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7.

Fortuitous Event, Essential Conditions, Exceptions:

Anton Mercado 1-E

Article 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 Event
An occurrence or happening which could not be foreseen, or even if foreseen, is inevitable.
Events beyond the control of the obligor. Must be impossible to foresee or to avoid.

Essential Conditions:
1. Cause of the breach must be independent of the debtors will
2. Event must either be unforeseeable or unavoidable
3. Event must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner
4. Debtor must be free from any participation in, or aggravation of, the injury to the creditor

Exceptions:
1. Express stipulation by the parties that there is liability even though non-performance is due to
fortuitous events
2. Nature of the obligation requires assumption of risk
3. Obligor is in delay
4. Obligor promised the same thing to 2 or more persons who do not have the same interest
5. Possessor in bad faith and thing is lost or deteriorated due to fortuitous event
6. Obligor contributed to the loss of the thing
7. Obligor is guilty of fraud, negligence, delay, or violation of the tenor of the agreement
8. If the adverse consequence is found to be partly the result of a persons participation or neglect to
act and take steps in forestalling the damage/injury.

Nakpil vs. CA
- The negligence of United Construction Inc. and Juan Nakpil and Sons Inc. in the planning, specification, and
construction of the Philippine Bar Association Building led to its collapse during an unusually powerful
earthquake. This is evidenced by the fact that many other buildings older than it remained standing. If the
happening of the fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the obligation as provided in Article 1170 which
results in the loss or damage, the obligor cannot escape liability.
Sia vs. CA
- The banks negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the
floods of 1985 and 1986; it also knew that the floodwaters inundated the room where the safe deposit box was
located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have
been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it
failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a
party to the aggravation of the injury or loss.
RP vs. Luzon Stevedoring
- The collision of Luzon Stevedorings barge with the supports of the Nagtahan Bridge was not caused by a
fortuitous event or force majeure. The Nagtahan bridge was an immovable and stationary object provided
with openings for the passage of water craft, thus, it is undeniable that the unusual event that the barge
rammed the bridge raises a presumption of negligence on the part of its employees manning the barge or the
tugs that towed it. Luzon Stevedoring voluntarily entered the swollen stream knowing the dangers that it
posed. It therefore assured the risk and cannot shed responsibility merely because the precautions it adopted
turned out insufficient.

NPC vs. Philipp Brothers


- Strikes are included in the definition of force majeure since it is an event which takes place by accident and
could not have been foreseen and by law and by stipulation of the parties as per their agreement, Philipp
Brothers is exempted from the liability of the effects of the delay in delivery of the coal. The Court stressed
that even considering force majeure as the reason for the delay in the first shipment, which exempted Philipp
Brothers from liability does not mean NAPOCOR is bound under any contract to approve Philipp Brothers
pre-qualification for subsequent biddings as it expressly reserved its right to reject bids.

8. Usury:
Article 1175. Usurious transactions shall be governed by special laws. (n)

Usury - The action or practice of lending money at unreasonably high rates of interest.
CBP Circular No. 905-82 suspended the effectivity of the Usury Law. Usurers are no longer criminally
liable. If stipulation on the interest rate is unconscionable, they are void for being contrary to morals.
Unilateral increase of interest rate by the lender is not allowed. Absent any evidence of fraud, undue
influence or any vice of consent exercised by one party against the other, the interest rate agreed upon is
binding upon them.

Medel vs. CA
- A stipulated rate of interest at 5.5% per month on the 500,000.00 pesos 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 latters effectivity. Interest can now be charged as lender and borrower may
agree upon. However, the interest of 5.5% a month or 66% perineum is unconscionable, contrary to moral and
thus this stipulation is VOID.
Article 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)
The presumption in the codal provision is rebuttable. Until the principal sum due is returned to the creditor,
regular interest continues to accrue since the debtor continues to use such principal amount.

9. Remedies for Breach of Obligations (Extra-judicial and Judicial; Principal and Subsidiary)
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims,
may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are
inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111)

Extrajudicial Remedies:
Ex. A demand letter, interest rates

Judicial Remedies:
Ex. Action for performance, damages, rescission

Principal Remedies:
a. Action for Performance (Specific Performance or Obtain Compliance)
b. Action for Damages (Exclusively or in addition to either of the first actions)
c. Action for Rescission (In a reciprocal obligation)

Subsidiary Remedies:
a. Accion Subrogatoria Creditor steps in the position of the debtor to collect valid and demandable
credit from those who owe the debtor. May be done extrajudicially
Limits: Not allowed to pursue actions which are personal to the debtor
Ex. The right to revoke a donation, right to exercise parental authority.
b. Accion Pauliana Action for the rescission of acts/contracts entered into by the debtor designed to
defraud the creditor

Article 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)
General rule:
Rights of obligations or those rights which are acquired by virtue of an obligation are transmissible in character.

1.
2.
3.

Exceptions:
Where they are not transmissible in their very nature (i.e. purely personal rights);
Where there are stipulations by the parties that they are not transmissible;
Where they are not transmissible by operation of law.

Pure and Conditional Obligations: (Articles 1179 1192)


Article 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)

1. Pure Obligations:
Pure Obligation
No condition or term upon which the fulfillment of the obligation is made to depend
Immediately demandable by the creditors and debtor cannot be excused from complying
Demandability is different from fulfillment, thus, when the court gives a grace period, this cannot be
seen as impairing the attribute of immediate demandability.
If debtor does not fulfill, he is in default (after a demand has been made)
Examples:
Bare acknowledgement of a debt by the debtor
Period originally given in a contract is cancelled by mutual agreement
HSBC vs. Spouses Broqueza
The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has
the right to demand immediate payment. Article 1179 of the Civil Code applies. The spouses Broquezas
obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior
monthly check-off from Editha Broquezas salary is of no moment. Once Editha Broqueza defaulted in
her monthly payment, HSBCL-SRP made a demand to enforce a pure obligation.

2. Kinds and Effects of Conditions, Suspensive vs. Resolutory:


Conditional Obligations
Obligation which is subject to a condition.
The effectivity of the conditional obligation is subjected to the fulfillment or the non-fulfillment of a
future and uncertain event.

Futurity and uncertainty must concur. If event is not uncertain, then it is a period/term.
Ex. An obligation subjected upon death is not a conditional obligation because death is certain.

Suspensive Condition Fulfillment of the condition gives rise to the obligation.


Ex. Ill buy your land if you pass the 2014 bar examinations
Resolutory Condition Fulfillment of the condition extinguishes an already existing obligation.
Ex. In donation propter nuptias, marriage is a resolutory condition.

If condition is made to be dependent upon past events, it is not a condition because the element of
uncertainty is no longer present. Proof of the past event can become a condition, but not the past event
itself.

Santiago vs. Millar


Two units of tickets for the sweepstakes draw and race were given to Santiago as a gift for his birthday.
However, he lost them along with the winning ticket that it contained. As the ticket bears the notation prizes
of tickets sold locally will be paid to holder of ticket upon surrender of same, PCSO is under no obligation to
pay Santiago if he is not able to present the required ticket. This is because the contract is aleatory in nature
(Art. 1790 Civil Code) and the contracting parties may establish any agreements, terms, and conditions they
may deem advisable, provided that they are not contrary to law, morals, or public order. Obligations arising
from contracts have the force of law between the contracting parties (Art 1091).
Article 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)
Patente vs. Omega
Omegas promissory note to Patente contained the condition that he will pay as soon as he has the money.
This is a void condition for its fulfillment is left solely to the will of the debtor. Still, the original intention
was to grant the debtor a deadline for the payment, and to make it a pure and unconditional obligation is to
impose a completely different approach than agreed upon. Thus, when the time for payment of an obligation
is left to the sole will of the debtor, and the condition is annulled, the obligation does not become a pure and
unconditional obligation. The recourse of the creditor is to go to court and ask for setting a time limit for the
payment.
Gaite vs. Fonacier
The shipment or sale of the iron ore is not a condition or suspensive to the payment of the balance of
P65,000.00, but was only a suspensive period or term. It was intended Merely to fix the future date of the
payment. It is certain that the payment will be made. What is uncertain is the exact date at which it will be
made. Nothing is found in the contract that Gaite assumed to run a risk of losing his right over the ore without
getting paid for it. This is proved by the fact that Gaite insisted on a bond to guarantee the payment of
P65,000.00.
Article 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)
Coronel vs. Court of Appeals
Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners
names was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale
became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of
title already in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately execute
the deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of the
purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively
admitted that: The sale was still subject to a suspensive condition. (Emphasis supplied.)

The third party is not a buyer in good faith because a notice of a pending suit was attached in the TCT which
was impossible to have been overlooked by the buyer.

Javier vs. Court of Appeals


Tiro assigned his shares of stock in Timberwealth Corp for 120k. Plus 30k if additional area is granted. The
said agreement in this case is a bilateral contract which gave rise to reciprocal oligations, that is the obligation
of Tiro to transfer his rights over the concession once approved by the BOF to the petitioners and on the other
hand, the petitioners to pay 30,000. The demandability of the obligation of one depends upon the fulfillment
of the other. Tiros non fulfillment of his end of the deal negates his right to demand from the Javiers.
Heirs of Atienza vs. Espidol
In a contract to sell, the buyers full payment of the price is a positive suspensive condition to the coming into
effect of the agreement. Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that
fell due in December 2002. That payment, said both the RTC and the CA, was a positive suspensive condition
failure of which was not regarded a breach in the sense that there can be no rescission of an obligation (to turn
over title) that did not yet exist since the suspensive condition had not taken place. since Espidol failed to pay
the installment on a day certain fixed in their agreement, the Atienzas can afterwards validly cancel and
ignore the contract to sell because their obligation to sell under it did not arise. Since the suspensive condition
did not arise, the parties stood as if the conditional obligation had never existed. The Court directs petitioner
Heirs of Atienza to reimburse the P130,000.00 down payment to respondent Espidol.

3. Effects of Potestative, Casual or Mixed Conditions:


Article 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)

This provision applies only to suspensive conditions. If the resolutory condition is dependent upon the
sole will of the debtor, the condition may be valid.

This article speaks of three conditions:


1. Potestative or Facultative Condition The fulfillment of the condition depends on the exclusive will
of one of the parties, that is either the debtor or creditor. However, this article refers only to the
debtor.
Ex. I promise to pay when my house is sold.
2. Casual Condition The fulfillment of the condition depends upon chance or the will of a third person.
Ex. Ill buy your house if you win the lotto.
3. Mixed Condition The fulfillment of the condition depends partly upon the will of the parties and
partly upon chance or the will of a third person.
Ex. Ill pay as soon as I received funds derived from the sale of my car in Spain.

Effect of Potestative (Facultative) Condition


- The conditional obligation is void, that is, both the obligation and the condition are void. This is to prevent the
establishment of obligations which are illusory.
Ex. A promises to sell if A finds it convenient to do so.
B would pay her shares after she had harvested from her fishpond.
-

If the fulfillment depends upon the will of the creditor, the condition and obligation are valid. This is because
a creditor is naturally interested in the fulfillment of the condition which will benefit him.

Parks vs. Province of Tarlac


- Parks contends that a condition precedent having been imposed in the donation and the same not having been
complied with, the donation never became effective. We find no merit in this contention. The appellant refers
to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the

erection of a central school and the other for a public park, the work to commence in both cases within the
period of six months from the date of the ratification by the parties of the document evidencing the donation.
It is true that this condition has not been complied with. The allegation, however, that it is a condition
precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right is not
effected while said condition is not complied with or is not deemed complied with. In the present case the
condition that a public school be erected and a public park made of the donated land, work on the same to
commence within six months from the date of the ratification of the donation by the parties, could not be
complied with except after giving effect to the donation. Also, action to revoke donation has already
prescribed.
Osmena vs. Rama
- It was suggested during the discussion of the case in this court that, in the acknowledgment above quoted of
the indebtedness made by the defendant, she imposed the condition that she would pay the obligation if she
sold her house. If that statement found in her acknowledgment of the indebtedness should be regarded as a
condition, it was a condition which depended upon her exclusive will, and is therefore, void. (Art. 1115, Civil
Code.) The acknowledgment, therefore, was an absolute acknowledgment of the obligation and was sufficient
to prevent the statute of limitation from barring the action upon the original contract.
Trillana vs. Quezon Colleges
- Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more imperative,
in view of the proposal of Damasa Crisostomo to pay the value of the subscription after she has harvested
fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, rendering the
obligation void. It cannot be argued that the condition solely is void, because it would have served to create
the obligation to pay, unlike a case, exemplified by Osmea vs. Rama (14 Phil., 99), wherein only the
potestative condition was held void because it referred merely to the fulfillment of an already existing
indebtedness.
Hermosa vs. Longara
- If the condition were "if he decides to sell his house." or "if he likes to pay the sums advanced," or any other
condition of similar import implying that upon him (the debtor) alone payment would depend, the condition
would be protestativa, dependent exclusively upon his will or discretion. In the form that the condition was
found by the Court of Appeals however the condition implies that the intestate had already decided to sell his
house, or at least that he had made his creditors believe that he had done so, and that all that we needed to
make his obligation (to pay his indebtedness) demandable is that the sale be consummated and the price
thereof remitted to the islands. Note that if the intestate would prevent or would have prevented the
consummation of the sale voluntarily, the condition would be or would have been deemed or considered
complied with (article 1119, old Civil Code)
Smith Bell vs Matti
- Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to
the tanks, the agreement was that the delivery was to be made "within 3 or 4 months," but that period was
subject to the contingencies referred to in a subsequent clause. With regard to the expellers, the contract says
"within the month of September, 1918," but to this is added "or as soon as possible." And with reference to
the motors, the contract contains this expression, "Approximate delivery within ninety days," but right after
this, it is noted that "this is not guaranteed." And as the export of the machinery in question was, as stated in
the contract, contingent upon the sellers obtaining certificate of priority and permission of the United States
Government, subject to the rules and regulations, as well as to railroad embargoes, since this was done during
the world war, then the delivery was subject to a condition the fulfillment of which depended not only upon
the effort of the herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill
the condition.
Lao Lim vs. Court of Appeals
- Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant needed the
premises and can meet and pay said increases" is a purely potestative condition because it leaves the
effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a
suspensive condition because the renewal of the lease, which gives rise to a new lease, depends upon said

condition. The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals
or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract
of lease and no equality exists between the lessor and the lessee since the life of the contract is dictated solely
by the lessee.
Catungal vs. Rodriguez
- Such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will of the
debtor but also on the will of third persons who own the adjacent land and from whom the road right of way
shall be negotiated. In a manner of speaking, such a condition is likewise dependent on chance as there is no
guarantee that respondent and the third party-landowners would come to an agreement regarding the road
right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
- In sum, Rodriguez's option to rescind the contract is not purely potestative but rather also subject to the same
mixed condition as his obligation to pay the balance of the purchase price - i.e., the negotiation of a road
right of way. In the event the condition is fulfilled (or the negotiation is successful), Rodriguez must pay the
balance of the purchase price. In the event the condition is not fulfilled (or the negotiation fails), Rodriguez
has the choice either (a) to not proceed with the sale and demand return of his downpayment or (b)
considering that the condition was imposed for his benefit, to waive the condition and still pay the purchase
price despite the lack of road access. This is the most just interpretation of the parties' contract that gives
effect to all its provisions.
- After thorough review of the records of this case, we have come to the conclusion that petitioners failed to
demonstrate that the Court of Appeals committed any reversible error in deciding the present controversy.

4. Effects of Possible or Impossible Conditions:


Article 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.
The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a)

This article applies only to cases where the condition was already impossible from the time of the
constitution of the obligation. Hence, any supervening possibility will not make the impossible condition
possible unless the parties agree again, nor will a supervening impossibility make the possible condition
an impossible one.

Possible Condition If it is capable of realization according to nature, law, public policy or good
customs. Otherwise, it is an impossible condition. When the condition is impossible, the obligation is
void.
Physically impossible Contrary to the law of nature
Ex. Drink the water of the Pasig River until it runs dry.
Juridically impossible Contrary to law, public policy, morals, and good customs.
Ex. Ill give you money if you kill X. Condition is contrary to law, hence impossible.

Condition not to do an impossible thing shall be considered as not written, because the rule has always
been that no person is allowed to commit an unlawful act. The obligations will then stand as simple, pure
and immediately demandable.

Impossible conditions differ from those found in obligations and in donations and wills. In the latter, it is
considered as not written but the will remains valid.

Luneta Motor vs. Abad


- Plaintiff sought recovery of the sum of P2,674.05 with accrued stipulated interest and attorney's fees
for balance due on four promissory notes executed by the defendant on March 12, 1931. The
complaint sued for a writ of attachment which was issued. Luneta Motor filed a suit against Abad,
and asked for a writ to attach Abads properties. The writ was granted, but Abad asked for its
cancellation, and for this purpose offered a bond, secured by two sureties. The bond contained a
statement that in case Luneta Motor should WIN, the sureties would answer for Abads liability.
Because of this bond, the writ was dissolved. Later, Luneta Motor lost the case, it having been
dismissed since Abad died. Are Abads sureties still bound?
- No more, because Luneta Motor can never win, the case having been dismissed. The condition has
become a legal impossibility. Therefore, the obligation dependent upon this condition must be
deemed extinguished, according to article 1116 of our Civil Code. (1183 NCC)

Article 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 refers to positive conditions, while 1185 refers to negative conditions.

Ex. A binds himself to give B, a 3rd year law student, a car if he becomes a lawyer in 2016. Year 2016 has lapsed
and B is still not a lawyer, obligation is extinguished. If B travels abroad on a 5-year contract of employment in
2014, then obligation is also extinguished due to the certainty that it will not take place.
Article 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)
The condition that some event will not happen at a specified time will make the obligation effective only when:
a. Specified time has already lapsed without the event occurring
b. Or if it has become definite that the event will not occur
Ex. A binds himself to give B a parcel of land if B does not run for Mayor in their City within 6 years. Time
elapsed and B did not run for Mayor, obligation to deliver land becomes effective. Also, if the City was erased
due to a nuclear bomb, B can no longer run for Mayor in that City, hence, obligation becomes effective too.

5. Constructive Fulfillment of Condition:


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

The Article refers to a constructive and not an actual fulfillment of the condition. Mere intent to prevent
the fulfillment is not enough without actual prevention of fulfillment. The prevention must be
consummated. These are the 2 requisites.

When an obligor committed an act voluntarily which is not intended to prevent the fulfillment of the
condition, but nevertheless resulted in the frustration of the condition, there shall be no constructive
fulfillment.

This article is brought about by the principle that no person shall profit by his own wrong.

If the parties stipulate that the obligation shall be extinguished if the condition could not be fulfilled for
any reason, then even if the obligor prevents its fulfillment, the obligation shall still be extinguished.

PLDT vs Jeturian
When PLDT abrogated the pension plan after the war, it voluntarily prevented the fulfillment of its
obligation to provide pension plans to its employees, thus, whether or not the employees have reached the
age of 50, their rights are reserved for such benefits.
Valencia vs. RFC
Valencia is liable for damages. The putting up of a performance bond is not a condition before he could
be compelled to make the installation. Assuming that the bond is a condition, it was he who voluntarily
prevented its fulfillment. In either case, the existence of the contractual relation between the parties did
not depend upon the posting the performance bond. Although, the latter was essential to the birth of some
of the rights stipulated in favor of petitioner herein, those of respondent were not conditioned upon the
giving of said performance bond.
Labayan vs. Talisay
There is another aspect to the case which has to do with the tenth paragraph of the mutual obligations of
the contract and which concerned the securing of the right- of-way for the proposed railroad. To get from
the Hacienda Esmeralda No. 2 to the Hacienda Dos Hermanos, the railroad would have to pass through
the haciendas of Esteban de la Rama. But he would not grant permission to use his land for this purpose
in 1920, and only consented to do so in 1924. Here then was a clear case of such a condition of affairs as
was contemplated by the contract.
Article 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)

This article only applies to suspensive conditions where there was fulfillment.

Since the condition is merely an accidental element of the obligation, the effect of a conditional obligation
to give, once the suspensive condition is fulfilled, shall retroact to the date of the constitution of the
obligation. This is similar to the legitimation of a natural child.

If the object of the obligation is the delivery of a determinate thing, obligor should not be allowed to
alienate the property during the pendency of the suspensive condition. If the obligor alienates the
property, alienation will be abrogated upon the happening of the condition unless the third person acted in
good faith. If that is the case, the only remedy then is to file for damages against the debtor. If the third
person acted in bad faith, he can be compelled to deliver upon the happening of the suspensive condition.

If it is the obligee who alienates the property before the condition is fulfilled, then fulfillment of the
condition will convalidate the alienation.

For practical reasons, delivery of fruits and interests accruing before the fulfillment of the suspensive
conditions is not required. When the obligation imposes reciprocal prestations, the fruits and interests
they receive during the pendency of the condition shall be deemed to have been mutually compensated.

If obligation is unilateral like in donation, debtor is allowed to appropriate the fruits and interests received
since the debtors has not received anything from the creditor.

Article 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)

Pending the happening of the suspensive condition, the creditor cannot compel the debtor to perform the
prestation.

Article does not grant any preference of credit but only allows the bringing of proper action for its
preservation.

However, the creditor may avail himself of some remedies such as:
1. Action for Prohibition restraining alienation of the thing during pendency
2. Petition for the Annotation of the creditors right
3. Action to demand security if debtor has become insolvent
4. Action to set aside alienations made by the debtor in fraud of creditors
5. Actions against adverse possessors to interrupt the running time of prescriptive periods.

6. Rules in Cases of Improvement, Deterioration, or Loss:


Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an
obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the
thing during the pendency of the condition:
(1) Lost without the fault of the debtor: obligation extinguished
(2) Lost through the fault of the debtor: obliged to pay damages; A thing is lost when it:
a. Perishes
b. Goes out of the commerce of man
c. Disappears in such a way that its existence is unknown or it cannot be recovered
Ex. Diamond ring falls into magma
(3) Deteriorates without the fault of the debtor: impairment is to be borne by the creditor;
(4) Deteriorates through the fault of the debtor: creditor may choose between the rescission of the obligation
and its fulfillment, with indemnity for damages in either case
(5) Improved by its nature, or by time: inure to the creditor
(6) Improved at the expense of the debtor: no other right than that granted to the usufructuary. (1122)

This article applies only to obligations to deliver a determinate or specific thing. No application to generic
objects.
Also, it applies only when the suspensive condition is fulfilled.

During pendency, the thing can undergo some changes:


a. Loss
b. Deterioration or Impairment
c. Improvement or Betterment

Gone out of commerce means that it is used to be sold in the market but is not a prohibited good.
Ex. A land where a public plaza is built can no longer be alienated.

Deterioration is making worse the condition of the thing. It is the impairment or reduction of its value.

Improvement is anything which increases the value of the thing.


a. If improvement is due to nature/time, it belongs to the creditor.
b. If at the expense of the debtor, cannot claim indemnification but may enjoy usufructuary rights.

Inure means belong


Usufructuary means the right to enjoy the use and advantages of another persons property.

Article 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.
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)

This article refers to the fulfillment of a resolutory condition. If the event happens, the obligation is
considered as if it did not exist. Thus, the parties are bound to return what they have received from each
other and return to the status quo.
In reciprocal restitutions, the fruits and interests shall be compensated against each other.
Same rules for loss, deterioration, or improvement in Art. 1189 will be applicable except the party bound
to return something shall be considered as the debtor under the present article.
Retroactivity of the fulfillment of the condition shall be determined by the courts, taking into
consideration the intention of the parties if they are determinable.

7. Power to Rescind in Reciprocal Obligations:


Article 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)
Article 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)
Ang vs. Court of Appeals
While it is true that in reciprocal obligations, such as the contract of purchase and sale in this case, the
power to rescind is implied and any of the contracting parties may, upon non-fulfillment by the other
party of his part of the obligation, resolve the contract, rescission will not be permitted for a slight or
casual breach of the contract. Rescission may be had only for such breaches that are so substantial and
fundamental as to defeat the object of the parties in making the agreement. The two aforementioned
conditions that were breached by petitioners are not essential for the fulfillment of the obligations on their
part but merely an incidental undertaking. The rescission of the contract may not be allowed on this
ground alone. The Court holds that when petitioners refused to proceed with the sale unless private
respondent agreed to pay the higher price of P2,340,000.00, the petitioners thereby committed a serious
breach of the agreement. Private respondent had the right to rescind the agreement as petitioners
committed a serious breach of the terms of the same.
Heirs of Gaite vs. The Plaza Inc
When Rhogen Builders failed to secure a proper and sufficient permit in due to non-compliance with the
provisions of the National Building Code, it had committed a serious breach in the terms of contract with
the Plaza for the purposes of constructing a restaurant in Makati. The construction contract between

Rhogen and The Plaza provides for reciprocal obligations whereby the latters obligation to pay the
contract price of the progress billing is conditioned upon simultaneous fulfillment of the other of its
contractual obligation to undertake to complete the works within the stipulated period and in accordance
with the approved plans and specifications of the owner.
Lalicon vs. NHA
NHA executed a deed of sale with mortgage over a Quezon City lot in favor of the Alfaros, with the
contidion that the Alfaros could sell the land within 5 years from the date of release of the mortgage
without NHAs prior consent. The Alfaros were forbidden from selling the property within the five-year
period prescribed by the NHA. However, the Alfaros sold the lot to their son when the mortgage was not
yet released and thereby committing a substantial breach of the obligation for failure to secure NHAs
consent to selling the lot while the mortgage payments were not yet completed. This entitled the NHA to
rescind the contract, but the Lalicons were arguing that the action has already prescribed.
It has been held that Article 1191 speaks of rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term resolution. Resolution applies only to
reciprocal obligations such that a breach on the part of one party constitutes an implied resolutory
condition which entitles the other party to rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of
damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a partys breach of obligation. The four-year prescriptive period
provided in Article 1389 applies to rescissions under Article 1381. Here, the NHA sought annulment of
the Alfaros sale to Victor because they violated the five-year restriction against such sale provided in
their contract. Thus, the CA correctly ruled that such violation comes under Article 1191 where the
applicable prescriptive period is that provided in Article 1144 which is 10 years from the time the right of
action accrues.
Spouses Fernando and Lourdes Viloria vs. Continental Airlines Inc.
While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the purchase of
a new ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it
cannot, however be considered substantial. The endorsability of the subject tickets is not an essential part
of the underlying contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking
to issue new tickets upon Spouses Vilorias surrender of the subject tickets. This Court takes note of
CAIs willingness to perform its principal obligation and this is to apply the price of the ticket in
Fernandos name to the price of the round trip ticket between Manila and Los Angeles. CAI was likewise
willing to accept the ticket in Lourdes name as full or partial payment as the case may be for the
purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAIs willingness
to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes ticket is non-transferable.
Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of
Fernandos round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the amount,
which is not covered by the subject tickets. Moreover, the contract between them remains, hence, CAI is
duty bound to issue new tickets for a destination chosen by Spouses Viloria upon their surrender of the
subject tickets and Spouses Viloria are obliged to pay whatever amount is not covered by the value of the
subject tickets.
F.F. Cruz vs. HR Construction
The right to rescind, however, may be waived, expressly or impliedly. Hence, in spite of the existence of
dispute or controversy between the parties during the course of the Subcontract Agreement, HRCC had
agreed, via a stipulation in the subcontract, to continue the performance of its obligations pursuant to the
Subcontract Agreement. In view of the provision of the Subcontract Agreement quoted above, HRCC is
deemed to have effectively waived its right to effect extrajudicial rescission of its contract with FFCCI.
Accordingly, HRCC, in the guise of rescinding the Subcontract Agreement, was not justified in
implementing a work stoppage.

a. Resolution vs. Rescission:

Article 1191 Rescission is different from Article 1381 Rescission.


The original term used for the Rescission in 1191 is RESOLUTION:
Rescission is a resolution or a cancellation of a contract.

Power to Rescind:
Means the right to cancel or resolve the contract or reciprocal obligations in case of nonfulfillment on the part of one of the contracting parties.
Failure without legal reason to comply with the terms of a contract is called a breach of
contract.
There can be no rescission of an obligation that is non-existent, hence when a suspensive
condition has not happened yet, then there cannot be a rescission.
The right to rescind is implied even absent any provision providing for a right to rescind.

Breach of Faith:
Resolution is predicated on a breach of faith by the other party, a failure to comply with an
obligation already existing, that violates the reciprocity between them.
This article applies only to reciprocal obligations where two parties are mutually debtor and
creditor. Reciprocity must arise from identity of cause. This means 2 obligations are created
at the same time.
Does not apply to non-reciprocal obligations.
Ex. Non-payment of the purchase price of a property.

Effect of Rescission:
General rule: to rescind a contract is not merely to terminate it, but to abrogate and undo it
from the beginning.
Annuls the contract and restores the parties to the relative positions which they would have
occupied if no such contract had ever been made.
Mutual restitution of the benefits received is required.

Who has the Right to Rescind:


The party who can demand rescission is the one who is ready, willing, and able to comply
with his own obligations while the other is not capable to perform his own.
Also, he must be in a position to return whatever he may be obliged to return.
A party who has not performed his part of the obligation cannot rescind.
A guilty party cannot rescind because he has unclean hands.
Power to rescind is given to the injured party in reciprocal obligations.

Remedies available to Aggrieved Party:


1. Specific performance or fulfillment of the obligation WITH damages
2. Rescission of the contract WITH damages
v Injured parties CANNOT seek BOTH remedies.
v Specific performance and rescission are ALTERNATIVE remedies, not conjunctive.

Exceptions:
1. If fulfillment was chosen but the same had become impossible, rescission may still be sought.
2. If there is a valid basis for the extension of the performance of the reciprocal obligation, the court
will not decree rescission but will rather fix a period for the fulfillment of the obligation.
3. Partial rescission and partial fulfillment may be allowed.
Not applicable in the following cases:
a. Sales of real property by installments (Maceda Law governs)
b. Sales of personal property by installments (Recto Law governs. If not by installment, 1191 governs.)
c. Contracts of partnerships (Governed by 1786 and 1788)

Basis

Article 1191 Rescission (Resolution)

Article 1381 Rescission

A principal action which seeks the resolution or


cancellation of the contract.

A subsidiary action limited to cases or rescission


for lesion as enumerated in Art. 1381.

Prescriptive period: 10 years

Prescriptive period: 4 years

Only ground is the non-performance of ones


obligation or what is incumbent upon him.

Five grounds enumerated in Art. 1381. Nonperformance by the other party is not important.

Applicability

It applies only to reciprocal obligations.

Applies to both unilateral and reciprocal


obligations.

Person who
may institute
the action

Only the a party to the contract may demand the


fulfillment or seek the rescission (cancellation) of
the contract.

Even a third person who is prejudiced by the


contract may demand the rescission of the contract.

Fixing of
period by the
court

Court may fix a period or grant extension of


time for the fulfillment of the obligation.

Court cannot grant extension of time for the


fulfillment of the obligation.

To cancel the contract.

To seek reparation for the damage or injury


caused, thus allowing partial rescission of contract.

Nature

Grounds

Purpose

b. Restrictions on the Power:


1. Due process must be observed:
Rescission authorized under 1191 is a judicial rescission.
Other party must be given his day in court, hence, the aggrieved party must not take justice in
his own hands and decide by himself along the right of the parties on the matter.
In the absence of a contrary stipulation, the power to rescind an obligation must be invoked in
court.
2. Right to rescind is subordinated to the rights of 3rd persons who acquired the thing in GOOD FAITH.
If the 3rd person acquired the thing in accordance with 1385 and 1388 of the Civil Code, the
innocent party can no longer recover the property.
The remedy is to seek indemnification for the value of the thing and damages.
3. Power of the Court to fix period in lieu of decreeing Rescission.
If the court finds a just cause for giving the debtor time to perform his obligation, such as
when the default was not willful or is excusable under the circumstances, then rescission will
not be granted.
4. Slight breaches of the contract will not justify Rescission.
Rescission will not be permitted for a slight or casual breach of a contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in
entering into the agreement.
5. A judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic
rescission has been stipulated.
Proof of violation of the agreement is a condition precedent to the declaration of rescission.

Tan vs. Court of Appeals


It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the
contract but only for such breaches as are so substantial and fundamental as to defeat the object of the
parties in making the agreement.
A court, in determining whether rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is substantial depends upon the
attendant circumstances
Time not being of the essence in the agreement, a slight delay on the part of the private respondents in
the performance of their obligation, is not sufficient ground for the resolution of the agreement, more
so when the delay was not totally attributable to them. In this case, as to the lot covered by TCT No.
T-13826, it is true that as of June 25, 1984, the date set for the execution of the final deed of sale, the
mortgage lien in favor of DBP annotated in the title has not yet been cancelled as it took DBP some
time in processing the papers relative thereto. However, just a few days after, or on July 12, 1984, the
cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title.
Petitioner is given a period of ninety (90) days within which to pay the sum of one million and five
hundred fifty thousand pesos (Pl,550,000.00) representing the balance of the purchase price, with
interest.

c. Necessity of Judicial Approval:

In specific performance, there is always a need for judicial action if the other party refuses to make the
delivery of the thing promised.
However in rescission, the rule is different:
1. If there is an express stipulation of automatic rescission without need of judicial action, rescission is
authorized without court intervention.
Where the contract provides that it may be revoked and cancelled for violation of any of its
terms and conditions, no judicial action is necessary.
Where the contract provides a resolutory provision by which the obligation may be resolved
or extinguished in case of a violation of the terms, judicial action is not necessary.
A stipulation of automatic rescission is in the nature of a facultative resolutory condition
Rescission shall take effect only after the creditor has notified the debtor of his choice of
rescission, as the creditor may choose between rescission or performance.
Cancellation of a contract based on such stipulation is provisional, and still subject to judicial
scrutiny. This means that the party must proceed at his own risk, as only the final judgment of the
corresponding court shall conclusively settle whether the action taken was correct in law.
2. If there is no express stipulation of automatic rescission in case of breach:
a. When the object has already been delivered, judicial approval is needed unless the debtor
voluntarily returned the thing.
b. Not yet delivered, judicial approval is not needed to rescind the contract.
If there is an arbitration clause, breaches by a party arising from the contract must be brought
first and resolved by arbitration, not through extrajudicial rescission or judicial action.
Rescission of contract is a power vested in the Regional Trial Courts, not Municipal Trial Courts.
Courts have no power to relieve parties from obligations voluntarily assumed, simply because
their contracts turned out to be disastrous or unwise investments.
Heirs of JBL Reyes vs. CA
We rule that there is no need for a judicial rescission of the lease contract between lessors heirs of
Justice J. B. L. Reyes, et al. and lessee MMB, Inc. The contract provides:
"Section 18, paragraph 4 (a) In the event of default or breach of any of the condition of this contract,
the LESSOR may, in his absolute discretion declare the contract cancelled and terminated and require
the TENANT to vacate the leased premises.

The law on obligations and contracts does not prohibit parties from entering into agreement providing
that a violation of the terms of the contract would cause its cancellation even without judicial
intervention. This is what petitioners and respondent entered into, a lease contract with stipulation
that the contract is rescinded upon violation of its substantial provisions, which MMB, Inc. does not
deny they violated.

d. Effects of Slight Breaches:


The breach of the contract should be substantial and fundamental as to defeat the object of the
parties in entering into the contract.
Non-substantial breach of a contract cannot give rise to a rescission.
The aggrieved party cannot seek the rescission of the contract based merely on slight infractions
committed by the other party. The law is not concerned with trifles.
Song Fo vs. Hawaiian Phil
The general rule is that rescission will not be permitted for a slight or casual breach of the contract,
but only for such breaches as are so substantial and fundamental as to defeat the object of the parties
in making the agreement. A delay in payment for a small quantity of molasses for some twenty days
is not such a violation of an essential condition of the contract was warrants rescission for nonperformance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by
accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo &
Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse
for writing its letter of April 2, 1923, cancelling the contract. the appellant had no legal right to
rescind the contract of sale because of the failure of Song Fo & Company to pay for the molasses
within the time agreed upon by the parties.
Filoil vs. Mendoza
A contract of lease of a 750 sq. meter lot between Fil-Oil Refinery and Jesus and Severina Garcia was
entered into. FilOil Refinery violated the terms of the contract for it subleased the property to FilOil
Marketing and PetroPhil and delayed in a number of times in their payment of monthly rentals. In
rescinding the contract of lease between petitioner Filoil Refinery Corporation and private
respondents, the lower court found that petitioners illegally subleased the lot to petitioner Filoil
Marketing Corporation and that the latter, in turn, assigned its sublease to petitioner Petrophil
Corporation. However an examination of the lease contract reveals that there is no express prohibition
against the assignment of the leasehold right. Under the law, when there is no express prohibition, the
lessee may sublet the thing leased and all rights acquired by virtue of an obligation are transmissible,
if there has been no stipulation to the contrary. Also delay in payment for a few days does not
constitute a substantial breach of the obligation. Such breaches were not fundamental as to defeat the
object of the parties in making the agreement because the law is not concerned with such trifles.
Arguments are moot and academic for the lease of contract has already expired, and the petitioners
are ordered to vacate the premises.

