is conceded that the plaintiff
has already received the sum represented by the United States treasury, warrant, which is in

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question, the appeal will thus determine the amount, if any, which should be paid to the plaintiff
by the defendant.

FACTS

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current account with the
bank.

On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau
issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos.
Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by
the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular
Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509.
Against this balance he had issued certain checks which could not be paid when the money was
sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas
which could not be delivered to him at that time because he was in Manila. In the bank’s letter of
August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that
the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for
$361 or P722, the payment for which had been received has been returned by our Manila office
with the notation that the payment of his check has been stopped by the Insular Treasurer. On the
return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received and the
unpaid balance of the United States Treasury warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced

Attorney Gullas. In the first place, as above indicated, checks including one for his insurance
were not paid because of the lack of funds standing to his credit in the bank. In the second place,
periodicals in the vicinity gave prominence to the news to the great mortification of Gullas.

ISSUES

(1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to
the bank and (2) as to the amount damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles
1195 et seq., 1758 et seq.  The portions of Philippine law provide that compensation shall take
place when two persons are reciprocally creditor and debtor of each other (Civil Code, article
1195). In his connection, it has been held that the relation existing between a depositor and a
bank is that of creditor and debtor.

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. From the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next consider if that remedy was
enforced properly. The fact we believe is undeniable that prior to the mailing of notice of
dishonor, and without waiting for any action by Gullas, the bank made use of the money standing
in his account to make good for the treasury warrant. At this point recall that Gullas was merely
an indorser and had issued in good faith.

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As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of
a third party, it has been held that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to
follow up that statement with others proving exact damages is not so easy. For instance, for
alleged libelous articles the bank would not be primarily liable. The same remark could be made
relative to the loss of business which Gullas claims but which could not be traced definitely to
this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy
by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all
good faith, then, leave for Manila, and on return find that those checks had not been cashed
because of the action taken by the bank. That caused a disturbance in Gullas’ finances, especially
with reference to his insurance, which was injurious to him. All facts and circumstances
considered, we are of the opinion that Gullas should be awarded nominal damages because of the
premature action of the bank against which Gullas had no means of protection, and have finally
determined that the amount should be P250.

HELD

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with
the result that the judgment of the trial court will be modified by sentencing the defendant to pay
the plaintiff the sum of P250, and the costs of both instances.

Article 1291: Carlos Sandico,Sr. and Teopisto Timbol vs. The Honorable Minerva
Inocencio Piguing and Desiderio Paras

Facts:

On April 16, 1960 the spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol,
administrator of the estate of the late Sixta Paras, obtained a judgment in their favor against
Desiderio Paras (hereinafter referred to as the respondent) in civil case 1554, an action for
easement and damages in the Court of First Instance of Pampanga. On appeal, the Court of
Appeals affirmed and modified the judgment, as follows: IN VIEW WHEREOF, judgment
affirmed and modified; as a consequence, defendant is condemned to recognize the easement
which is held binding as to him; he is sentenced to pay plaintiffs the sums of P5,000.00 actual,
and P500.00 exemplary damages, and P500.00 attorney’s fees; plus costs in both
instances. Judgment is hereby rendered, (1) declaring that the respondent judge did not act in
excess of jurisdiction or with grave abuse of discretion in issuing the order dated February 3,
1966 (granting the respondent’s motion to set aside the alias writ of execution, and recalling and
guashing the said alias writ) and the order dated March 30, 1966 (denying the petitioners’
motion for reconsideration, of the order dated February 3, 1966) ; and (2) remanding the case to
the court a quo with instructions that the respondent court (a) conduct an ocular inspection of the
irrigation canal passing through the respondent’s land to determine whether or not the said canal
has been rebuilt in accordance with its original dimensions; (b) in the event that the said canal
fails to meet the measurements of the original one, order the respondent to reconstruct the same
to its former condition; and (3) in the event of the respondent’s further refusal or failure to do so,
appoint some other person to reconstruct the canal in accordance with its original dimensions, at
the cost of the said respondent, pursuant to section 10 of Rule 39 of the Rules of Court. Without
pronouncement as to costs.

