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Case: Thus, to the extent that the obligation of the petitioner

ACE-AGRO Dev. Corp. vs. CA has been extinguished, respondent Guevarra may demand for
Facts: Petitioner Ace-Agro Development Corporation and private reimbursement from his principal. To rule otherwise would result
respondent Cosmos Bottling Corporation are corporations duly in unjust enrichment of petitioner.
organized and existing under Philippine laws. Private respondent
Cosmos Bottling Corp. is engaged in the manufacture of soft Cases:
drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace- PAL vs. CA
Agro) had been cleaning soft drink bottles and repairing wooden Facts: Respondent Amelia Tan filed a motion praying for the
shells for Cosmos, rendering its services within the company issuance of a writ of execution of the judgment, which was
premises. granted. The writ was duly referred to Deputy Sheriff Emilio Z.
On April 25, 1990, fire broke out in private respondent's Reyes. Later, respondent Amelia Tan moved for the issuance of
plant, destroying, among other places, the area where petitioner an alias writ of execution stating that the judgment remained
did its work. As a result, petitioner's work was stopped. unsatisfied.
On May 15, 1990, petitioner asked private respondent to Petitioner filed an opposition to the motion for the issuance of an
allow it to resume its service, but petitioner was advised that on alias writ of execution stating that it had already fully paid its
account of the fire, which had "practically burned all . . . old soft obligation to plaintiff through the deputy sheriff of the respondent
drink bottles and wooden shells," private respondent was court, Emilio Z. Reyes, as evidenced by cash vouchers properly
terminating their contract. signed and receipted by said Emilio Z. Reyes.
Issue: W/N respondent was justified in unilaterally CA ordered Emilio Z. Reyes to appear with his return and explain
terminating the contract on account of a force majeure? the reasons for his failure to surrender the amounts paid to him by
Ruling: No. Only for suspension. petitioner PAL. However, the order could not be served upon
Article 1231 of the New Civil Code on extinguishment of Deputy Sheriff Reyes who had absconded or disappeared.
obligations does not specifically mention unilateral termination as Issue: Did the payment made to the absconding sheriff by check
a mode of extinguishment of obligation. But in some contracts, in his name operate to satisfy the judgment debt?
either because of its indeterminate duration or because of Ruling: NO. PAL did not issue the checks intended for her, in
the nature of the prestation which is its object, one of the her name. The payment to the absconding sheriff by check in
parties may free himself from the contractual tie by his own will his name did not operate as a satisfaction of the judgment
(unilateral extinguishment). debt.
What defendant-appellant was trying to say was that the In general, a payment, in order to be effective to discharge an
prestation or the object of their agreement had been lost and obligation, must be made to the proper person. Article 1240.
destroyed in the above-described fire. Apparently, the defendant- Thus, payment must be made to the obligee himself or to an
appellant would like this situation to fall within what would be: agent having authority, express or implied, to receive the
Obligations may be extinguished by the happening of unforeseen particular payment.
events, under whose influence the obligation would never have Payment made to one having apparent authority to receive the
been contracted, because in such cases, the very basis upon money will, as a rule, be treated as though actual authority had
which the existence of the obligation is founded would be been given for its receipt.
wanting. Likewise, if payment is made to one who by law is authorized to
Both parties admitted that the April 25, 1990 fire was act for the creditor, it will work a discharge.
a force majeure or unforeseen event and that the same even The receipt of money due on a judgment by an officer authorized
burned practically all the softdrink bottles and wooden shells by law to accept it will, therefore, satisfy the debt
which are the objects of the agreement. The theory is where payment is made to a person authorized and
But it is true that defendant-appellant still had other recognized by the creditor, the payment to such a person so
bottles that needed cleaning and wooden shells that needed authorized is deemed payment to the creditor. Under ordinary
repairing; therefore, the suspension of the work of the plaintiff- circumstances, payment by the judgment debtor in the case at
appellee brought about by the fire is, at best, temporary as found bar, to the sheriff should be valid payment to extinguish the
by the trial court. judgment debt.
There are circumstances in this case, however, which compel a
Case: different conclusion.