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Obligations with a Period: (Articles 1193 1198)


1. Classification, In diem vs. Ex die, Legal, Conventional, Judicial,
Article 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)

Arrival of the Term/Period is either Definite or Indefinite


a. Definite Exact date or time is known
b. Indefinite Exact date or time is not known but is sure to come or happen.*
*Uncertainty of the date does not convert it into a condition as long as there is no uncertainty as to
whether it will happen or not.

Classification of Terms/Periods in Roman Law


1. Ex Die

Term or period with a suspensive effect


Obligation becomes effective only from the arrival of a certain day

Example: A binds himself to support B from the death of Bs father. Obligation begins only after Bs father dies.

2. In Diem

Term or period with a resolutory effect


Obligation will subsist up to a certain day, the arrival of which terminates the obligation

Example: A binds himself to support B until B reaches the 18 years old. Obligation terminates upon B turning 18.

Other Classifications
1. Legal Period is fixed by law
2. Conventional/Voluntary Period is agreed upon by the parties
3. Judicial Period is fixed by the courts for the performance of the obligation or for its
extinguishment

On or About Fulfillment may be made on the date, or a few days after, but not on a remote date.
On or Before Fulfillment may be made before the date, but the deadline is fixed.

Requisites for a Valid Term/Period


1. It must be future
2. It must be certain, that is, sure to come but may be extended by mutual agreement
3. It must be possible physically and legally

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Period Distinguished from Condition


Basis

Period

Condition

As to Time

Period always refers to the future.

Condition can refer to a past


event unknown to the parties.

As to Fulfillment

Sure to happen at an exact date


known from the start, or at an
indefinite time, but is sure to arrive.

May or may not happen being


an uncertain event.

No effect or influence upon the


existence of the obligation but only
in its demandability or
performance.

May cause the arising of an


obligation, or the cessation of
one already existing.

While a period has a suspensive or


resolutory effect, nonetheless, in
the former, it cannot prevent the
birth of the obligation in due time,
and in the latter, does not militate
against its existence.

The former is known as a


suspensive condition and the latter
a resolutory condition.

As to its Influence on the


Obligation to be Fulfilled
or Performed

PNB vs. Lopez Vito

Defendant spouses entered into a mortgage contract with PNB payable in 10 installments.
The mortgage contact has a condition stating that if the mortgagors at any time neglect, fail or
refuse to comply with any or all the stipulations or conditions of the contract., the mortgagee
shall have the right to declare such stipulations or condition violated and to proceed for the
foreclosure of the mortgage. However, the Lopez Vito were not able to pay the sums
corresponding to six annual installments. Thus, PNB instituted an action demanding the
defendants to pay the installments due and unpaid, and the spouses contended that such action
is premature. The trial court ordered the spouses to pay PNB the unpaid installments but
reserved to PNB the proper action on the last installment since it is not yet demandable, hence
the recourse to the Supreme Court.
To determine whether the obligation is demandable, it has to be resolved first whether the
obligation was with a period or an obligation subject to a resolutory condition. The Court
ruled that it is an obligation subject to a resolutory condition. The non-fulfillment of the
conditions of the contract renders the period ineffective, and makes the obligation
demandable at the will of the creditor.

Victorias Planters vs. Victorias Milling


Victoria and Negros Planters entered into milling contracts with North Negros Sugar Inc. for
30 years. War broke and destroyed the central that was being used and so North Negros Inc.
made an arrangement with Victoria Milling Inc. for respondents to mill their sugar canes with
them. Thirty years had lapsed and respondent corporation refused for execution of new
contract and accepting the petitioners contention of the 6 year extension. The court ruled that
the 6 year period comprising 4 years of the last World War II and 2 years of post-war
reconstruction of respondent's central at Victorias, Negros Occidental cannot be deducted in
the 30 year period contract of plaintiff and defendant.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Article 1194.

The seventh paragraph of one of the contracts, quoted by the appellant in its brief, where the
parties stipulated that in the event of flood, typhoon, earthquake, or other force majeure, war,
insurrection, civil commotion, organized strike, etc., the contract shall be deemed suspended
during said period, does not mean that the happening of any of those events stops the running
of the period agreed upon. It only relieves the parties from the fulfillment of their respective
obligations during that time the planters from delivering sugar cane and the central from
milling it.

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)

Article 1189 is applicable:

Loss
F Through the fault of debtor Obligor to pay damages
F Without the fault of debtor Obligation extinguished

Deterioration
F Through the fault of debtor Creditor may choose between rescission or fulfillment, with damages
F Without the fault of debtor Impairment to be borne by the creditor

Improvement
F By its nature or time Inure to the creditor
F At the expense of the debtor No other right than usufructuary

Article 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)

Applicability:

This article only applies to obligations to give because it speaks of payment or delivery.

Rationale:

Article 1126 of the Old Civil Code provides that in such cases, only the fruits and interests may be
recovered and not what the debtor has paid or delivered prematurely. This was seen as unjust, hence the
modification.

Effects of Good and Bad Faith


If debtor was not aware of the period or he was of the belief that the obligation has become due and

demandable, he can recover what he paid or delivered including fruits and interest.
If debtor was aware of the period and he paid voluntarily, he cannot recover the payment or delivery he
made. He is deemed to have waived the benefit of the term and the obligation is considered as already
matured. Hence, recovery is barred.
Good faith or Bad faith of the Creditor is immaterial, since it is unfair if the creditor will be allowed
to hold on the thing when it is not yet due and leave the debtor without any relief.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Comparison with Solutio Indebiti


In Solutio Indebiti, where there is payment of what is not due, the recipient will pay legal interest only if

money is involved. If he acted in bad faith, he will be liable for the fruits or fruits which he might have
received. If he acted in good faith, no interests or fruits will be returned, only the thing received.
The big difference is that in the present article, the debtor already has an existing debt or obligation to the
creditor which will become demandable upon the arrival of the period; While in solutio indebiti, the payer
has no debt or obligation to pay the recipient.

Exceptions
Even if the conditions in the Article are present, there can be no recovery in the following situations:
a. Obligation is reciprocal and there has been premature performance on both sides.
b. Obligation is a loan on which the debtor is bound to pay interest.
c. Period is exclusively for the benefit of the creditor because debtor paying in advance loses
nothing.

2. Benefit of the Period


Article 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)

Applicability:
Applies only when the parties themselves have fixed a period on the performance of the obligation.
Does not apply to a case where the Court was authorized by the parties to fix a reasonable term.
Effects of the Presumption:
Creditor cannot demand the performance of the obligation before the expiration of the designated

period.
Debtor cannot perform the obligation before the expiration of the period.
This is because the creditor is interested in the interest, and the debtor is interested in the time given him
within which to pay the obligation.
Debtor has no right, unless the creditor consents, to accelerate the time for the payment, even if the
payment includes not only the principal but also the interests in full.

Presumption is Rebuttable:
If it can be shown that the period was established for the benefit of the creditor, he can compel

performance even before the arrival of the period. He may also waive this right if he so desires.
If it can be shown that the period was established for the benefit of the debtor, he can oppose the
premature demand for the performance of the obligation. He may also waive the benefit of the period by
paying the creditor in before the arrival of the period.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Reasons why Creditor cannot be compelled to accept before period arrives:


1. Payment of Interest:

The interest expected to be realized will be lessened if premature payment is done.

2. Desire of the creditor to have his money invested safely instead of having it in his hands:

By the fixing of the period, he is able to protect himself against the sudden decline in the purchasing
power of the currency loaned specially at a time when there are many facts that influence the
fluctuation of the currency.

Ponce de Leon vs. Syjuco

Ponce de Leon executed two promissory notes in favor of Syjuco for P20,000 and P16,000.
Both loans are payable within one year from May 5, 1948. However, on several occasions
in November 1944, Ponce de Leon tendered payment to Syjuco but the latter refused to
accept the same so the former deposited the payment to the court (consignation). The Court
ruled that Ponce de Leons consignation is invalid because the tender of payment was
prematurely done and he cannot compel Syjuco to accept the same since the period is for the
benefit of both of them.
The benefit of the period is both for the debtor and the creditor hence the debt owed by de
Leon to Syjuco is not yet due and demandable. Furthermore, it may be argued that the
creditor has nothing to lose but everything to gain by the acceleration of payment of the
obligation because the debtor has offered to pay all the interests up to the date it would
become due, but this argument loses force if we consider that the payment of interests is not
the only reason why a creditor cannot be forced to accept payment. One of them is that the
creditor may want to keep his money safely invested instead of having it in his hands.
Another is that the creditor wants to protect himself from sudden decline in the purchasing
power.

3. When Courts May Fix a Period:


Article 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)

Note:

The status of the obligation is suspended before the period of compliance had been fixed.
Rationale for fixing a period is to prevent debtors from not fulfilling their obligations forever without
being liable for delay.
Prescriptive period for filing an action to fix the period is 10 years from the perfection of the
contract.

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Situations When The Court Will Fix A Period


1. When no period is mentioned, but it is inferrable from the nature and circumstances of the obligation
that a period was intended.
Examples:

Contract of sale on credit without any time fixed for the payment
Contract for construction where the period of completion was not stated but intended
Contract of lease that states as long as the tenant pays the stipulated rent
When the period is for a reasonable time agreed upon, there is a period fixed. The court
will determine whether the reasonable time had elapsed.
When the seller of a property is given the right to redeem but no period was stipulated for the
redemption, the court may fix the period.

2. When the period is dependent upon the will of the debtor.


Examples:

When the debtor binds himself to pay when his means permit him to do so
When the debtor binds himself to pay as soon as possible or little by little
When the debtor shall pay as soon as he has the money
When the duration of the lease is left to the will of the lessee

Significance of The Courts Fixing of The Period


It is the duty of the court to fix the period if the parties intended it.
When the court fixes the period, it merely ascertains the will of the parties and gives effect thereto.
The court does not modify or amend the obligation but carries out an implied stipulation in the contract.
It is essential that it be alleged that a period was clearly intended by the parties.
Specific performance cannot be demanded simultaneously with the petition for fixing a period because
the former is premature, unless the latter action will only be a formality and serves no purpose but to
delay.

Period Fixed By The Court Cannot Be Extended


Once the court has fixed the period, the period cannot be changed or extended.
Cases Where Article Was Not Applied
A stipulation in a contract that the agent will turn over the proceeds of the sale of the tobacco as soon as

the same was sold, does not fall under this article.
When the duration of the lease is left to the sole will of the lessor.
Contract of lease had not been renewed, there could be no contract on which a period could be fixed.
When the obligation agreed upon is payable on demand.
When the obligation is pure, simple and unconditional.
Duration of contracts of employment or service is implicitly fixed by the period for the payment of the
salary of the employee. This article is inapplicable in such a case.

Barretto vs. City of Manila


Barretto offered to donate his land situated in front of Malacaang palace on the following
condition: That no building will be erected and it will be used for the beautification of the
vicinity. The agreement entered into did not fix a period as to which the donee would
commence the conditions, therefore, after 18 years, Barretto filed an action reclaiming the
land alleging that the city of Manila has not fulfilled the terms stipulated therefrom. Court
fixed the period in question to 30th September 1907, But days later, the court modified and
extended the period.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

The issue is WON the Court can validly modify a period it has fixed. When the terms of the
donation do not fix the time of the performance of a condition, the proper period will be
determined by the court. Once the court has fixed the period , such period acquires the nature
of the contract, becoming the law governing the contract and once it has been agreed upon by
the parties, IT CANNOT BE CHANGED OR MODIFIED through any subsequent action.

Peoples Bank vs. Odom


Odom was contracted by Gibbs to construct two buildings. The contract provides that the
respondent shall bear all the expenses of the construction until its completion in exchange for
Gibbs transfer of rents which the building may produce in 8 years. Respondent entered into a
contract with the petitioner bank to obtain an overdraft which was increased twice. To secure
its payment, respondent assigned all his rights, title and interest in the contracts of lease in the
buildings with interest at 9% per annum in favor of the petitioner. Based on their contracts,
the payment shall be due and demandable upon demand of the petitioner bank.
Issue: WON the petitioner should have first brought an action to fix the date of payment as
provided by Article 1228 of the Civil Code
It was expressly stipulated in that the obligation contracted by Odom shall expire and be due
upon demand of the petitioner, and in view of the fact that the latter deed was incorporated in
Exhibit D and that Odom was required by the petitioner to pay all his indebtedness, it is plain
that the obligation was without a term and that it became due and is demandable.
Gonzales vs. Jose
Jose issued two promissory notes (PNs) in favor of Gonzales. The PNs were worded as I
promise to pay as soon as possible. Benito Gonzales instituted an action to recover from
Florentino de Jose the amount of two promissory notes. CFI of Manila ordered Jose to pay
Gonzales within 30 days from notice of the decision. Jose, in defense, asserted that the
complaint is uncertain since it does not specify when the indebtedness was incurred or when
it was demandable, and that, granting that the plaintiff has any cause of action, the same has
prescribed in accordance with law.
The Court held that such are governed by Article 1128 (Art.1197 NCC) of the Civil Code
because under the terms thereof, the plaintiff (Gonzales) intended to grant the benefit of the
period to De Jose. As the PNs do not fix the period, it is for the court to fix. But, the action to
ask the court to fix the period has already prescribed (10-year prescription period) in
accordance with Sec. 43 (1) of the Code of Civil Procedure.
Eleizegui vs. Manila Lawn Tennis Club
Elezegui leased his piece of land to Manila Lawn Tennis Club. The contract thereof stipulates
the ff: The lease to Mr. Williamson is subject to a lease for all time the members of the club
shall see fit. The owners of the land undertake to maintain the club as tenant as long as the
latter shall see fit without altering in the slightest degree the conditions of the contract, even
though the estate be sold.
Elezegui maintains that the contract of lease was terminated on Aug. 28 of the recent year and
such theory is maintained by Article 1581 which substantially provides that if theres no
conventional term, the legal term will be applied.
In this case, a conventional term was established. That being the case, it erases the
assumption that the lease was terminated by the notice given by the plaintiffs. Notice is only
necessary when it becomes necessary to recourse to the legal term. It was apparent that the
lessors did not intend to reserve to themselves the right to rescind the contract when they
expressly conferred upon the lessee this right by stipulating it in the contract. Generally, if the
term of the lease whose termination is at the sole will of the lessee, the courts must fix the
period according to the character and conditions of the mutual undertakings. Legal term will
not be applied in this case as to the existence of an express stipulation stating a conventional
term at the sole will of the lessee.

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Araneta vs. Phil Sugar
Gregorio Araneta Inc, sold a portion of land to Philippine Sugar Estates Development Co Ltd.
In their contract they agreed that the buyer will build on the said parcel of land the Sto.
Domingo Church and Convent, and the seller will construct streets on the NE, NW and SW
sides of the land sold and the NE street will be named Sto. Domingo Avenue. The buyer
was able to build on such the Sto. Domingo Church and Convent but the seller was not able
to perform his end of the bargain because of a third party. The land sold was inhabited by
informal settlers wherein one of them, Manuel Abundo, refused to vacate the same. Because
of the failure of the petitioners to perform their part, the defendants filed a complaint. The
lower court gave Gregorio Araneta Inc, a period of 2 years to comply with its obligation. CA
affirmed the decision of the lower court. Hence, this appeal.
No basis is stated to support the conclusion that the period should be set at two years after
finality of the judgment. According to Art. 1197, the courts cannot set the period arbitrarily.
As the parties must have known that they could not take the law into their own hands, but
must resort to legal processes in evicting the squatters, they must have realized that the
duration of the suits to be brought would not be under their control nor could the same be
determined in advance. The conclusion is thus forced that the parties must have intended to
defer the performance of the obligations under the contract until the squatters were duly
evicted, as contended by the petitioner Gregorio Araneta, Inc.

4. Loss of Benefit of the Period


Article 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)

Applicability:
Applies only if the parties have designated or fixed a period for the fulfillment of the obligation.
It cannot apply to a case where no period is fixed by the parties. (Article 1197 shall apply)
Elaboration on the Five Instances
a. Insolvency

Insolvency terminates the period. Obligation becomes due and demandable unless the debtor gives
a guaranty or security for the payment of the debt.

Insolvency does not have to be declared by the insolvency court. It is enough that the debtor could
not pay his financial obligations due to lack of money or funds.

Insolvency must be one occurring after the fixing of the term.

Where the gifts are, that is where the giver is

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b. Failure to Provide Guaranties or Securities

When the debtor failed to provide the creditor the guaranties or securities he had promised, he
loses the right to use the period.

Thus, failure of the mortgagors to register the mortgage they had executed in favor of the mortgagee,
and in mortgaging the same parcel of land to another entity, there is a non-fulfillment of the promise
to furnish the creditor with the agreed security. Obligation becomes due and demandable.

c. Impairment of the Guaranties or Securities

When there is an impairment of the guaranties or securities caused thereon by the fault of the
debtor, or got lost by fortuitous event, the obligation becomes due and demandable immediatelyunless the debtor immediately provides the creditor with new guaranties or securities equally
satisfactory as the first ones.

d. Violation of any undertaking

If the debtor has violated any undertaking, which undertaking is the reason for the creditor to agree
to the contract, the term is terminated and the obligation becomes due and demandable at once.

Thus, the employer may terminate the employment of an employee who made a substantial
breach of his employment contract, even if there was a fixed duration for the job.

e. Attempt to Abscond

The debtors act of absconding (leaving hurriedly and secretly, escaping) with the intention to hide
from and defraud creditors is an indication of bad faith. The term is thus terminated.

Mere attempt to abscond is enough to render the obligation pure and immediately demandable.

Gaite vs. Fonacier


Fonacier was an owner of two iron ore mineral claims in which he executed a Deed of
Assignment with his attorney-in-fact, Gaite. Gaite executed a General Assignment
conveying the development and exploration to HIS OWN COMPANY Larap Iron Mines.
He has developed, paved roads and extracted 24,000 metric tons of iron. Fonacier decided to
revoke the authority of Gaite and agreed to exchange the right and possession in
consideration of 75,000 pesos, 10,000 of which was fully paid upon signing of the agreement.
In order to secure payment Gaite required Fonacier to secure a bond, with Fonacier as
principal and the stockholders of Larap Iron Mines as sureties upon the stipulation that:
65,000 will be paid upon the first shipment and local sale of iron ore. HOWEVER, Gaite
insisted on another bond for which Fonacier obtained from Far Eastern Sureties and it
provided that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Come Dec. 8 1955, no sale of iron ore was made and bond with
Far Eastern Sureties expired. On the theory that they had lost right to make use of the period
given them when their bond, automatically expired and when Fonacier and his sureties failed
to pay as demanded by Gaite, the latter filed the present complaint.
The period granted wherein Gaite should wait for the sale or shipment of the ore before
receiving payment was lost because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the
bonding company's undertaking substantially reduced the security of the vendor's rights as
creditor for the unpaid P65,000.00. All the alternatives, therefore, lead to the same result: that
Gaite acted within his rights in demanding payment and instituting this action one year from
and after the contract was executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance of
P65,000.00 became due and payable thereafter.

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Abesamis vs. Woodcraft
"East Samar Lumber Mills" (owned by Jose Abesamis) and Woodcraft Works, Ltd. entered
into two agreements wherein Woodcraft is to purchase logs from East Samar Lumber.
In the first agreement, Jose Abesamis maintains that due to the failure of appellant to send a
vessel to Dolores, Samar, the storm on May 5, 1951 swept away almost all the logs then
awaiting shipment, amounting to 410,000 board feet. It should be noted that under the
contract, shipment was to be made before the end of July 1951, but not to commence earlier
than April of the same year. The obligation between the parties was a reciprocal one,
appellant to furnish the vessel and appellee to furnish the logs. It was also an obligation with
a term, which obviously was intended for the benefit of both parties, the period having been
agreed upon in order to avoid the stormy weather in Dolores, Samar, during the months of
January to March. The obligation being reciprocal and with a period, neither party could
demand performance nor incur in delay before the expiration of the period. Consequently,
when the typhoon struck on May 5, 1951 there was yet no delay on the part of appellant, and
the corresponding loss must be shouldered by appellee.
In the second purchase agreement entered into by the parties, East Samar Lumber Mills
(plaintiff-appellee) is to load the logs upon the arrival of the vessels to be sent by Woodcraft
(defendant-appellant). However, on several occasions, the vessels did not come. Plaintiff thus
seeks for rescission of the contract and indemnification for damages. Appellant was advised
of the quantity of logs ready for shipment and was urged to send a vessel to take delivery. It
thereupon gave assurance that a vessel, the "SS ALBAY," will come on June 25, 1951.
Appellee readied the necessary quantity of logs but the vessel did not arrive. As a result,
60,000 board feet of logs which had been rafted broke loose and were lost. Although the
obligation would not become due until July 31, 1951 appellant waived the benefit of the
period by the assurance that it gave. Appellant failed on his commitment without any
satisfactory explanation for such failure. Therefore, appellant should bear the corresponding
loss.
Song Fo vs. Oria
Song Fo & Co., the original plaintiff in this action, sold a launch to Oria, the defendant, for
P16,500, payable in quarterly installments of P1,000, together with interest at the rate of ten
per centum per annum. The launch was shipwrecked while in Orias possession, without
having paid the full purchase price. Oria contends that Song-Fo had obligated themselves to
insure the launch but they failed to do so, therefore making Song-Fo responsible for the
shipwreck or loss. But upon examination of the facts, and from the fact that the contract of
sale did not impose such obligations to insure to Song-Fo, because it was Song-Fos duty to
do so, they exercised all means necessary to secure an insurance. While waiting for the
insurance policy to be released, Oria, having the exclusive control of the ship sent the ship
from Manila to Samar which, evidently the shipwreck was well beyond Song-Fos control.
The trial court favored Song Fo but only for the payment of P6000 with interest that being the
amount of unpaid installments due under the express terms of the contract at the date of
institution of the action. The same court declined to render judgment for the balance of the
indebtedness on the ground that the full payment was not yet due and payable when the
complaint was filed.
Ruling: Article 1129 par. 3 When by his own acts, he has reduced such security, after giving
it, or when it disappears through an unforeseen event.
The security for the payment of the purchase price of the launch itself having disappeared as
a result of an unforeseen event (vis major), and no other security having been substituted
therefor, the plaintiffs were clearly entitled to recover judgment not only for the installments
of the indebtedness due under the terms of the contract at the time when the instituted their
action, but also for all installments which, but for the loss of the vessel had not matured at
that time. The judgment entered in the court below should be modified from P6,000 together
with interest to P16,500 together with interest at the rate of ten per centum per annum.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Alternative and Facultative Obligations: (Articles 1199 1206)


1. Concept and Features, Limitations of the Right of Choice:
Article 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)

Classification Of Obligations with Plurality of Prestations or Objects


a. Conjunctive Obligation Debtor has to perform all the prestations to extinguish the obligation
b. Alternative Obligation Debtor has to completely perform only one of several prestations
Example: A promised to give B a land, or a painting, or 500 pesos. The delivery of one is enough.

c. Facultative Obligation Debtor is bound to perform one prestation or deliver one thing with a reserved
right to choose another prestation or thing as substitute for the principal

Creditor Cannot Be Compelled To Receive Parts of the Prestations

In the above example, the creditor cannot be compelled to receive part of the car, part of the painting, or
part of the money.
However, if the creditor agrees to accept part of one and part of the other, there is no prohibition. In that
case, there is a novation in the prestation.

Reyes vs. Martinez

Estanislao Reyes and the Martinez heirs executed a contract of ownership of:
(ALTERNATIVE PRESTATIONS) A parcel of land containing 1,000 trees described in
paragraph 8 of the contract, OR 5 parcels of land which contains an equivalent number of
trees described in paragraph 9 of the contract.
Reyes elected the parcel of land described in paragraph 8 but upon a subsequent litigation
among the parties, Reyes was seeking to recover 5 parcels of land to which he did not elect
to. Furthermore, Reyes is asking for a sum to be awarded to him, the value of which is
proceeds of the coconut trees as well as awarding of consequential damages thereof.
The plaintiff is bound by his election and that he could not now reject said parcel and elect to
take other land under the alternative conceded in the contract. An election once made is
binding on the person who makes it and he will not thereafter be permitted to renounce who
makes it, and he will not thereafter be permitted to renounce his choice and take an
alternative which was at first open to him. He is now estopped from asserting a contrary
election to take the 5 parcels of land described in paragraph IX of his complaint. The title to
the parcel of land in paragraph 8 is in the heirs of Inocente Martinez and it does not appear
that they have transferred said title to Reyes. It results therefore that Reyes now has a claim
for damages against the parties signatory to the contract for the value of the aforesaid
property. The Martinez heirs are given 3 months, extendible if necessary, within which to
procure the execution of a sufficient deed conveying to the plaintiff the particular parcel of
land described in paragraph 8.

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Article 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)

Right of Choice:

The general rule is that the right of choice belongs to the debtor unless that right had been expressly
granted to the creditor.
Implied grant of the right to the creditor is not allowed.
If it does not appear on the agreement as to who of the debtor and creditor has the right of choice, it is
the debtor who can choose the prestation. The creditor shall have it only when expressly granted to him.
The debtor must choose and fulfill only one of the prestations which does not belong to any of the above
unacceptable kinds.

2. Purpose of Choice:
Article 1201.

The choice shall produce no effect


except from the time it has been communicated. (1133)

Effectivity of the Choice


Choice produces no legal effect until it has been communicated to the other party.
Notice of choice may be effected in any form in the absence of any specific requirement under the law.
Hence, it can be done in writing, verbally, impliedly, or by any other unequivocal means.
If the debtor, without announcing to the creditor his choice of the prestation simply performed one of

them, the performance is not binding. The debtor can recover what he had delivered, performed, or paid,
under the law on quasi-contracts.

Effect of Choice or Selection


Once the choice has been communicated, the effects are the following:
1. Obligation becomes limited to the prestation chosen and all its natural consequences.
2. The choice is irrevocable, otherwise, the other party might be exposed to damages which may arise
for instance, from costly preparations in anticipation of the performance of the announced prestation.

Consent of the Other Party Not Required in the Making of Choice


In the making of the choice, the law does not require that the choosing party first secure the conformity of
the other party. Otherwise, that will in effect frustrate the clear intention of the law and the alternative
nature of the obligation. The decision in Ong Guan in holding that the purpose of the notice is to give the
other party the opportunity to express his consent is erroneous.

Where the gifts are, that is where the giver is

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Effect of Delay in Choosing and Rules in Case of Plurality of Debtors/Creditors


If there is delay in the making of the choice, the right to make the choice is not lost.
The code is silent on what will happen when a case is filed before any choice is made, hence three

possibilities may arise:


a. The Court will make the choice
b. The Court may order the Debtor or
c. Creditor to make the choice within a certain period
If the debtor is in delay, the court should authorize the creditor to make the choice because the debtor is
deemed to have waived his right. The same applies if the creditor has the choice but incurred delay.
If there are several debtors or creditors all must give their consent in the making of the selection. This is
because if the obligation is joint, none of then can extinguish the entire obligation.
If the obligation is solidary, the choice of one is binding to all.

Ong Guan Chan vs. Century Insurance


Ong Guan Can (Can) insured his building and the goods and merchandise therein against fire
to The Century Insurance Co. (Century). The conditions of the policies provided that Century
may, at its option, pay the amount in which the house was insured, or rebuild it. The issues
are whether or not Century could elect to rebuild the house without notice to Ong Guan Can
of such election. In alternative obligations, the debtor, the insurance company in this case,
must notify the creditor of his election/choice, stating which of the two prestations he is
disposed to fulfill, in accordance with Art. 1133 of the Civil Code. (Art. 1201 NCC).
The object of this notice is to give the creditor the opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal
effect when consented by the creditor, or if impugned by the latter, when declared proper by a
competent court. The record shows that Century did not give a formal notice of its election to
rebuild. There is nothing to justify the reversal of the finding of the trial judge, holding that
the election alleged by the appellant to rebuild the house burnt instead of paying the value of
the insurance is improper.
Until the choice is made and communicated, the obligation remains alternative. Once notice
has been given, the obligation becomes simple. Such choice, when properly made and
communicated, is irrevocable and cannot be changed by either party without consent of the
other. Concurrence of the creditor to the choice is not required.
Article 1202.

The debtor shall lose the right of choice when


among the prestations whereby he is alternatively bound,
only one is practicable. (1134)

Applicability:
Applies only to debtors with right of choice.
If creditor is expressly given the right to choose, Article 1205 will apply.
Practicable means possible or lawful.
If only one of the prestations is practicable, debtor loses his right of choice and the obligation loses its
alternative character. The prestation becomes a simple obligation.

Article 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)

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When Debtor Cannot Make A Choice Due to The Creditors Acts; Consequences:
If the debtor cannot make any choice due to the creditors fault, he may rescind the contract with

damages.
However, if the debtor is being prevented to choose only a particular prestation, and there are others
available, he is free to choose any of the others, after notifying the creditor of his decision.
The rescission mentioned in the law does not take place ipso facto but only upon the debtors initiative.
Example: A agreed to paint the house or the building of B at 100 pesos. B sold his commercial building.
Painting the building is now impossible due to a change of ownership. Debtor has now the option to paint
the house or rescind the contract with damages, if he suffered any.

Article 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.
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)

Applicability:
The article applies only when the right to choose belongs to the debtor.
It is Article 1205 which applies when the right to choose belongs to the creditor.
All prestations must have been rendered impossible due to the fault of the debtor. When only one or

some of the prestations had been lost or become impossible, the creditor cannot claim indemnity for
damages because the debtor, who has the right of choice, may still perform any of the remaining
alternative prestations.
If the impossibility is caused by the fault of the debtor, the creditor is entitled to indemnity for damages.
If all things which are alternatively the object of the obligation have been rendered impossible of
performance by fortuitous event, obligation is extinguished and the debtor is released from responsibility
unless the contrary had been stipulated by the parties.
Example: A agreed to deliver B his 2020 model car with Plate Number 337 or his diamond ring worth 200
pesos, or his condominium at Makati City. If A burned his car, threw his diamond ring into boiling lava,
and sold his condo, nothing is left of the prestations. B is entitled to indemnity for damages under 1204.

Indemnity for Damages, Mode of Determination


The basis for the amount of indemnity is the value of the last thing whish disappeared or that of the

service which has become impossible last.


The reason behind this is because upon the loss or impossibility of the first thing or service, the last
one is converted into a simple obligation. Consequently, the debtor has no more alternative to choose
from. He must deliver or perform the last thing or service. If he fails to do so, due to his own fault, he will
be liable for damages using the value of this last thing as measurement for damages.
Additional damages may be awarded to the creditor if there is any justification therefor.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Applicability:
Applies only when the right of choice has been expressly granted to the creditor.
The obligation of the debtor ceases to be alternative from the day the selection of the specific prestation

out of the two or several, had been communicated by the creditor. From that moment on, the obligation is
converted into a simple one.
If the creditor is guilty of delay, the debtor will not incur any delay for the reason that until the
obligation shall have become a simple obligation, the debtor would know now what prestation to perform.
If there is any period in the obligation, the creditor is deemed to have waived the same.

3. Difference between Alternative and Facultative Obligations:


Article 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)

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Concept of Facultative Obligation:


An obligation where the obligor is obliged to perform only one prestation, but he is allowed to perform
or deliver another one in substitution thereof.

Example: A promised to deliver B an iPhone 6 with a stipulation that he could give a brand new S5 as a substitute.

If loss or deterioration of the thing intended to be a substitute happens before the substitution is made
known, obligor is not liable for he can still choose the principal in payment of the obligation. This is
regardless of whether it was through the fault of the debtor or due to any other cause.
After the substitution has been made and communicated to the creditor, obligor is then liable for the loss
of the thing on account of the obligors delay, negligence, or fraud.
Deterioration, according to Pineda, must also be deemed included in the last sentence of the provision
since there is no valid reason why it should not be included, as it adversely affects the value of the thing
substituted.

Basis

Facultative Obligation

Alternative Obligation

As to Contents of Obligation

Only one thing is principally due but


a substitute upon the choice of the
debtor may be delivered in payment
of the obligation.

There are various things due but the


complete performance of one of
them is sufficient for the payment of
the obligation.

As to Nullity

If the principal obligation is void, the


creditor cannot compel delivery of
the substitute.

If one of the prestations is void, the


others which are without vices
preserve the validity of the obligation.

Effect of Loss or Impossibility

If there physical or legal impossibility


to deliver the principal thing or
prestation, the obligation is
extinguished.

If the various prestations are


impossible of performance except one,
this one must be delivered to settle the
obligation. If all prestations are
impossible of performance, the
obligation is extinguished.

The right of choice that is, whether


to make a substitution or not, pertains
to the debtor alone. The creditor is
never given this right.

The right of choice may be given


either to the debtor or the creditor.

Right of Choice

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Joint and Solidary Obligations: (Articles 1207 1222)


1. Comparative Jurisprudence:
Article 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)

Article 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)

Concept of Joint Obligation


A joint obligation is one in which each debtor is liable only for proportionate part of the debt, and the
creditor is entitled to demand only a proportionate part of the credit from each debtor.

Concept of Solidary Obligation:


A solidary obligation is one in which each of the debtors is liable for the entire obligation and each of
the creditors is entitled to demand the satisfaction of the whole obligation form any of all of the debtors.

Classification of Obligations According to Number of Parties:


1. Individual Obligation One debtor and one creditor.
2. Collective Obligation Two or more debtors and two or more creditors. Has 2 kinds:
a. Joint Obligation Entire obligation is paid proportionately by the debtors.
b. Solidary Obligation Each debtor is obliged to pay the entire obligation and creditors may
demand from any of the debtors the payment of the entire obligation. Has 2 kinds:
i. Passive Solidarity Solidarity on the part of the debtors.
ii. Active Solidarity Solidarity on the part of the creditors.

Presumption in Collective Obligation and its Rationale:


An obligation is presumed joint unless the contrary appears from the:

1. Law (Legal Solidarity) The law has its own legal reason.
2. Nature of the obligation (Real Solidarity) The obligation requires solidarity.
3. Stipulation of the parties (Conventional Solidarity) Burden of solidarity is assumed voluntarily.
If the obligation is silent, on the nature or character of the rights of creditors and debtors, it is joint.
The presumption is there because solidarity is burdensome on the debtors. It increases their
responsibilities and liabilities as against the solidary creditors whose rights are correspondingly increased
at the burden of the debtors. To favor the debtors, the law recognizes the existence of solidarity only in
the situations mentioned above.

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Consequences of a Joint Obligation:


1. Each debtor is liable only for a proportionate part of the entire debt, the reason being that there are as
many separate debts as there are debtors.
2. Each creditor, if there are several, is entitled only to a proportionate part of the credit. The reason is,
there are as many separate credits as there are creditors.
3. Demand made by one creditor upon one debtor produces the effects of default only as between them.
4. Interruption of prescription caused by the demand made by one creditor upon one debtor will not benefit
the co-creditors; neither will that demand interrupt the prescription of the obligation as to the other
debtors.
5. Insolvency of a debtor will not increase the liability of his co-debtors, meaning, his co-debtors will not
answer for him. Neither will it allow a creditor to demand anything from the co-creditors.
6. The vices of each obligation emanating from the personal defect of a particular debtor or creditor will not
affect the obligation or rights of the others.
7. As the credit or debt is presumed divided into as many shares as there are creditors and debtors, a joint
creditor cannot act in representation of the other creditors. A debtor cannot be compelled to answer
for the liability of other debtors.
8. If there is a breach of the obligation arising from the act of one of the debtors, he alone must bear the
damages caused.
9. An acknowledgement made by one of the joint debtors as to the existence of the debt will not stop the
running of the period of prescription as to the others. Same rule applies if only one of the debtors paid.
10. If the consent of one debtor is vitiated by the creditors, this will not affect the liability of the other debtor
whose consent is not vitiated.
11. Defenses available to one debtor is not necessarily useful for the others.

Practical Problems:
A and B bind themselves in a promissory note to pay C and D the sum of 100,000. It is now due and
demandable, and no voluntary payment was made by A and B.

1. Can C alone proceed against A and B for the payment of the whole obligation?

No. Obligation is silent on the character of credit and the liability of the debtors. It is
presumed joint. C can only collect his proportionate share, which is 25,000 from A and
25,000 from B.

2. Can C and D proceed against A alone?


No. The explanation is the same as above. C and D can only collect 25,000 each from A.
3. If A is insolvent, can B be compelled to pay for the share of A?
No. The obligation being joint, the debt is presumed to be divided into as many equal shares
as there are debtors. The share of A is distinct from the share of B.
4. As prescription of the action is nearing. C wrote a demand letter to A alone. Did this letter
interrupt the running of the prescriptive period as against B?