Issue: Whether or not is there novation on this case?

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 Ruling:  No, the reduction of money is not amount to novation because the concept of novation
is the substitution or change of an obligation by another and not by reduction.

Article 1293: Magdalena State v   Antonio& Herminia Rodriguez (Art 1293-JNR)

FACTS

Antonio & Herminia  bought 2,191 SQM lot in Quezon City  from Magdalena State. In view of
the unpaid balance of 5,000  on account of purchase price, they executed promissory note for
5,000 which promised to pay with out any demand and with interest of 9 %  that payment be
made within 60 days from Jan 1957.

On the same day, Antonio & Herminia executed also a bond on favor of Magdalena State which
embodied bonding company Luzon Surety Company to pay the 5,000 balance to Magdalena, but
the bonding company be notified in writing within 10 days from the moment there was default
otherwise the undertaking become null and viod.

June 1957 the obligation becomes due and demandable the surety company paid Madalena State
the 5,000, shortly thereafter, Magdalena demanded payment of 6.55.89 for accumulated interest
on principal which was refused, therefore sued respondent with MTC to enforced collection, the
MTC rules in favor of the Magdalena. MTC ordered  Rodriguez and Luzon Surety to pay jointly
not contented went to CFI and the CFI rules that it waived or condoned the interest due based on
Art 1235 and Art 1253

ISSUE/S    

Whether Magdalena State was entitle to penalty after the bonding company paid the entire
amount  timely.

LAWS            

Article 1253  If the debt produces interests, payment of the principal shall not be deemed to have
been made until the interest have been covered.

HELD

    1. It affirmed the CA ruling that, when there is  no agreement that the first debtor shall have
been released from responsibilities does not constitute Novation       and the creditor can still
enforce the obligation against the original debtor.

1. The surety company is not a new and separate contract but an accessory of the promissory note.
2. Obligation to ay sum of money is not novated in a new instrument wherein the old is ratified by
changing the terms of payments and adding other obligations not incompatible with the old one.
3. In Novation, presumption is never favored to be sustained, it needs to be established that the old
and the new contract ,s are incompatible in all point or that the will to novate appears by express
agreement of the parties.

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Article 1295: Manuel Rios and Paciencia Reyes vs. Jacinto Palma Y. Hermanos, S.C.,
Rafael Palma, and Perfecto Jacinto

This action was instituted in the Court of First Instance of the City of Manila by Manuel Rios
and wife, Paciencia Reyes, for the purpose of recovering the sum of P23,300, with legal interest,
and costs, as damages alleged to have been incurred by the plaintiffs by reason of breach of a
contract of lease. The defendants named in the complaint are the firm of Jacinto, Palma y
Hermanos, S. C., as lessee, in the same firm. Upon hearing the cause the trial court absolved the
defendants from the complaint and the plaintiffs appealed.

No transcript of the oral testimony appears in the record, with the result that our view of the case
will be limited to the questions of law arising upon the facts found by the trial court, in
connection with the letter (Exhibit K) referred to in the opinion.

FACTS

It appears that by contract dated September 1, 1920, the plaintiffs, as owners of a parcel of land
on Gagalangin Street, Tondo District, Manila, let the same, with the improvements thereon, to
the firm of Jacinto, Palma y Hermanos, S. C., for the term of fifteen years at a monthly rental of
P400 payable in advance during the first ten days of each month. Among the provisions
contained in this contract we note clause 9, which is to the effect that the terms and conditions of
the contract shall be obligatory upon and redound to the benefit of the persons composing the
lessee firm, their heirs executors, administrators, successors and assigns, as well as the
successors and assigns of the lessors. The lessee entered upon the possession of the leased
premises upon the date above stated; and the payment of the agreed rental was continued until
November and December of the year 1923, for which months the rent fell into arrears.