Dominion Insurance Corp. vs. CA The payment made by the petitioner to the absconding sheriff
Facts: Plaintiff Rodolfo S. Guevarra instituted Civil Case for sum was not in cash or legal tender but in checks. The checks were
of money against defendant Dominion Insurance Corporation. not payable to Amelia Tan or Able Printing Press but to the
Plaintiff sought to recover thereunder the sum of P156,473.90 absconding sheriff.
which he claimed to have advanced in his capacity as manager of
defendant to satisfy certain claims filed by defendants clients. In Baritua vs. CA
its traverse, defendant denied any liability to plaintiff. Facts: Tricycle driven by Nacario (respondent parents) figured in
Issue: Whether respondent Guevarra is entitled to an accident with a BUS (petitioner) as a result Nacario died, and
reimbursement of amounts he paid out of his personal money in the tricycle was damaged.
settling the claims of several insured. As a consequence of the extra-judicial settlement, by the
Ruling: YES. Article 1236, second paragraph, Civil Code, petitioners, Nacarios widow Alicia, received 18,500 in
provides: "Whoever pays for another may demand from the consideration of the Release of Claim in favor of the petitioners.
debtor what he has paid, except that if he paid without the 1 year and 10 months from accident, private
knowledge or against the will of the debtor, he can recover only respondents parents of Nacario filed a complaint for damages
insofar as the payment has been beneficial to the debtor." against petitioners.
In this case, when the risk insured against petitioner Issue: whether or not Alicia, the spouse and the one who received
occurred, petitioners liability as insurer arose. This obligation was the petitioners' payment, is entitled to it.
extinguished when respondent Guevarra paid the claims and Ruling: YES. Article 1240 of the Civil Code of the Philippines
obtained Release of Claim Loss and Subrogation Receipts from enumerates the persons to whom payment to extinguish an
the insured who were paid. obligation should be made. (Successors in Interest)
Certainly there can be no question that Alicia and her son with the obligation. When payment is made to the wrong party, however,
deceased are the successors in interest referred to in law as the the obligation is not extinguished as to the creditor who is without
persons authorized to receive payment. fault or negligence even if the debtor acted in utmost good faith
The surviving spouse concurs with all classes of heirs. As it has and by mistake as to the person of the creditor or through error
been established that Bienvenido was married to Alicia and that induced by fraud of a third person.
they begot a child, the private respondents are not successors-in- In general, a payment in order to be effective to
interest of Bienvenido; they are not compulsory heirs. The discharge an obligation, must be made to the proper person.
petitioners therefore acted correctly in settling their obligation with Thus, payment must be made to the obligee himself or to an
Alicia as the widow of Bienvenido and as the natural guardian of agent having authority, express or implied, to receive the
their lone child. particular payment. Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though
Culaba vs. CA actual authority had been given for its receipt. Likewise, if
Facts: The spouses Culaba were the owners of Culaba Store and payment is made to one who by law is authorized to act for the
were engaged in the sale of SMC beer products. SMC sold beer creditor, it will work a discharge. The receipt of money due on a
products on credit to the Culaba spouses. As they failed to pay judgment by an officer authorized by law to accept it will,
despite repeated demands, SMC filed an action for collection of a therefore, satisfy the debt.
sum of money against Culaba. The respondent was able to establish that the LBP
The defendant-spouses denied any liability, Petitioner check was not received by her or by her authorized personnel.
Francisco Culaba asserts that he made the payment in good faith, The PNPs own records show that it was claimed and signed for
to an agent who issued SMC receipts which appeared to be by Cruz, who is openly known as being connected to Highland
genuine. Thus, according to the petitioners, they had duly paid Enterprises, another contractor. Hence, absent any showing that
their obligation in accordance with Articles 1240 and 1242 of the the respondent agreed to the payment of the contract price to
New Civil Code. The private respondent SMC, for its part, avers another person, or that she authorized Cruz to claim the check on
that the burden of proving payment is with the debtor, in her behalf, the payment, to be effective must be made to her.
consonance with the express provision of Article 1233 of the New
Civil Code. Cases:
Issue: Did the spouses Culaba pay their obligation when they Pagsibigan vs. CA
paid the supervisor who came in an SMC van? Facts: Petitioner through her daughter as attorney-in-fact,
Ruling: NO. Payment is a mode of extinguishing an obligation. obtained an agricultural loan secured by a parcel of land from the
Article 1240 of the Civil Code provides that payment shall be Planters Development Bank.
made to the person in whose favor the obligation has been Initial payment was made followed by several payments
constituted, or his successor-in-interest, or any person authorized in the total amount of P11,900. However, only four of these
to receive it. payments were applied to the loan, while the rest were
In this case, the payments were purportedly made to a temporarily lodged to accounts payable since the account was
supervisor of the private respondent, who was wearing an SMC already past due. The property was foreclosed extra-judicially for
uniform and drove an SMC van. The supervisor appeared to be failure to pay an outstanding balance.