No. The obligation being merely joint, the prescriptive period insofar as B is concerned is not
interrupted. After 10 years, the obligation of B will become stale due to prescription.

Other Technical Terms for Joint Obligation


1. Proportionate or Pro Rata
2. Mancomunada Simple
3. Mancomunada (If solidaria is added, it becomes solidary)

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Consequences of Solidarity:
1. Passive Solidarity Several Debtors

This arises when any one of the several debtors can be made liable for the payment of
performance of the entire obligation without prejudice to his right to seek reimbursement from his
co-debtors as to their respective shares in the obligation in accordance with their internal
arrangement of which they are allowed to enter into.
Full payment made by anyone of the solidary debtors extinguishes the obligation.
The debtor who made the payment may claim reimbursement from his co-debtors as regards their
corresponding shares in the obligation.

Example: A, B, and C, are solidary debtors of X. If X filed a case against all of them when the debt
becomes due and demandable, he can execute the judgment against anyone of them to compel satisfaction
of the entire judgment.

2. Active Solidarity Several Creditors

Where any one of the solidary creditors can demand the payment or performance of the entire
obligation from the debtor or any of the debtors if there are several of them. Among them, there is
mutual representation with power to exercise the rights of others in the same manner as their own
rights.
The creditor who received the entire amount will be liable to pay the corresponding shares of his
co-creditors in accordance with their internal agreement. If there is no agreement, it is presumed
that each creditor is entitled to receive equally.

Example: A is indebted to X, Y, and Z who are solidary debtors. A can pay either to X, Y, or Z. The full
payment to any of them extinguishes the obligation.

Legal, Real, and Conventional Solidarity:


1. Legal Solidarity From Law
Example: All partners are liable solidarily with the partnership for everything chargeable to the
partnership under articles 1822 and 1823. (Article 1824 of the NCC)
*Solidarity may also arise if imposed by final judgment by a court upon several defendants

2. Real Solidarity From Nature of the Obligation


Example: Solidary liability may arise if two or more persons acting together in violation of Articles 19,
20, 21, and 22 of the Code under the Chapter on Human relations shall be liable solidarily be reason of
the nature of the obligation incurred. According to Manresa, the mentioned articles have a comment
element they are morally wrong. A moral wrong cannot be divided into parts; hence, the liability for it
must be solidary

3. Conventional Solidarity From Stipulation of Parties

When the parties expressly agreed on solidary liability, the precise word solidary need not be
used. It is sufficient if the obligation states that each one of the debtors can be compelled to pay
the entire obligation, or that each of them is obligated for the entire value of the obligation.
The following terms are used to convey the idea of solidary obligation:
a. Mancomunada Solidaria (if mancomunada only, then it is joint)
b. De Mancomun e Insolidum
c. In Solidum
d. Juntos or Separadamente
e. Jointly and severally
f. Individually and collectively
g. Each to pay the whole value
h. I promise to pay signed by 2 or more debtors

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Jaucian vs. Querol
Dayadante and Rogero executed in a private writing a note acknowledging indebtedness the first part
of which says: We jointly and severally acknowledge our indebtedness in the sum of 13,332.33php
Philippine currency (a balance made October 23, 1908) bearing interest at the rate of 10 percent.
Rogero signed the document in the capacity of surety for Daydante. Jaucian, as answer to the action
of Rogero for the court to declare the private instrument void, asked for judgement against Rogero for
the amount due from the obligation. Jaucian continued instituting the demand for the obligation
because Dayadante became insolvent but Querol (heir of Rogero) contends that their relationship is
that of a principal debtor-surety and that it should be the courts action to exhaust first all the property
of Dayadante.
IS ROGERO/QUEROL LIABLE AS A SURETY? OR AS A SOLIDARY DEBTOR?
Rogero, though acting as surety for Dayadante, was bound jointly and severally with Dayadante in the
obligation because when a surety bound himself jointly with the debtor he will be compelled to pay a
creditor. The relationship is that of a joint solidary obligation by the very reason of the choice of
words in the private instrument executed which has the force of law between the parties. Joint and
several = solidary.
Borromeo vs. Court of Appeals
Jose Villamor is a friend and former classmate of Borromeo. Villamor was then faced with a need to
settle a pressing obligation with Miller (owner of the Lumber Company). In a promissory note
executed by Villamor, he promised to pay Borromeo AS SOON AS I HAVE MONEY and further
stipulates that he waives his rights to the prescription established in the Civil Procedure and that
Borromeo can collect or recover even after the lapse of ten years. Borromeo has repeated ORAL
DEMANDS but Villamor failed to settle his obligation. The CFI rendered a judgment sentencing
Villamor to pay his indebtedness with in 90 days but CA reversed, the legal basis of which was the
lack of validity of the stipulation amounting to a waiver, that a person CANNOT RENOUNCE
FUTURE PRESCRIPTION
The issue in this case is whether or not the stipulation amounting to a waiver of a future prescription
is valid.
Yes. Borromeo was not renouncing any right for he was just being considerate. Between two possible
interpretations, that which saves rather than destroys shall be preferred. In interpreting contracts, what
matters is the ascertainment of the intent of the parties. Decision of the CA is reversed.
PNB vs. Sta Maria
Siblings Sta. Maria executed Special Power of Attorney authorizing brother Maximo to mortgage a
land. In addition, Valeriana Sta. Maria alone executed another SPA authorizing Maximo to borrow
money and mortgage real estate owned by her:
For me and in my name to borrow money and make, execute, sign and deliver mortgages of real
estate now owned by me standing in my name and to make, execute, sign and deliver any and all
promissory notes necessary in the premises. (Exh. E-I)
Maximo obtained two loans including in its security the land he jointly owned with his brothers and
sisters. PNB then filed a petition for collection against Maximo and his siblings.
The authority granted by defendants-appellants (except Valeriana) unto their brother, Maximo, was
merely to mortgage the property jointly owned by them. They did not grant Maximo any authority to
contract for any loans in their names and behalf.
Although the question has not been raised in appellants' brief, we hold that Valeriana's liability for the
loans secured by Maximo is not joint and several or solidary as adjudged by the trial court, but only
joint, pursuant to the provisions of Article 1207 of the Civil Code that "the concurrence ... of two or
more debtors in one and the same obligation does not imply that ... each one of the (debtors) 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." It should be
noted that in the additional special power of attorney, Exh. E-1, executed by Valeriana, she did not
grant Maximo the authority to bind her solidarity with him on any loans he might secure thereunder.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Ronquillo vs. Court of Appeals
Petitioner Ronquillo together with 3 others owed Antonio P. So of a certain amount. The compromise
agreement entered into by the parties are worded as follows:
Plaintiff agrees to reduce its claim of 117, 498.95 to only 110,000 and defendants agrees to
acknowledge the validity of such claim and further bind themselves to initially pay out their total
indebtedness defendants individually and jointly agree to pay within a period of six months.
Because of the failure of the 2 other debtors (aside from Ronquillo) to pay their corresponding shares
in the amount of the debt, a Motion for Execution was issued. Certain furniture and appliances owned
by Ronquillo were then sold at a public sale to satisfy the full amount of the unpaid debt. Ronquillo
now questions the validity of the Motion for execution by saying that since their liability is joint, each
of them should only be held liable for of the total debt and that his properties should not be made to
answer for the full amount.
WHAT IS THE NATURE OF THE LIABILITY OF THE DEBTOR IN THE CASE AT BAR?
By the express term of the compromise agreement and the decision based upon it, the defendants
obligated themselves to pay their obligation "individually and jointly". The term "individually" has
the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An
agreement to be "individually liable" undoubtedly creates a several obligation, and a "several
obligation is one by which one individual binds himself to perform the whole obligation. The
obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.
Marsman vs. Philippine Geoanalytics
Marsman Drysdale and Gotesco Properties entered into a Joint Venture agreement for the
construction and development of an office building on a land owned by Drysdale in Makati. In the
agreement, a 50-50 investment share was agreed upon in which Drysdale is to contribute the property
and Gotesco is to contribute the monetary investment of 420,000,000 in cash. A technical services
contract was entered into by Marsman with Philippine GeoAnalytics Inc. to provide subsurface soil
exploration. PGI was only able to drill 4 out of 5 holes due to the failure on the part of the joint
venture to clear the area where the drilling has to be made. PGI billed the JV and despite repeated
demands the JV failed to pay its obligations. Marsman Drysdale passed the responsibility to Gotesco
which, under the JVA is solidarily liable for all money claims.
Court finds Marsman Drysdale and Gotesco jointly liable to PGI. A technical services contract clearly
listed Marsman Drysdale and Gotesco as beneficial owners of the project. Article 1208 If from the
law or the nature of the obligation to which the preceding article refers the contrary does not appear,
the credit or debt shall be presumed to be divided into as many equal shares as there are creditors and
debtors. Thus the obligation between Drysdale and Gotesco with respect to PI is joint notwithstanding
the JVA which is only binding among them.
2. Joint Divisible Obligations:
Agoncillo vs. Javier
The heirs of Anastacio Cruz Anastacio Alano, Jose Alano and Florencio Alano, executed a
document promising to pay Marino on or before Feb. 27, 1905. In order to secure the payment they
will mortgage to Marino the house and lot bequeathed to them by Anastacio Cruz AND in case of
insolvency on their part, they will transfer ownership of said house to Marino and if the appraisal of
the property be lower than the amount of indebtedness, it will be deducted from the amount and they
will be liable to pay the difference. No part of the sum due was paid, except the 200 paid by
Anastacio Alano who died intestate. A complaint was filed, alleging that, unless defendants pay the
debt for the recovery of which the action was brought, they be required to convey to plaintiffs the
house and lot.
The obligation involved here is an alternative one. The principal undertaking is the payment of
money. The agreement to convey the house and lot at an appraised valuation in the event of failure to
pay the debt in money at its maturity is simply an undertaking that if the debt is not paid in money, it

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will be paid in another way. It is clear that the liability of the respondents 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.
The complaint was not filed within 10 years (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. An extrajudicial
demand is not sufficient, under the law, to stop the running of the statute. There must be either (1) a
partial payment, (2) a written acknowledgement or (3) a written promise to pay the debt.
It cannot be said that the payment made by Anastasio Alano was for the benefit of Jose or Florencio
or that it was authorized by either of them, hence suspending the running of the period of prescription.
Article 1138 of the Civil Code joint obligations are, as regards to each of the debtors, to be reputed
as separate debts with respect to each of the debtors. It follows that a payment or acknowledgement
by one of such joint debtors will not stop the running of the period or prescription as to the others.
The payment only suspended the period of prescription as regards to him alone.

Article 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)

Applicability:
This article applies to a Joint Indivisible Obligation because solidarity is not provided and the

prestation or object is not susceptible of division.


According to Manresa, the peculiarity of a joint indivisible obligation is that on the part of the debtors, its
fulfillment requires the concurrence of all the debtors, although, each for his part. On the part of the
creditors, there must be a collective action for acts which are prejudicial to the rights of the creditors.
In case of the insolvency of a debtor, his co-debtors shall not be liable for his share. Otherwise, the joint
character of the obligation will be disregarded.

Effect of Breach of A Joint Indivisible Obligation


In a joint indivisible obligation where there is plurality of debtors, compliance can only be enforced by

proceeding against all of them.


If one of them failed in his undertaking, the obligation could no longer be fulfilled because the prestation
or object is an indivisible one. Division is not possible in indivisible prestation. Accordingly, the
obligation is converted into one of indemnity for damages. (See Article 1224)
If there is plurality of creditors but there is only one debtor, the obligation can be performed only be the
delivery of the thing to all the creditors jointly. Debtor may only deliver to one if that one is authorized by
all the other creditors.
The debtor can refuse to make delivery if only one creditor or some, but not all, are making the demand.

Meaning of Right of the Creditors May Be Prejudiced Only by Collective Acts


The collective action required of creditors in acts which may be prejudicial to them clearly implies the

opposite that if the act is beneficial to the others, the act of one creditor is sufficient to benefit all other
creditors.
As long as the obligation is joint, the act of one creditor cannot have any effect as to the other creditors
because the credit of each is separate from the credits of others. Indivisibility requires collective action to
be effective.
In the old code, shall was used instead of may. The court is now given the discretion to determine when
an act of one creditor which is beneficial to the others would be binding upon all of them.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 1210.

The indivisibility of an obligation does not necessarily give rise to solidarity.


Nor does solidarity of itself imply indivisibility. (n)

Indivisible Obligation:
An indivisible obligation is one where the prestation or object cannot be performed by parts without
altering its essence or substance.

Example: Delivering a horse. If this obligation is made divisible, the horse will be delivered in pieces,
which destroys the essence of the object.

Kinds of Indivisibility:
1. Legal Indivisibility Indivisibility by operation of law, whereby a law declares as indivisible an
obligation which has for its object a prestation that is not divisible by nature.
Example: Delivery of definite things like a car (Art. 1225)

2. Conventional Indivisibility Indivisibility by the agreement of the parties whereby an


obligation which is divisible in nature is made indivisible by the will of the parties.
Example: Accomplishment of work by metrical units but by agreement is made indivisible.

3. Solidary Obligation - One where each debtor is liable for the entire obligation, and each creditor
is entitled to demand the fulfillment of the whole obligation. It refers to the vinculum or tie or
relationship existing between the parties representing the same interest. Thus there are solidary
debtors as well as solidary creditors. The tie is within the group.

Basis

Indivisibility

Solidarity

1. Nature

Refers to the prestation or object of the


contract

Refers to the vinculum or tie existing


between the subjects or parties to the
obligation

2. Number of Subjects

It does not require plurality of subjects


or parties

It requires plurality of subjects or


parties

Converted into one of indemnity for


damages. As a result, indivisibility of
the obligation is terminated and so
each debtor is liable only for his part
of the indemnity

The liability of the solidary debtors


although converted into one of
indemnity for damages shall remain
solidary

Heirs of the debtor remain bound to


perform the same prestation

Terminates the solidarity, the tie or


vinculum being intransmissible to the
heirs

3. Effect of Breach of Obligation

4. Effect of Death of a Debtor

Indivisibility and solidarity are not identical. They need not exist together, but they can also exist together.
a.
b.
c.
d.

Solidary Divisible X and Y to pay Z $100. $100 is divisible but is made indivisible by agreement.
Solidary Indivisible X and Y to deliver a plane to Z. In case of breach, both liable for entire indemnity.
Joint Indivisible X and Y to deliver horse to Z worth $100. In case of breach, $50 indemnity each.
Joint Divisible X and Y to pay Z $100. In case of breach, $50 indemnity each.

Before you quit, remember why you started

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Article 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)

Solidarity Not Affected by Differences in Terms and Conditions


The solidarity of the debtors, whether active or passive, is not affected even if different terms and

conditions are assumed or made applicable to them.


Enforcement may be made at different times. Obligations which have matured can be enforced while
those still undue will have to be awaited. A particular debtor is answerable for all prestations which fall
due although chargeable to the other co-debtors. Thus, the essence of solidarity remains.
Example: A, B, and C got a loan of $150 from D. They bound themselves solidarily under the terms that
A will pay the following month, B a month after that, and C another month after that. Once As obligation
becomes due, D may claim from him, but only As share until B and Cs share matures. Once they do, D
may claim again from A the shares of B and C. The solidarity between A, B, and C was not affected by
the difference in terms and conditions.

Forms of Passive Solidarity


1. Uniform Solidarity when the debtors are bound by the same terms and conditions or stipulations.
2. Varied Solidarity when the debtors, while bound under the same obligation, are not subject to the same
terms and conditions of payment but to different secondary stipulations or clauses. The example above
shows a varied solidarity.
Article 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)

Beneficial and Prejudicial acts of Solidary Creditor:


Relationship of mutual agency exists among solidary creditors. Acts of one will affect the others because

of their relationship. Solidary creditors may perform acts which are useful or beneficial to the others.
Every solidary creditor is benefited by the useful acts of any one of them.
Example: Act of a solidary creditor in filing a complaint so that the obligation may bear legal interest.
Demand of a solidary creditor which interrupts the running of the prescriptive period of filing the action.
If a solidary creditor performs an act which is prejudicial to his co-creditors, the act may have valid legal
effects, but the performing creditor shall be liable to his co-creditors. (See Article 1215 for an example)

Article 1213.

A solidary creditor cannot assign his rights without the consent of the others. (n)

Rationale:
There is a mutual agency among the solidary creditors. This mutual agency is the essence of their active

solidarity which is based on mutual trust and confidence.


Thus, this agency cannot just be assigned to a third person without the consent of the other creditors.
With the consent of all, the rights may be assigned.
Without the consent, the assignee does not become a solidary creditor. Any payment made to him by the
debtor does not extinguish the obligation. He is considered a stranger. His acts will not bind other
creditors.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

To Whom Payment Shall Be Made:


The debtor can actually pay any one of the solidary creditors! Can you believe that?
Payment, when accepted by any of the solidary creditors, will extinguish the obligation.
HOWEVER, once there has been a demand, payment shall be made to the demanding creditor.
Payment to another creditor, once a demand has been made, will not extinguish the obligation except

insofar as the share of the payor is concerned.


If there are other debtors to whom no demand was made, they are free to pay any of the other solidary
creditors unless the first debtor had already fully paid the entire obligation. This is without prejudice to
the debtors respective liability to the paying debtor.
In case of two or more demands were made, the first demand must be given preference.
If the first demanding creditor made only an extrajudicial demand, but neglected to pursue it to the
prejudice of the other creditors, judicial demand may still be resorted by the latter against the debtor.

Article 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)

Novation
There is novation when obligations are modified by:
1.
2.
3.

Changing their Object or Principal Conditions


Substituting the person of the debtor
Subrogating a third person in the rights of the creditor (Art. 1291)

Compensation
Takes place when two persons, in their own right, become creditors and debtors of each other. (Art. 1278)
Confusion
Takes place when the characters of creditor and debtor are merged in the same person. (Art. 1275)
Remission
Gratuitous abandonment by the creditor of his right. Acceptance by the obligor is necessary. (Art. 1270)
Effects of Execution of the Specified Four Modes of Extinguishing:
These four modes are prejudicial to other solidary co-creditors, because said acts have the effect of

extinguishing the debt or obligation which is due to all of them.


The co-creditors are not left without any recourse. The one who had collected the debt shall be liable for
the shares corresponding to all his co-creditors.
The remission made by a solidary co-creditor to 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. (Art. 1219)
If there is no such previous payment, all the solidary debtors are released from the obligation. The
solidary debtor who accepted the remission cannot seek reimbursement from his co-debtors. (Art. 1220)

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Against whom will the creditors action be addressed?


When there is passive solidarity, the creditor can proceed against:
a. Any of the solidary debtors
b. Some of the solidary debtors, or
c. All of the solidary debtors simultaneously

No Bar to Subsequent Actions:


If a solidary creditor made an extrajudicial demand on a solidary debtor and the latter did not pay

despite such demand, the former may direct similar demands to any or all of the other co-debtors. The
first demand shall not preclude subsequent demands on the other co-debtors.
If demand is judicial and a judgment was rendered by the court, the rules are different:
a. If the decision is favorable to the solidary creditor, judgment will benefit all of them.
b. If the solidary co-debtor happens to be insolvent and the case was filed only against him,
judgment cannot be executed against the other co-debtors who were not made parties in the
complaint. A new action is necessary to make them liable and this new action is not barred by the
first action. There is no waiver against those not sued.
c. If the solidary creditor lost the case, the judgment will constitute res judicata between the cocreditors and co-debtors. The judgment will constitute a bar to the filing of the same case by any
or some or all of the solidary creditors. The remedy of the co-creditors is to go after the creditor
who filed the case for not informing them of the complaint. If they knew about it, it is their duty
to join in the case.

Passive Solidarity and Suretyship are not Identical:


Basis

Passive solidarity

suretyship

Nature of the Obligation

Primary

Subsidiary

Extent of the Liability

Solidary debtor liable for his own


obligation and that of his co-debtors

Surety is responsible only for the


principal debtor

Right to Reimbursement

Solidary debtor is entitled to be


reimbursed for what he has paid,
minus his own share

Surety is entitle to be reimbursed for


everything that he has paid

Effect of Grant of Extension of Time


to the Debtor to pay the Creditor

If granted extension of time to pay, the


co-debtors are not released but shall
remain liable for the whole obligation
minus the share of the debtor who was
granted the extension

If principal debtor is granted extension


of time without the consent of the
surety, the surety is released from the
obligation

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Effect of Full Payment By A Solidary Debtor:


Payment The delivery of the thing or the rendition of the service which is the object of the obligation.
Payment made by one of the solidary debtors extinguishes the obligation. The release of the paying

solidary debtor results in the simultaneous release from the same liability of the other co-debtors.
When a solidary debtor fully pays the obligation, the resulting obligation of the co-debtors to reimburse
becomes a joint one (but not ordinary joint, -wtf does that mean Pineda?)
If one of the debtors is insolvent, all solidary debtors including the paying debtor shall share
proportionately in the settlement of the corresponding share of the insolvent debtor in the obligation.
Co-debtors shall pay their shares with the corresponding interest at the legal rate if there is no
specification, from the time the debt has become due and not from the date of payment.

Effect of Partial Payment:


If the payment made by the solidary debtor is only partial, he is entitled to be reimbursed only for such

amount of money which he had paid in excess of his own share in the obligation.
If there is no excess, he cannot seek reimbursement.

Payor May Be Substituted as Party Plaintiff:


Solidary debtor who paid the entire obligation may be substituted as plaintiff in the same action for the

purpose of enforcing the payment of the contributions of the co-debtors to which the former is entitled.
This is not subrogation, as the right is not based on the original obligation but upon his payment.
He does not step into the shoes of the creditor because he is entitled to collect only the corresponding
contribution of his co-debtors and not the whole amount.
If payment was made before maturity of the debt, there shall be interests for the period between the date
of payment and the date of maturity which the law refers to as intervening period. [This is how it is
written in the Pineda book. (Page 184, bottom portion) I believe it should have read, there shall be NO
interests. What a stupid book huh?]

When Offer To Pay is Made by Two or More Solidary Debtors


When two or more solidary debtors offer to pay, the creditor may choose which of the offers to accept.
The law gives him the option.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Applicability:
Applicable if payment of the obligation was made under the following situations:
a. Obligation had already prescribed due to the lapse of time required by law:
Example: A, B, and C are solidary debtors of D in the amount of $150. The creditor did not make
any demand for more than 10 years. Obligation already prescribed in accordance with Article
1144. Still, A paid the entire obligation because he felt a sense of fairness within him. A is now
precluded from seeking reimbursement from B and C based on Article 1218.

b. Obligation has become illegal before it could be performed


Example: A, B, and C solidarily bound themselves to make and deliver 100 air rifles to D. Before
the air rifles could be finished and delivered, an ordinance was passed prohibiting the
manufacture and sale of such rifles. Being the lil bitch that he is, A still delivered the prohibited
rifles to D. A cannot seek reimbursement from B and C for the expenses he incurred in the
manufacture and delivery, in accordance with Article 1218.

The payor is not entitled to reimbursement in such situations.

Article 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)

Applicability:
This article applies to a situation where one of the solidary debtors paid the entire obligation to the

creditor. Subsequently, the creditor remitted the share of one of the solidary debtors. The one whose share
had been belatedly remitted is not released from his responsibility as to his co-debtors. This is to prevent
the commission of fraud and unfairness to the co-debtor/s who paid the entire obligation.
The creditor cannot, by his act of belated remission, exempt any debtor from the latters obligation to his
co-debtors. Thus, if one of them is insolvent, the one whose share was remitted remains liable for the
share of the insolvent who is bound to make reimbursement for what had been paid by the paying debtor.
In passive solidarity, a dual relationship exists: the relationship of the solidary debtors to the creditor, and
the relationship that exists between or among the solidary debtors themselves. The creditor is not privy to
the second relationship. Any belated remission by the creditor of the share of any debtor has no effect on
the internal relationship of the co-debtors.
Example: A, B, and C solidarily owe D $150. A paid the entire obligation. Thereafter, D remitted the
share of C. Can A seek reimbursement from B and C? The answer is yes. A can collect $50 each from B
and C even if the share of C in the obligation had been belatedly remitted. The reason is that after the
prior payment of the entire obligation, there is nothing more to remit because the obligation had already
been extinguished.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Applicability:
This article applies only when remission covers the whole or entire obligation and the remission is

obtained by one of the solidary debtors without spending anything for its grant.
In case the remission is only partial, the solidary debtor who paid the unremitted part of the obligation is
entitled to reimbursement with respect only to the amount he actually paid.
Example: A, B, and C are solidarily liable to D in the sum of $150. When A offered to pay the entire
obligation, D, by an impulse of sudden kindness, remitted the entire obligation resulting in the
extinguishment thereof. A is not entitled to reimbursement from B and C because A did not spend
anything for the remission granted by D, the remission being a gratuitous one.

Article 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)

Effect of Loss of Thing or Impossibility of Prestation:


In case of loss of the thing or the impossibility of the prestation, the following rules apply:
1. If there is no fault on the part of the solidary debtors, liability is extinguished.
2. If there is fault on the part of anyone of them, all will be liable because of their mutual agency,
without prejudice to their action against the guilty or negligent solidary debtor.
3. If the loss or impossibility is due to a fortuitous event, there is no liability unless there is delay. In
which case, all will be liable without prejudice to their right to go against the guilty or negligent
solidary debtor.

If the thing was lost due to the fault of one and the creditor sued the guilty debtor and fortunately the
latter fully paid him, the guilty solidary debtor cannot get any contribution from his co-debtors because he
as the one who caused the loss. The one at fault will shoulder all the consequences.
However if the thing was not lost, but there is merely a delay, fraud, or negligence on the part of one of
the solidary debtors, all will share in the payment of the principal prestation. If there are damages and
interest imposed, the debtor who was guilty of delay, fraud, or negligence, will shoulder not only his
share in the prestation but also, will be liable alone to pay the amount of damages and interest imposed.
When the thing is lost or becomes impossible due to the fault of all of the debtors, or anyone of them, the
obligation is converted into one of indemnity for damages. This indemnity includes the price or value of
the thing or prestation due plus damages and interest.
Article 1221 is just a repetition of 1174, 1262, and 1266.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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 Which a Solidary Debtor May Avail Himself Of:


When a creditor files a complaint against a solidary debtor, whether the case is filed solely against him or
simultaneously against all of the solidary debtors, he may set up as defenses the following:
a. Defenses arising from the nature of the obligation such as payment, prescription, remission,
statute of frauds, presence of vices of consent, and similar others.
b. Defenses which are personal to him or which pertains to his own share along such as minority,
insanity and others purely personal to the solidary debtor.
c. Defenses personal to the other solidary debtors but only as regards that part of the debt for
which the latter are liable.

Illustrative Cases:
A mother and her two minor children signed a promissory note binding themselves solidarily to pay Villa

Abrille 10,000 pesos in legal currency of the Philippines two years after the war. The money was used for
the support of the children who are minors. For failure to pay the indebtedness, the lender sued the mother
and her minor children. The minority of the children was pleaded as defense. It was held that the minority
of the children did not completely release the mother from responsibility, because such defense is a
personal defense of the minors. (Braganza vs. De Villa Abrille)
If a solidary debtor is granted an extension of time within which to pay the obligation, the solidary debtor
against whom the action is filed for the enforcement of the entire obligation, may interpose as defense the
extension of time granted to one of the solidary debtors but only with respect to that portion of the debt
the payment of which was extended. (Inchausti vs. Yulo)

4. Consequences of Solidarity:
Inchausti vs. Yulo
August 12, 1909 Gregorio, for himself and in representation of his brother Manuel, and in their
own behalf Pedro, Francisco, Carmen, and Concepcion, the latter being of age at the time, executed
the notarial instrument. They severally and jointly acknowledged and admitted their indebtedness to
Inchausti for P253,445.42 First installment begins on June 30, 1910.
They also stipulated that the default in payment of any of the installments or the noncompliance of
any of the other obligations they have assumed will result in the maturity of all the said installments,
and their debt will immediately be due and demandable. All the obligations were contracted in
solidum by all of them.
The Yulos did not pay the first installment of the obligation. 1911Inchausti brought an ordinary
action against Gregorio Yulo for the payment of the whole amount due plus interest (10% per annum)
Francisco, Manuel, and Carmen Yulo executed in favor of Inchausti another notarial instrument in
recognition of the debt and obligation of payment with terms: reducing the debt and pushing back the
date of the first installment to June 30, 1911.
The issue is whether or not the court may demand the whole amount of their debt to Gregorio alone.
Gregorio answered in defense that, among others, the initial instrument was novated by that which
was executed by Manuel, Francisco and Carmen, concluding that the action is premature since the
new due date would be on 1911. The court however, replied that when the suit was brought on March
27, 1911, the first installment of the obligation had already matured of June 30, 1910, and with the

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

maturity of this installment, the first not having been paid, the whole debt had become due and
demandable.
But as regards Francisco, Manuel, and Carmen, none of the installments payable under their
obligation, contracted later, had as yet matured. The first payment was to mature on June 30, 1912.
This exception or personal defense of Francisco, Manuel, and Carmen Yulo "as to the part of the
debt for which they were responsible" can be sent up by Gregorio Yulo as a partial defense to the
action.
The part of the debt for which these three are responsible is P112,500, hence Gregorio may claim
that, even acknowledging that the debt for which he is liable is P225,000, nevertheless not all of it can
now be demanded of him, for that part of it which pertained to his co-debtors is not yet due, a state of
affairs which not only prevents any action against the persons who were granted the term which has
not yet matured, but also against the other solidary debtors who being ordered to pay could not now
sue for a contribution, and for this reason the action will be only as to the P112,500.
The contract of May 12, 1911 has affected the action and the suit to the extent that Gregorio Yulo has
been able to make in his favor the defense of remission of part of the debt (Art.1222 NCC) because it
is a defense derived from the nature of the obligation, so that although the said defendant was not
party to the contract in question, yet because of the principle of solidarity he was benefited by it.
The remission of any part of the debt, made by the creditor in favor of one or more of his solidary
debtors, inures to the benefit of the rest of them, and these latter may utilize in their favor the defense
of remission. (Art. 1222 NCC).
The solidary debtor unconditionally obligated (or whose period for payment has expired) may
not, with respect to the part of the debt for which he is liable, plead the defense of prematurity
of the action, which is personal to his co-debtors.

Quiombing vs. Court of Appeals


A Construction and Service Agreement was entered into by Nicencio Tan Quiombing and Dante
Biscocho, as the first party, jointly and severally bound themselves to construct a house for private
respondents Francisco and Manuelita Saligo, as the second party. Quiombing and Manuelita Saligo
entered into a second agreement under which the completion of the house and payment of the balance
of the contract price were stipulated to be done.
M. Saligo signed a promissory note for 125,363.50 php representing the amount still due from them
payable to Quiombing. Quiombing filed a complaint for the recovery of the said amount, and
respondents contend that the complaint must be dismissed because Biscocho was an indispensable
party to the case and therefore should have been included as co-plaintiff.
On the other hand, petitioner argues that as a solidary creditor he could act by himself alone in the
enforcement of his claim. The amounts due were payable only to him under the second agreement,
where Biscocho was not mentioned at all.
May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of
them without joining the other creditor as a co-plaintiff?
Biscocho does not need to be included as a co-plaintiff in the complaint. Quiombing as a solidary
creditor can by himself alone enforce payment of the construction costs by respondents and as a
solidary debtor may by himself alone be held liable for any possible breach of contract that may be
proved by the private respondents. Biscocho is neither a necessary nor an indispensable party.
Question of who should sue the private respondents was a personal issue between Quiombing and
Biscocho in which the spouses Saligo had no right to interfere. If Quiombing eventually collects the
amount due from the solidary debtors, Biscocho may later claim his share thereof, but that decision is
for him alone to make. Payment of the debt to the complainant will be considered payment to the
other solidary creditor even if the latter was not a party to the suit.
Imperial Insurance vs. David
Reyes and his wife (David) executed 3 indemnity agreements in favor of Imperial Insurance Inc.
jointly and severally to assure indemnification of the latter for whatever liability it may incur in

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

connection with its posting the security bonds to lift the attachments in civil cases, for the benefit of
Felicisimo Reyes.
While the case was pending, Reyes died. In the first two civil cases, judgment was rendered against
the spouses Reyes and Emilia David. Appellee made demands on Emilia T. David to pay the amounts
of P60,000.00 and P40,000.00 under the surety bonds. When David failed to make payments,
Imperial filed an action for collection of sums of money under three (3) different causes of action.
Judgment was rendered ordering David to pay the amounts under the surety bonds. David contended
that the action has been barred because of petitioners failure to file its claims against the estate of
Reyes in due time.
The issue in the case at bar is whether or not the creditor may file an action against the surviving
solidary debtors alone instead of instituting a proceeding for the settlement of the estate of the
deceased debtor(Reyes).
Under the law and well settled jurisprudence, when the obligation is a solidary one, the creditor may
bring his action in toto (as a whole) against any of the debtors obligated in solidum (for the whole).
Thus, if husband and wife bound themselves jointly and severally, in case of his death her liability is
independent of and separate from her husbands; she may be sued for the whole debt and it would be
error to hold that the claim against her as well as the claim against her husband should be made in the
decedent's estate.
In the case at bar, appellant signed a joint and several obligation with her husband in favor of herein
appellee; as a consequence, the latter may demand from either of them the whole obligation. The
Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or
all of them simultaneously. Hence, there is nothing improper in the creditor's filing of an action
against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of
the estate of the deceased debtor wherein his claim could be filed.

Divisible and Indivisible Obligations: (Articles 1223 1225)


Article 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. Indivisibility of Obligation vs. Indivisible Thing: (Check out Article 1225 to see Comparison)

Divisibility and Indivisibility (Of an Obligation):


1. Divisibility refers to the susceptibility of an obligation to be performed partially.
Example: Obligation to deliver 500 television sets
2. Indivisibility refers to the non-susceptibility of an obligation to partial performance.
Example: Obligation to deliver a particular car

True Test of Divisibility:


The true test is whether or not the prestation is susceptible of partial performance.
Partial performance should not be taken in the sense of possibility or impossibility of performance in

separate or divided parts, but in the sense of the possibility of realizing the purpose which the obligation
seeks to obtain.
If a thing could be divided into parts and is divided, its value is impaired disproportionately, that thing is
indivisible. Otherwise, it is divisible.
Example: A car may be divided into major parts but this will not serve the purpose of the obligation.
Hence, the obligation to deliver a car is indivisible, that is, it must be delivered as a whole thing to suit its
purpose.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Kinds of Division of Things:


The divisibility of things may be classified into three:

1. Qualitative Division When the divisibility of the thing depends on the quality of the thing,
which means that the thing is not homogenous (not of the same kind).
Example: Inheritance consists of real property and personal property. Both come from one estate
or inheritance but the things are not homogenous.
2. Quantitative Division When the divisibility of the thing depends on the quantity of the thing,
which means that there is homogeneity in the thing.
Example: One hundred kilos of fine sugar can be divided into two parts, etc.
3. Ideal Division When the divisibility is not material division of a thing but only mental or
intellectual division.
Example: The undivided portions of a whole property in co-ownership.

*Important: Check page 7 (Article 1201) for a comparison between Indivisibility and Solidarity

Kinds of Indivisibility:
There are three kinds of indivisibility:
1. Legal Indivisibility Indivisibility provided by law.
2. Conventional Indivisibility This is the indivisibility agreed upon by the contracting parties.
3. Natural Indivisibility This is the indivisibility by reason of the nature of the object or subject
matter of the obligation. Example: A contract to sing in a wedding.
Article 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)

Applicability:

This article applies to a Joint Indivisible Obligation. The object is indivisible but the liability of the
parties is joint. The action for enforcement of the obligation must be pursued against all the debtors.
From the time any one of the debtors fails to comply with his part of the undertaking, he will be liable for
damages sustained by the creditor and even by his co-creditors. The unfulfilled undertaking is converted
into a monetary obligation which is now divisible.
Example: A and B undertook to deliver to C a valuable painting displayed for sale. The painting was
valued at $100. At the maturity date of the obligation, A was ready with his $50 but B could not produce
his share. Hence, they failed to comply with their joint indivisible obligation to deliver the painting to C.
The obligation to deliver the painting is converted into money obligation, meaning, A and B will be liable
to pay C $100. A is liable to pay C the amount of $50. But, he is not liable for the share of B. On the
other hand, B is now indebted to C in the sum of $50. Damages may be imposed against B the erring
debtor if warranted by the circumstances.
Based on the same facts but with the modification that A and B are solidarily (not jointly) liable to deliver
the painting to C, A can be made liable for the entire monetary obligation of $100 without prejudice to his
right to go after B for the latters share in the obligation in the amount of $50.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Indivisibility or Divisibility of a Thing, Different from Divisibility of Obligation

The test of divisibility of an object is its susceptibility to physical division.