Meanwhile several successive reorganizations of the lessee firm had been effected as follows:
The first lessee, Jacinto, Palma y Hermanos, S. C., was succeeded by the firm of P. & F. Jacinto,
and the latter in turn by the firm of Palma Brothers & Co., Ltd., to be itself again succeeded by
Palma & Co,. a corporation. The plaintiffs were informed of these changes in the personality of
the lessee and, as the trial court found, acquiesced therein.

In view of the default in the payment of the monthly rental for the months of November and
December, 1923, Mr. Gregorio Araneta, as attorney for Manuel Rios, addressed a letter, on
December 27, 1923, to Rafael Palma, as partner in the original firm and its former manager. In
the course of this letter the writer asked Mr. Palma, in case the lessee could not continue to pay
the rent, to return the property at once to Rios, “without prejudice to ulterior responsibility for
damages for breach of contract.” The writer added that Rios desired prompt action in the matter
and that he must have possession of the property on or before the 29th of the month, otherwise
he would be compelled to begin a detainer suit.

In response to this demand the occupant, Palma Bros. & Co., Ltd., or Palma & Co., or whoever
had actual possession, vacated the premises on December 29, giving notification to the plaintiff
Manuel Rios, who at once assumed possession. We gather from the record that the rent for
November and December, 1923, has subsequently been paid; but the premises appear to have
been entirely vacant during the months of January and February, 1924, and for this period no
compensation has been paid to the plaintiffs by any one. Beginning with March, 1924, the
property was let by the plaintiffs for a term of three years, renewable for another three, to the
firm of Walter A. Smith Co., Inc., upon the best terms then procurable in the market, which was
at a monthly rental of P250.

In this court the plaintiffs, as appellants, have assigned error among other things, to the failure of
the trial court to give judgment for the sum of P800, the stipulated rent for January and February,

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1924, and for the further sum of P22,500, being the difference between the amount which the
lessee had agreed to pay during the twelve years that the lease was to run from the time when the
plaintiffs resumed possession and the amount which, during the same period, the plaintiffs would
obtain from the new-lessee, or others, at the rate of P150 a month.

The firm of Jacinto, Palma y Hermanos, S. C., allowed a default judgment to be entered in this
case for its failure to answer, but the individual defendants interposed an answer relying upon
two special defenses which will be examined in turn. It is first claimed that the original lessee
and the partners in that concern were discharged by a novation of the original contract whereby
the lessee was changed and new debtor substituted for the original debtor. We are of the opinion
that there is no merit in this defense and that the facts found by the trial court are not sufficient in
law to show a discharge of the parties liable upon the original lease. What appears to have
occurred, and what the court found, was that the plaintiff Rios said that it was all right when told
of the successive changes in the personality of the lessee, and he seems to have been content to
receive the monthly rent from anybody who wanted to pay it.

But by preference to clause 9 of the contract, it will be seen that the lessors really had no choice
in their attitude to these changes. It was there stipulated that the provisions of the lease should be
obligatory upon and redound to the benefit not only of the persons composing the lessee firm but
their assigns. The transfer of the lease was therefore anticipated in the lease and stipulated for,
and the lessors had no right to complain as the leased premises passed from one entity to another.
The contract, however, does not stipulate that the original lessee should be discharged by any
such assignment, and an agreement to this effect cannot be implied from the mere forced
acquiescence of the lessors in the transfer of the lease.

The second ground of defense to the action is, in the opinion of the majority of the members of
the court, of a more meritorious character. This defense is planted upon the fact that after the
default occurred in the payment of rent for the months of November and December, 1923, the
lessors voluntarily, and upon their own demand, resumed possession of the premises. It is
insisted for the defense that this relieved the original lessee and all other persons liable upon the
lease from any liability for future rent and therefore from any liability for damages that may have
accrued, or might accrue, to the lessors during the remainder of the term of the lease. The
situation is one that must be considered in the light of certain provisions of the Civil Code, to
which attention will be directed.