authorized to accept payments. Unfortunately for the Francisco It is petitioner's contention that the bank has no right to
Culaba, he did not ascertain the identity and authority of the said foreclose the mortgage, there having been full payment of the
supervisor, nor did he ask to be shown any identification to prove principal obligation. As per their computation the payment which
that the latter was indeed an SMC supervisor. Petitioners relied they have made totalling P11,900.00 more than sufficiently
solely on the mans representation. Petitioners were considered covered their total obligation with respect to their loan, there
negligent for not ascertaining the identity of the supervisor to having been, in fact, an overpayment based on the interest rate
whom they were remitting their payments to. used in the computation. Thus, the principal obligation having
been extinguished by payment, the accessory obligation of
Republic of the Philippines vs. De Guzman mortgage is necessarily extinguished, and the foreclosure thereof
Facts: Respondent is the proprietor of MGM, a contractor is improper and not valid.
accredited by the PNP. Respond averred that MGM and petitioner The respondent bank on the other hand countered that
PNP, through its chief, executed a Contract of Agreement the computation relied upon by petitioner is not in consonance
undertook to procure and deliver to the PNP the construction with the Promissory Note which contains an acceleration clause.
materials. Now through counsel, demands payment to the PNP. Respondent bank also averred that upon petitioner's failure to pay
PNP, through its Officer-in-Charge, replied to her first installment, the entire obligation became due and
respondents counsel, informing her of the payment made to demandable and its right to foreclose the mortgage has accrued.
MGM via LBP Check. Respondent, denying having ever received Issue: W/N the payment constitutes substantial performance?
the LBP check, personally or through an authorized person. Ruling: YES. We hold that the payment amounting to P8,650.00
Could not support the PNPs claim of payment as the aforesaid for the balance of P3,558.20 as of August 26, 1978 8 plus the
receipt belonged to MB, her other company, which was also doing P1,000.00 it was asked to pay on April 24, 1984 would at the very
business with the PNP, and not to MGM, with which the contract least constitute substantial performance. Article 1234.
was made. Respondent filed a Complaint for Sum of Money Petitioner in this case has the right to move for the
against the petitioner. cancellation of the mortgage and the release of the mortgaged
Issue: W/N petitioners obligation has been extinguished? property, upon payment of the balance of the loan. Definitely, it
Ruling: NO. Petitioners obligation has not been extinguished. would not be in the amount demanded by the respondent bank.
The petitioners obligation consists of payment of a sum of Article 1234 xxx also militates against the unilateral act
money. In order for petitioners payment to be effective in of the defendants-appellants in cancelling the contract."
extinguishing its obligation, it must be made to the proper person. Thus, aside from the fact that the respondent bank was
Article 1240. estopped from enforcing its right to foreclose by virtue of its
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In Cembrano v. City of Butuan, this Court elucidated on acceptance of the delayed payments for a period of more than six
how payment will effectively extinguish an obligation, to wit: years, the application of such payment to the interest and the
Payment made by the debtor to the person of the creditor or to principal during the first three payments constitutes a virtual
one authorized by him or by the law to receive it extinguishes the waiver of the acceleration clause provided in the contract. We
cannot sustain the legality of the foreclosure under the peculiar judgment. The obligation is not extinguished and remains
facts of this case, because there is substantial performance of the suspended until the payment by commercial document is actually
obligation on the part of petitioner. Under Article 1235 of the Civil realized (Art. 1249, Civil Code, par. 3).
Code, when the creditor accepts performance, knowing its
incompleteness and irregularity without protest or objection, the Fortunado vs. CA
obligation is deemed complied with. Facts: Petitioners contended that the check issued by NSC, not
being legal tender, could not be considered payment of the
De Castro vs. CA, Artigo redemption price. Private respondents however contended that
Facts: Private respondent Francisco Artigo sued petitioners Article 1249 of the New Civil code is inapplicable as it "deals with
Constante A. De Castro to collect the unpaid balance of his a mode of extinction of debts" while the "right to redeem is not an
broker's commission from the De Castros. obligation, nor is it intended to discharge a pre-existing debt."
Appellants(De Castros) were co-owners of four (4) lots. Issue: W/N tender of payment through a check is valid?