The test of divisibility of an obligation is its susceptibility of partial performance or compliance.
The divisibility of an object does not necessarily carry with it the divisibility of an obligation, unlike the
indivisibility of an object which carries with it the indivisibility of the obligation.
While a divisible thing is that which can be physically divided without impairing its usefulness or value
and therefore is considered divisible, nevertheless, the obligation to deliver it will be considered
indivisible under two situations:
a. When the law so provides
b. When the parties intended that the obligation be indivisible

Indivisible Obligations
The following are considered indivisible obligations :
1. Obligations to give definite things A specified diamond ring
2. Obligations which are not susceptible of partial performance Creation of a wedding dress
3. If the law provides or if the parties intended it to be indivisible.

Divisible Obligations
The following are considered divisible obligations:
1. Object of the obligation is the execution of a certain number of days of work
(such as the employment of a carpenter to work for a week)
2. Object of the obligation is the accomplishment of work measured by metrical units
(such as the irrigation of ten hectares of agricultural land)
3. Object of the obligation is susceptible of partial compliance
(such as stage-by-stage construction of a building)
4. Object of the obligation is the accomplishment of analogous things
(such as when the debtor is required to pay in installments)

Effect of Illegality of a Part of a Contract


1. Divisible Contract If contract is divisible and a part of it is illegal, the illegal part is void and is
not enforceable. The legal part remains valid and is enforceable.
2. Indivisible Contract If the contract is indivisible and a part is illegal, the entire contract is void
and is not enforceable.

Effect of Partial Performance of an Indivisible Obligation:


In an indivisible obligation, partial performance is tantamount to non-performance.
Thus, a debtor who abandoned work he had started, cannot recover payment based on quatum meruit for
the partial works done. When an obligation is indivisible, it is not susceptible to partial performance.

Where the gifts are, that is where the giver is

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Obligations with a Penal Clause: (Articles 1226 1230)


1. Concept and Purpose of Penal Clause:
Article 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)

Penalty Clause:
An accessory obligation or undertaking attached to a principal obligation, which imposes an additional

liability in case of breach of the principal obligation.


If the debtor fails to perform his obligation, he suffers a fixed civil penalty without need of proving the
damages of the other party.
It is attached to assume greater liability in case of breach and to secure the performance of the obligation.
If the stipulation is found contrary to law for being usurious, it can be nullified by the courts without
affecting the principal obligation.

Nature of Penalty:
Penalty imposable is a substitute for the indemnity for (a) damages, and (b) payment of interests in case

of breach of the obligation, unless there is a contrary stipulation, unless there is a contrary stipulation, in
which case additional damages may further be recovered.
It can be in the form of money or any other thing agreed upon, including an act, or an abstention.

Purposes of Penalty:
In short: Imposition of the penalty is designed to ensure faithful compliance by the obligor of his

obligation, and in case of breach, to stand as the substitute for damages and payment of interests
without need of proving damages.
It is intended to create an effective deterrent against breach of the obligation, by making the consequences
of such breach as onerous as may be possible.
Examples:
1. In a contract for the sale of a subdivision lot, there was a stipulation that the buyer would complete a
house within a year on the said lot, otherwise, the buyer will pay the sum of 100 pesos to the seller. As the
buyer failed to construct 50% of the proposed house, within the period stipulated, the penalty is
demandable. However, there being partial performance, the obligation of the debtor may be mitigated.
2. A penalty of 15% interest on the unpaid installment is a valid penal clause.
3. Imposition of attorneys fees in case of breach is a valid penal clause.
4. A stipulation that an employee shall be liable to his employer for damages if he would engage in any
business similar to that conducted by the employer is a valid penal clause.

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When Additional Damages May Be Recovered Aside From The Stipulated Penalty:

General Rule: Penalty takes place of indemnity for damages and for payment of interests.
However, the rule is subject to certain exceptions where additional damages are recoverable:
1. If the obligor refuses to pay the penalty
2. If the obligor is guilty of fraud in the fulfillment of the obligation; In case of fraud, the difference
between the proven damages and the stipulated damages may be recovered
3. If there is an express stipulation that other damages or interests are demandable in addition to the
penalty in the penal clause.

Penalty Clause Compared With Liquidated Damages:


Penal clause is strictly penal in nature or cumulative in character and does not partake the nature of

liquidated damages.
However, in so far as legal results are concerned, there is no difference between penalty and liquidated
damages, and either may be recovered without proving actual damages, and both may be reduced when
found unconscionable or iniquitous.

Obligation with a Penal Clause Distinguished from Obligation with Suspensive Condition:
In an obligation with a penal clause, there is already an existing obligation; in an obligation with a

suspensive condition, there is no obligation yet, until the condition shall have been fulfilled.
In the former, the accessory obligation is dependent upon the non-performance of the principal obligation;
while in the latter, the principal obligation is dependent upon the happening of an uncertain event, which
may or may not happen.

Obligation with
a penal clause

Alternative
obligation

Number of Obligations

There is only one principal obligation,


the non-performance of which makes
the stipulated penalty enforceable.

There are two or more obligations, the


fulfillment of one of which is
sufficient to satisfy the obligation.

Impossibility of Obligation

The impossibility of the principal


obligation extinguishes the penalty.

The impossibility of one of the


obligations, without fault of the debtor,
leaves the other prestation subsisting.

Obligor cannot choose to pay the


penalty to excuse himself from the
principal obligation, unless given that
right explicitly.

The obligor can choose which


prestation or obligation to fulfill.

Basis

Freedom to Choose

Example: A obligated himself to deliver a specific Mercedes Benz to B, or to pay B the sum of 2 million pesos.
This obligation is an alternative obligation. A can choose which one to deliver. However, if the obligation
of A is to deliver the said car to B, and in case he fails to deliver, he will pay 2 million with 15% interests,
the obligation is now with a penal clause. A has no choice. He will deliver the money with interest, if he
fails to deliver the car.

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Distinctions Between Obligations With A Penal Clause and Facultative Obligation:


Obligation with
a penal clause

Facultative
obligation

Power to Make Substitution

The obligor cannot substitute the


payment of penalty for the principal
obligation, unless expressly allowed.

The power of the obligor to make


substitution is absolute.

Demand for fulfillment of both


prestations

The creditor may demand both the


principal and accessory obligations.

Creditor cannot demand both


prestations or obligations.

basis

Example: A is obliged to deliver a specific car to B, or if A so desires, to deliver as a substitute a specific yatch to
B. This is a facultative obligation. However, if A, who is a car dealer, obliged himself to deliver a specific
car to B within 10 days and if he fails to do so, he will pay 1,000 pesos per day of delay, there is an
accessory obligation in the form of a penalty.

Are All Penalties Inserted In Contracts Demandable or Recoverable?


The answer is no, my friend. The second paragraph of Article 1226 reads: The penalty may be enforced
only when it is demandable in accordance with the provisions of this Code. Thus, when the penalty
imposed is unlawful, immoral, or against public order it should not be enforced.

Manila Racing Club vs. Manila Jockey Club


Rafael Campos entered into a contract with the Manila Jockey Club whereby he purchased
from it a parcel of land with its improvements, good will and certain personal property. The
price agreed upon is 1,200,000 pesos payable in installments on or before March 24, 1937.
It was agreed upon that should the purchaser fail to pay the amount corresponding to each
installment in due time, the vendor may rescind the contract and keep the amounts paid
for itself.
Manila Racing Club Inc. (formed by Campos) paid a total of 100,000 as preliminary payment
and second installment to Manila Jockey Club. The third installment of 300,000 pesos was
defaulted by Manila Racing Club Inc. Manila Jockey Club moved for the rescission of the
contract but later on agreed to grant an extension of payment in which Manila Racing Club
Inc. still failed to comply with. Thus this action for the rescission of the contract and the
forfeiture of the amount of 100,000 pesos.
Is the forfeiture of what has been partially paid valid?
The forfeiture of what has been partially paid is valid. It is in the nature of a penal clause.
A penal clause has a double purpose:
1. Insuring compliance with the contract and
2. Measuring beforehand the damages which may result from non-compliance.
The amount to be forfeited in the case at bar constitutes only 8% of the stipulated price, thus,
it would not have been excessive as opposed to the case of Jison v. CA where 47,312.64Php
has already been paid out of the 55,000 purchase price and forfeiture of the same would be
unconscionable and iniquitous.
The penal clause does away with the duty to prove the existence and measure of the damages
caused by the breach.

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SSS vs. Moonwalk
Moonwalk applied for a loan from SSS in the amount of 30 million pesos for the purpose
of developing and constructing a housing project in the provinces of Rizal and Cavite. Out of
the 30 million pesos, only 12 million was released to Moonwalk. Moonwalk issued a
promissory note for this.
Subsequently, SSS issued a Statement of Account (SOA) to Moonwalk showing that the total
obligation of the latter amounted to 15 million pesos and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made a complete
payment of its obligation. After settlement of the account, plaintiff issued to defendant
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite.
After some time, SSS alleged that it committed an honest mistake in releasing defendant
because there is still an unpaid amount for the penalties that Moonwalk has to pay. The
penalty is said to be because of Moonwalks delayed payments.
Whether or not the defendants are still liable for the unpaid penalties as claimed by plaintiffappellant or is their obligation extinguished?
No. According to the court, the principal obligation (the loan) was already extinguished
when Moonwalk paid for its full amount even beyond maturity date. Thus, the penalty
clause (an accessory obligation) was also extinguished. Furthermore, there was no demand
made by SSS even though Moonwalk was already late in its payments. There being no delay,
SSS has no right to ask for penalties.
What is a penal clause?
A penal clause is an accessory undertaking to assume greater liability in case of
breach. It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility
in the event of breach.
From the foregoing, it is clear that a penal clause is intended to prevent the obligor
from defaulting in the performance of his obligation. Thus, if there should be default,
the penalty may be enforced.
What is an accessory obligation?
An accessory obligation has been defined as that attached to a principal obligation in
order to complete the same or take its place in the case of breach (4 Puig Pea Part 1
p. 76). Note therefore that an accessory obligation is dependent for its existence on
the existence of a principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without a principal
obligation.
In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of
the loan. If therefore the principal obligation does not exist the penalty being
accessory cannot exist.
When is the penalty deemed demandable?
A penalty is demandable in case of nonperformance or late performance of the main
obligation. In other words in order that the penalty may arise there must be a breach
of the obligation either by total or partial non fulfillment or there is nonfulfillment in
point of time which is called mora or delay. We must make a distinction between a
positive and a negative obligation. With regard to obligations which are positive (to
give and to do), the penalty is demandable when the debtor is in delay; hence, the
necessity of demand by the debtor unless the same is excused
Caridad Estate vs. Santero
Caridad Estates leased to Pablo Santero its cadastral lots for 2,200 pesos. About three months
after, the lessor sold the same to Santero the lots in consideration of 30,000 pesos payable in
installments.
Stipulated in the contract:

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Should the vendee fail to make the payments agreed upon within 60 days of the date they fall
due, the total balance shall become due and payable and recoverable by any action at law, or
the vendor may recover possession of the property and consider any and all the sums paid by
the vendee forfeited.

The last installment was offered by Santero to Caridad Estates but the latter refused on the
reason that a contract of sale to a third party has already been executed due to the failure of
Santero to pay the total balance on the day it has become due and payable.
Is the refusal of Caridad Estates on account of the failure of Santero to pay the total balance
on the day it has become due, valid notwithstanding the payments already made by Santero?
The stipulations in the contract, in the form of a penal clause, is valid and not unconscionable.
It gives the vendor, if the vendee fails to make the specified payments, the option of (1)
considering the total remaining purchase price due and payable and recoverable by an action
at law or (2) recovering the possession of the property in which case any and all sums paid by
the vendee shall be regarded as rental for the use and occupancy of the property.
The person to whom the property is forfeited is the real and equitable owner of the property
because the title will not pass until the payment of the last installment. In the case at bar, full
ownership has not been vested to the lessee-vendee because of failure to pay the last
installment, thus, the payments made has been considered rental payments for the time the
lessee-vendee benefitted from the property.
Provisions are not unjust and does not make the vendee unduly rich at his cost and expense

2. Exception to the Purpose of Penal Clause:


Article 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)

General Rule on Penalty; Exception:


A debtor cannot shirk from the payment of his principal obligation by choosing to pay the penalty

stipulated.
Stated otherwise, he cannot put up as defense his offer to pay the penalty to avoid the payment of the
principal obligation.
Exception: When the debtor is expressly granted the right to substitute the penalty for the principal
obligation.

Restriction on the Right of the Creditor:


General Rule: The creditor cannot demand the fulfillment of the principal obligation and the stipulated

penalty at the same time.


Exceptions to the Rule:
a. When the creditor was clearly given the right to enforce both the principal obligation and the
penalty
b. When the creditor has demanded fulfillment of the obligation, but the same could no longer be
fulfilled due to the debtors fault, he may demand the penalty agreed upon

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If the fault is due to the creditors own act, he cannot claim the penalty.
If the impossibility of fulfillment is due to fortuitous events, both the principal obligation and the penalty
shall be extinguished.

Example: If a contractor, who obligated himself to finish the construction of a building for the owner, was
negligent and failed to finish the building on time, the owner is not allowed to claim the stipulated
penalty and at the same time confiscate the balance of the contract price not yet paid to the
contractor.
Bachrach vs. Espiritu
Faustino Espiritu purchased from Bachrach a two-ton White truck for 12,000 pesos paying a
1,000 down payment obligating himself to pay 11,000 within the periods agreed upon.
It was agreed that a 12 percent interest would be paid upon the unpaid portion of the price at
the execution of the contracts and in case of non-payment of the total debt upon its maturity,
25% thereon as penalty.
Espiritu failed to pay the remaining purchase price secured by mortgaging his three other
trucks which were also purchased and paid in full from plaintiff corporation.
Was the 25% penalty in addition to the 12% interest per annum makes the contract usurious?
Article 1226 (1152 in the Old Civil Code) permits the agreement upon a penalty apart from
the interest. Should there be such an agreement, the penalty does not include the interest and
as such the two are different and distinct things which may be demanded separately. The
penalty is not to be added to the interest for the determination of whether the interest exceeds
the rate fixed by law, since said rate was only fixed for the interest.
But considering that the obligation was partially performed, and by virtue of Article 1229 the
penalty is hereby reduced to 10% of the unpaid debt.
Cabarroguis vs. Vicente
Cabarroguis was a passenger of a jeep owned by Vicente; the jeep got involved in a vehicular
accident causing permanent disability to her forearm. To avoid court litigation, Telesforo
Vicente, owner and operator of the AC jeep, entered into a compromise agreement with
Cabarroguis, obligating himself to pay to her the sum of P2,500 as actual and compensatory,
exemplary and moral damages. Vicente had an unpaid balance of P1,000. It was also
stipulated in the agreement that should defendant fail to complete payment within a period of
60 days, he would pay an "additional amount of P200.00 as liquidated damages."
Defendant failed to pay the balance of 1,000Php and refused, upon repeated demands, to
comply with his obligations, thus Cabarroguis filed an action for the collection of the sum of
money. The municipal trial court as well as the Court of Appeals ruled in favor of
Cabarroguis and sentenced defendant herein for payment of interests apart from the penalty
thereof.
Is the awarding of interests apart from the penalty valid?
In obligations with a penal clause (Article 1226 NCC), the penalty shall substitute the
indemnity for damages and the payment of interests. The exceptions to this rule, according to
the same article, are: (1) when the contrary is stipulated; (2) when the debtor refuses to pay
the penalty imposed in the obligation, in which case the creditor is entitled to interest on the
amount of the penalty, in accordance with Article 2209; and (3) when the obligor is guilty of
fraud in the fulfillment of the obligation.
Applying the law, no interest can be awarded on the principal obligation of defendant, the
penalty of P200.00 agreed upon having taken the place of the payment of such interest and
the indemnity for damages.
The case, however, takes a different aspect with respect to the penalty attached to the
principal obligation. It has been held that in obligations for the payment of a sum of money
when a penalty is stipulated for default, both the principal obligation and the penalty can be
demanded by the creditor. Vicente having refused to pay when demand was made by
Cabarroguis, the latter clearly is entitled to interest on the amount of the penalty.

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In the discretion of the court, this interest may be alleged upon damages awarded for breach
of contract(Art. 2210 NCC). The interest is recoverable from the time of delay (date of
demand) either judicial or extrajudicial. There being no showing as to when demand for
payment was made, plaintiff must be considered to have made such demand only from the
filing of the complaint.

4. Proof of Actual Damages:


Article 1228.

Proof of actual damages suffered by the creditor is not necessary


in order that the penalty may be demanded. (n)

Proof of Actual Damages Not Necessary:


If the contracting parties had fixed the penalty for the purpose of compensating or substituting the

indemnity for damages as well as the payment of interests, proof of actual damages suffered by the
creditor is not necessary to enforce penalty whether or not damages had been suffered as long as the
agreement or contract had been breached.
The presentation of proofs for the enforcement of a penal clause after establishing the breach of the
contract will be superfluous.
Thusly, in this sense, penalty and liquidated damages are the same in cases where there is no partial or
irregular performance by the debtor.
However, when the debtor refuses to pay the agreed penalty despite demands and the creditor was
compelled to litigate to collect the penalty, additional damages may be claimed by the creditor, but these
latter damages must be proved with sufficient evidence to justify their grant by the court.
Mere nonfulfillment of the principal obligation entitles the creditor to the penalty stipulated. The purpose
of the penalty clause is precisely to avoid proving damages.
Thus, a bond of 10,000 which is penal in nature may be forfeited to its full amount even if the amount
involved in its violation is considerably much lesser in amount.

Lambert vs. Fox

John R. Edgar & Co. in 1911 found itself in such condition financially that its creditors
agreed to take over the business. Lambert and Fox, being the two highest stockholders of the
company, agreed not to sell, transfer, or otherwise dispose of any part of their present
holdings of stock till after 1 year from the date hereof. Either party violating the agreement
shall pay to the other the sum of 1,000 pesos.
Notwithstanding the contract, defendant Fox sold his stock to their competitor corporation.
The trial court decided the case in favor of the defendant upon the ground that the intention of
the parties as it appeared from the contract in question was to the effect that the agreement
should be good and continue only until the corporation reached a sound financial basis, and
that that event having occurred some time before the expiration of the year mentioned in the
contract, the purpose for which the contract was made and had been fulfilled and the
defendant accordingly discharged of his obligation thereunder.
Hence, this recourse by Lambert. Fox contends that Lambert cannot claim for the reason that
the latter was not able to prove damages.
Is the decision of the trial court meritorious? Is foxs contention that lambert cannot claim
for the reason that the latter was not able to prove damages valid?
The trial court erred in interpreting and construing the contract without applying the clear and
unequivocal terms of the same. When the language is plain and terms are clear, the only duty
of the court is to apply the law. Interpretation and Construction shall be its last resort. In this
jurisdiction, penalties provided in the contracts are enforced. Parties are allowed to make such
stipulations as long as the same are not contrary to law, public policy, good morals, etc.

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The only case recognized by the Civil Code in which the courts are to intervene is when the
principal obligation has been partly complied with or when the penalty is iniquitous or
unconscionable.
One of the functions of a penalty clause is to do away with the proof of damages therefore not
being able to prove damages would not preclude a party from enforcing the penalty clause to
a contract. In the case at bar, the penalty is neither unconscionable nor the principal
obligation partly complied with, therefore the only duty of the courts is to apply the
stipulations in the contract. Court rules in favor of Lambert ordering Fox to pay 1,000 pesos.

3. Reduction of Penalty:
Article 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)

Judicial Reduction of Penalty, When Proper


Court can order reduction of the penalty under the following circumstances:

1. When the principal obligation had been partly complied with by the debtor
2. When the principal obligation had been complied with but not in accordance with the tenor of the
agreement thus rendering the compliance irregular
3. When, although there is no performance, the penalty is iniquitous or unconscionable
4. When the penalty interest is patently iniquitous and unconscionable as to warrant the exercise by the
Supreme Court of its judicial discretion

Limitation of the Judges Power to Reduce Penalties


Power to reduce penalties applies only to penalties agreed upon in private contracts. It cannot cover the
collection of surcharges on taxes already due, as the same is mandatory on the collector.

When Penalty Is Iniquitous or Unconscionable


A penalty is iniquitous when it is revolting to the conscience or common sense, or when it is grossly

disproportionate to the damage suffered.


A contract with an unconscionable penalty is not void. However, the penalty must be reduced.
In exercising the power to determine what is iniquitous and unconscionable, courts must consider the
circumstances of each case.

Situations When Penalty is Not Enforceable


A penalty will not be enforceable under the following situations:

1. When the principal obligation has become impossible of performance due to fortuitous events
2. When the debtor is prevented by the creditor to fulfill the obligation
3. When the penalty agreed upon is contrary to morals or good customs. (Example: Penalty of forfeiture
of future support is contrary to law, morals, and good customs. It is void.)

4. When both parties are guilty of breach of contract


5. When none of the contracting parties committed any willful or culpable violation of the agreement,
no one can invoke the penalty clause against each other

6. When the breach of the contract is committed by the creditor

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Interest on the Penalty May be Stipulated Separately From the Penalty


The civil code allows an agreement on the payment of interest in case of breach of contract, in addition to
the penalty agreed. In such a case, the two may be demanded separately from the debtor.
Jison vs. Court of Appeals
Spouses Jison entered into a contract to sell with private respondent, Robert O. Phillips &
Sons Inc. in which respondent agreed to sell a subdivision lot at 55,000 pesos with 8%
interest per annum, payable on installment. It was expressly written that in case any of the
terms in contract was violated, there would be an automatic rescission and forfeiture of
payments.
Spouses Jison were able to pay the of 47,000 pesos, but then failed to pay 3 subsequent
installments despite a letter from the respondents reminding them of the automatic rescission
and forfeiture clause, leading the latter to rescind the contract.
Was the rescission and the forfeiture of the amounts already paid, valid?
Yes. Although RA 6552 (which was in effect at that time, 1972) provides for a notarial notice
for rescission before the automatic rescission clause can be effected, the same was not yet
operative in the year the agreement was entered into. Thus, a letter reminding the petitioner of
the automatic rescission clause would suffice and render the automatic rescission valid.
However, the forfeiture of the amount of 47,000 pesos, although it includes the accumulated
fines for petitioners failure to construct a house as required by the contract, is clearly
iniquitous as the contract price was only 55,000PHP. A forfeiture of 50% of the amount
already paid (Around 23,000 pesos) could have been a fair settlement.
The court gave weight to the fact that after the rescission of the contract, the lot has reverted
back to the respondents and they are free once again to sell it.
Umali vs. Miclat,
For the showing of the film Lagrimas, Miclat prepared posters, a theatre board display, a
theatre display standee, a float and other forms of advertisement and Umali agreed to pay a
sum of money in which 225Php was paid in advance. In the contract of said parties, if
appellant should fail to pay the balance of P675 after the lapse of 30 days from the date
exhibition of the film "LAGRIMAS" has started, he should pay a surcharge of 10% every 30
days thereafter until the amount has been fully paid. (penal clause)
However, after several demands on the remaining balance, Umali refused to pay without
justification. An action to recover certain sums of money was then filed by Miclat.
The trial court and the CA ruled that Umali should pay Miclatthe sum of P675.00, plus 10%
surcharge thereon as stipulated in the contract, and the sum of P200.00 as attorney's fees; and
with respect to the second claim, to pay the sum of P344.50. The Court ordered that the sums
of 675.00 and 344.50 shall bear 6% interest per annum for the date of the filing of the
complaint until paid.
Is the penal clause valid? Is the surcharge and the 6% interest per year unreasonable?
While this surcharge partakes of the nature of a penal clause which the parties may stipulate
under the law, however, one cannot deny that the same is unreasonable, for if that is to be
maintained, we would have that on the basis of P675 which is the balance that remains
outstanding, appellant would pay P67.50 a month, or P810 a year, which considering the time
that has already elapsed since appellant defaulted, would amount to P3,420. In this case,
equity demands that the penalty be reduced in fairness to the debtor. The court is of the
opinion that the surcharge of 20% per annum would be reasonable.
The claim of Umali that the 6% interest per annum is unconscionable is untenable. For
Article 1226 provides that in obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay
the penalty. In other words the penalty takes place of the interest only if there is no stipulation
to the contrary and even then, damages may still be collected if the obligor refuses to pay the
penalty.

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Article 1230.

In the case at bar, not only is there an express stipulation to pay damages in addition to the
penalty, but appellant has failed to pay his obligation as well as the penalty. Therefore, the
imposition of the 6% interest in thus justified.

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 the Penal Clause Upon the Principal


If the penal clause is void, the principal obligation will remain subsisting.
The efficacy of the principal obligation does not depend upon the efficacy of the penal clause, hence, the
nullity of the penal clause does not carry with it the nullity of the principal

Effect of nullity of the Principal Obligation


The nullity of the principal obligation carries with it the nullity of the penal clause as the latter is just an

accessory to the former.


The accessory cannot exist alone.

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CHAPTER 4
Extinguishment of Obligations
General Provisions
Article 1231. Obligations are extinguished:
This article is not
(1) By payment or performance;
included in the syllabus
(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)

Other Causes which the Article failed to State:


According to Pineda, this article is deficient for failing to include many other causes of terminating
obligations, such as:
1. Waiver or renunciation by the creditor
2. Mutual agreement or mutual dissent
3. Compromise
4. Fulfillment of resolutory condition
5. Expiration of a resolutory term
6. Prescription
7. Death of the debtor when the obligation is purely personal like an obligation to render a
personal service
8. Decision or will of one of the parties in certain contracts like agency, partnership, and lease
of services
9. Happening of unforeseen events
10. Abandonment of the property charged with an obligation like the abandonment of an interest
in a party wall (Art. 662)

Payment or Performance: (Articles 1232 1261)



Article 1232.

Payment means not only the delivery of money


but also the performance, in any other manner, of an obligation. (n)

Definition:
Payment is the satisfaction or fulfillment of a prestation that is due, resulting in the extinguishment of
the obligation of the debtor.

Kinds of Payment:
Voluntary When the debtor willingly pays in money or performs the prestation stipulated.
Involuntary When the debtor is forced to deliver or perform by order of the court.
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Requisites of a Valid Payment:


1.
2.
3.
4.
5.
Article 1233.

Capacity of the person paying


Capacity of the person receiving the payment
Delivery of the full amount or the full performance of the prestation
Propriety of the time, place, and manner of payment
Acceptance of the payment by the creditor
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)

Elaboration:
A debt is considered paid when the full amount has been delivered, or the service has been rendered.
To extinguish the indebtedness, performance must be complete unless otherwise stipulated.
A receipt is a good proof of payment, and the debtor can demand the issuance of a receipt when the debt

is paid.
Burden of proving payment rests upon the debtor, after the creditor has shown that the debt exists.

1. Substantial Performance in Good Faith:


Article 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)

Rationale:
In case of substantial compliance of the obligation, the obligee is benefited. So the obligor should be

allowed to recover as if there had been a strict and complete performance.


There is substantial compliance by the debtor when in good faith, he has attempted to perform the
contract or prestation, but through excusable neglect, failed to make a full and complete performance.
The omission or defect contemplated in the article must be slight and unimportant. It must not be so
material as to frustrate the accomplishment of the intended work.
There must also be no willful or intentional deviation from the contract.
Having received the benefits of the substantial compliance, the creditor cannot require the performance of
the unperformed portion of the obligation as a condition precedent to the payment of his own liability.
Right to rescind cannot be availed of when there is substantial performance.

Angeles vs. Calasanz


Defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located
in Cainta, Rizal for the amount of P3,920 plus 7% interest per annum. Pursuant to the terms
of the contract, Angeles made a down payment of P392 and promised to pay the balance in
monthly installments of P 41.20 until fully paid.
On numerous occasions, Calasanz have received late payments from Angeles. Due to the
failure of Angeles to effect subsequent installment payments, Calasanz cancelled the contract
by virtue of a stipulation which allows unilateral cancellation in case of non-payment. But
upon perusal of Angeles together with the CFI of Rizal of all the subsequent payments made,

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they found out that 4,533 pesos including interests have already been paid. Thus, Angeles
contend that the rescission be held invalid.
Was the contract validly cancelled?
Unilateral cancellation is unwarranted if there is only a slight or casual breach on the
fulfillment of the obligation. Apart from the initial down payment of 392 pesos, Calasanz
received and accepted the aggregate amount of 4,533 pesos. Angeles have paid the monthly
installments for 9 years and full payment will be made in such a short time, thus not
amounting to a substantial breach thereof. Courts should only order the payment of the few
remaining installments but not uphold the cancellation of the contract.
In addition, when the defendants-appellants, instead of availing of their alleged right to
rescind, have accepted and received delayed payments of installments, though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph 6 of the
contract, the defendants-appellants have waived and are now estopped from exercising their
alleged right of rescission. Calasanz is ordered to execute the final deed of sale upon full
payment of the purchase price.

Pagsibigan vs. Court of Appeals


Petitioner Pagsibigan obtained an agricultural loan from the Planters Development Bank
secured by a mortgage over a parcel of land.
Pagsibigan issued a promissory note stipulating that for a first payment to be made on May 3,
1977 and payments every six months at 1,018 pesos with 19% interest for unpaid
amortizations. This promissory note contained an acceleration clause.
Initial payment was made followed by several payments in the total amount of 11,900 pesos.
However, only 4 payments were made in time and those were the only payments that were
credited in his loan amount. The property was foreclosed extra judicially on May 7, 1984 for
failure to pay an outstanding balance of 29,554 pesos. This resulted in the property being sold
to the bank for 8,163 pesos and the bank thereafter claimed a deficiency of 21,391 pesos.
Was the foreclosure and auction sale of the property valid and justified under the
circumstances?
No. The respondent bank has the right to foreclose the mortgage upon the first default of but
the records show that it did not. When it received payment which had been 2 months and 3
days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to
penalty. From this act of receiving delayed payment, it is clear that the respondent bank had
waived its right under the acceleration clause.
Petitioner in this case has the right to move for the cancellation of the mortgage and the
release of the mortgaged property, upon payment of the balance of the loan. Aside from the
fact that the respondent bank was estopped from enforcing its right to foreclose by virtue of
its acceptance of the delayed payments for a period of more than six years, the application of
such payment to the interest and the principal during the first three payments constitutes a
virtual waiver of the acceleration clause provided in the contract. We cannot sustain the
legality of the foreclosure under the peculiar facts of this case, because there is substantial
performance of the obligation on the part of petitioner. Under Article 1235 of the Civil Code,
when the creditor accepts performance, knowing its incompleteness and irregularity without
protest or objection, the obligation is deemed complied with.
The bank is bound by estoppel and has no right to rescind, and further foreclose the property
and claim an astronomical amount of 29,554 pesos. In fact, it was the bank who acted in bad
faith, thereby being liable for: Moral damages, because of the mental anguish caused to
petitioners, and Exemplary damages, to sufficiently deter similar acts in the future.
JM Tuason vs. Javier
Jm Tuason and Co. and Javier entered into a contract to sell a parcel of land in Sta. Maria
Heights for the total sum of P3,691.20, with interest thereon at the rate of 10% a year,
payable as follows: P396.12 upon execution of the contract and P43.92 every month

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thereafter, for a period of 10 years.. Paragraph 6 of said contract substantially stipulates that
upon failure of payment, a one month grace period will be given and if no payment has been
made on the defaulted month plus the grace period, a 10% interest per annum will be added
and further, if nothing has been paid within 90 days, the vendor may have the right to rescind
the contract.
Upon execution of contract and the payment of the first installment, the respondent was
placed in possession of the land. Subsequently, however, she defaulted in the payment of said
installments, in view of which, petitioner informed her by letter that their contract had been
rescinded. Respondent sent an answer, admitting that she had defaulted in the payment of the
stipulated monthly installments and that this fact was due to unforeseen circumstances. She
said that she is willing to pay all overdue installments under the contract and had in fact
offered the same to the petitioner. Tuason refused and moved for the rescission of the
contract. CFI of Rizal rendered a decision, declaring the contract to sell has not yet been
rescinded and ordering the respondent to pay the petitioner within 60 days
Can JM Tuason and Co. validly rescind the contract?
Apart from the initial installment paid upon the execution of contract, the respondent
religiously satisfied the monthly installments accruing thereafter, for a period of 8 years.
Although the principal obligation under the contract was P3,691, the total payments made by
the respondent, including the stipulated interest, aggregated to P4,134.08. The respondent has
offered to pay all of the installments overdue including the stipulated interest, apart from
reasonable attorneys fees and the costs.
The petitioner will be able to recover everything due thereto, pursuant to its contract,
including such damages as the former may have suffered in the consequence of the latters
default. Under these circumstances, We feel that, in the interest of justice and equity, the
decision appealed from may be upheld upon the authority of Art. 1234 of the Civil Code.

2. Completeness by Estoppel:
Article 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)

Reason behind the Article:


Although the obligation is not completely executed, the same is deemed fully fulfilled or performed

because the obligee is placed under estoppel in accepting the payment or performance with actual
knowledge of its incompleteness or irregularity.
He has waived his right to question the defect when he made the acceptance without any protest or
objection thereto.
Examples:

Owner accepted and occupied a newly constructed house without protest. This would amount
to an acknowledgement of the performance of the work by the contractor. He is also estopped
from setting up the claim that the material used in the construction of said house was not in
accordance with the plans and specifications.

Meaning of the word Accept


Accept means to take as satisfactory or sufficient, or to give assent or to agree or to accede to an
incomplete performance.

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The law does not require the creditor to protest or object in a particular manner or at a particular time, so
long as the acts of the creditor at the time of the payment or a reasonable time thereafter, shows that he is
not satisfied with the said payment or performance. If this is the case, obligation is not extinguished.
When by the acts of the creditor himself caused the appearance of the defects in the performance, he is
estopped from objecting to the performance.

Esguerra vs. Villanueva

De Guzman and Esguerra agreed to enter into a contract of lease of the Esguerra Gueco
building in which de Guzman is bound by a 10-year term of 300 pesos monthly and 400
thereafter. De Guzman failed to pay for 7 consecutive months, thus, he executed a promissory
note promising to pay. De Guzman failed to do so, and forcing Esguerra to file an action to
recover. A writ of attachment was issued and the parties entered into a compromise
agreement wherein De Guzman is bound to pay Esguerra 2,260 pesos ON OR BEFORE
November 26, 1962. De Guzman failed to pay, and thus a writ of execution was issued. De
Guzman contends that he delivered 800 and subsequently 1400 pesos to Esguerra and that
this constitutes full satisfaction and compliance with the obligation.
Was the "receipt" of said sums by the Esguerras constituted "acceptance" of the
incomplete and irregular performance of respondents' obligation? Was the acceptance
deemed as full compliance of the obligation?
Esguerra had neither acceded or assented to said payment, nor taken the same as satisfactory
or sufficient compliance with the judgment aforementioned. The day immediately following
that of the first payment of P800, the Esguerras asked the court to issue the corresponding
writs of execution. Thus, the Esguerras patently manifested their dissatisfaction with
which necessarily implied an objection or protest to said partial payment.
The law does not require the protest or objection of the creditor to be made in a particular
manner or time. So long as the acts of the creditor, at the time of the incomplete or irregular
payment by the debtor, or within a reasonable time thereafter, evince that the former is not
satisfied with or agreeable to said payment or performance, the obligation shall not be
deemed fully extinguished.

3. Effect of Payment by and to Third Persons:


Article 1236.

The creditor is not bound to accept payment or performance


by a third person who has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the debtor. (1158a)

Rationale:
The creditor should not be compelled to accept payment from a third person whom he may dislike or

distrust. Creditor may also have personal reasons not to have any business dealings with a third person,
such as lack of confidence in the honesty of the third person.

Exceptions:
1. If there is a stipulation that the creditor shall accept the payment made by a third person
2. If the third person has an interest in the fulfillment of an obligation such as the interest of sa surety, a
guarantor or amortgagee.

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Right of the Third Person who Paid the Obligation:


Payment may be made with consent of the debtor or without the knowledge or against the will of the

debtor.
If payment is made with the knowledge and consent of the debtor, the payor is entitled to be reimbursed
for the full amount he paid. Same rule applies if the debtor knows about the payment but did not object.
If payment is made without the knowledge or against the debtors will, reimbursement shall be only up to
the amount or extent by which the debtor was benefited. If the debt had already prescribed, payment
cannot beneficial to the debtor, thus the payor is not entitled to reimbursement.
Debtors knowledge of the payment may be proved inferentially or by his act or conduct.