In the case before us the lessors clearly elected to resolve or rescind the contract. Now it is an
inseparable incident of resolution or rescission that the parties are bound to restore to each other
the thing which has been the subject matter of the contract, precisely as in the situation where a
decree of nullity is granted. In the common case of the resolution of a contract of sale for failure
of the purchaser to pay the stipulated price, the seller is entitled to be restored to the possession
of the thing sold, if it has already been delivered. But he cannot have both the thing sold and the
price which was agreed to be paid, for the resolution of the contract has the effect of destroying
the obligation to pay the price. Similarly, in the case of the resolution, or rescission, of a contract
of lease, the lessor is entitled to be restored to the possession of the leased premises, but he
cannot have both the possession of the leased premises for the remainder of the term and the rent
which the other party had contracted to pay. The termination of the lease has the effect of
destroying the obligation to pay rent for the future.

The damages or indemnity conceded in case of resolution by article 1124 and the damages
conceded by article 1556 in the case of the rescission of a lease have reference to the damages
for the default which gave rise to the right to terminate the lease. In a case of the kind now before
us it would cover rent in arrears and damage done by the lessee to the leased premises or other
special damages in particular cases resulting from nonperformance of the lessee’s obligation. By
no reasonable interpretation of these provisions can the indemnity or damages be understood as

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extending the rent for the future, inasmuch as the termination of the lease abrogated liability for
future rent.

At first blush it might appear that the case would perhaps be affected by the reservation
contained in the demand of plaintiffs’ attorney for the surrender of the premises, in which he
stated that the demand was without prejudice to ulterior responsibility for damages. But a
moment’s reflection ought to show that the right of action here reserved must be understood as
having reference to such damages as might be recoverable in law, consistently with the election
of the plaintiffs to rescind the contract.

HELD

From what has been said it follows that the judgment absolving the defendants from the
complaint must be affirmed; and it is ordered, with costs against the appellants.

The plaintiffs were unable to find a new tenant until March 1, 1924, when the property was
leased to Walter A. Smith, Inc., for the period of three years at a rental of P250 per month, P150
less than that which the plaintiffs would have received under the former lease. On April 4, 1924,
the plaintiffs brought the present action for damages alleged to have been suffered by reason of
the defendants’ breach of contract.

The theory that damages for the loss of profits suffered subsequent to the rescission of a lease,
but before the expiration of its original term, are incompatible with the idea of rescission, is
entirely new and in direct conflict with the views expressed by this court It is also out of
harmony with all other cases upon the subject of damages for breach of contract in this
jurisdiction and cannot be good law.

Article 1297: Bert Osmena & Associates vs. Court of Appeals and Sps. Pedro Quimbo and
Leonadiza Quimbo

FACTS

On June 3, 1971, a “Contract of Sale” over Lots 1 and 2, Block I, Phase II of the Clarita
Subdivision, Cebu City was executed in favor of the Quimbo spouses. The sellers were petitioner
company, developer of the subdivision, and Carmen and Helena Siguenza, owners of the
property, represented by petitioner. Antonio V. Osmeña signed the contract on behalf of the
company.

The spouses had intended to construct a house and were ready to pay the purchase price in full
even before the due date of the first installment and advised Helena Siguenza accordingly so that
title in their names could be delivered to them. On the pretext that a road would traverse the lots
purchased, Helena proposed to exchange another lot (Lot 409) with the same area for the lots
purchased by the spouses to which the latter hesitating agreed. Until 1973, however, no title
could be given the Quimbo spouses.

It turned out that Lots Nos. 1 and 2 had already been sold to Dr. Francisco Maningo. Discovering
this fact only in 1973, respondent spouses instituted this suit for Damages against petitioner
company and the Siguenzas on March 25, 1974.

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In its judgment, the lower Court ordered petitioner company and the Siguenzas to pay damages
to respondent spouses.  Furthermore, the Appellate Court affirmed the judgment of the Trial
Court in toto.