Article 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)

Consequences of Payment without knowledge or against the will of the Debtor:


1. He can recover only insofar as the payment has been beneficial to the debtor.
2. He cannot compel the creditor to subrogate him in his rights, such as those arising from mortgage,
guaranty, or penalty.

Subrogation Elaborated:
This is the juridical act of putting somebody into the place of the creditor by virtue of which, the former is

enabled to exercise all the rights and actions appertaining to the latter.
Subrogation transfers to the person subrogated the credit with all the right thereto appertaining, either
against the debtor.
Example:
Bianca got a loan of 1 million from a bank using as collateral a parcel of land. Without the consent of
Bianca, her friend Kosh paid the obligation, whereby Bianca benefited to the full amount of 1 million.
Kosh can claim form Bianca full reimbursement of the amount she paid to the bank. However, if Bianca
could not make the reimbursement, Kosh has no right to foreclose the mortgage because Kosh had not
been given the right to subrogate the bank as the payment was done without the consent of Bianca.
If Kosh made the payment with the consent of Bianca, Kosh is entitled to full reimbursement of the
amount paid and to subrogation, such that if the debtor fails to reimburse Kosh, the latter can foreclose the
mortgage as the payor is subrogated to the rights of the bank.

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Article 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)

Applicability:
The donation and the acceptance of the thing/money must comply with the

formal requisites to make it

valid. (See Articles 748 and 749 of the New Civil Code)

Reason why consent of the Debtor is required:


The reason is that no one should be compelled to accept the generosity of another.
When the payor does not intend to be paid back, the presumption arises that such payment is a donation.
The debtors consent is necessary to perfect the donation. When the debtor has given his consent, the law

on ordinary donation will apply.


If the debtor did not give his consent to the presumed donation, nonetheless, the payment if accepted by
the creditor will have the effect of extinguishing the obligation.
The consent of the debtor is immaterial insofar as the extinguishment of the obligation is concerned.

Article 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)

Valid Payment in Obligations to Give:


In an obligation to give, the payor must have the free disposal of the thing paid, otherwise, the payment is

not valid. Payment made by a payor who does not have the capacity to alienate the thing, such as when he
is insane, is not valid.
Article 1427 (which refers to minors aged 18-21 being able to recover what is paid due to incapacity) is
no longer applicable since R.A. 1609 reduced the age of majority to 18.

Article 1240.

Payment shall be made to the person


in whose favor the obligation has been constituted,
or his successor in interest,
or any person authorized to receive it. (1162a)

Persons to whom payment shall be made:


Payment shall be valid and effective if it is paid to:

1. The creditor himself in whose favor the obligation was constituted. If the credit had been
transferred or assigned to a third person, payment shall be made to the latter. The term creditor
shall refer to the creditor at the time of the payment.
2. To the successor or successors in interest (like the heirs) in default of the creditor.

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3. To any person duly authorized to receive the payment. He may be an attorney-in-fact or an agent.
The authority may be granted by law such as the authority of the guardian in relation to his ward;
liquidator of a partnership or corporation; the administrator or executor of an estate.
Payment to an unauthorized person is not valid payment (Exception: Article 1241)
The phrase a person authorized to receive it means not only those who are authorized by law to do so
(such as guardian, executor, etc.) but also any other person who may be authorized to do so by law.

Illustrations:
Payment to unauthorized persons:

a) Payment to an alleged agent who is not authorized is not valid payment. Payment was made at
ones risk.
b) Payment made to the second wife instead of the children of the first wife who are the ones
authorized to receive payment, was void. The payors obligation was not extinguished.
Payment to authorized persons:
a) Payment of an account with the China Banking Corp through its liquidator is a valid payment.
b) Payment made to the administrative officer of PRRA, a government agency, for certain goods
sold by the agency to the defendants, was considered valid since said officer had been allowed to
receive payment from the buyers of such goods.

Tanguilig vs. Court of Appeals


Tanguilig entered into a proposal with Herce on the construction of a wind-mill system for a
consideration on 60,000Php. Herce was able to pay a downpayment of 30,000Php and a
subsequent installment of 15,000Php leaving a balance of 15,000Php. Tanguilig, due to the
refusal of Herce to pay the remaining installment, filed an action for the recovery of the sum
of 15,000Php. Herce contends that he already paid 15,000Php to San Pedro General
Merchandising Inc the contractor who built the deep well to which the windmill system was
to be connected, and assuming he still had to pay the balance, it should be offset because of
the defects of the windmill which caused it to collapse after a strong wind hit the area.
Did the payment to SPGMI constituted a valid 3rd party payment?
The word deep well or the construction thereof was not actually included in the proposals.
It was not a stipulation included in the construction of the wind mill system it merely
described the type of a deep well pump suitable for the construction of the wind mill system.
SPGMI is not an authorized 3rd party in the case. Although defendant contends that
Tanguilig executed a letter authorizing SPGMI to construct a deep well, the same has
not been proven with sufficient and convincing evidence. Thus no debtor-creditor
relationship exists between defendant and SPGMI.
A one-year guaranty from the date of the completion of windmill still binds petitioner to
reconstruct it. When the windmill failed to function properly it became his obligation to make
proper repairs in accordance with said guaranty agreed by both parties. Strong wind is not
unforeseen in the case of windmills, because you put windmills where the strong winds are!
PNB vs. Court of Appeals

Loreto Tan is the owner of a parcel of land in which expropriation proceedings was instituted
by the government. Tan filed a motion to release him the expropriation price of 32,480Php.
Court, as a judgment rendered in favor of Tan, ordered PNB to release to Tan 32,480. Branch
manager issued the check to Sonia Gonzaga, whom, by SPA, they contend to be an
authorized representative of Tan. Tan denies as such but PNB contends that an SPA was
signed by Tan authorizing Gonzaga to receive such payment.
Did an SPA ever exist? Is the payment to Gonzaga valid?
There is no question that no payment had ever been made to Tan as the check was never
delivered to him. When the court ordered PNB to pay Tan the amount of 32,480, it had the
obligation to deliver the same to him. The burden of proof of such payment lies with the
debtor (PNB). In the case at bar, neither SPA nor the check issued by the PNB was ever
presented to the court.

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Article 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)

Applicability:
The article refers to payment made by the debtor with the intention to extinguish his debts to an:

a) Incapacitated Creditor, or
b) Third Person who is not a successor in interest of the creditor nor an authorized representative

Effects:
1. If the payment made to the incapacitated creditor who cannot administer his property did not
benefit him or he has not kept the thing delivered, the debtor may be compelled by the creditor
to pay anew when he regains capacity, or by the latters representative during the time of the
incapacity.
2. If the incapacitated creditor has kept the thing delivered or he benefited from the payment he
received, the debtor is released from his obligation by virtue of the payment. There is benefit if
the thing or the money received was used for payment of medical expenses, taxed, or
indebtedness of the creditor. Benefit may be in the form of financial, moral or intellectual
advantages which must be proved.

The rationale behind this is that because the creditor is incapacitated and cannot administer his own
property, payment to him should, in the ordinary course of things, be coursed to the legal representative or
guardian; if there is none, the debtor may consign the thing in court so that he will be released from the
obligation.

Exception to the rule in Article 1240


This article is an exception to the rule that payment made to a third person who is not a successor in

interest nor an authorized representative shall be invalid.


In this article, payment to such a third person is also valid IF the creditor was benefited thereby. The
validity of the payment is co-extensive to the benefit which the creditor achieved. This requires evidence
to establish the extent of the benefit enjoyed.
However, the benefit need not be proved in the three given situations provided in the codal provision.
1. In the first case given, there is a merger of right of the creditor and of the third person. There
being a conveyance of rights, the creditor must have received a valuable consideration therefor.
2. In the second case, there being ratification, whatever defects there may be in the manner the
payment had been made, are all deemed cleansed or cured.
3. In the third case, the creditor is under estoppel to deny the payment received in his behalf by the
third person.

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Article 1242.

Payment made in good faith


to any person in possession of the credit
shall release the debtor. (1164)

Character of Payment
Payment made by the debtor must be made in good faith.
It is immaterial whether the creditor acted in good faith or bad faith, since the law is intended to protect
the debtor from being required to pay again, and not to protect the creditor.

Meaning of Possessor of Credit


The one in possession of the credit does not refer to the real creditor or his heirs, or person authorized by

him or by law.
It refers rather to a person who has the appearances of the creditor but who actually is not.
This article is an exception to the rule that payment shall be made to the persons enumerated therein.
Example: A holder of a negotiable instrument payable to bearer who merely stole it is the apparent
creditor. Payment to the bearer made in good faith will release the debtor from the obligation. The remedy
of the creditor then is to go against the person who received the payment.

True Possession of Credit vs. Document Representing the Credit


The first refers to the very credit itself, that is, the monetary prestation.
The second refers merely to the document representing or evidencing the credit.

The explanation of
Pineda on this matter is
deficient for me. YOLO

Example: If a document which is payable to order or to a definite person is in the possession of someone
but without any indorsement, the possession is not of the credit but only of the title, and payment to the
holder is not a valid payment

In true possession of credit there must be an actual and legal relation between the credit and the possessor
of the document.
Example: An instrument payable to bearer is held by the person to whom it is intended. This is true
possession of credit.

Article 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)

Applicability:

The article applies to debts or credits and not to property.


Properties are attached, while a credit on the other hand is garnished.
The law contemplates a situation where the debtor had been sued by his creditor and a writ of
garnishment was issued by the court enforced against another person who is the debtor of the defendantdebtor. The debtor of the defendant-debtor, who was served the notice of garnishment, should not pay the
credit garnished to the defendant-debtor because that credit is now subject to the outcome of the case and
is earmarked for the plaintiff-creditor in case of victory. By the garnishment, the stranger becomes a
forced intervenor. The garnished credit is deemed in custodia legis. If the forced intervenor violates the
writ of garnishment by paying the defendant-debtor, the payment is not valid. Thus, if the plaintiffcreditor finally wins the case, he can execute the judgment against the forced intervenor to the extent of
the amount paid.

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Example:
A is creditor of B. B is creditor of C. A filed to collect from B. A issued writ of garnishment against B.
Writ was served upon C. C shall not pay to B without consent of A and the Court. If he does, and A wins
the case, A can compel C to pay again the sum representing the debt garnished.

In the illustration given above, C may consign (deposit) the money in court for his own convenience. If
this is properly done, he will be freed from further responsibility.
An interpleader is not within the ambit of the article.
An interpleader, a person who possesses a certain property, interest or credit is confronted by two or more
persons laying conflicting claims on the same thing, files a case against all claimants that the latter may
litigate among themselves their conflicting claims.

Article 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)

No payment or delivery of a different thing:


General Rule: Creditor shall be paid ONLY hat has been stipulated upon because the contract between the

parties is the law between them. This applies even if the thing offered is worth more than the thing agreed
to.
However, it is the compulsion which is barred. If the creditor consents, his acceptance of the substitute
extinguishes the obligation. This happens in novation, and also in dacion en pago.
The same applies to obligations to do and not to do.

4. Dation in Payment:
Article 1245.

Dation in payment,
whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law of sales. (n)

Concept:
Dation in payment or dacion en pago is the alienation by the debtor of a particular property in favor of his

creditor, with the latters consent, for the satisfaction of the formers money obligation to the latter, with
the effect of extinguishing the money obligation.
Dation in payment is a form of novation in which there is a change in the object involved in the original
contract.
The thing offered as an accepted equivalent of the performance of the obligation is considered as the
object of the contract of sale, while the pre-existing debt is considered as the purchase price.
Dation in payment extinguishes the whole obligation, unless otherwise provided by the parties.
Example:
A owes B. A could not pay his money obligations to B. A offered a property as payment for his money
obligations. If be agrees, there is dacion en pago.

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Elements of Dation in Payment:


1. Existence of a money obligation
2. Alienation to the creditor of a property by the debtor with the consent of the former
3. Satisfaction of the money obligation of the debtor

Since the law on sales governs, the creditor is deemed as the vendee and the debtor as the vendor.
The reason why law on sale governs is because the undertaking really partakes the nature of a sale. The
creditor is really buying the thing or property of the debtor, payment or which is to be charged against the
debtors debt.
Adjudicacion en pago and datio in solutum are legal terms synonymous with dacio en pago.

Basis

Dation in Payment

Sale

Existence of pre-existing credit

There is a pre-existing credit.

There is no pre-existing credit.

Effect

It extinguishes the obligation


completely or partially depending
upon the agreement of the parties.

It gives rise to obligations, to deliver


on the part of the seller and to pay on
the part of the buyer.

From the viewpoint of the creditor, the


cause is the acquisition of the object
offered as payment; from the
viewpoint of the debtor, the cause is
the extinguishment of his debt.

From the viewpoint of the buyer, the


cause is the object; from the viewpoint
of the seller, the cause is the price.

Cause of consideration

Freedom to bargain

There is less freedom to bargain in the


determination of the price because if
the creditor refuses, the debtor will
suffer more. The debtor is forced to
yield to the dictates of the creditor to
save himself from more inconvenience
and embarrassment.

There is greater freedom in the


determination of the price as the
parties stand on equal footing at the
bargaining table.

Caltex vs. IAC

Private respondent Asia Pacific Airways Inc., entered into an agreement with petitioner
Caltex (Philippines) Inc., whereby petitioner agreed to supply private respondent's aviation
fuel requirements for two (2) years. Private respondents had an outstanding obligation to
petitioner in the total amount of around 4 million pesos representing the unpaid price of the
fuel supplied. Asia Pacific assigned its receivables from National Treasury to be applied as
payment. The National Treasury then issued a Treasury warrant amounting to 5.4M which
was issued in favor or Caltex. Private respondent, having learned that the amount remitted to
petitioner exceeded the amount covered by the Deed of Assignment, wrote a letter to
petitioner, requesting a refund in the amount of 900k pesos. However, 500k was not returned
by Caltex as it represented interest and service charges at the rate of 18% per annum on the
unpaid and overdue account of respondent. Thus, Asia Pacific filed a complaint to collect the
said amount, contending that the Deed of Assignment was in fact dation in payment limiting
their debt to only 4.072M.
Did the deed of assignment satisfy the requisites of dation in payment?

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The obligation is totally extinguished only when the parties, by agreement, express or
implied, or by their silence, consider the thing as equivalent to the obligation.
.... in payment of ASSIGNOR's outstanding obligation plus any applicable interest
charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR
may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby
accepts such assignment in its favor.
The Deed of Assignment speaks of three (3) obligations (1) the outstanding obligation of
P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts;
(3) the other avturbo fuel lifting and deliveries that assignor (private respondent) may from
time to time receive from assignee.
If it were the intention of the parties to limit or fix respondent's obligation to P4,072.682.13;
they should have so stated and there would have been no need for them to qualify the
statement of said amount with the clause "as of June 30, 1980 plus any applicable interest
charges on overdue account" and the clause "and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE".
After the execution of the Deed of Assignment, petitioner continued to charge respondent
with interest on its overdue account. This was pursuant to the Deed of Assignment which
provides for respondent's obligation for "applicable interest charges on overdue account." The
charges for interest were made every month and not once did respondent question or take
exception to the interest. The foregoing subsequent acts of the parties clearly show that they
did not intend the Deed of Assignment to have the effect of totally extinguishing the
obligations. The Court rules in favor of Caltex and held that the Deed of Assignment was not
a dation in payment.

Luzon Development Bank vs. Enriquez


Luzon Development Bank is a bank that extends loans to subdivision developers. Delta is a
domestic corporation engaged in the business of developing and selling real estate properties.
Spouses de Leon, owners of Delta, obtained a loan from LDB amounting to 4 million pesos
and as security for said loans executed a Real Estate Mortgage in favor of the Bank on several
of their properties including the lot in question.
Years later, Delta executed a contract to sell with Enriquez over the house and lot in Lot 4.
On the other hand, Delta defaulted on its loan with the Bank and instead of foreclosing the
mortgage, the two agreed to a dation in payment wherein Delta assigned/transferred to the
bank several properties including Lot 4. The BANK argues that, if title to Lot 4 is ordered
delivered to Enriquez, DELTA has the obligation to pay the BANK the corresponding value
of Lot 4. According to the BANK, the dation in payment extinguished the loan only to the
extent of the value of the thing delivered.
Did the dacion en pago extinguish the loan obligation, such that DELTA has no more
obligation to the BANK?
A dacion en pago is governed by the law of sales. Contracts of sale come with warranties,
either express (if explicitly stipulated by the parties) or implied (under Article 1547 et seq. of
the Civil Code). In this case, however, the BANK does not even point to any breach of
warranty by DELTA in connection with the Dation in Payment. To be sure, the Dation in
Payment has no express warranties relating to existing contracts to sell over the assigned
properties. As to the implied warranty in case of eviction, it is waivable and cannot be
invoked if the buyer knew of the risks or danger of eviction and assumed its consequences.
As we have noted earlier, the BANK, in accepting the assigned properties as full payment of
DELTAs total obligation, has assumed the risk that some of the assigned properties are
covered by contracts to sell which must be honored under PD 957.
Delta is NOT LIABLE TO PAY the Bank the value of the subject lot; and respondent
Enriquez is ordered to PAY the balance of the purchase price and the interests accruing
thereon, as decreed by the Court of Appeals, to the Bank.

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Tan Shuy vs. Spouses Maulawin
Petitioner Tan Shuy, a man engaged in the business of buying copra and corn in Quezon
Province, extended a loan to Guillermo Maulawin, a farmer-businessman engaged in buying
and selling of copra and corn, in the amount of P 420,000. In consideration thereof,
Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner. Despite
repeated demads, Guillermo failed to pay his outstanding balance and Tan Shuy filed a case
before the Court.
According to respondent Guillermo, he had already paid the subject loan in full. Allegedly, he
continuously delivered and sold copra to petitioner. Guillermo said they had an oral
arrangement that the net proceeds thereof shall be applied as installment payments for the
loan. He alleged that his deliveries amounted to P 420,537.68 worth of copra. Furthermore,
he pointed out that the pesadas (like a receipt) did not contain the notation "pd," which meant
that actual payment of the net proceeds from copra deliveries was not given to him, but was
instead applied as loan payment.
Did the delivery of copra amount to installment payments for the loan obtained by
Guillermo from Tan Shuy?
Yes. There was a dation in payment. In this case, the debtor delivers and transmits to the
creditor the formers ownership over a thing as an accepted equivalent of the payment or
performance of an outstanding debt. In such cases, Article 1245 provides that the law on sales
shall apply, since the undertaking really partakes in one sense of the nature of sale.
Dation in payment extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless the parties by
agreement express or implied, or by their silence consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.
Supported by petitioners statement that he only gets the payments for trucking while the total
amount which represent the total purchase price for the copras that he delivered to the
plaintiff were all given to Elena Tan Shuy as installments for the loan he owed to plaintiff,
the arrangement between Tan Shuy and Guillermo can thus be considered as one in the nature
of dation in payment. Pesadas show that other deliveries were for corn and not copra, so
Maulawin is still indebted to the plaintiff in the amount of 41k pesos.
Article 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)

Rule in Delivering Indeterminate or Generic Things:


When the quality and circumstances of an indeterminate or generic thing supposed to be delivered had not

been stated, only the ordinary kind or category of said thing should be delivered.
For example, if the obligation consists in delivering a car of a particular brand (latest model), and there
are three kinds of that brand with different costs, the one to be delivered is the second most powerful in
the row.
The purpose and other circumstances shall be considered. Thus, in the example earlier, if the purpose is to
secure the most powerful to be used in a race, then the car with the superior quality should be delivered.
The law speaks of quality. Quantity is not mentioned. The reason is because if both quantity and quality
are not determined, then the contact is considered void (Art. 1349 and 1409)

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Article 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)

If there is no agreement regarding extrajudicial expenses, debtor shall bear the expenses because he is the
one principally benefited as he is freed from the obligation by reason of the payment.

5. Effects of Partial Payment:


Article 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)

Partial Performance can be Refused:


The debtor cannot make a partial payment or partial performance to the creditor unless there is an express

agreement to that effect. The creditor therefore can refuse partial payment or performance. Conversely,
the debtor cannot be compelled to make partial payments if he is ready to make a full payment.
The reason behind this is that a debt is not 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.

Example:
A obligated himself to finish the construction of the house of B with 7 bedrooms in a period of 8 months.
A cannot compel B to receive the house where only 4 bedrooms had been finished, unless B agrees.

When the prestation is partly liquidated and partly unliquidated, the creditor may demand the fulfillment
of the liquidated portion, without waiting for the liquidation of the unliquidated portion.
Example:
A borrowed money 100 pesos from B with interests based on the prevailing bank rates. The loan matured
after one year. B can collect the 100 pesos which is liquidated without waiting for the liquidation of the
interests which have yet to be computed and determined.

Nasser vs. Cuevas


In the proceedings for the settlement of the estate of Amadeo Molave, a supplemental
compromise agreement and project of partition was executed among the heirs and interested
parties. The agreement provided for the payment of attorneys fees to Atty. Canlas in the
aggregate amount of 600,000Php 128,000Php in property and 472,000Php in cash.
Stipulation: Until after the full payment, there shall be established on all the properties of the
Estate, a charging lien for attorneys fees to secure the payment of said fees and, by these
present, all the signatories to this Compromise Agreement expressly agree to the
establishment and creation of the aforesaid charging lien, provided that upon full payment of
the corresponding liability of party the lien on his/her share is extinguished.

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The agreement was approved by the Court and shortly thereafter, Canlas moved for the
execution of the agreement. The court assigned the corresponding shares to be paid by the
heirs and ordered Mariano Nasser to deliver payment within 10 days from the receipt of the
directive. The heirs contend that the execution was improper due to the absence of a written
agreement on the precise terms of payment, furthermore, the clause Upon full payment of
the corresponding liabilities of a party, the lien on his/her share is extinguished - to mean
that the agreement is that of an installment basis and the fact that Nasser have complied with
their undertaking, they are not subject to their lien, and that the same was extinguished.
Did the clause upon full payment of the corresponding liability of party the lien on his/her
share is extinguished in the agreement connote payment of fees in installments?
The meaning of the proviso only connotes that the heirs will pay at different times but does
not connote that of a separate payment in installments. The creditor cannot be compelled to
partially receive the prestations in which the obligations consist unless there is an express
stipulation to that effect.
Petition is hereby denied, and the Court holds that the Order and Execution are validly and
lawfully issued, and alias execution may issue to the extent that the judgment credit of Atty.
Canlas remains unsatisfied, with the proviso that the sums still due to him shall bear interest
until fully paid since it has already been 16 years and not a single centavo has been paid by
the heirs.

6. Currency of Payment:
Article 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.
(All monetary obligations shall be settled in the Philippine currency
which is the legal tender in the Philippines.
However, parties may agree that the obligation or transaction
shall be settled in any other currency at the time of payment.) (RA 8183)
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.

The portion
cancelled out is
no longer in
effect since this
provision has
already been
repealed. The
applicable law
today has been
inserted in the
first portion of
this codal
provision for
easy reading.
The rest of the
provision remain
subsisting.

In the meantime,
the action derived from the original obligation
shall be held in the abeyance. (1170)

Evolution of this Article:


Article 1249 was amended by R.A. No. 529 in 1950 (prohibited transactions in foreign currency), further

amended by R.A. No. 4100 (provided exceptions to RA 529 to encourage foreign investments) in 1964,
and recently amended by R.A. No. 8183 in 1996.
Section 1 of R.A. No. 8183 provides:
All monetary obligations shall be settled in the Philippine currency which is the legal tender in the
Philippines. However, parties may agree that the obligation or transaction shall be settled in any other
currency at the time of payment.
Only the first paragraph was amended. The rest remain subsisting.
Today, there is no more legal impediment to having obligations paid in a foreign currency as long as the
parties agree to such an arrangement.

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Legal Tender, Concept:


Legal tender refers to such currency which may be used for payments of debts whether public or private,

and which the creditor cannot refuse to accept.


Legal tender in the Philippines covers all notes and coins issued by the Central Bank of the Philippines.
However, P.D. No. 72 set a limit in the use of coins as legal tender:
a. 1 centavo coins and 5 centavo coins are legal tender up to 20 pesos.
b. Other coins are legal tender up to 50 pesos
The reason for the limit is to avoid burdening the creditor with the work of counting huge amounts of
coins and carrying the same. He can refuse the acceptance of coins which go beyond the limits.

Payment in Negotiable Documents:


Negotiable documents like checks, promissory notes payable to order, or bill of exchange, are not legal

tenders. Creditor has the right to refuse such even if they happen to be good.
Payment in such medium does not produce the effect of payment. These papers shall produce the effect of
payment only when they have been encashed, meaning, they had been exchanged with cash money like
the honoring of checks by the drawee bank.
Section 62 of the Central Bank Act provides that checks representing deposit money do have legal tender
power and their acceptance in payment of debts, both public and private, is at the option of the creditor.
Provided, however, that a check which has been cleared and credited to the account of the creditor shall
be equivalent to payment in cash.

Rule on Payment in Check:


A check, whether it is ordinary or managers, is not legal tender. Creditor may refuse payment of such.
This rule applies even if the check was consigned in court.
Exceptions: Check is considered as valid payment when

1. When the creditor has accepted the check. He cannot refuse to accept the check as payment the

following day. Creditor is under estoppel.


2. When the check had lost its value due to the fault of the creditor, such when he unreasonably
delayed the presentation of the check.
3. When the foreign bill of exchange lost its value for the reason that the creditor had neglected to
make a protest. Had the creditor protested to dishonor the bill, the debtor could have pursued the
right to recourse against the parties secondarily liable therefor.
4. When a managers check is consigned with the court, endorsed to the provincial treasurer which
was honored by the bank and credited to the treasurers account.
5. When after the payment of the check in court by the debtor, the creditor petitions to withdraw the
amount in deposit.
Mere delivery of a bill of exchange by the debtor does not immediately effect payment. It however
suspends the action arising from the original obligation. To finally extinguish the obligation, the
commercial instrument or check should be cashed.

Distinction between Article 1249 and Article 1250:


In Article 1249, the parties may agree on payment by another currency and the basis of the value shall be

the value during the time of the payment.


In Article 1250, the parties may also agree on a different currency, but the basis of the value of the
stipulated currency is reckoned at the time of establishment of the obligations and not at the time of
payment. But before this applies, there must first be a supervening extraordinary inflation/deflation of the
currency stipulated.

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Fortunado vs. Court of Appeals
A judgment in favor of Fortunado was rendered by the court whereby two parcels of land of
Bautista were levied as payment for the damages. The latter lot had already been purchased
by National Steel Corporation (NSC) but had not yet been registered in its name.
After due notice, these lots were sold at public auction to the petitioners as the only bidder.
They were issued a certificate of sale which was registered thereafter. NSC notified the
sheriff of its intention to redeem one of the parcels of land. The sheriff suggested that as the
two lots had been sold together for the lump sum, both of them should be redeemed by NSC.
As the motion remained unresolved and the period of redemption would soon expire, NSC
issued to the sheriff a check as the redemption price for the lot. The sheriff acknowledged
receipt of the check on the same date.
The sheriff acknowledged receipt of the check as redemption money for the two parcels of
land; issued a certificate of redemption in favor of NSC and Bautista.
In a Motion, Bautista prayed that the sum covered by the check be delivered to and kept by
the Clerk of Court of the RTC until such time as all incidents relative to the validity of the
auction sale conducted by the sheriff were finally resolved. The sheriff notified the
petitioners counsel of the deposit of the check. The said counsel replied that he was rejecting
the check because it was not legal tender and was not intended for payment but merely for
deposit.
Was the check issued by NSC considered payment of redemption price?
Redemption is not rendered invalid by the fact that the said officer accepted a check for the
amount necessary to make the redemption instead of requiring payment in money. It goes
without saying that if he had seen fit to do so, the officer could have required payment to be
made in lawful money, and he undoubtedly, in accepting a check, placed himself in a position
where he could be liable to the purchaser at the public auction if any damage had been
suffered by the latter as a result of the medium in which payment was made. But this cannot
affect the validity of the payment.
The Court held that, while it is not sanctioning the use of a check for the payment of
obligations over the objection of the creditor, a check may be used for the exercise of the
right of redemption, the same being a right and not an obligation. The tender of a check is
sufficient to compel redemption but is not in itself a payment that relieves the redemptioner
from his liability to pay the redemption price.
Tibajia vs. Court of Appeals
In a civil case, Spouses Tibajia was ordered to pay Eden Tan a total money judgment of
398,483.40php. They paid Tan in the following form: 262,750.00php in cashiers check and
135,733.70php in cash. Tan refused to accept the payment, and insisted that the garnished
funds deposited with the RTC cashier be withdrawn to satisfy the judgment. Trial court and
CA favored Tan by saying that a payment in cashiers check is not payment in legal tender.
Petitioners cited that the cashiers check was that of Bank of the Philippine Islands, a bank of
good standing, and it was enough to fulfill the obligation.
Is payment by means of a cashiers check considered as payment in legal tender?
No, it is not considered payment in legal tender. Section 1 of RA No. 529, as amended,
which provides:
Section 1. Every provision contained in, or made with respect to, any obligation which
purports to give the obligee the right to require payment in gold or in any particular kind
of coin or currency other than Philippine currency shall be as it is declared against
public policy null and void, and no effect in any obligation thereafter incurred.
Section 63 of RA No. 265 (Central Bank Act), as amended, which provides:
Section 63. Legal Character Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private, is at
the option of the creditor. (There is a proviso in this section, but not significant in this
case.)

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In Philippine Airlines, Inc. vs CA and Roman Catholic Bishop of Malolos, Inc. vs IAC,
the Court held that:
A check, whether a managers check or ordinary check, is not legal tender, and an offer
of a check in payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor.

General Insurance vs. Union Insurance


Union Insurance Society of Canton, an insurance organization, and General Insurance &
Surety Corp (GISC for brevity) entered into a First Surplus Reinsurance Agreement. Parties
agreed on reciprocal reinsurance expressed and payable in pounds sterling or any equivalent
Philippine currency valued at the exchange rate existing at the time of payment.
After termination of the reinsurance agreement, Union Insurance claim that General
Insurance is still indebted with a sum of 4,784.51 pounds and demands that it be paid
according to the terms stipulated in the contract. Union requested GISC to pay the
aforementioned sums in pounds sterling or in Philippine Pesos at the exchange rate prevailing
at such time. GISC refused to pay in pounds and insisted to pay the said amounts in
Philippine Pesos at the old exchange rate. Hence, this recourse to the Supreme Court.
Was the agreement to pay in a foreign currency valid under Philippine Law?
While the petitioners seek to evade its obligation to pay in pounds sterling as being
inconsistent to public policy, it manifested its willingness to pay in another foreign currency,
U.S. dollars.
Whether GISC agreed to pay its obligations in pounds sterling or in US dollars, it is settled
that if there is any agreement to pay the (instant) obligation in a currency other that the Phil
Currency, the same is null and void as contrary to public policy (RA 529).
HOWEVER, RA 529 does not invalidate the whole contract which gives the obligee the right
to demand payment in gold or in other foreign currencies. What it declares void is the
provision to such effect. Consequently, the transactions or contract SUBSISTS! The most that
could be demanded is to pay the obligation in Philippine Currency.

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7. Extraordinary Inflation or deflation of currency:


Article 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)

Applicability:

Applies only to contractual obligations.


Applies only if there is an extraordinary inflation or deflation of the currency stipulated, and when there is
an official pronouncement or declaration of the existence of an extraordinary inflation or deflation.
As a declaration by the competent authorities is needed, extraordinary inflation or deflation cannot be
presumed.
If the inflation or deflation is just ordinary, that is, it is a universal trend which did not spare the country,
Article 1250 will not apply.

Illustration:

Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and
such decrease or increase could not have been reasonably foreseen or was beyond the contemplation of
the parties at the time of the establishment of the obligation.
An example would be Germany in 1921: Early in that year it was 4.2 mark to the US dollar, by May it
became 62 to the US dollar. On October of 1923, it was 4.2 trillion mark to the US dollar.

Basis:

There is a great deal of uncertainty and confusion as a result of contracts entered into or payments made
during the last war. It is thought that the foregoing rule provides a just solution for future cases, so that
the juridical relations of creditor and debtor would be equitably adjusted in case of another war resulting
in extraordinary inflation.

Exception:

As an exception, the parties may agree on another basis if they do not want the value of the currency at
the time of the establishment of the obligation as the basis of payment.

Velasco vs. Meralco


Velasco bought 3 lots at Diliman, Quezon City. 2 of these lots were sold to Meralco, who
then proceeded to built a substation which is a facility that reduces high voltage electricity to
a current suitable for commercial distribution. As this facility emitted noise, Velasco filed a
claim for damages due to nuisance. The trial court dismissed it, but upon appeal to the
Supreme Court, the latter granted the petition granting P20,000 in damages and P5,000 for
attorneys fee to Velasco. Hence, this motion for reconsideration contending that the decision
has incorrectly assessed appellant's damages and unreasonably reduced their amount. It is
first argued that the decision erred in not taking into account, in computing appellant's loss of
income. Appelant also claimed that he lost his chance in selling his house for P95,000 due to
the noise caused by Meralcos substation. Appellant Velasco urges that the damages awarded
him are inadequate considering the present high cost of living, and calls attention to Article
1250 of the present Civil Code.
Is Article 1250 of the Civil Code applicable to this case?
No, it is not applicable. It can be seen from the employment of the words "extraordinary
inflation or deflation of the currency stipulated" that the legal rule envisages contractual
obligations where a specific currency is selected by the parties as the medium of payment;
hence it is inapplicable to obligations arising from tort and not from contract, as in the case at

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bar, besides there being no showing that the factual assumption of the article has come into
existence. Hence, his motion for reconsideration was denied.
Filipino Pipe Foundry vs. NAWASA
NAWASA entered into a contract with FilPipe and Foundry Corp in which the latter is to
supply cast iron pressure pipes amounting to 270k pesos. NAWASA paid in installments,
leaving a balance of 135,507 pesos. FilPipe demanded payment for the unpaid balance and
NAWASA failed to pay, thus, FilPipe instituted a complaint for recovery of a sum of money.
Subsequently, FilPipe demanded that an adjustment for the unpaid balance in accordance
with the value of the Phil peso at the time of the decision, due to the alleged supervening
extraordinary inflation.
Filpipe presented voluminous records and statistics showing that the price index of
commodities, which is the usual evidence of the value of the currency, has been rising.
Was there an extraordinary inflation as to warrant the adjustment for the unpaid balance?
While appellant FPFCs voluminous records and statistics proved that there has been a
decline in the purchasing power of the Philippine peso, this downward fall of the currency
cannot be considered "extraordinary." It is simply a universal trend that has not spared our
country.
Extraordinary inflation exists "when there is a decrease or increase in the purchasing power
of the Philippine currency which is unusual or beyond the common fluctuation in the value
said currency, and such decrease or increase could not have reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.
Example of extraordinary inflation: More recently, in the 1920's Germany experienced a case
of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By
May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly,
so that by October 1923, it had reached 4.2 trillion to the U.S. dollar!
Gonzalo Maluel Co. vs. Central Bank
The Central Bank issued a circular which limited the sales of exchange at 2 pesos to 1 dollar
to certain specified transactions. Subsequently, the Monetary Board passed two resolutions,
the first one adjusting the exchange rate of dollars in the free market at 3.20 pesos to 1 dollar
and the second reducing the said amount to 3 pesos is to 1 dollar, with a 15% margin levy.
Gonzalo L. Manuel & Co., Inc., purchased US dollars from Central Bank through its duly
authorized agent bank, the Philippine Bank of Communications, at the rate of P3.00 to $1.00.
After some time, petitioner filed a formal claim with CB for the refund of around P20,000
pesos, allegedly paid in excess of the amount which the law allowed, based on the statutory
par value of P2.00 to $1.00. Central Bank turned down the claim explaining that there was no
devaluation of the peso or change in its par value, and only that the exchange rate changed.
Company then filed a petition at the CFI but was likewise dismissed for the same reason.
Was there a change in the par value of the peso in relation to the US dollar?
Par value vs. Exchange Rate
Par value
Sometimes called legal exchange rate or par of exchange.
It signifies "the amount it takes of one currency (also based on gold) to buy a unit
another currency(also based on gold) that is, how many pieces of the one unit (or
their gold content) are necessary to equal the gold content of the other unit.
Exchange Rate
The price, or the indication of the price, at which one can sell or buy with one's own
domestic currency a foreign currency unit.
Normally determined by the law of supply and demand for a particular currency.
The price of one currency in terms of another
Thus, there is a difference between par value and rate of exchange: the first is defined by law,
and (as in the case of the peso) is based upon its gold content. The second is conditioned by

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Article 1251.

prevailing economic factors which bear upon the demand for a particular currency and its
availability in the market.
The par value of the peso is defined in the Central Bank Act, which is seven and thirteentwenty first (7-13/21) grains of gold, nineteenth (0.900) fine. If the resolutions were meant to
change the par value of the peso, they were null and void for not having complied with the
requisites under the said act, which provides that any modification in the gold or dollar value
of the peso shall be made only by the President upon the proposal of the Monetary Board and
with the approval of Congress and the proposal of the Monetary Board shall require the
concurrence of at least five of the members.

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.
These provisions are without prejudice to venue under the Rules of Court. (1171a)

Venue of Payment:
1. If there is a specific place designated, that place is where payment shall be made.
2. If there is no agreement on where payment shall be made, the following rules shall apply:
a. If the undertaking is to deliver a determinate thing, place of payment is where the thing might be
at the time the obligation was constituted.
b. In other cases, such as to deliver a generic thing or to perform a specific service, payment shall be
made at the domicile of the debtor.

Effect of Debtors Change of Domicile:

If done in bad faith or after having been in delay, additional expenses incurred by the collecting party
shall be borne by the debtor.
These additional expenses do not cover the regular expenses incurred in going to the original place of the
debtor.
If changing of domicile is done in good faith, such as for security reasons or for being appointed as an
officer in another place, the debtor will not be liable for additional expenses.

In case of conflict between the parties stipulation on the place of payment and the rules on venue
provided under the Rules of Court, the latter shall prevail.

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SUBSECTION 1.
Application of Payments

8. Application of Payments:
Article 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 Defined:

Application of payments is the designation of the particular debt being paid by the debtor who has 2 or
more debts or obligations of the same kind in favor of the same creditor to whom the payment is made.

Right to Make Application of Payments Belongs Primarily to the Debtor:

Debtor has the right to choose which debt of the several debts due shall be paid.
Designation of the debt to which payment shall be made must be made at the moment of payment.
If the debtor fails to exercise such right, the creditor may exercise it by issuing a receipt wherein the debt
paid is indicated. If the debtor accepts the receipt without objection, payment is deemed applied to the
debt indicated in the receipt.
If the assent or the acceptance of the receipt by the debtor is tainted with fraud, intimidation, violence, or
undue pressure, the application of payment shall be invalid.
If both do not exercise the right, or if the application is void, Articles 1253 and 1254 shall apply.
By mutual agreement, application of payment already made may be changed, unless a third person is
adversely affected. i.e., when payment is applied to a debt for the release of a mortgage, and
subsequently, a third party caused the inscription of a lien over the property which was just released.
Changing such application of payment would then adversely affect the third party.

Requisites for a Valid Application of Payment by the Debtor:


1. There is only one debtor and one creditor.
2. The debtor owes the creditor two or more debts which are of the same kind or identical specie such as
money obligations obtained on different dates.

3. All the debts are due and demandable, except when there is a stipulation to the contrary or when the
application is made by the party for whose benefit the term has been constituted.

4. The payment made by the debtor is not sufficient to cover or settle all the debts.

Requisites for a Valid Application of Payment by the Creditor:


1. The debtor did not make any designation on which debt should be paid when he made the payment.
2. The creditor issued a receipt expressing the application of the payment to a particular debt.
3. The debtor assented to the application made by the creditor by accepting the receipt w/o objections.

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Contract means Assent in the Last Paragraph:

In the last paragraph, the term contract was used. It actually refers to the assent given by the debtor in
accepting the receipt. It must be noted that the debtor may or may not accept the receipt where the
application is made. When the debtor rejects such application, Article 1254 will apply.

Limitations on the Right of the Debtor to Choose the Debt to be Paid:


1. Debtor cannot apply payment to a debt not yet liquidated or due, unless there is a contrary stipulation or
2.
3.
4.
5.

he is the one given the benefit of the period or term.


If creditor is given the benefit of the period or term, application of payment cannot be made by the debtor.
If there is an agreement as to which debts shall be paid first, debtor cannot change it without consent of
the creditor.
If there is a principal obligation which bears interests, the debtor cannot pay the interests without first
paying the principal (Article 1253)
A debtor cannot choose to pay a bigger debt partially when the payment can be applied as full payment to
a smaller debt. The reason is that he is not allowed to make partial payment for the bigger debt unless
there is an agreement to the contrary. (Art. 1248)

Not Applicable to a Surety:

Articles 1252 to 1254 do not apply to a person whose obligation as a mere surety is both contingent and
singular. His liability is confined to such obligation.
He is entitled to have all payments applied exclusively to said obligation and to no other.

Article 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)

Article is Directory and not Mandatory:

The Supreme Court has ruled that this article applies only if there is no verbal or written agreement to the
contrary; this means that the article is merely directory and not mandatory.

Article 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)

Applicability:

Applies only in the following circumstances:


a. When application of payment cannot be made in accordance with Art. 1252 and 1253, or
b. The application of payment cannot be inferred from other circumstances.
The rule to follow is then is that the debt which is the most onerous to the debtor shall be deemed to have
been satisfied.
If the debts happen to be of the same nature and burden, the payment shall be applied to all
proportionately.

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Onerous Debt Defined:

An onerous debts is one with a burden. i.e., a loan secured with a mortgage. The mortgage is a burden.
A contract is onerous when it has responsibilities or obligations which outweigh its advantages.
Determining the most burdensome debt is a question of fact and must be resolved on the basis of the
surrounding circumstances.

Guides in Determining Which Debt is More Onerous:


1.
2.
3.
4.
5.
6.

A debt that bears interest is more burdensome than a debt which does not.
Older debts are more onerous than recent debts.
A mortgage obligation is more burdensome than a debt arising from a current account.
A mortgage debt is more burdensome than unsecured advances.
Debts covered by a guaranty are more onerous because the creditor & guarantor may sue the debtor.
In a bond where the surety is bound solidarily with the debtor but for a lesser amount, the principal
debtors portion is more onerous.
7. Debts subject to a penal clause is more onerous than debts subject to the general rules on damages.
8. An exclusive debt is more burdensome than a solidary debt!

More Burdensome Rules Applicability:

Only applicable if the two preceding articles are not applicable.


Will not apply where there has been an application of payment!

When it cannot be determined which debt is more onerous, they must be treated as equally onerous.
Payments must then be applied to all the debts proportionately.
If debts are of the same nature and burden, payment shall also be applied proportionately.
Magdalena Estates vs. Rodriguez
Spouses Antonio and Herminia Rodriguez bought from Magdalena Estates a parcel of land in
Quezon City. In view of the unpaid balance of 5,000 pesos, the spouses executed a PN
binding them to pay solidarily such amount with an interest rate of 9% per year. On the same
date, the spouses and the Luzon Surety Co., Inc. executed a bond in favor of the petitioner.
When the obligation of the spouses became due and demandable, Luzon Surety Co., Inc. paid
to the petitioner the sum of P5,000. Subsequently, the petitioner demanded from the spouses
the payment of P655.89 corresponding to the alleged accumulated interests on the principal
of P5,000. Due to the refusal of the spouses to pay the said interest, the petitioner filed a suit
the spouses contend that the unqualified acceptance of payment made by Luzon Surety of
P5,000 and without exercising the petitioners right to apply a portion of P655.89 thereof to
the payment of the alleged interest due despite its presumed knowledge of its right to do so,
the petitioner showed that it waived or condoned the interests due because of Art. 1235 and
1253 of the CC:
Art. 1235. When the obligee accepts performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been recovered.
Was the petitioner deemed to have waived his right to the interests due when it failed to
exercise its right to application of payment from the 5,000 pesos paid by Luzon Surety?
No. The petitioners did not protest when it received only P5,000 because they knew that it
was the only amount that the surety obligated himself to deliver. The liability of a surety is
not extended, by implication, beyond the terms of his contract. The petitioners cannot apply a
part of the P5,000 as payment for the accrued interest. Therefore there is no waiver or
condonation.
Article 1253 only applies to a person owing several debts of the same kind to a single
creditor. It cannot be made applicable to a person whose obligation as a mere surety is both

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contingent and singular; his liability is confined to such obligation and he is entitled to have
all payments made applied exclusively to said application only.
Baltazar Vs. Lingayen Gulf Inc.
Baltazar and Rose subscribed to a number of shares of stock of Lingayen Gulf Electric Power
Co. They were issued certificates of stock for the shares they have already paid. In a board
meeting, the members of the BoD passed a resolution which provided that all unpaid
subscriptions should bear interest, and any or all payments already made on said unpaid
subscriptions should be applied first to interest, then the capital debt after all interest is fully
paid.
Issue: WON previous payments applied to capital may be applied to interest on unpaid
balance of subscription.
Lingayen Gulf Inc. argues on the basis of Art. 1253 NCC which provides that "if the debt
produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered." This provision of law only applies in the absence of verbal or
written agreement, to the contrary. It is likewise merely directory, and not mandatory. (Art.
1252 NCC).
In the present case, the defendant-corporation had applied the payments made by the
stockholders to the full par value of the shares of stock subscribed by them, instead of the
accepted interest, as shown by the capital stock shares certificate issued for the payments
made, and the stockholders had accepted such certificates issued for such payments. The said
application of payments must be deemed to have been agreed upon by the Corporation and
the stockholders, and the same cannot now be changed without the consent of the
stockholders concerned.
The Corporation Law and the by-laws of the defendant Corporation do not contain any
provision, prohibiting the application of stockholders' payments to the full par value of a
corporation's capital stock, ahead of the payment of accrued interest for unpaid subscriptions.
A corporation may, upon request of an interested stockholder, as his option, apply payment
by them to the full par value of shares of capital leaving its collection later of the accrued
interest on unpaid subscriptions, and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation cannot, by a unilateral act,
legally nullify and cancel the capital stock certificates so issued.
SUBSECTION 2.
Payment by Cession

9. Cession:
Article 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 be governed by special laws. (1175a)

Concept of Payment By Cession:

Cession means the formal giving up of


rights, property, or territory

Payment by cession is the same as payment by assignment.


A special form of payment where the debtor cedes his property to his creditors so the latter may sell the
same and the proceeds realized by applied to the debts of the debtor.
No cession or assignment if the creditors do not agree. Without creditors acceptance, it has no effect.
Properties covered by this provision are those not exempt from execution.

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Classes of Cession or Assignment:


1. Voluntary or Contractual This is cession or assignment by agreement of the parties.
2. Involuntary or Legal This is cession or assignment which is governed by the Insolvency Law.

Requisites of Voluntary Cession or Assignment:


1.
2.
3.
4.
5.

There is plurality of debts


There is complete or partial insolvency on the part of the debtor
There are at least two creditors
There is acceptance of the cession or assignment by the creditors
Property ceded or assigned is not exempt from execution

Effect of Valid Cession or Assignment:

If there is a valid cession or assignment, the debtor is released from responsibility up to the extent of the
net proceeds of the property, unless there is a contrary stipulation.

Payment by Cession contemplates existence of Two or More Creditors:

There is no payment by cession under Art. 1255 where there is only one creditor for the plain reason that
the Article contemplates the existence of two or more creditors to whom the property of the debtor is
assigned.

Cession or Assignment Distinguished from Dation in Payment


Basis

Cession or assignment

Dation in payment

Object

What is ceded is the universality of all


the debtors property excluding those
exempt from execution

What is delivered is only a particular


property considered as an equivalent
of the performance of the obligation

Number of Parties

There is plurality of creditors

There may be only one creditor

Financial Condition of Debtor

Debtor is necessarily in a state of


insolvency

Debtor is not necessarily in a state of


insolvency

Effect

Ownership is not transferred to the


creditors

Ownership is transferred to the


creditor upon delivery

Novation

It is not an act of novation of the


contract

It is an act of novation of the contract

Lopez vs. Court of Appeals


Benito Lopez obtained a loan of 20,000Php from Prudential Bank. Lopez executed a
promissory note in favor of Prudential Bank, binding himself to repay in one year with
interest of 10% per annum.
Aside from the promissory note, he executed a surety bond with Phil American General
Insurance and bound themselves jointly and severally in favor of Prudential Bank for the
payment of 20,000Php.
Lopez executed an indemnity agreement whereby he agreed to indemnify PhilAmGen and
hold the same harmless from and against all damages.

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Lopez also executed a deed of assignment of 4,000 shares of the Baguio Military Institution
(BMI) entitled Stock Assignment Separate from Certificate which contains Lopez, as the
assignor, sells, assigns, and transfers unto Philamgen, as assignee surety company, 4,000
shares of the BMI in consideration of the obligations undertaken by Philamgen under the
terms and conditions of Surety Bond.
It was Lopez and Philamgens understanding that if the former could not pay the loan,
Philamgen Vice-President Emilio Abello and Pio Pedrosa of PBTC would buy the shares of
stocks and out of the proceeds thereof, the loan would be paid to PBTC.
June of next year came, Lopezs obligation matured without it being fulfilled, so PBTC made
a demand to both Lopez and Philamgen. In turn, Philamgen also demanded Lopez to perform
his obligations, in which the latter failed to do so. Hence, PBTC filed an action to enforce
Lopez to pay.
Atty. Timoteo J. Sumawang, upon receipt of the complaints, reminded Pedrosa and Abello of
their commitment to buy the shares of stock of BMI in the even that Lopez failed his
obligations. So the two ordered him to transfer the stocks to Philamgen, and after which, they
will buy the shares, the proceeds of which will be used to pay the bank. The stock certificate
in the name of Lopez was then cancelled, and a new one was created in favor of Philamgen.
The first complaint was dismissed, but when no payment was still insight from the end of
both Lopez and Philamge, PBTC filed another complaint. This time around, Lopez made an
appearance and sent a letter to Philamge, asking the company what happened to my shares
of stocks of BMI which were pledged to your good selves to secure said obligation. These
shares of stock I think are more than enough to answer for said obligation.
Philamgen was forced to pay PBTC the sum of 27,785.89php which included the loan and the
interest. The company brought an action in the Court of First Instance to demand
reimbursement from Lopez.
CFI dismissed the complaint, but the Court of Appeals reversed it. CA declared that the stock
assignment was a mere pledge: that the transfer of stocks was intended to make Philamgen
the owner thereof; and that Philamgen was merely holding the stock as a security for the
payment of Lopezs obligation.
In response, petitioner Lopez raised the following: when Philamgen caused the shares of
stock to be transferred to it, taking a new certificate of stock, the transaction was a pledge,
and in not holding instead that it was a Dation payment.
Was the stock assignment a pledge or a dation in payment? Pledge!
Dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. Pledge is merely a
security to a debt when the debtor fails or delays in paying his obligations.
If the transfer of stock was intended to secure the payment of money, then it must be
considered a pledge. The indemnity agreement and the stock assignment must be considered
together as related transactions because in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered.
The indemnity agreement connotes a continuing obligation of Lopez towards Philamgen
while the stock assignment indicates a complete discharge of the same obligation.
This is consistent with the theory of an absolute sale for and in consideration of the same
undertaking of Philamgen. There would be no necessity for the indemnity agreement if the
stock assignment was really intended as an absolute conveyance. There are strong reasons to
say that the parties intended the stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of Philamgen should it be required to
pay Lopezs loan to PBTC.
If the transfer was intended to secure the payment of money, then it must be construed as a
pledge. And the Court sided with CA when it declared the transfer of BMI stock to
Philamgen as a pledge.
In summation, the Court finds that the transaction (Stock Assignment Separate from Stock in
relation to Surety Bond No. 14164 and Indemnity Agreement) constitutes a pledge of the

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shares of stock in favor of Philamgen. And since respondent did not choose to file an action
against Pedrosa and Abello over their promise to buy the shares, and that respondent
Philamgen chose to sue petitioner under the Indemnity Agreement shows that Philamgen has
abandoned its right and interest over the pledged properties and must therefore return the
same to Lopez upon the latters satisfaction of his obligation under the Indemnity Agreement.
SUBSECTION 3.
Tender of Payment and Consignation

10. Tender of Payment and Consignation:


Article 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)

Presence of Creditor-Debtor Relationship is Required:

If there is no creditor-debtor relationship, consignation cannot apply.


The debtor must be willing to pay or deliver, but the creditor unjustifiably refuses to accept.
To shield himself from responsibility, debtor should make a tender of payment, which if refused, should
be followed by a complaint for consignation.
The second paragraph lists situations when tender is dispensable.

Article 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.
The consignation shall be ineffectual if it is not made strictly in consonance
with the provisions which regulate payment. (1177)

Consignation must first be Announced to the Creditor:

Consignation will not release the debtor from the obligation unless it has been first announced to the
creditor.
The purpose of the announcement is to give the creditor the opportunity to accept the tender of payment
and avoid unnecessary litigation.

Article 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)

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Concept of Tender of Payment and Consignation:

Tender of payment is the voluntary act of the debtor whereby he offers to the creditor for acceptance the
immediate performance of the formers obligation to the latter.
Consignation is the act of depositing the object of the obligation with the court or competent authority
after the creditor has unjustifiably refused to accept the same or is not in a position to accept it due to
certain reasons or circumstances.
Tender of payment is an antecedent of consignation, it is a preliminary act for the consummation of
consignation. Consignation generally requires tender of payment, subject to exceptions provided in the
second paragraph of Article 1256.
Before the consignation has been accepted by the creditor or before it has been judicially declared as
properly made, the debtor is still the owner of the thing or amount deposited. Other parties have no right
to oppose the withdrawal of such thing or amount.
The rational behind consignation is to avoid the performance of an obligation becoming more onerous to
the debtor by reason of causes not imputable to him.
Consignation indispensably requires a creditor-debtor relationship between the parties.

Requisites of Consignation and their explanations:


1. There is an existing valid debt which is already due
Tender of payment not yet due may be refused by the creditor.
When there is no debt due, deposit of the thing with the court is not necessary.
2. There is a prior valid tender of payment to the creditor (except when tender is dispensable)
The tender of payment must be a valid one to be an effective antecedent of consignation; Reqs:
a. Made before the act of consignation
b. Unconditional
c. Full amount including interests due must have been offered in legal tender
Mere sending of letters expressing intent to pay without any payment is not a valid tender of payment.
Tender made must be proved by evidence. A formal complaint must be commenced before the trial
court to provide the proper venue for the determination if there is a valid tender of payment.
3. There is a refusal to accept the payment tendered without any valid reason on the part of the creditor
Refusal must be without a valid cause.
If refusal to accept is with a valid cause, the consignation will not extinguish the obligation.
A tender to pay part of the full obligation may be refused.
Payment of a debt which is due must be in full and complete.
4. There is a prior notice of consignation given to the persons interested in the fulfillment of the obligation
Before depositing, there must be a prior notice of consignation to the creditor and to other persons
interested in the fulfillment of the obligation.
Without this notice, the consignation is void.
Purpose is to give the creditor the opportunity to withdraw the money deposited and to make use of it
or to allow them the opportunity to reconsider their previous refusal to accept the tender of payment
so as to avoid unnecessary litigation.
5. That the amount or the thing due is deposited with the court or competent authority
It is necessary to file a consignation case in court. Without a suit, there can be no valid consignation.
In certain cases, the deposit may be made with a competent authority other than a court, i.e., payment
of rentals due may be made by consigning the same to a bank in the name of the lessor with due
notice to the latter.
Not knowing whom to pay the rentals does not justify the failure of the lessees to pay because they
can avail of the remedy of consignation.
6. Subsequent notice of consignation is given to the persons interested in the fulfillment of the obligation
Mandatory, made after the filing of the complaint and after the deposit has been made.
May be made in the form of a letter properly addressed to the creditor.
Not required if amount is due as a consequence of a final judgment, since the law contemplates only
contractual obligations.
Consignation is void if the notices required had not been complied with.

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Requirement of Notices Explained:

When the creditor is absent or is unknown, the notice may be effected through publication.
The reason for requiring the notices is to enable the creditor to withdraw the goods or money deposited. It
would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or
money by reason of lack of knowledge of the consignation.

Other Cases Where Tender of Payment is Not Necessary:

No need for tender before consignation when:


(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.
Tender may be dispensed with for consideration of equity such as when prior tender would be useless.
Consignation need not be preceded by tender of payment when the consignation is ordered by the court.

No Automatic Cancellation, and the Retroactive Effect of Cancellation

Once consignation has been effected, the debtor may by motion ask the court to order the cancellation of
the obligation. In other words, there is no automatic cancellation of the obligation.
A judicial order is still necessary because there might be some factual issues which may be raised in the
court needing presentation of evidence.
The obligation is deemed cancelled from the time the amount or thing has been placed at the disposal of
the court or at the disposal of the competent authority.

Consequences of the Deposit:


1. The amount or property is placed in custodia legis
Property cannot be alienated or disposed of without judicial approval. If the property is perishable, the
court may order its sale.
2. The property is exempted from attachment or execution.
3. When the property consigned consists of real estate which cannot actually be placed in the hands of the
court, the debtor becomes the agent of the court. To effect a valid consignation, a receiver should be
appointed by the court upon the initiative of the debtor.
4. Consignation has a retroactive effect and the payment is deemed to have been made at the time of the
deposit of the thing in court or when it was placed at the disposal of the judicial authority.

Cases where Consignation Does Not Apply:


1. Where the filing of the complaint is the equivalent of an offer to redeem, consignation is not necessary.
2. In a contract of lease where the lessee is granted the option to buy the property leased, the latter is not
obliged to consign the price in court, if the lessor refused to sell. The lessee is merely exercising a right.
3. Consignation does not apply to an exercise of a right but to the discharge of a debt.
4. Consignation is not a remedy to determine the relation between a landlord and a tenant.
5. There is no valid tender of payment when the payment is tendered is in check, unless creditor accepts it.
Payment in check produces effect only upon encashment. Creditor may always insist on payment in cash.
6. A debtor does not incur any default in failing to make a fruitless tender of payment after the creditor had
notified him that he would not accept or receive the money.
7. Tender of payment is dispensed with where the buyer of the land acquired under a free patent refused to
permit the repurchase of the property.
8. Articles 1256 and 1257 do not apply to a money judgment. In case of a refusal of a tender of payment of
the amount due on a judgment, the court may direct the money to be paid into court.
9. When there is no creditor-debtor relationship, consignation will have no legal effect.

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Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Tender of Payment Distinguished from Consignation


basis

Tender of payment

consignation

Nature

Antecedent of consignation or the


preliminary act to consignation

Principal or consummating act for the


extinguishment of the obligation

Effect

It does not by itself extinguish the


obligation

It extinguishes the obligation when


declared valid

Character

It is extrajudicial

It is judicial for it requires the filing of


a complain in court.

Article 1259.

The expenses of consignation,


when properly made,
shall be charged against the creditor. (1179)

Creditor to Bear the Expenses of Consignation:

The creditor, who by reason of his unjustifiable acts has prompted the filing of the suit, must bear the
expenses of the consignation like storage fees, filing fees, attorneys fees and other related
expenses.

Article 1260.

Once the consignation has been duly made,


the debtor may ask the judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation,
or before a judicial declaration that the consignation has been properly made,
the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force. (1180)

Effect of a Valid Consignation:

When the consignation is properly effect, the court will order the cancellation of the obligation upon
motion duly filed by the debtor.
When the validity of the consignation has been affirmed or declared by the court, the consignation shall
have a retroactive effect.
The obligation is deemed paid from the moment the amount or the thing due has been actually placed at
the disposal of the court.
The running of interest if stipulated is also deemed suspended at the same time.
If the consignation is improperly made, the obligation stays.
If the consignation case is dismissed by the court, it will have no favorable effect upon the debtor.

Withdrawal of the Thing or Sum Deposited, When Allowable:

The debtor may still withdraw the thing he deposited in court provided that:
a. The creditor has not yet accepted the thing or sum deposited
b. The court had not yet made a judicial declaration that the consignation had been properly made

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The reason why the debtor may still withdraw the thing deposited is that he still owns the money or thing
deposited at that precise time.
Before the consignation has been accepted or judicially declared as properly made, the debtor is still the
owner of the thing or amount deposited.
Pineda opines that since a declaration will be made in a formal order, it will be subject to a 15-day period
before it becomes final and executory, hence the debtor may still withdraw the thing during this time.
In case of partial acceptance by the creditor, withdrawal by the debtor is still proper.
The obligation will remain in place if the debtor decides to withdraw the thing or amount deposited.
It can happen that the thing deposited may be lost or depreciated pending the hearing of the case. If the
consignation is finally found to have been done properly, the loss shall be borne by the creditor. If it is
improperly made, the loss shall be at the risk of the debtor.

Article 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)

Effect of Withdrawal After Creditors Acceptance or Judicial Approval of Consignation:

Withdrawal under this article is not a matter of right unlike the preceding article, but a privilege.
Without the consent of the creditor, the withdrawal is not allowable.
For allowing such withdrawal, the creditor shall lose any preference or priority of right over the thing
previously consigned.
Solidary co-debtors, guarantors and sureties of the debtor who are benefited by the consignation are
released from their obligations. The solidary co-debtors are released from their liability in relation to the
creditor but not from their individual liability to one another. Thus, they are still liable for their share.
The withdrawal of what has been consigned has the effect of reviving the obligation of the debtor.

Adelfa Properties vs. Court of Appeals


Private respondents in this case and their brother, Jose and Dominador Jimenez were the
registered co-owners of a parcel of land in Metro Manila
Private respondents sold their share of the eastern portion of the land to Adelfa Properties,
and subsequently executed an Exclusive Option to Purchase of the western portion thereof:
Selling price of 2,586,150Php, 50,000 option money credited as partial payment and the rest
shall be paid on Nov. 30, 1989. In case of default, this option shall be cancelled and 50% of
the option money shall be forfeited and refund of remaining 50% upon sale of the property to
a 3rd party
Before petitioner could even make payments, it received summons on November 29, 1989
and an action filed against them by the nieces of private respondents for the annulment of the
deed of sale in favor of Household Corporation. Petitioner wrote a letter that it would hold
payment of the full purchase price and Atty. Bernardo, as petitioners counsel, offered to pay
the purchase price to private respondents provided that 500,000 be deducted for the
settlement of the civil case, but the same was refused.
Private respondents executed a deed of conditional sale in favor of Chua for 3,029,250Php.
Atty. Bernardo wrote to private respondents again, expressing their willingness to pay the
purchase price but this was ignored by the private respondent. 50% of this option money was
returned to Adelfa Properties.
Was the refusal without just cause? Was there a valid tender of payment? YES, NO
Petitioner was justified in suspending payment of the balance of the purchase price by reason
of the vindicatory action filed against it. Be that as it may, and the validity of the suspension
of payment notwithstanding, we find and hold that private respondents may no longer be
compelled to sell and deliver the subject property to petitioner for two reasons, that is,

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petitioner's failure to duly effect the consignation of the purchase price after the disturbance
had ceased (i.e. the dismissal of the civil case); and, secondarily, the fact that the contract to
sell had been validly rescinded by private respondents.
Mere sending of letters expressing intent to pay do not constitute a valid tender of payment.
A mere tender of payment is not sufficient to compel private respondents to deliver the
property and execute the deed of absolute sale. It is consignation which is essential in order to
extinguish petitioner's obligation to pay the balance of the purchase price.
A contract to sell, as in the case before us, involves the performance of an obligation, not
merely the exercise of a privilege of a right. Consequently, performance or payment may be
effected not by tender of payment alone but by both tender and consignation.

Soco vs. Militante


Soco and Francisco entered into a contract of lease on January 17, 1973 whereby SOCO
leased her commercial building to Francisco for a monthly rental of 800 pesos for a period of
10 years renewable for another 10 years.
Francisco noticed that Soco did not anymore send her collector for the payment of rentals and
at times there were payments made but no receipts were issued. This situation prompted
Francisco to write Soco the letter which the latter received.
After writing this letter, Francisco sent his payment for rentals by checks issued by the
Commercial Bank and Trust Company. Obviously, these payments in checks were received
because Soco admitted that prior to May, 1977, defendant had been religiously paying the
rental.
Soon after SOCO learned that Francisco sub-leased a portion of the building to NACIDA at a
monthly rate of more than 3,000 SOCO felt as if she was losing end of the contract and tried
to look for ways and means to terminated the contract
Soco through her lawyer served notice to vacate the premise leased because of alleged
nonpayment of rental of the leased premises beginning May, 1977. Francisco informed Soco
through letters that he was in fact paying the rentals through Commercial Bank which issued
the check to the Clerk of Court. However Soco still filed this instant case of illegal detainer.
CFI ruled that there was substantial compliance of the requisites of consignation, hence his
payments were valid and effective.
Is substantial compliance of the requisites enough for a valid consignation? NO
We hold that the respondent lessee has utterly failed to prove the following requisites of a
valid consignation:
o First, the tender of payment of the monthly rentals to the lessor except that indicated
in the June 9, l977 letter. There is no factual basis for the lower court's finding that
the lessee had tendered payment of the monthly rentals, thru his bank, citing the
lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in the
amount of P840.00 every 10th of each month. In Franciscos arrangement with the
bank, it was the lessee's duty to send someone to get the cashier's check from the
bank and logically, the lessee has the obligation to make and tender the check to the
lessor. This the lessee failed to do.
o Second, respondent lessee also failed to prove the first notice to the lessor prior to
consignation, except the payment referred to in the June 9, 1977 letter. purpose of the
notice is in order to give the creditor an opportunity to reconsider his unjustified
refusal and to accept payment thereby avoiding consignation and the subsequent
litigation. This previous notice is essential to the validity of the consignation and its
lack invalidates the same.
o Third, respondent lessee likewise failed to prove the second notice, that is after
consignation has been made, to the lessor except the consignation for 2 payments
indicated in the July 6 letter.
o The fourth requisite that respondent lessee failed to prove is the actual deposit or
consignation of the monthly rentals except the two cashier's checks referred to in the
July 6 letter. As indicated earlier, not a single copy of the official receipts issued by

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the Clerk of Court was presented at the trial of the case to prove the actual deposit or
consignation.
Substantial compliance is not enough for that would render only a directory construction to
the law. We hold that the essential requisites of a valid consignation must be complied with
fully and strictly in accordance with the law. CFI decision is reversed and set aside, petition
granted.

Ponce De Leon vs. Syjuco


Ponce de Leon executed two promissory notes in favor of Syjuco for P20,000 and P16,000.
Both loans are payable within one year from May 5, 1948. However, on several occasions
in November 1944, Ponce de Leon tendered payment to Syjuco but the latter refused to
accept the same so the former deposited the payment to the court (consignation).
Was the consignation valid? NO
Requisites for a valid consignation:
1. That there was a debt due;
2. That consignation of the obligation had been mad because the creditor to whom
tender of payment was made refused to accept it, or because he was absent or
incapacitated, or because several persons claimed to be entitled to receive the amount
due;
3. That previous notice of the consignation had been given to the person interested in
the performance of the obligation;
4. That the amount was placed at the disposal of the court;
5. That after the consignation had been made the person interested was notified thereof.
The consignation made by de Leon failed in the 1st and 3rd requisites.
Regarding the first requisite, the obligation was not yet due and demandable when the money
was consigned and was thus made prematurely. Regarding the 3rd requisite, there was no
previous notice of consignation given by Ponce de Leon to Syjuco, thus invalidating the
consignation.
Federation of United NAMARCO Distributors vs. National Marketing
Due to the rise in the prices of commodities, National Marketing Corporation (Namarco) was
to procure, buy, and distribute such commodities that were in short supply with a special nonrecurring dollar allocation from the Central Bank.
But during those times, the activities of Namarco were paralyzed by the picketing of its
workers who were on strike. They realized that should the strike continue, the goods to be
imported under said dollar allocation would be frustrated.
They devised a plan to prevent such occurrence and as a result, Federation of United
Namarco Distributors, Inc. (Federation) was one of the various associations who filed for
petition for trade assistance. In response, Namarco issued different resolutions and it also
executed a Contract of Sale with the Federation.
The commodities started to arrive and the Federation, in compliance with the terms of the
contract of sale proceeded to pay to the NAMARCO the full value of the merchandise that
had been arriving.
A new Board of Directors and General Manager took over the management of the Namarco,
and this new management decided to discontinue compliance by Namarco of the contract of
sale with respect to the commodities not actually delivered, and it so notified the Federation.
The Federation a complaint in the Court of First Instance of Manila against the Namarco, to
compel the latter to perform the Contract of Sale as to what was left of the commodities
subject matter thereof.
The trial court sentenced Namarco to specifically perform the contract of sale by delivering
the commodities and among others, to reimburse Federation the storage charges.
Is the Federation liable for the handling and storage charges of the commodities as the
trial court ruled?

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It is true that on March 2, 1960, the FEDERATION, upon filing its complaint, obtained a writ
of preliminary injunction to prevent NAMARCO from disposing of these goods through
other distributors or retailers, but the FEDERATION was willing to accept, and in fact had
been requesting, the delivery of the same to it or its members for sale to the general public,
but NAMARCO refused to make such delivery.
The storage charges that became due from the date the goods had to remain in the warehouse
because of the refusal of NAMARCO to deliver the same to the FEDERATION which had
been demanding the surrender thereof to it, can not be charged to the FEDERATION, but to
NAMARCO as the one who, in the performance of its obligation under the contract, has been
guilty of delay in the delivery of the goods subject matter thereof.

PNCC vs. Court of Appeals


A contract was entered into by PNCC and herein private respondents for a rock crushing
project in which petitioners had to enter into the contract of lease with private respondents
Lease contract, among others, contained the ff:
o Period of 5 years
o Suspensive condition of obtaining an industrial permit with the Ministry of Human
Settlements and payment of lease starts within the happening of this condition
PNCC obtained from Ministry of Human Settlements a Temporary Use Permit and
subsequently, private respondents wrote to PNCC requesting payment for the first annual
rental of 240,000 due and payable upon the execution of the contract.
PNCC contends that the payment of rentals would commence from the date of the issuance of
the industrial clearance and not from the date of signing and further alleges that the
Temporary Use Permit was not the clearance contemplated in the agreement
Furthermore, provided that it really had the obligation which is due and demandable, the
same cannot be effected because of Rebus Sic Stantibus in that PNCC should be released
from the obligation because there was an abrupt change in the political climate after the
EDSA revolution as well as financial difficulties.
Can PNCC invoke Articles 1266 and 1267 to release it from its obligation?
PNCC cannot successfully take refuge in Article 1266 as well as Article 126725 because both
contemplates obligations to do. The obligation to pay rentals constitutes obligations to give in
which the doctrine of rebus sic stantibus cannot be validly invoked.
Besides, PNCC failed to state specifically the circumstances brought about by the abrupt
change in the political climate of the country. Prior to entering into a contract, there were
already risks of unfavorable developments such as the assassination of Ninoy, political
upheavals, turmoils, mass demonstrations, inflation, peace and order deterioration, etc.
Notwithstanding, PNCC entered into the contract of lease with open eyes of the deteriorating
conditions of the country. Mere pecuniary inability to fulfill an engagement does not
discharge a contractual obligation, nor does it constitute a defense to an action for specific
performance.
Naga Telephone vs. Court of Appeals
Naga Telephone Co., Inc. (NATELCO), telephone company in Naga City, entered into a
contract with Camarines Sur II Electric Cooperative, Inc. (CASURECO II), an electric power
servicing company, for the use by NATELCO in the operation of its telephone service the
electric light posts of CASURECO in Naga City.
In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone
connections for the use by private respondent.
After over ten (10) years, private respondent (CASURECO) filed for reformation of the
contract with damages against petitioners on the ground that
o It is too one-sided in favor of petitioners;
o It is not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the use of
the posts is P10.00 per post, per month;

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After eleven (11) years of petitioners' use of the posts, the telephone cables strung by
them thereon have become much heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen bore holes through the posts at
which points those posts were broken during typhoons;
o That a post now costs as much as P2,630.00;
o That justice and equity demand that the contract be reformed to abolish the inequities
thereon.
o That since 1981, petitioners have used 319 posts in the towns outside Naga City,
without any contract with it;
Is Article 1267 applicable?
Petitioners assert that Article 1267 of the New Civil Code is not applicable because the
contract does not involve the rendition of service or a personal prestation and it is not for
future service with future unusual change.
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the
rationale behind this provision, the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga City, which is the service
contemplated in said article.
Furthermore, the article reveals that it is not a requirement that the contract be for future
service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267
states in our law the doctrine of unforeseen events. This is said to be based on the discredited
theory of Rebus Sic Stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist
the contract also ceases to exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of
the party prejudiced.
Despite the increase in the volume of appellant's subscribers and the corresponding increase
in the telephone cables and wires strung by it to plaintiff's electric posts in Naga City for the
more than 10 years that the agreement has been in effect, there has been no corresponding
increase in the ten (10) telephone units connected by appellant free of charge to plaintiff's
offices and other places chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of plaintiffs electric posts.
Also, appellant even started using plaintiff's electric posts outside Naga City although not
provided in the agreement. Hence, while very few of plaintiff's electric posts were being used
by appellant in 1977 and they were all in the City of Naga, the number of plaintiff's electric
posts that appellant was using in 1989 had significantly increased outside Naga City.
Add to this the destruction of some of plaintiff's poles during typhoons, and the escalation of
the costs of electric poles from 1977 to 1989, and the conclusion is, without a doubt, that the
agreement has already become too one-sided in favor of appellant to the great disadvantage
of plaintiff.
The parties were hereby released from their correlative obligations under the contract.
However, the possible consequences of merely releasing the parties therefrom should be
taken into account: petitioners will remove the telephone wires/cables in the posts of private
respondent, resulting in disruption of their service to the public; while private respondent, in
consonance with the contract will return all the telephone units to petitioners, causing
prejudice to its business.
Such cannot be allowed. Rather, it is required that: 1) petitioners pay CASURECO for the use
of its posts in Naga City and in the towns of Camarines Sur and in other places where
petitioners use private respondent's posts, the sum of ten P10/post, per month, beginning
January, 1989; and 2) CASURECO to pay NATELCO the monthly dues of all its telephones
at the same rate being paid by the public beginning January, 1989.
o

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Loss of the Thing Due: (Articles 1262 1269)


SECTION 2
Article 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)

Loss of the Thing Due, Meaning:

Article 1189 states that a 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.
Not confined to the strict legal meaning of loss, but extends to causes which render impossible the
performance of the prestation.
This is not limited to obligations to give but also extends to personal obligations.
To extinguish the obligation, the impossibility of performance must arise subsequent to the execution of
the contract and that the debtor has not incurred any delay in the delivery thereof when the loss happened.