ISSUE

Whether or not the new contract was validly executed.

HELD

The Honorable Court of Appeals seriously erred in not having considered the contract as having
been novated by virtue of the change in the subject matter or object of the contract. The courts
below seriously erred for having found petitioner to have acted fraudulently where there is no
evidence to support such a finding.

The Court of Appeals committed serious error in law when it held petitioner jointly and severally
liable to pay P100,000.00 as compensation for the pecuniary loss suffered by Mrs. Quimbo.  The
Court seriously erred in holding petitioner jointly and severally liable with the Siguenzas to pay
moral damages to Quimbo, there being no evidence showing fraud or bad faith perpetrated by
petitioner.

Article 1299: U.S vs. Francisco Bautista, Et. Al.

Facts:  In 1903 a junta was organized and a conspiracy entered into by a number of Filipinos in
Hongkong, for the purpose of overthrowing the government of the United States in the
Philippine Islands by force of arms and establishing a new government.

Francisco Bautista (1), a close friend of the chief of military forces (of the conspirators) took part
of several meetings. Tomas Puzon (2) held several conferences whereat plans are made for the
coming insurrection; he was appointed Brigadier-General of the Signal Corps of the
revolutionary forces. Aniceto de Guzman (3) accepted some bonds from one of the conspirators.

The lower court convicted the three men of conspiracy. Bautista was sentenced to 4 years
imprisonment and a P3,000 fine; Puzon and De Guzman to 3 years imprisonment and P1,000.

Issue: Whether or not the accused are guilty of conspiracy?

Ruling: Judgment for Bautista and Puzon CONFIRMED. Judgment for de Guzman

REVERSED. Yes, Bautista and Puzon are guilty of conspiracy. Bautista was fully aware of the
purposes of the meetings he participated in, and even gave an assurance to the chief of military
forces that he is making the necessary preparations. Puzon voluntarily accepted his appointment
and in doing so assumed all the obligations implied by such acceptance. This may be considered
as an evidence of the criminal connection of the accused with the conspiracy.

However, de Guzman is not guilty of conspiracy. He might have been helping the conspirators
by accepting bonds in the bundles, but he has not been aware of the contents nor does he was, in
any occasion, assumed any obligation with respect to those bonds.

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Article 1303: Malayan Insurance Co., Inc. vs. Rodelio Alberto and Enrico Alberto Reyes

FACTS

At around 5 o’clock in the morning of December 17, 1995, an accident occurred at the corner of
EDSA and Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) a Nissan Bus
operated by Aladdin Transit with plate number NYS 381; (2) an Isuzu Tanker with plate number
PLR 684; (3) a Fuzo Cargo Truck with plate number PDL 297; and (4) a Mitsubishi Galant with
plate number TLM 732.[4]

Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer 1
Alfredo M. Dungga (SPO1  Dungga), the Isuzu Tanker was in front of the Mitsubishi Galant
with the Nissan Bus on their right side shortly before the vehicular incident. All three (3)
vehicles were at a halt along EDSA facing the south direction when the Fuzo Cargo Truck
simultaneously bumped the rear portion of the Mitsubishi Galant and the rear left portion of the
Nissan Bus.  Due to the strong impact, these two vehicles were shoved forward and the front left
portion of the Mitsubishi Galant rammed into the rear right portion of the Isuzu Tanker.

Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance Policy
No. PV-025-00220 in favor of First Malayan Leasing and Finance Corporation (the assured),
insuring the aforementioned Mitsubishi Galant against third party liability, own damage and
theft, among others.  Having insured the vehicle against such risks, Malayan Insurance claimed
in its Complaint dated October 18, 1999 that it paid the damages sustained by the assured
amounting to PhP 700,000.