Effects:

If the debtor is at fault for the loss or destruction of the thing, obligation is converted to an indemnity for
damages. (Art. 1170)
If the debtor is not at fault but he is in delay, he will be liable for damages. (Art. 1170)
If there is a stipulation, or when the law mandates that the obligor is liable for the loss even if it is due to
fortuitous events, or when the nature of the obligation requires assumption of risk, the obligor is liable.
(Art. 1174)

Situations when the Law makes the Obligor liable even if due to Fortuitous Events:
1. Art. 1165 When the debtor is in default, or when the debtor has promised to deliver the same thing to
two or more persons with different interests
2. Art. 1174 When the nature of the obligation requires assumption of risk
3. Art. 1263 When the obligation consists in the delivery of a generic thing
4. Art. 1268 Obligation to deliver a determinate object arising from a criminal act
5. Art. 1942 Liability of Bailee
6. Art. 1979 Liability of Depositary
7. Art. 2147 Liability of Officious Manager
8. Art. 2159 Acceptance in bad faith of undue payment

Article 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)

Consequences:

When the obligation is to deliver a generic thing, the loss or destruction of anything of same kind does not
extinguish the obligation. i.e., obligation to pay money, to deliver sugar without regard to origin, etc.
Obligation subsists under the principle genus never perishes.

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Exceptions:

If the generic thing has been delimited, that is, where there has been a limitation of the generic object to a
particular group of things, the obligation is extinguished by the loss of that particular group from which
the prestation has to be taken. i.e., obligation to deliver mangoes from a specific mango tree, and the
harvest was damaged by a typhoon. Obligation is then extinguished.

Article 1264.

The courts shall determine whether, under the circumstances,


the partial loss of the object of the obligation is so important
as to extinguish the obligation. (n)

Partial Loss May Extinguish the Obligation:

Even if the loss is partial, if it is so important to the obligee that without it, he would not have entered into
the contract, the partial loss may be considered a sufficient reason to extinguish the obligation.
Illustration: A man buys a house and lot due to its swimming pool and garden. The said pool and garden
were expropriated by the government before the man was able to pay for the property. Obligation to pay
is now extinguished.
Partial loss may be considered total by the court after considering the intention of the parties.

Article 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 of Negligence on the part of the Debtor:

The presumption is rebuttable. The debtor may prove that he was not at fault.
However if he has incurred delay, or that he had promised to deliver the thing to two or more persons
with different interests, he will be liable even if the loss is due to fortuitous events.
The last sentence refers to the applicability of Art. 1174, the rule on fortuitous events where the
presumption of negligence shall not apply.

Article 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)

Applicability:

Applies only to obligations to do.


Impossibility of performance must exist only after the execution of the contract. Otherwise, the contact is
void if it existed from its inception.
Where a person by his contract charges himself with an obligation possible to be performed, he must
perform it, unless performance is rendered impossible by the act of God, by the law, or by the other party.

Kinds of Impossibility:
1. Legal Impossibility Arises when the act to be performed is subsequently prohibited by law. i.e.,
construction of a 30 story building but then a law is passed limiting maximum stories to 3 in that area.
2. Physical Impossibility Arises when the act could not be physically performed due to reasons subsequent
to the execution of the contract. i.e., painter agreeing to paint but gets his hand cut-off in an accident.

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Effect of Impossibility and Rationale:

If the impossibility had emerged without fault of the debtor, whether legal or physical, the latter is
released from his obligation.
The reason is because if a man binds himself by contact unconditionally to do that which turns out to be
impossible, he will be held to his bargain and have to pay damages for his failure to perform. If the
impossibility arises from a cause that neither party can reasonably have contemplated when the contract
was made, a man will not be so bound, the matter being unforeseen, he is not taken to have promised
unconditionally.

Article 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)

Applicability:

Applies only to personal obligations but not to obligations to give.


This article does not refer to impossibility but to difficulty of service or performance manifestly beyond
the intention of the parties.
If considered favorably, the obligor is released from his prestation totally or partially depending upon the
degree of difficulty or performance.
Not applicable if the debtor had merely suffered minor or insignificant losses which are normal risks in
contractual relationships.
The reason behind this is that 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.

Limitation:

The court cannot modify or revise the terms and conditions stipulated in the contract. i.e., cannot modify
terms and conditions in a subdivision contract, cannot fix a sharing ratio different from the one
contractually stipulated, etc.

Principle of Unforeseen Difficulty Of Service:

The article may be referred to as the principle of unforeseen difficulty of service, is said to have been
based on the principle of rebus sic stantibus used in international law which provides that a treaty
remains valid only if the same conditions existing and prevailing at the time of its execution shall
continue to exist at the time of performance. Otherwise, the treaty shall not be enforceable.
However, this principle cannot be absolutely applied in contractual relations, as to do so would undermine
the stability of contracts. It is only in extremely unusual change of circumstances that equity shall come to
the succor of the debtor.
Unforeseen events or circumstances must be greatly beyond what could have been reasonably anticipated
by diligent persons at the time of the execution of the contract.
The debtor cannot be required to overcome the difficulties if to do so would mean economic ruin on his
part and unjust enrichment on the part of the creditor.

Illustration:

Kevin contracted Eden for the latter to construct a deep well. The contract price was pegged at only 50
pesos considering that on the neighboring areas, Eden was able to strike the water basin at the depth of
only 5 feet. In Kevins area, Eden was confronted by an unusual problem for she could only extract water
at a depth of 10 feet which is beyond the contemplation of the parties. Thus, Eden is released from her
prestation. Otherwise, she will be prejudiced as the contract price of 50 pesos will not be enough to cover
the expenses for the deep well.

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Article 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)

Applicability:

Applies only to an obligation to deliver a certain thing which is determinate, and which obligation arose
out of the commission of a criminal offense committed by the debtor. If the thing is lost for whatever
reason, the debtor shall pay for the value of the thing.
Exception: If the obligor had offered or tendered the delivery of the thing to the obligee, but the latter had
unjustifiably refused to accept it, and the thing got lost, the former is not liable anymore because the latter
is in mora accipiendi.

Remedies of Debtor if Creditor Refuses without just cause to Receive the Thing:

If debtor offers the thing but the creditor refuses to receive, debtor has two options:
a. Consign the thing in court and seek the cancellation of the obligation
b. Keep the thing and preserve it using due diligence, but obligation will subsist. But if the thing is
then lost through a fortuitous event, the obligor is no longer liable.

Article 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)

Consequences of Extinguishment By Loss:

There shall be a sort of subrogation whereby the creditor shall have all the rights of action which the
debtor may have against third persons by reason of the loss.
The transfer of rights is by operation of law starting from the moment of extinguishment of the
obligation. i.e., thing due is insured by the debtor, but then it got lost due to reasons allowable by under
the policy. The creditor can collect the insurance indemnity from the insurer.
Another example, when the thing due is expropriated, the creditor can collect the compensation paid by
the authorities for the taking of the property for public use.

Yu Tek Co. vs. Gonzales


A contract was entered into by Basilio Gonzales and Yu Tek & Co. In the contract, Gonzales
acknowledged that he had received Php3,000 from Yu Tek , and in consideration of that money, he
obligated himself to deliver to Yu Tek 600 piculs of sugar of the within a period of three months.
It also included that in case Gonzales would not deliver the sugar, the contract will be rescinded, and
Gonzales would be obligated to return to Yu Tek the money he received and also an additional sum of
Php1,200 by way of indemnity for loss and damages.
No sugar was delivered by Gonzales, because according to him, his sugar plantation was unable to yield
enough sugar to fulfill his obligation. The dry weather destroyed his growing sugar cane.
Gonzales claimed that his obligation was extinguished because of the loss of the thing (the sugar) due,
especially because its loss was not his fault. Yu Tek brought an action to the court, asking that Gonzales
return the money plus the indemnity.
Was the failure of Gonzales produce the sugar constitute a loss of the thing due thereby
extinguishing his obligation?
No, there was never a loss in this case; obligation subsists. After a careful examination of the contract,
Court found that there was no clause written even remotely suggesting a condition that the sugar must
exclusively come from Gonzales plantation. It meant Gonzales could have bought 600 piculs of sugar or

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

could have gotten it someplace else to fulfill his obligation. His plantation might have been the best place
to source out the sugar, but the contract had not implicated such limit.
Contract was rescinded, and Gonzales was ordered to pay back Php3,000 plus the liquidated damages.

Labayen vs. Talisay-Silay Milling


Labayen, the owner of Dos Hermanos (hacienda) entered into a contract with Talisay-Silay Miling Co.
Parties agreed that a permanent railroad shall be built by the defendant whenever the contour of the land,
the curves, and elevations permit the same.
A stipulation in the contract states that In case of . . . inability to secure, under reasonable conditions
such rights-of-way as "La Central" may require, . . . "La Central" shall notify the Committee of Producers
and without incurring any liability for the nonfulfillment of the terms of this contract.
The defendant has not continued its railroad through to the Hacienda Dos Hermanos. A civil engineer
testified that it was possible to construct a railroad to the Hacienda Dos Hermanos but that to do so would
be very dangerous.
Can the defendant excuse itself from constructing the railroad on the grounds that it would be very
dangerous to do so?
Article 1184 (NCC Art. 1266) of the Old Civil Code provides: "The debtor shall also be relieved from
obligations which consist in the performance of an act if fulfillment of the undertaking becomes legally or
physically impossible."
The contract was a general contract of the form used by the central and various proprietors of sugarcane
fields. It was intended to be limited in particular application to haciendas where not impeded by physical
impossibility.
The contract was qualified by an implied condition which, if given practical effect, results in absolving
the central from its promise. Not to sanction an exception to the general rule would run counter to public
policy and the law by forcing the performance of a contract undesirable and harmful.
There is another aspect to the case which has to do with the mutual obligations of the contract and which
concerned the securing of the right- of-way for the proposed railroad. To get from the Hacienda
Esmeralda No. 2 to the Hacienda Dos Hermanos, the railroad would have to pass through the haciendas of
Esteban de la Rama. But he would not grant permission to use his land for this purpose in 1920, and only
consented to do so in 1924. Here then was a clear case of such a condition of affairs as was contemplated
by the contract.
Trial court did not err in ruling in favor of the defendant. Decision affirmed, costs against appellant.

Condonation or Remission: (Articles 1270 1274 and 748 752)


SECTION 3
Article 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)

Concept of Condonation or Remission:

Remission or Condonation is an act of liberality by which the creditor renounces the enforcement of the
obligation contracted without receiving any price or equivalent. It is the gratuitous abandonment by the
creditor of his right. To condone is to forgive or remit a debt.

Essential Characteristic:

The essential and inherent characteristic of condonation/remission is that it is gratuitous.


If the creditor receives something, it is not longer a condonation or remission but rather a novation or a
Dation in payment.

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Requisites of Condonation or Remission:


1.
2.
3.
4.
5.

Existence of a demandable debt


Renunciation of the debt is purely gratuitous
Acceptance of the condonation or remission by the debtor
Formalities require by law on donation must be complied with
What has been condoned or remitted must not be inofficious

Express Condonation or Remission:

When the condonation is express, it


Article 748. The donation of a movable may be made orally or in writing. An oral
donation requires the simultaneous delivery of the thing or of the document
is not enough that it be in writing.
representing the right donated. If the value of the personal property donated exceeds
It must follow the formalities
five thousand pesos, the donation and the acceptance shall be made in writing.
Otherwise, the donation shall be void. (632a)
required of ordinary donations
provided in Articles 748 and 749.
Article 749. In order that the donation of an immovable may be valid, it must be made in a
public document, specifying therein the property donated and the value of the charges which
When the condonation is oral and
the donee must satisfy. The acceptance may be made in the same deed of donation or in a
separate public document, but it shall not take effect unless it is done during the lifetime of the
involves movable things, the same
donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof
need not follow the formalities.
in an authentic form, and this step shall be noted in both instruments. (633)
There is no need for delivery
anymore because the thing is already in the possession of the debtor.
When the express condonation is defective for failure to follow form of ordniary contracts, it does not
become an implied condonation with valid effect.

Implied and Legal Condonations:

Tacit condonations may be deduced from the acts of the parties confirming the existence and acceptance
of the condonation not reduced to writing. i.e., creditor burning promissory note in front of the debtor.
If the debtor does not accept the remission but does not pay, and the creditor does not enforce payment
within the prescriptive period, the abandonment will result in the prescription of the credit.
Remissions or waivers are not presumed. Their existence must be established by convincing evidence.

Acceptance By Debtor Required:

Condonation is a donation of an existing credit in favor of the debtor.


As the liberality of a person cannot just be imposed upon another, it is required that the debtor gives his
consent thereto by making an acceptance.
Condonation or remission is not a unilateral act. It is a bilateral act.
No acceptance, no remission.
Article 745. The donee must accept the donation personally, or through
an authorized person with a special power for the purpose, or with a
When accepted, subject to the rules on donation.
general and sufficient power; otherwise, the donation shall be void. (630)
Article 745 and 746 must be complied with to
make the acceptance effective and valid.
Article 746. Acceptance must be made during the lifetime of the donor
and of the donee. (n)

Limitation on Condonation:

It is subject to the rule that it shall


not be inofficious.
The creditor must reserve
sufficient means for his own
support and of all relatives who
are entitled to be supported by
him at the time of the acceptance
of the condonation or remission.
(Articles 750 and 752)


Article 750. The donation may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the
support of himself, and of all relatives who, at the time of the acceptance of the donation,
are by law entitled to be supported by the donor. Without such reservation, the donation
shall be reduced in petition of any person affected. (634a)
Article 751. Donations cannot comprehend future property. By future property is understood
anything which the donor cannot dispose of at the time of the donation. (635)
Article 752. The provisions of article 750 notwithstanding, no person may give or receive,
by way of donation, more than he may give or receive by will. The donation shall be
inofficious in all that it may exceed this limitation. (636)

Subject to Revocation:

If the condonation or remission is excessive or inofficious, it may be totally revoked or reduced


depending on whether or not it is totally or only partially inofficious.
The grounds for revocation are found in Articles 760, 761, and 765 of the Code.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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.
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)

Applicability and Coverage, Private Document Evidencing a Credit:

Applies only to private documents evidencing credits like a private promissory note.
Cannot apply to public instruments evidencing credits because such instruments ordinarily have other
copies in the hands of the Notary Public who had notarized them.

Implied Renunciation of Action:

It is implied that the action for the enforcement of the debt had been renounced or remitted by the creditor
when he voluntarily delivered to the debtor the private document of credit.
The law does not state specifically the remission of the credit. The credit has not yet prescribed. It merely
states the implication of renunciation of the action which the creditor has against the debtor.
This is because if the debt itself had already been renounced, subsequent payment will be void. However,
if only the right of action is renounced, and the debtor pays even after the prescription of the action, the
payment could not be recovered anymore because it constitutes a performance of a natural obligation.

Defense of Debtor and His Heirs when Waiver of Action is Challenged:

If the remission is claimed to be inofficious meaning, it is excessive as it cannot be totally covered by


the disposable free portion of the estate of the deceased creditor, or that is revocation is sought under
Articles 750, 752, 760, and 761, the law provides a defense for the debtor or his heirs.
The defense is that the delivery of the document was made in virtue of payment of the debt.
According to Pineda, there is an absurdity in the article if this defense is pursued, particularly because
there is a presumption of renunciation of the action in the first part of the article. This presumption is not
being maintained if the defense proffered by the debtor is payment.
The solution to this absurdity is that if the debt had actually been paid, the debtor must give up the
presumption of renunciation in his favor. He might as well present the proofs of payment rather than lean
on a presumption of remission which is rebuttable.
If the debtor has no receipts to prove payment, there will be two presumption available: either
presumption of payment, or the presumption of remission. If they are not rebutted, the action of the
creditor shall fall.
In the face of these two favorable presumptions, presumption of payment should be stressed because there
is greater reciprocity of interests in that presumption.

Article 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)

Applicability and Presumption:

Applies only when the subject document evidencing the credit is a private one.
If the document evidencing the credit is found in the possession of the debtor, the presumption that the
said document was delivered voluntarily to the said debtor. The presumption is rebuttable.
The presumption of voluntary delivery of the document implies the remission of the debt evidenced by
the credit.

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Article 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)

Effect of the Remission of the Principal on the Accessory:

If the principal debt has been remitted, the accessory obligation is extinguished.
The reasons is that the existence of the accessory obligation is dependent upon the principal.
The principle accessory follows the principal applies.
Example: Monica borrowed money from May, and Mikey guaranteed the payment of the loan. May
remitted the entire obligation of Monica. The guarantee of Mikey is then also extinguished.
On the other hand, if the accessory alone is extinguished by remission, the principal stays.
Thus, if May remitted the guarantee of Mikey, the loan of Monica remains.

Article 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)

Coverage; Pledge:

Article refers only to pledge. Pledge is a real contract. It is not valid unless the thing pledged is delivered
and placed in the possession of the creditor, or of a third person by common agreement. (Article 2093)

Presumption When Thing Pledged Found in Possession of Debtor or 3rd Person Owner:

If the thing pledged, after its delivery to the creditor, is found in the hands of the debtor, it is presumed
that the pledge had been remitted. The presumption does not include the principal obligation (loan).
The presumption also applies if thing pledged is found in the possession of a third person, not just any
third person, but a third person who is the owner of the thing. This happens when the loan is secured by a
property owned by a third person.
Presumption is rebuttable as the creditor may prove that the thing was just stolen from him, that he
delivered it for repair purposes, etc.

Soria vs. COA


The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program wherein loans
were granted to various cooperatives. The Ipil Branch granted six loans to the four cooperative borrowers
amounting to P3,115,000.00.
Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the cattle.
REMAD, however, failed to supply the cattle on the dates agreed upon (because of foot-and-mouth
disease that broke out among its herds).
In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 in view of the non-delivery
of the cattle. Also made as the basis of the disallowance was the fact that advanced payment was made in
violation of bank policies and COA rules and regulations.
Petitioners Reyna and Soria were among those who were found liable by the Auditor for the amount of
P3,115,000.00 which was advanced to REMAD.
Employees, including Soria and Reyna, herein petitioners are now asked to refund the disallowed
transaction but they contend that the same had been written off by the main branch, approved by the CB,
thus amounting to a condonation of the same and the obligation is thereby extinguished.
Is writing-off a loan equal to a condonation or release of a debt by the creditors?
As an accounting strategy, the use of write-off is a task that can help a company maintain a more
accurate inventory of the worth of its current assets. In general banking practice, the write-off method is
used when an account is determined to be uncollectible and an uncollectible expense is recorded in the

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books of account. If in the future, the debt appears to be collectible, as when the debtor becomes solvent,
then the books will be adjusted to reflect the amount to be collected as an asset. In turn, income will be
credited by the same amount of increase in the accounts receivable.
Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. It is not a
compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the
obligee and acceptance by the obligor are required. In making the write-off, only the creditor takes action
by removing the uncollectible account from its books even without the approval or participation of the
debtor.
Furthermore, write-off cannot be likened to a novation, since the obligations of both parties have not been
modified. When a write-off occurs, the actual worth of the asset is reflected in the books of accounts of
the creditor, but the legal relationship between the creditor and the debtor still remains the same the
debtor continues to be liable to the creditor for the full extent of the unpaid debt.
Based on the foregoing, as creditor, Land Bank may write-off in its books of account the advance
payment released to REMAD in the interest of accounting accuracy given that the loans were already
uncollectible. Such write-off, however, as previously discussed, does not equate to a release from liability
of petitioners. Petition is unmeritorious, hence it is denied.

Confusion: (Articles 1275 1277)


SECTION 4 Confusion or Merger of Rights
Article 1275.

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

Concept of Confusion or Merger of Rights:

Confusion is also known as merger of rights, as it is a merger or convergence of the characters of the
creditor and debtor in the same person involving the same obligation.
Since it is non-sensical for the person to pursue a claim against himself, the merger results in the
extinguishment of the obligation.
Example: Kara issued a check payable to cash in favor of Eunice in order to pay Eunice the amount Kara
loaned from the her. Instead of encashing the check, Eunice endorsed it to her creditor Therese. Later,
Therese indorsed it to Kara in payment of her indebtedness to Kara. Kara issued the check and she
received the same check. There is a merger which is definite and complete.

Requisites for Confusion or Merger of Rights:


1. There is a merger in the same person the characters of a creditor and a debtor
2. The merger must be in the characters of a principal creditor and a principal debtor
3. The merger is definite and complete. (Partial merger is allowed. It is definite and complete up to the
extent of the concurrent amount or value.)

Effect of Revocation of Merger or Confusion:

The event the act which created the confusion is revoked for some causes (like rescission of contracts),
the confusion or merger is also revoked.
The obligation is revived in the same condition as it was before the confusion. During the interregnum,
the running period of prescription of the obligation is suspended since the creditor could not have made a
demand for the fulfillment of the obligation.

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Article 1276.

Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation.
(1193)

Applicability:

The article refers to two kinds of mergers: Merger in the person of the principal debtor or creditor, and
merger in the person of the guarantor.
In the first merger, the guaranty is also extinguished because it is just an accessory obligation to the
principal.
In the second merger, the principal obligation will not be extinguished because the efficacy of the
principal is not dependent upon the accessory obligation.

Illustration:

Alyssa owes Kit 100 pesos. Kyrah was taken in as a guarantor. Kit assigned this particular credit to Ira.
Later, Ira assigned this credit to Alyssa. There is now a merger in the characters of the principal debtor
and creditor. Thusly, the principal obligation of Alyssa is extinguished which carries the extinguishment
too of Kyrahs obligation as guarantor.
Continuing from the same scenario, if Ira assigned her credit to Kyrah, there is a merger of the credit in
the person of the guarantor. Kyrah is thus released from the guaranty because of the merger of the credit
in her person. However, the principal obligation of Alyssa remains. So, Kyrah can collect from Alyssa the
100 pesos.

Article 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)

Joint Obligation not Extinguished by Confusion, Exception:

Generally, the emergence of confusion in one principal debtor or creditor will not extinguish the joint
obligation because the confusion is not definite and complete with regard to the entire obligation. A part
of the obligation still remains outstanding.
However, the law allows the merger as a mode of extinguishing the obligation with respect only to the
share corresponding to the debtor or creditor concerned, in whom the two characters of debtor and
creditor converge.
If the confusion takes place in the person of the debtor, the effect is only with regard to his share. In fine
there is only partial extinguishment of the obligation. Thus, the creditor can still go after the other debtors
whose part of the debt had not been affected by the extinguishment.

Illustration:

Camille and Chloe jointly obtained a loan of 10 pesos from Georgia. Georgia later assigned this whole
credit to Camille. This extinguishes Camilles share in the obligation because of the merger of the
characters in her person. However, Chloe remains liable to the extent of her share which is 5 pesos, not to
Georgia but to Camille.

Solidary Obligation:

The rule in solidary obligation is different. If a solidary debtor had paid the entire obligation, the
obligation is totally extinguished without prejudice to the rights of the solidary debtor who paid, to
proceed against his solidary co-debtors for the latters individual contribution or liability.

Where the gifts are, that is where the giver is

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Sochayseng vs. Trujillo
Paulina Sochayseng, mother of the deceased, Marcela Sochayseng, filed a complaint against Marcelas
widower Andres Trujillo in that she asks that she be reimbursed of the total expenses she incurred when
Marcella was hospitalized as well as the funeral expenses therein.
Background: Marcela Sochayseng left her husbands house without the latters knowledge and consent.
She went to her mother and spent her remaining days with her. Her mother was the one who paid all
hospitalization, care and subsistence, as well as burial expenses.
Is the widower of marcella liable to pay marcellas mother for the hospitalization expenses during
marcellas lifetime?
The matter involved is a claim for expenditures to the benefit of a married woman. During her lifetime a
third person furnished her subsistence which amounted to P410 in value, and at her death defrayed her
funeral and burial expenses, amounting to P320, both sums aggregating P730. The first of these debts is
not a personal and exclusive one of the said married woman; it pertains to the marriage or the conjugal
partnership. The widower must pay it out of the property of the conjugal partnership. As the deceased left
property of her own, it is improper to deduct the P320 demanded for funeral expenses.
But of course we must not lose sight of the provision of article 1192 of the Civil Code (1275 NCC):
"Whenever the characters of creditor and debtor are merged in the same person, the obligation is
extinguished."
Since Paulina is the sole heir of Marcela, the latters exclusive property and share in the conjugal
property will go to the her mother Paulina. Thus, as regards to the amount of P320, it is extinguished
since it is to be paid out of the total amount of property that now belongs to Paulina (i.e., Paulina owes
herself the amount of P320).
Yek Ton Lin vs. Court of Appeals
Defendant Pelagio Yusingco was the owner of the steamship Yusingco. He executed a power of attorney
in favor of Yu to administer, lease, mortgage and sell the vessel.
Yu mortgaged the steamship to plaintiff Yek Tong Lin Fire & Marine Insurance Co. Ltd.
After some time, the steamship needed some repairs which were made by the Earnshaw Docks &
Honolulu Iron Works.
When the Yusingcos could not pay the cost of the repair, defendant-appellant Vicente Madrigal had to
make payment by reason of the bond filed by him as the guaranty of said repairs.
When Madrigal discovered that he was not to be reimbursed for the repairs made on the steamship, he
brought an action against the Yusingcos to compel them to reimburse him. It was provided in the
judgment that upon failure of the Yusingcos to pay the above-stated amounts to Madrigal, a writ of
execution would be issued in order to have the steamship sold at a public auction for the purpose of
satisfying said amounts with the proceeds. The Yusingcos again failed to pay the amount of the judgment.
Said steamship was nevertheless sold at the public auction and was purchased by the Yek Tong Fire and
Marine Insurance, being the highest bidder worth 12,000 pesos. The sheriff turned over 10,000 to
Madrigal in payment of the judgment credit.
Is confusion or merger of rights applicable in the case at bar?
Article 1156 and 1192 of the Civil Code provide that obligations are extinguished by the merger of the
rights of the creditor and debtor.
After the steamship Yusingco had been sold for the execution of the judgment rendered in favor of
Vicente Madrigal, the only right left to the Yek Tong Fire and Marine Insurance was to collect its
mortgage credit from the purchaser thereof at public auction, inasmuch as the rule is that a mortgage
directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to
the fulfillment of the obligation for the security of which it was created; but it so happens that it cannot
take such steps now because it was the purchaser of the steamship Yusingco at public auction, and it was
so with full knowledge that it had a mortgage credit on said vessel.
Thus, there is no need for Madrigal to turn over to Yek Tong Fire and Marine Insurance the amount of
money paid by him by the provincial sheriff fom the proceeds of the sale of steamship Yusingco. The
obligation was extinguished by virtue of Confusion or Merger of Rights.

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Chittick vs. Court of Appeals
William and Muriel Chittick, both American citizens, married in USA but lived in Manila. They had 4
children. However, their marital relation became strained because of infidelity, so they entered into an
agreement of separation:
o William will pay Muriel P550/month for the support of Muriel and children. Said payment shall
continue until the youngest child turns 18.
o The community or conjugal assets of the parties will be divided equally once Muriel secures a
final decree of divorce.
Muriel obtained a divorce. William complied faithfully with the payment of P550/mo. until war broke
out. William, during the period of interment, paid Muriel but it was not sufficient. Muriel commenced an
action to recover support and her share in the conjugal partnership. While the case was pending with CA,
Muriel died.
5 days after CA promulgated its decision, her counsel filed a motion for substitution of party by her heirs:
her surviving spouse (Laurence de Prida) and the legitimate children of parties. CA granted the
substitution. William appealed to SC and while it was pending, he died.
WON the death of William and Muriel, in which their legitimate children became their heirs,
extinguished the obligation?
When a party dies, the heirs of the deceased may be allowed to be substituted for the deceased without
requiring the appointment of an executor or administrator and the court may appoint a guardian for the
minor heirs. In the case at bar, the counsel of Muriel failed to notify the court instantly of Muriels death,
therefore the substitution was INVALID.
Assuming that the substitution was valid, the obligation is still extinguished. This is due to the fact that
William died during the pendency of the case, which meant that the heirs were bound to substitute for the
defendant also. The substitution effectively merged the persons of the plaintiff and the defendant and thus
extinguished the obligation being sued upon.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Compensation: (Articles 1278 1290, Rule 6 of the Rules of Civil Procedure)


1. Concept and Distinctions with Other Means of Extinguishing an Obligation:
Article 1278.

two persons, in their own right,


Compensation shall take place when

are creditors and debtors of each other.
(1195)

Concept:

It is the off-setting of the respective obligations of TWO persons who stand as principal creditors and
debtors of each other, with the effect of extinguishing their obligations to their current amount.
Example: Samantha borrowed 100 pesos from Bettina, and Bettina borrowed 50 pesos from Samantha.
Samantha now only owes Bettina 50 pesos, by reason of compensation.

Kinds:

As to origin:
1. Conventional or Voluntary By agreement of the parties
2. Legal By operation of law from the time all requisites of compensation concur
3. Judicial By judgment of the court when there is a counterclaim duly pleaded, and the compensation is
decreed.
4. Facultative Takes place when it is claimed by one of the parties who has the right to object to it, but
waives his objection thereto such as when the object of litigation of such party is with a period for his
benefit alone, and he renounces the period to make the obligation become due. i.e., Gem borrowed 100
pesos from Natasha payable within 3 years. Natasha borrowed money from Gem for the same amount. If
Gem will renounce the term, there will be immediate compensation.
As to extent:
1. Total Takes place when both obligations are totally extinguished because they happen to be the same
amount, or by agreement of the parties.
2. Partial Takes place when after the operation of compensation, a balance still remains because the
obligations are not of the same amount.

Distinguished from Payment:

In compensation, there can be partial extinguishment; In payment, the performance must be complete
unless waived by the creditor.
Payment involves delivery or action, while (legal) compensation takes place by operation of law without
simultaneous delivery.
Compensation is simplified or abbreviate payment, because the two debts are extinguished without
requiring the transfer of money or property.

Distinguished from Merger or Confusion:

In compensation, there are at least two persons who stand as principal creditors and debtors of each other.
In merger, there is only one person involved who becomes the debtor and creditor.
In compensation, there are two obligations; in merger, there is only one.

Distinguished from Counterclaim:

Compensation takes place by mere operation of law, a counterclaim must be pleaded as part of the answer
to a complaint. Counterclaim is judicial compensation.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Insular Investment vs. Capital One
Insular Investment and Trust Corporation (IITC), Capital One Equities Corporation (COEC) and Planters
Development Bank (PDB) were regularly engaged in trading, sale and purchase of Philippine treasury
bills.
Insular purchased from Capital treasury bills with an aggregate face value of 260 million pesos. Capital
was able to deliver 121 million worth to Insular. Insular bought as well from Capital (called COEC Tbills). But allegedly, to satisfy Capitals purchase from it, Insular also bought treasury bills from the bank,
hence Insular demanded a delivery from the bank. Capital proposed a legal set-off, but Insular argues that
was it was only a mediator or facilitator in this chaotic purchase.
Can there be valid legal set-off?
Yes. Because both Insular and Capital were principal creditors of the other over debts which consist of
consumable things or a sum of money, Capital may validly set-off its claims for undelivered treasury bills
against that of Insulars claims.
Second requisite only requires that the thing be of the same kind and quality, COEC T-Bills and IITC TBills are both government securities and the tripartite agreement recognized the monetary value and
treated them as sums of money.
Both debts are due and remained unsatisfied, the existence and amount are determined, and there was no
retention or controversy commenced by third persons.
Therefore, in the case at bar, there was indeed a valid legal set-off/compensation

2. Requisites:
Article 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 Legal Compensation:

All the requisites must be present before compensation can be effectual.


Their right as such creditors, or obligations such as debtors, need not spring from one and the same
contract or transaction.

Elaboration:
1. Principal creditor and debtor of each other.
Relationship must be a principal one. Obligation to a guarantor is not a principal debt.
2. Both are sums of money or consumable things of the same kind and same quality if stated.

When the debts consist of things, it is necessary that the things are consumable which must be
understood as fungible and therefore susceptible of substitution.
More than that they must be of the same kind, and if quality is stated, same quality.
Compensation is not proper when one of the debts consists in civil liability arising from a penal
offense, as the satisfaction of such obligation is imperative.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
3. The two debts are due.
Both are mature debts that is due for payment.
The law does not require that the parties obligations be incurred at the same time, what it
requires only is that the obligations be due and demandable.
When an obligation is payable on demand, not yet due until there is a demand.
In voluntary compensation, parties may agree upon compensation of debts which are not yet due.
4. Liquidated and demandable.

It is liquidate when its amount is clearly fixed, or if it is not specifically fixed, a simple
mathematical computation will determine its value.
If the amount is not fixed because it is still the subject of dispute, it is unliquidated.
Not enough that they are liquidated, they must also be demandable. A debt is demandable when it
is not yet barred by prescription and it is not illegal or invalid.
5. No retention or controversy commenced by 3rd parties

A debt or thing cannot be the subject of compensation if it is also the subject of a garnishment, or
if the thing is placed under custodia legis.

Purpose and Reason of Compensation:

Purpose is to prevent unnecessary suits and payments.

Article 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)

Exception to the Rule:

General Rule: For compensation, the parties must be the principal debtors and creditors of each other.
Exception: Guarantor is allowed to set up compensation for:
a. What the creditor owes the principal debtor whom the guarantor is guaranteeing and/or
b. For what the creditor owes the guarantor himself.
The reason for this is that the creditor shall not collect from the guarantor on the basis of the guaranty, as
long as the principal debtor is capable of paying his obligation.

Article 1281.


Compensation may be total or partial.
When the two debts are of the same
amount, there is a total compensation. (n)

Article 1282.


The parties may agree upon the compensation
of debts which are not yet due. (n)

Parties must have the capacity to dispose of their credits which they compensate, otherwise, there will be
no compensation.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Garcia vs. Lim Chiu Sing
Sing executed a promissory note in favor of Mercantile Bank of China payable in monthly installments
which shall become immediately due and demandable in case of default. He defaulted when the balance
was P9,105.17, thus such balance became due and demandable. Sing owns P10,000 shares of stock in
MBC, and he is claiming for compensation of his shares with his debt.
Is it proper to compensate the indebtedness if defendant is a stockholder of plaintiff?
A share of stock or certificate is not an indebtedness or an evidence of indebtedness of the owner to
stockholder. Stockholders are not creditors of a corporation.
The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of
his shares therein, there being no relation of creditor and debtor with respect to such shares.
Domingo vs. Carlitos
In the estate proceedings of the late Walter Scott Price, the government claims inheritance taxes in the
amount of 40,058.55Php.
On an earlier petition, SC ruled for the settlement of inheritance taxes, etc. However, CFI of Leyte denied
the enforcement of claims presented subsequently as the Government is indebted to the estate under
administration in the amount of 262,200Php.
Can there be valid compensation?
The court having jurisdiction of the estate had found that the claim of the estate against the Government
had been appropriated for the purpose of RA 2700.
Both the claim of the government for inheritance taxes and the claim of the intestate for services rendered
have already became due and demandable as well as fully liquidated
Compensation in the case at bar takes place by operation of law.
Soriano vs. Compania General
Compania General de Tobaco de Filipinas granted Soriano a crop loan account to finance the planting,
cultivation, harvesting and milling of sugar cane in Sorianos various sugar cane plantations
A subsequent loan agreement was entered into and to secure both the prior and the latter loans, Soriano
executed a deed of mortgage in favor of defendant on the sugar cane plantations of Soriano.
Soriano and herein defendant, Compania General included in heir agreement that Soriano is to be
obligated to deliver sugar during crop year of 1941-1942 and defendant, Compania General is to sell it at
the most advantageous prices of which, the proceeds thereof will be credited to plaintiffs account.
Soriano made several inquiries from defendant about the status of his export sugar produced during 19411942 crop year, however, defendant informed Soriano that said sugar was destroyed during the war but it
was later found out by Soriano that said sugar was in fact sold by defendant and that the defendant.
Defendant argues that automatic compensation should take place by operation of law to the concurrent
amounts between the two debts because the plaintiff is a debtor of the defendant on his crop loan account
and at the same time a creditor of the defendant for the proceeds of the sale of plaintiff's sugar.
Is there automatic compensation?
No, there is no automatic compensation.
Compania General cannot invoke the defense of automatic compensation since by virtue of Article 1278,
compensation takes place when two persons in their own right are creditors and debtors of each other. As
defendant theorizes, the sugar was shipped to the US for its own account, it cannot reverse its stand and
consider Soriano as its creditor.
Even if we consider soriano as creditor of defendant to the extent of 35,528.01 piculs of sugar which
defendant exported without crediting sorianos account, the very act of fault and breach of the crop loan
agreement would be the only reason why soriano would be the creditor of compania general.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Republic vs. Mambulao
Defendant Mambulao owes the Republic of the Philippines the amount of 4k pesos for forest charges.
Prior to that, Mambulao has already paid the amount of P8,200.52 for reforestation charges. It is the
contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has
not made use of those reforestation charges collected from it for reforesting the denuded area of the land
covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be
refunded, at least it should be compensated with what Mambulao Lumber Company owed the Republic of
the Philippines for reforestation charges.
Can the sum of 9k pesos paid by Mambulao be set-off or applied to the payment of the sum of 4k pesos
as forest charges to RP?
NO. Under RA 115, it seems quite clear that the amount collected as reforestation charges shall constitute
a fund known as the Reforestation Fund which shall be expended by the Director of Forestry with the
approval of the Secretary of Agriculture and Natural Resources, upon investigation of the areas needing
reforestation. There is nothing in the law that requires that the amount collected as reforestation charges
should be used EXCLUSIVELY for the reforestation of the area covered by the license.
There is no compensation where parties are not creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in
the coffers of the government as taxes collected, and the government does not owe anything, crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts.
Gullas vs. PNB
Atty. Gullas was a member of the Philippine Bar and a holder of a current account with PNB
Atty. Gullas, together with Pedro Lopez signed as indorsers of the check paid to the US Treasury as
payment to the warrant in the amount of $361 for their client.
PNB learned of the dishonor of the treasury warrant thus applied the outstanding balance of Gullas
current accounts to the US Treasury.
Can PNB validly apply a deposit to the debt of a depositor to the bank?
Yes. 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. It has been held that the relationship existing between a
depositor and a bank is that of a creditor and debtor.
Ong vs. Court of Appeals
Ong borrowed 160,000 from private respondent and secured payment of 3 post-dated checks totaling the
same amount. Ong stored in private respondents warehouse quantity of zippers valued at 181,000.
When Ong tried to get the zippers, private respondent refused to release them on the ground of nonpayment of the loan. Ong promised to pay his indebtedness if the zippers be returned to him, but likewise
claims that because private respondent refused to release the zippers, the same became outmoded and lost
their value.
Can Ong validly invoke compensation?
Each one of the obligor be bound principally and that he be at the same time a principal creditor of the
other. Mariano Ong, the private respondent, is not a debtor of Fermin Ong, it is only the latter who is
indebted to Mariano Ong.
Both debts consist in the sum of money, or if the things due are consumable, they be of the same kind and
of the same quality, if the latter had been stated.
Debts in the case at bar do not both consist in a sum of money nor are they of the same quality or of the
same kind.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Perez vs. Court of Appeals
CONGENERIC Development and Finance Corporation is a company engaged in money market
operations.
On May 8 and 15, 1974, CONGENERIC issued promissory notes valued at 100kPhp and 200kPhp
respectively in favor of Ramon Mojica
MEVER Films Inc, private respondent in the case at bar borrowed 500kPhp from CONGENERIC,
issuing a promissory note to be referred to as NCI-0352.
CONGENERIC sold to Perez 200kPhp out of the 500kPhp of the NCI-0352. In lieu of this sale,
CONGENERIC obligated itself to pay 3kPhp.
On August 5, 1974, MEVER paid 100kPhp on account of NCI-0352
On the same date, CONGENERIC paid 100kPhp, the 3kPhp coming from its own funds CONGENERIC
paid Mojica the interests due from both the debts it incurred and the principals for both were rolled-over
to mature on October 4 and 11, 1974 respectively
Mojica, assigned both the accounts of CONGENERIC to MEVER through a notarized deed.
CONGENERIC advised Mever that of the original amount of 500k the sum of 200k was sold to a third
party (Corazon Perez)
MEVER contends that because Mojica assigned to it the account of the debt due by CONGENERIC to
Mojica, there was legal compensation.
Can MEVER validly claim legal compensation?
There was no legal compensation since the bills were not yet due and demandable as of the date of their
assignment by MOJICA to MEVER nor as of the date of surrender to CONGENERIC; for it to exist, the
two debts, among other requisites, must be due and demandable.
Mialhe vs. Manalili
While their civil case was still on appeal in the Supreme Court, petitioners already asked for a writ of
execution against the properties of Halili. The public auction done by the sheriff of Manila was a success,
but SC actually reduced the judgment sum from Php74,400.00 to Php46,800.00.
Petitioners were now obligated to return the difference between trial courts judgment and SCs judgment
to Halili.
Petitioners claimed that they could retain the 2,004.28 because in another civil case (in which the parties
were the same), petitioners were able to secure a judgment against Halili for the same amount.
Can the petitioners retain the 2k on the defense of compensation?
Compensation could not take place in this case because petitioners claim against Halili was still being
the subject of court litigation. It is a requirement, for compensation to take place, that the amount
involved be certain and liquidated.
Dalton vs. FGR Realty
Dayrit owned a parcel of land located in Cebu City which is leased to Dalton and Sasam, et. Al. Later on,
Dayrit sold such parcel of land to respondent FGR Realty and Development Corporation (FGR). Dayrit
and FGR stopped accepting rental payments because they wanted to terminate the lease agreements with
Dalton and Sasam, et al. Dalton and Sasam, et al. consigned the rental payments with the RTC.
They failed to notify Dayrit and FGR about the consignation. Dayrit and FGR withdrew the rental
payments. In their motions, Dayrit and FGR reserved the right to question the validity of the
consignation.
Is the consignation valid?
The consignation made by Dalton is NOT VALID because it did not satisfy the mandatory requirements
of a valid consignation given in the NCC.
Daltons failure to notify the respondents regarding the consignation rendered such
INEFFECTIVE/VOID/NOT VALID .

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

3. Other Kinds of Compensation:


Article 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 Based on Judgment:

If a plaintiff filed a complaint against a defendant for collection of sum of money, and the defendant has a
claim for damages, the claim for damages if properly pleaded and proven by evidence, will be converted
into a liquidated claim payable in money.
When the adjudication of the court has become final and executory, assuming the plaintiffs claim for
collection is justified, there will be a compensation between the plaintiffs claim as against the
defendants claim for damages.
The compensation retroacts to the date of the filing of the pleading where compensation was alleged and
claimed.

Article 1284.

voidable,
When one or both debts are rescissible or
they may be compensated against each other
before they are judicially rescinded or avoided. (n)

Effect of Subsequent Rescission:

Until the debts are rescinded, they can be compensated against each other.
If the debt is rescinded or annulled, the compensation is automatically cancelled and there shall be
restitution of what each party had received before the rescission.
If the prescriptive period for the rescission or annulment of the debts had already lapsed, there is
automatic compensation and the same will not be disturbed.

Article 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)

Assignment of Debts Subject to Compensation:

When all the requisites of compensation are present, compensation takes effect automatically ipso jure
whether the parties are aware of it or not.
If after automatic compensation one of the debts is assigned to a third person, the assignment is
ineffective because there is nothing more to assign, except only the excess amounts.
Insofar as the excess is concerned, the assignment to 3rd person with the consent of debtor constitutes
subrogation of a third person in the rights of the creditor (Art. 1300)

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Exception to the General Rule on Compensation:

If compensation had already taken place ipso jure, but the parties nevertheless agreed to waive, or not to
pursue their rights under Art. 1290, then the effects will be in accordance with the ff:
1. Assignment with consent of the debtor Here, the debtor cannot avail himself against the assignee,
of any defense of compensation which he might have against the assignor. Exception: If at the time of
assignment, the debtor has notified the assignor the he is reserving his right to the compensation.
2. Assignment made with knowledge but without the consent of the debtor The debtor retains his
right to invoke against the assignee, the compensation of his debts which fell due prior to the
assignment. Debts falling due after the assignment are not included.
3. Assignment made without the knowledge of the debtor The debtor is allowed by law to set up
the compensation of all credits of the creditor prior to the assignment as well as subsequent ones until
the time that the debtor learns of the assignment. The compensation is set up against the assignee
not against the old creditor.

Assignment under the Article is Different from Cession under Article 1255:

Article 1255 refers to cession or assignment of the property of the debtor to his creditors in payment of
his debts. In the present article, the one assigning rights is the creditor in favor of a third person who need
not be a creditor.

Limitation to Assignment of Rights:

A solidary creditor cannot assign his rights without the consent of the others (Art. 1213)

Article 1286.

Compensation takes place by operation of law,


at different places,
even though the debts may be payable

but there shall be an indemnity for expenses
of exchange or transportation
to the place of payment. (1199a)

Legal Compensation:

Legal compensation takes place by operation of law. This rule applies even if the debts are payable at
different places.
If debts are payable abroad and there is a need to use foreign currency, whoever claims compensation
must shoulder the expenses for the foreign exchange.
Similarly, expenses for transportation to the place of payment will be borne by the party claiming
compensation.
Impliedly, other kinds of expenses incurred by the claiming party shall not be charged against the other.

Compensation is Ipso Jure; Retroactive:

Compensation takes effect by operation of law even without the consent or knowledge of parties
concerned as long as all the requisites mentioned are present.
Compensation when used as a defense, retroacts to the date when all its requisites are fulfilled.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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)

Debts or Obligations not subject to Compensation:


1.
2.
3.
4.
5.
6.

Debts or obligations arising from contracts of depositum;


Debts arising from obligations of a depositary;
Debts arising from obligations of a bailee in commodatum;
Debts or claims for support due by gratuitous title.
Debts or obligations consisting in civil liability arising from penal offense. (Art. 1288)
Debts or obligations du to the government, like taxes, fees, duties, and similar others.

Support in arrears like future support is no longer subject to compensation.

Parties who cannot claim Compensation, Exceptions:

The parties who are not allowed to claim compensation are the depositary (a person to whom
something is lodged in trust) and bailee (a person to whom goods or property are delivered for a purpose,
for example repair, but no transfer of ownership occurs.)
The reason for the prohibition is to prevent breach of trust. However, the depositor and the bailor are
allowed to claim compensation against the depositary and bailee respectively. This is may be called a
FACULTATIVE COMPENSATION.
Example: Sofia agreed to keep for safekeeping Elaines 100 pieces of 1k peso bills which are newly
printed. Elaine borrowed money from Sofia in the sum of 50k pesos. When Elaine asks for the return of
her 100 pieces, Sofia offers only 50 pieces of the money claiming partial compensation as Elaine owes
her 50k.
Sofia cannot refuse to return to Elaine the entire 100 pieces. This money is not subject to compensation
because it was specifically entrusted to Sofia for purposes of deposit.
However, if Elaine the depositor desires, she may set up compensation against Sofia in which case Sofia
will only owed Elaine 50 pieces of the bills. The depositor is allowed to claim compensation but not the
depositary.

Status of Money Deposited in the Bank

A deposit of money with a bank is not really a depositum but a loan.


The relationship of the depositor and the bank is one of creditor and debtor between whom there can be
compensation.

Article 1288.

Debts arising from crime cannot be compensated by the criminal.


Compensation is improper because the satisfaction of the obligation arising from crime is imperative.
However, the victim is allowed to claim compensation.

Article 1289.

Neither shall there be compensation



if one of the debts consists in civil
liability arising from a penal offense. (n)

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)

It can happen that a debtor may have several debts to a creditor and vice versa.
Under these circumstances, Articles 1252 to 1254 (application of payments) shall apply.

Before you quit, remember why you started

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 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. (1202a)

Time When Compensation Takes Effect:

When it is a legal compensation, the moment all five requisites become present, compensation takes place
by operation of law, even though the parties are not aware thereof.
When the compensation is voluntary, it will take effect from the time or day agreed upon by the parties.
If the compensation is judicial, it will be effective from the moment the judgment becomes final and
executory.

Pioneer Insurance vs. Court of Appeals


Pioneer issued warehousing bonds in favor of Bureau of Customs in behalf of Wearever Textile Mills and
its president Lim. Wearever failed to comply with its commitments so Customs demanded the amount of
the warehousing bonds from the Pioneer.
Wearever promised to Pioneer that they will settle their obligations with Customs.
Customs granted the request of Wearever for staggered monthly payments however they still failed to pay
said amount. Customs demanded from Pioneer for payment of said bonds. No payment, however, has
been made as yet. A fire broke in Wearevers factory in which they were claiming insurance from
Pioneer.
Pioneer refused to pay in account of the previous warehousing bond and claimed that said proceeds must
be applied by way of partial compensation or set-off against its liability with the Bureau of Customs
arising from the warehousing bonds.
Can there be a valid compensation in the case at bar?
There is no dispute that the petitioner owes the private respondents the amount representing the proceeds
of the insurance policy.
The contention of private respondents that the petitioners cannot claim for reimbursement because they
have not paid Bureau of Customs yet cannot be maintained since it was ruled in jurisprudence that
stipulations in the indemnity agreement allowing the surety to recover even before it paid the creditor is
enforceable and it has long been settled by courts in the affirmative.
Thus, legal compensation can take place because all requisites for a valid compensation are present.
Sesbreno vs. Court of Appeals
Philfinance assigned to Sebsereno a note called Delta Motors Corporation Promissory Note (DMC PN
No. 2731) in consideration for the money market placement made by the latter to the former. Said note
was originally made by Delta in favor of Philfinance.
When Sebsereno wants to collect from Delta the amount of the note, Delta denied any liability to
petitioner on the promissory note, and explained that it had previously agreed with Philfinance to offset
its DMC PN No. 2731 against another promissory note issued by Philfinance in favor of Delta.
Was there a valid compensation between Delta and Philfinance?
The assignment to Sesbreno would have prevented compensation to take place between Philfinance and
Delta, to the extent of 304, 533.33Php, because upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and debtors of each other.
However, Sesbreno only notified Delta of the fact of the assignment in July 14, 1981 when the DMC PN
2731 had already been discharged by compensation.
Hence a valid compensation have taken place. Thus, Sesbreno cannot validly run after Delta in
fulfillment of Deltas obligations, but should run after Philfinance by virtue of the terms of assignment

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

Novation: (Articles 1291 1304)


1. Concept:
Article 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)

Concept:

Novation is the extinguishment of an obligation by substitution or change of the obligation by a


subsequent one which terminates the first, either by changing the object or principal conditions,
substituting the persons of the debtor or subrogating a third person with the rights of the creditor.
The animus novandi, whether partial or total, must appear by the express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.

Two-Fold Function of Novation:


1. It extinguishes an obligation
2. Creates a new obligation in lieu of the old one

If novation is partial, modificatory, or an imperfect one, it will operate only as a relative extinction.
Novation need not be absolute, thus the beginning of the article reads Obligations may be modified
implying clearly that it may be partial.
The term principal conditions should be construed to include a change in the period to comply with the
obligation, which change would only be a partial novation, since the period merely affects the
performance, not the creation of the obligation

Requisites:
1. There must be a previous valid obligation.
It cannot be void, as in the eyes of the law, it does not exist.
If there is no previous obligation, there is nothing to modify.
2. There must be an agreement by the parties to extinguish or modify the old obligation, and to create
a new one or a modified version.
3. The validity of the new obligation.

Effects of a Valid Novation:

In novation consisting of the substitution of a new debtor, it is not enough to extend the juridical relation
to a third person; It is necessary that the old debtor be released from the obligation, and the third person or
new debtor take his place in the relation.
If not, then there is no novation and the third person merely becomes a co-debtor or a surety.
A novation is not made by showing that the substituted debtor agreed to pay the debt, it must also appear
that he agreed with the creditor to do so.

Defective Obligations and Mere Drafts:

A void obligation cannot be novated, but a voidable obligation may be novated before it is annulled.
If the new obligation created is void, there is no novation. The original obligation will subsist, unless the
parties intended that the former relation is extinguished in any event..
A mere draft of the new contract is not a perfected contract. It cannot supplant the original contract.
Neither will a contract not signed by all have any effect.

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2. Kinds: Objective, Subjective, or Mixed:


Kinds of Novation
As to essence:
1. Objective or Real Novation This is the novation effected by changing the object or principal
conditions of the obligation.
2. Subjective or Personal Novation This is the novation effected by either substituting the person of the
debtor or subrogating a third person to the rights of the creditor. The first kind is also called passive
novation and the second active novation.
3. Mixed Novation This is the novation which arises when there is a combination of the objective and
subjective novations.
As to form of their constitution:
1. Express It is express when the parties declared in unequivocal terms that the old obligation is
extinguished by the new obligation, the latter thusly superseding the old one.
2. Implied It is implied when there are no express declarations that the old obligation is extinguished by
the new one. However, the old and new obligations are incompatible on every material point such that
they cannot co-exist.
As to the extent of their effects:
1. Total or Extinctive It is total when the original obligation is completely extinguished. The new
contract must extinguish the old contract. There is no novation when the new contract is not between the
same parties as in the old contract. Extinctive Novation has four requisites:
a. Existence of a previous valid obligation
b. Agreement of all the parties to the new contract
c. Extinguishment of the old obligation or contract
d. Validity of the new one
2. Partial or Modificatory It is partial when the original obligation is not totally extinguished but merely
modified. Hence, the unmodified portion of the obligation remains effective. Novation is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement.
As to their origin:
1. Legal Novation Takes place by operation of law such as the novations in Arts 1300 & 1302.
2. Conventional Novation This novation takes place by agreement of the parties. Arts 1300 & 1301.
As to the presence or absence of condition:
1. Pure When the creation of a new obligation is not subject to any condition.
2. Conditional When the creation of the new obligation is subject to a condition.

Effect of Non-Fulfillment of Condition:

If the condition is not fulfilled, there is no novation.


Failure to comply with a suspensive condition of the novation restores the original agreement.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E

NOVATION IS NEVER PRESUMED:

Novation can never be presumed. The intention to novate should be expressly, clearly and unequivocally
declared, or that the terms of the new agreements be incompatible with the old contract on every point.
Novation must be clearly proved as a fact either by express stipulation or by implication derived from an
irreconcilable incompatibility between old and new obligations or contracts on every point.
Changes that breed incompatibility must be essential in nature and not merely accidental.
An agreement subsequently executed between a seller and a buyer that provides for a different schedule
and manner of payment, to restructure the modes of payment by the buyer so that it could settle its
outstanding obligation in spite of its delinquency in payment, is not tantamount to novation.
Novation may be a means to avoid criminal liability as long as novation occurs prior to the filing of the
criminal action.

Article 1292.

In order that an obligation may be extinguished


by another which substitute the same,

it is imperative that it be so declared in unequivocal terms,

or that the old and the new obligations be on every point incompatible with each other. (1204)

Formalities Required When Novation is Express:

If done in writing, it is imperative that it be declared in unequivocal terms to avoid any doubt.
It is also imperative that the new obligation should expressly declare that the old obligation is
extinguished or that the new obligation is on every point incompatible with the old one.
In the absences thereof, absolute incompatibility of the two agreements must be shown.

Implied Novation:

It is essential that the old obligation and the new obligation are incompatible in all material points.
If there is no incompatibility, there is no novation created.

Test of Incompatibility:

The test is Whether the two obligations can stand together.


If they cannot, incompatibility arises, in which case the latter obligation novates the first one.
Absolute incompatibility must exist, in order to establish novation in the absence of an express
declaration.
If there is no incompatibility, there is no novation. i.e., a party executed three successive overdraft
obligations which increased the debt, it could not be said that the third novated the first two.
If the parties expressly negate the lapsing of the old obligation, there can be no novation.

Effect of Increasing or Reducing the Term or Period:

Increasing the term of the obligation will not give rise to novation because of the absence of
incompatibility between the two obligations.
Thus, the postponement of the date of payment and the grant of an extension did not result in novation
because the obligations are not incompatible and there is no change in the obligatory relation of the
parties which altered the essence of the obligation.
The rule is different if the term is decreased. If the term is reduced, novation arises because there is
now an incompatibility between the old and the new obligations.
When there is a change not only on the persons of the parties involved but also on the amount due as well
as on the date of maturity of the obligation, it is clear that there is a novation.
If there is a novation, the parties shall be governed by their subsequent agreement which alone can be the
basis of any action between them.
An obligation is not novated by an instrument that expressly recognizes the old one, changes only the
terms of payment, and adds other obligations not incompatible with the old provisions or where the new
contract merely supplements the previous one.

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4. Delegacion vs. Expromision:


Article 1293.

Novation which consists in substituting a new debtor in the place of the original one,
or against the will of the latter,
may be made even without the knowledge
but not without the consent of the creditor.

Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. (1205a)

Passive Subjective or Personal Novation:

Consists in the substitution of a new debtor in place of the original debtor with the consent of the creditor.
Active subjective novation, on the other hand, consists in substituting a new creditor in place of the old.

Two forms of Passive Subjective:


1. Delegacion When the substitution is initiated by the old debtor himself by convincing another person to
take his place and to pay his obligation to the creditor.
Requisites:
a. The substitution is upon the initiative or proposal of the old debtor himself by proposing to the
creditor the entry of another person as the new debtor who will replace him in the payment of the
obligation.
b. The creditor accepts, and the new debtor agrees to the proposal of the old debtor.
c. The old debtor is released from the obligation with the consent of the creditor.

If the new debtor in turned out to be insolvent, the creditor is estopped from going after the old
debtor because the old debtors obligation has already been extinguished.
Exceptions: If the insolvency of the new debtor was already existing and of public knowledge, or
if the old debtor knew that the new debtor is insolvent when he delegated his debt, the old debtor
may still be held liable.

2. Expromision When the substitution of the old debtor by a new debtor is upon the initiative or proposal
of a third person. Here, there is an agreement by and among the old debtor, the new debtor, and the
creditor to extinguish the old obligation. There must be an express and clear agreement that with the entry
of the new debtor, the old debtor is released from the obligation.
Requisites:
a. The substitution is upon the initiative of a third person who will step into the shoes of the old
debtor.
b. The creditor gave his consent to the proposal of the third person.
c. The old debtor must be released from the obligation with the consent of the creditor.

The substitution of the old debtor by a new debtor may be made without the consent of the old
debtor or even against his will. The consent of the creditor, however, is mandatory.

Rights of the New Debtor:

If the new debtor has paid the obligation of the old debtor, the former is given the right to
beneficial reimbursement, if payment was made without old debtors consent or against his will.
The new debtor is given the right to reimbursement and subrogation if payment as made with the
old debtors consent.

Creditors Consent:

Creditors consent or acceptance of the substitution of a new debtor may be given at anytime and in any
form whatever while the agreement of the debtors subsists.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 1294.

If the substitution is without the knowledge or against the will of the debtor,
the new debtor's insolvency or nonfulfillment
of the obligations

shall not give rise to any liability on the part of the original debtor. (n)

Applicability:

Applies only to expromision where the substitution of the old debtor is upon the proposal of a third
person whose proposal was accepted by the creditor.
Expromision may be made without the knowledge of the old debtor, or even against his will.
If made without consent of the old debtor, he will not be liable in case the new debtor becomes insolvent.
But if made with his consent, the old debtor will be made liable to avoid unjust enrichment.

Article 1295.

The insolvency of the new debtor,


who has been proposed by the original
debtor and accepted by the creditor,

shall not revive the action of the latter against the original obligor,
except when said insolvency was already existing and of public knowledge,
or known to the debtor, when the delegated his debt. (1206a)

Applicability:

Applies only to delegacion where the substitution of the old debtor is upon the proposal of the old debtor
himself and the proposal was accepted by the new debtor and the creditor.

Effect of Insolvency of New Debtor:

If the new debtor is insolvent, old debtor will not be liable anymore because the obligation is already
extinguished. However, if the insolvency was already existing and is of public knowledge when the debt
was delegated to the new debtor, or if the insolvency of the new debtor was already existing and known to
the original debtor at the time of the obligation of the debt to the new debtor, the old debtor is liable.
Thus, if the insolvency was not existing at the time of the delegation of the debt, or even if it was but it
was not of public knowledge, or the same is not known to the original debtor, the latter has no more
liability to the creditor. The obligation of the original debtor had already been extinguished by the
novation.

When Delegacion does not give rise to Novation:


1. When the third person acted merely as a surety or guarantor for the original debtor
2. When the third person is merely an agent of the debtor
3. When the new debtor merely agreed to assume a joint responsibility for the obligation. The delegacion
is only with reference to the proportionate share.
Article 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)

Extinction of the Principal, Effect on Accessories:

General Rule: Extinguishment of principal carries with the extinction of the accessory.
Exception: Accessories may subsist only insofar as they benefit third persons who did not consent.
If the contract contained a stipulation in favor of the third party, the beneficiary who did not consent may
demand the accessory obligation. If he consented, he cannot make a demand anymore.
Article does not apply to novations by the subrogation of a third person in the rights of the creditor.

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Article 1297.

one shall subsist,


If the new obligation is void, the original
unless the parties intended that the former
relation should be extinguished in any event. (n)

Effect of Invalidity of New Obligation:

If the new one turns out to be void, it follows that there is no new obligation to supersede the old
obligation. Corrolarily, the original obligation shall continue to subsist.
Exception: If the parties have agreed that the old obligation shall nevertheless be extinguished even if it
turns out that the new one is invalid, then this is tantamount to waiver or remission of the obligation.
Example: Pio, a well known movie director owes Regal films a sum of money. Because Pio could not pay
the amount, he proposed to direct a particular film for Regal films in settlement of his obligation. The
film involves rebellion, and before the film could be directed, a law was passed prohibiting the production
of such movies. The new obligation having become legally impossible is now void and the old obligation
subsists.

Effect of New Obligation which is merely Voidable:

When the obligation is merely voidable, that is, it is valid and binding until annulled, the obligation is
novated.
However, once it is annulled, the old obligation will subsist and the novation will be set aside.
If the parties agree otherwise, that the old obligation would still be extinguished in any event, then the old
obligation shall not subsist.

Article 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)

Effect of Invalidity of the Old Obligation:

If it is the old obligation which is void, there is nothing to novate. So the new will also be void.
The action to set aside a void contract is an action for declaration of nullity, while an action to set aside a
voidable contract is referred to as an action for annulment.
There is a contradiction in the words used in the article because a void contract is not susceptible of
annulment or ratification. The solution is that the first portion should apply only to void obligations, and
the second portion to voidable obligations.

Effect of a Voidable New Obligation:

If the new obligation is voidable, it is valid and binding upon the parties until annulled.
Once annulled, whatever has been novated shall be set aside.

Effect of a Voidable Old Obligation:

If the old obligation, being the voidable one, was ratified before it could be annulled, then it can be the
subject of novation.
However, if it was already annulled, it ceases to exist and there is nothing to novate.

Rule in Prescribed Debts:

An obligation which had not been enforced within the prescribed statute of limitations is considered to
have prescribed. That is, it cannot be enforced anymore in court.
Nonetheless, it has been reduced to a natural obligation such that when one pays, the payment will be
valid. As a prescribed debt constitutes a moral or natural obligation, it can be the cause or consideration
for a new obligation in novation.

Where the gifts are, that is where the giver is

Obligations and Contracts Pineda Reviewer Following Misons syllabus plus Case List Doctrines : Anton Mercado 1-E
Article 1299.

If the original obligation was subject to a suspensive or resolutory condition,


the new obligation shall be under the same condition, unless it is otherwise stipulated. (n)

Applicability:

Applies only to cases of original obligations subject to conditions, whether suspense or resolutory.

Effect of the existence of Conditions in the Original Obligation on the New one:

In the absence of any contrary stipulation, the conditions attached to the original shall also be considered
as attached to the new obligations.
Example: Naomi promised Alexandra with a building which could be converted into a hospital, provided
that Alexandra shall become a licensed doctor of medicine. Shortly thereafter, the parties agreed that
instead of a building, Naomi will just give Alexa his resthouse in Baguio City. The second agreement did
not make any stipulation on the nature of the condition. The giving of the rest house is nevertheless
subject to the same condition, that Alexa shall become a licensed doctor of medicine.

Article 1300.

Subrogation of a third person in the rights of the creditor is either legal or conventional.
cases expressly mentioned in this Code;
The former is not presumed, except in
the latter must be clearly established in order that it may take effect. (1209a)

Konsepto:

Ang sabrogasiyon ay isang.. just kidding! Subrogation is the active subjective novation characterized by
the transfer to a third person of all the rights appertaining to the creditor in the transaction concerned
including the right to proceed against the guarantors or possessors of mortgages, and similar others
subject to any applicable legal provision or any stipulation agreed upon by the parties in conventional
subrogation.
It is the transfer of the credit of the creditor arising in a transaction, to a third person with all the rights
appertaining thereto, either against the debtor or against the third persons.
Rationale: Equity. It is designed to promote and to accomplish justice and is the mode which equity
adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay.
Limitation: A subrogee cannot succeed to a right not possessed by the subrogor.

Kinds of Subrogation (Active Subjective Novation):


As to their creation:
1. Legal Subrogation This is the subrogation that takes place by virtue and operation of law (Art. 1302)
2. Voluntary or Conventional Subrogation This is the subrogation created by the agreement of the
parties.
As to their extent:
1. Total Subrogation This is the subrogation where the credit or rights of the creditor in the transaction
are totally transferred to the third person.
2. Partial Subrogation This is the subrogation where only a part of the credit or rights of the creditor in
the transaction are transferred to the person.

Proving the Existence of Subrogation:

Legal subrogation is not presumed except in the cases mentioned in article 1302.
Voluntary subrogation must be clearly established with sufficient evidence.

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Article 1301.

Conventional subrogation of a third person


requires the consent of the original
parties and of the third person. (n)

In the absence of consent of all the parties, no subrogation will result.


Assignment of rights is not subrogation.
Active subjective novation is stricter than passive subjective novation because in the latter, the consent of
the old debtor is not even required in expromission.

Basis

Conventional Subrogation

Effect

Extinguishes the original obligation


and creates a new one.

Need for consent of Debtor

The consent of the debtor is necessary


including the other original parties.

The consent of the debtor is not


necessary, notification is enough for
the validity of the assignment.

Effectivity

Effectivity begins from the moment of


subrogation.

Effectivity begins from the notification


of the debtor.

Curability of defect or vice

The defect in the old obligation may


be cured such that the new obligation
becomes valid.

The defect in the credit or rights is not


cured by its mere assignment to a third
person.

5. Legal Subrogation:
Article 1302.

Assignment of credit/rights
The transfer of the credit/right does
not extinguish or modify the
obligation. The transferee becomes the
new creditor for the same obligation.

The word legal is added to clarify that this applies to


legal subrogation and not voluntary subrogation.

It is presumed that there is legal subrogation:


(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation,

pays with the express or tacit approval of the debtor;

(3) When, even without the knowledge of the debtor,


a person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter's share. (1210a)

Legal Subrogation Not Presumed:

Legal subrogation is subrogation by operation of law.


Generally, it is not presumed, unless there is a specific law providing for it.
Three Exceptions: in the 3 instances mentioned in the provision, legal subrogation is presumed to exist.

Where the gifts are, that is where the giver is

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First Presumption:

The payment is made by a creditor to another who is preferred, meaning, one who enjoys priority of
payment under the rules on preference of credits.

Example: Isabel borrowed money from Lea and Bianca in the sum of 100 and 50 pesos, respectively. Isabels loan
from Lea is secured by a real estate mortgage, while Isabels loan from Bianca is unsecured. Without the
knowledge of Isabel, Bianca paid Lea all the obligations of Isabel. By this development, Bianca becomes a
mortgage creditor of Isabel at the same time an ordinary creditor insofar as the 50 pesos is concerned. There is
now a presumption that there is legal subrogation. Wherewith, Bianca can collect from Isabel and if the latter
failed to pay the mortgage obligations, Bianca can foreclose the mortgage. From the proceeds of the foreclosure
sale, Biancas credits shall be paid.

The rule in Articles 1236 and 1237 referring to payments made by a third person in behalf of the debtor
does not apply in the first exception.

Second Presumption:

A person not interested in the fulfillment of the obligation is someone who is not a party to the obligation
or contract. A person interested in the fulfillment is someone connected to the obligation like a guarantor,
co-debtor, or somebody who has a right on the property under consideration.
When a third person without interest in the obligation pays the obligation of the debtor, with the consent
of the latter, he is entitled not only to be reimbursed for what he had paid but is also subrogated in all the
rights of the creditor.
If the third person made the payment without the consent of the debtor, the former has no right to be
subrogated in all the rights of the creditor. He can only demand reimbursement for what he had paid and
only to the extent of the benefit enjoyed by the debtor (Art. 1236-37)

Example: Camila borrowed money from Meg. The loan is secured by a real estate mortgage. Sofy paid all the
obligations of Camila with the consent of the latter. The result of the consented payment is the subrogation of
Sofy into all the rights of Meg. Sofy may foreclose the mortgage if the mortgage obligations are not paid when
they become due.

Continuing from the above, if the payment was made by Sofy without the consent of Camila, Sofy cannot
be subrogated into the rights of Meg. This time, Art. 1236 applies.

Third Presumption:

In the third exception, the one who pays the obligation is someone interested in the fulfillment of the
obligation like a surety or guarantor.
Payment may be done without the knowledge of the debtor. Legal subrogation operates.
The co-debtor or guarantor is placed in the position of the old creditor.
Subrogation contemplates full substitution such that it places the party subrogated in the shoes of the
creditor, and he may use all means which the creditor could employ to enforce payment.
Rule In Case A Solidary Debtor Pays: If the payor is a solidary debtor, once the full payment is made
the entire obligation is extinguished. Hence, there is nothing more to subrogate. The payor cannot step
into the position of the creditor because he cannot enforce against his co-debtors the payment of the
original obligation.

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Article 1303.

Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining,

either against the debtor or against third person, be they guarantors or possessors of mortgages,

subject to stipulation in a conventional subrogation.
(1212a)

Effect:

Article applies to both legal and voluntary subrogations. Once subrogation takes effect, the credit of the
creditor as well as all the rights appurtenant thereto like guaranty are transferred. However in
conventional subrogation, parties may stipulate on the extinguishment of the accessories.

Example: Bea borrowed money from Nica. Monique stood as guarantor for the obligation of Bea. Nicole, a
stranger to the contract, paid the obligations of Bea with the latters consent and that of Monique, the guarantor. If
Bea could not pay the obligation to Nicole, who has been subrogated in the place of Nica, Nicole could proceed
against Monique, the guarantor. The reason is that the guaranty subsists in the absence of a contrary agreement.

If the credit transferred to the new creditor is subject to a suspensive condition, the credit cannot be
collected until after the fulfillment of the said condition.

Article 1304.

A creditor, to whom partial payment has been made, may exercise his right for the remainder,

and he shall be preferred to the person who has been subrogated in his place
credit. (1213)
in virtue of the partial payment of the same

Rule of Preference In Case Of Partial Subrogation:

There is partial subrogation when the credit had not been entirely subrogated.
It arises when a third person makes partial payment only to the creditor leaving the remainder of the
credit as subsisting.
There being two creditors, there may arise in conflict of interests when the payment made is not enough
to cover the two credits, in which case, the law states, the original creditor shall be preferred to the new
creditor.
The preference granted to the original debtor applies only to assets in the possession of the debtor. It
cannot be exercised against assets already transferred to other persons.
Example: Joyce borrowed money from Hazel in the sum of 10 pesos. Kim, a stranger, paid Hazel the sum
of 5 pesos leaving a balance of 5 pesos in the original obligation. The payment made by Kim is with the
consent of Joyce and Hazel. When the obligation matured, due to a bad choices, Joyce has only 7 pesos.
By the rule of preference, Hazel will be paid 5 pesos in full, and Kim will be paid only 2 pesos.

Where the gifts are, that is where the giver is