Maintaining that it has been subrogated to the rights and interests of the assured by operation of
law upon its payment to the latter, Malayan Insurance sent several demand letters to respondents
Rodelio Alberto (Alberto) and Enrico Alberto Reyes (Reyes), the registered owner and the
driver, respectively, of the Fuzo Cargo Truck, requiring them to pay the amount it had paid to the
assured.  When respondents refused to settle their liability, Malayan Insurance was constrained
to file a complaint for damages for gross negligence against respondents.

In their Answer, respondents asserted that they cannot be held liable for the vehicular accident,
since its proximate cause was the reckless driving of the Nissan Bus driver. They alleged that the
speeding bus, coming from the service road of EDSA, maneuvered its way towards the middle
lane without due regard to Reyes’ right of way.  When the Nissan Bus abruptly stopped, Reyes
stepped hard on the brakes but the braking action could not cope with the inertia and failed to
gain sufficient traction.  As a consequence, the Fuzo Cargo Truck hit the rear end of the
Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in front of it.  The Nissan Bus,
on the other hand, sideswiped the Fuzo Cargo Truck, causing damage to the latter in the amount
of PhP 20,000. Respondents also controverted the results of the Police Report, asserting that it
was based solely on the biased narration of the Nissan Bus driver.

After the termination of the pre-trial proceedings, trial ensued.  Malayan Insurance presented the
testimony of its lone witness, a motor car claim adjuster, who attested that he processed the
insurance claim of the assured and verified the documents submitted to him.  Respondents, on
the other hand, failed to present any evidence.

In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled in favor
of Malayan Insurance and declared respondents liable for damages. The dispositive portion
reads:

Judgment rendered in favor of the plaintiff against defendants jointly and severally to pay
plaintiff the following:

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1. The amount of P700,000.00 with legal interest from the time of the filing of the complaint;
2. Attorney’s fees of P10,000.00 and;
3. Cost of suit.

Dissatisfied, respondents filed an appeal with the CA, In its Decision dated July 28, 2010, the
CA reversed and set aside the Decision of the trial court and ruled in favor of respondents,
disposing:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the

assailed Decision dated 2 February 2009 REVERSED and SET ASIDE. The Complaint dated
18 October 1999 is hereby DISMISSED for lack of merit. No costs.

SO ORDERED

The CA held that the evidence on record has failed to establish not only negligence on the part of
respondents, but also compliance with the other requisites and the consequent right of Malayan
Insurance to subrogation.  It noted that the police report, which has been made part of the records
of the trial court, was not properly identified by the police officer who conducted the on-the-spot
investigation of the subject collision. It, thus, held that an appellate court, as a reviewing body,
cannot rightly appreciate firsthand the genuineness of an unverified and unidentified document,
much less accord it evidentiary value.

Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a police
report is a prima facie evidence of the facts stated in it.  And inasmuch as they never questioned
the presentation of the report in evidence, respondents are deemed to have waived their right to
question its authenticity and due execution.

In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration. Hence,
Malayan Insurance filed the instant petition.

ISSUES

In its Memorandum dated June 27, 2011 raised by Malayan Insurance were sum up to (1) the
admissibility of the police report; (2) the sufficiency of the evidence to support a claim for gross
negligence; and (3) the validity of subrogation in the instant case.

HELD

Admissibility of the Police Report

Malayan Insurance contends that, even without the presentation of the police investigator who
prepared the police report, said report is still admissible in evidence, especially since respondents
failed to make a timely objection to its presentation in evidence. Respondents counter that since
the police report was never confirmed by the investigating police officer, it cannot be considered
as part of the evidence on record.

Indeed, under the rules of evidence, a witness can testify only to those facts which the witness
knows of his or her personal knowledge, that is, which are derived from the witness’ own
perception.Concomitantly, a witness may not testify on matters which he or she merely learned
from others either because said witness was told or read or heard those matters. Such testimony
is considered hearsay and may not be received as proof of the truth of what the witness has
learned. This is known as the hearsay rule.

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Entries in official records made in the performance of his duty by a public officer of the
Philippines, or by a person in the performance of a duty specially enjoined by law are prima facie
evidence of the facts therein stated.

Sufficiency of Evidence

Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck, bumped the
rear of the Mitsubishi Galant, he is presumed to be negligent unless proved otherwise. It further
contends that respondents failed to present any evidence to overturn the presumption of
negligence. Contrarily, respondents claim that since Malayan Insurance did not present any
witness who shall affirm any negligent act of Reyes in driving the Fuzo Cargo truck before and
after the incident, there is no evidence which would show negligence on the part of respondents.

One of the theoretical bases for the doctrine is its necessity, i.e., that necessary evidence is absent
or not available.

The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the
instrumentality which causes the injury either knows the cause of the accident or has the best
opportunity of ascertaining it and that the plaintiff has no such knowledge, and therefore is
compelled to allege negligence in general terms and to rely upon the proof of the happening of
the accident in order to establish negligence. The inference which the doctrine permits is
grounded upon the fact that the chief evidence of the true cause, whether culpable or innocent, is
practically accessible to the defendant but inaccessible to the injured person.

In the case at bar, aside from the statement in the police report, none of the parties disputes the
fact that the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the
rear end of the vehicle in front of it. Respondents, however, point to the reckless driving of the
Nissan Bus driver as the proximate cause of the collision, which allegation is totally unsupported
by any evidence on record. And assuming that this allegation is, indeed, true, it is astonishing
that respondents never even bothered to file a cross-claim against the owner or driver of the
Nissan Bus.

As mentioned above, the requisites for the application of the res ipsa loquitur rule are the
following: (1) the accident was of a kind which does not ordinarily occur unless someone is
negligent; (2) the instrumentality or agency which caused the injury was under the exclusive
control of the person charged with negligence; and (3) the injury suffered must not have been
due to any voluntary action or contribution on the part of the person injured.

In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the Mitsubishi
Galant unless someone is negligent. Also, the Fuzo Cargo Truck was under the exclusive control
of its driver, Reyes. Even if respondents avert liability by putting the blame on the Nissan Bus
driver, still, this allegation was self-serving and totally unfounded. Finally, no contributory
negligence was attributed to the driver of the Mitsubishi Galant. Consequently, all the requisites
for the application of the doctrine of res ipsa loquitur are present, thereby creating a reasonable
presumption of negligence on the part of respondents.

Validity of Subrogation

Malayan Insurance contends that there was a valid subrogation in the instant case, as evidenced
by the claim check voucher and the Release of Claim and Subrogation Receipt presented by it
before the trial court. Respondents, however, claim that the documents presented by Malayan
Insurance do not indicate certain important details that would show proper subrogation.

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Note also that when a party desires the court to reject the evidence offered, it must so state
in the form of a timely objection and it cannot raise the objection to the evidence for the
first time on appeal. Because of a party’s failure to timely object, the evidence becomes
part of the evidence in the case. Thereafter, all the parties are considered bound by any
outcome arising from the offer of evidence properly presented.

Subrogation is the substitution of one person by another with reference to a lawful claim or right,
so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. The principle covers a situation wherein an insurer has paid a
loss under an insurance policy is entitled to all the rights and remedies belonging to the insured
against a third party with respect to any loss covered by the policy. It contemplates full
substitution such that it places the party subrogated in the shoes of the creditor, and he may use
all means that the creditor could employ to enforce payment.

We have held that payment by the insurer to the insured operates as an equitable assignment to
the insurer of all the remedies that the insured may have against the third party whose negligence
or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow
out of, any privity of contract. It accrues simply upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and
to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a
debt by one who, in justice, equity, and good conscience, ought to pay.

The petition was GRANTED.  The CA’s July 28, 2010 Decision and October 29, 2010
Resolution in CA-G.R. CV No. 93112 are hereby REVERSED and SET ASIDE. The Decision
dated February 2, 2009 issued by the trial court in Civil Case No. 99-95885 is
hereby REINSTATED.

No pronouncement as to cost

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