Appellee(Artigo) was authorized by appellants to act as real Ruling: NO. Tolentino v. Court of Appeals, besides citing
estate broker in the sale of these properties for the amount Javellana, stresses the liberality of the courts in redemption
of P23,000,000.00, five percent (5%) of which will be given to the cases. On the issue of the applicability of Article 1249 of the Civil
agent as commission. Eventually, sometime in May of 1985, the Code and the validity of the tender of payment through check, this
sale of 2 lots was consummated. Appellee received from Court held: Redemption is not rendered invalid by the fact
appellants P48,893.76 as commission. that the said officer accepted a check for the amount
It was then that the rift between the contending parties soon necessary to make the redemption instead of requiring
emerged. Appellee apparently felt short changed because payment in money. It goes without saying that if he had seen fit
according to him, his total commission should be P352,500.00 to do so, the officer could have required payment to be made in
which is five percent (5%) of the agreed price. lawful money, and he undoubtedly, in accepting a check, placed
Issue: Whether Artigo's claim has been extinguished by full himself in a position where he could be liable to the purchaser at
payment, waiver or abandonment? the public auction if any damage had been suffered by the latter
Ruling: NO. The De Castros also contend that Artigo's inaction as a result of the medium in which payment was made. But this
as well as failure to protest estops him from recovering more than cannot affect the validity of the payment.
what was actually paid him. The De Castros cite Article 1235. TENDER OF CHECK SUFFICIENT TO COMPEL
The De Castros' reliance on Article 1235 of the Civil REDEMPTION BUT IS NOT IN ITSELF A PAYMENT. We are
Code is misplaced. Artigo's acceptance of partial payment of his not, by this decision, sanctioning the use of a check for the
commission neither amounts to a waiver of the balance nor puts payment of obligations over the objection of the creditor. What we
him in estoppel. This is the import of Article 1235 which was are saying is that a check may be used for the exercise of the
explained in this wise: right of redemption, the same being a right and not an obligation.
"The word accept, as used in Article 1235 of the Civil The tender of a check is sufficient to compel redemption but is not
Code, means to take as satisfactory or sufficient, or agree to an in itself a payment that relieves the redemptioner from his liability
incomplete or irregular performance. Hence, the mere receipt of to pay the redemption price. In other words, while we hold that the
a partial payment is not equivalent to the required private respondents properly exercised their right of redemption,
acceptance of performance as would extinguish the whole they remain liable, of course, for the payment of the redemption
obligation." price.
There is thus a clear distinction between acceptance and
mere receipt. In this case, it is evident that Artigo merely received Papa vs. A.U. Valencia, et. al.
the partial payment without waiving the balance. Thus, there is no Facts: Respondents A.U. Valencia and Pearroyo filed a
estoppel to speak of. complaint for specific performance against herein petitioner
Myron C. Papa, as administrator Angela M. Butte.
Cases: The complaint alleged that petitioner Myron C. Papa, acting as
PAL vs. CA attorney-in-fact of Angela M. Butte, sold to respondent Pearroyo,
Issue: The payment made by the petitioner to the absconding through respondent Valencia, a parcel of land, that prior to the
sheriff was not in cash or legal tender but in checks. The checks alleged sale, the said property, together with several other parcels
were not payable to Amelia Tan or Able Printing Press but to the of land likewise owned by Angela M. Butte, had been mortgaged
absconding sheriff. by her to the Associated Banking, that it was only upon the
Did such payments extinguish the judgment debt? release of the title to the property, that respondents Valencia and
Ruling: NO. Article 1249. Pearroyo discovered that the mortgage rights of the bank had
In the absence of an agreement, either express or been assigned to one Tomas L. Parpana, then, herein petitioner
implied, payment means the discharge of a debt or obligation in had been collecting monthly rentals from the tenants of the
money and unless the parties so agree, a debtor has no rights, property, knowing that said property had already been sold to
except at his own peril, to substitute something in lieu of cash as private respondents; that despite repeated demands from said
medium of payment of his debt. Consequently, unless authorized respondents, petitioner refused and failed to deliver the title to the
to do so by law or by consent of the obligee a public officer has property.
no authority to accept anything other than money in payment of Petitioner, likewise, claimed that he could not recall in
an obligation under a judgment being executed. Strictly speaking, detail the transaction which allegedly occurred in 1973; that he
the acceptance by the sheriff of the petitioner's checks, in the did not have TCT No. 28993 in his possession; that he could not
case at bar, does not, per se, operate as a discharge of the be held personally liable as he signed the deed merely as
judgment debt. attorney-in-fact of said Angela M. Butte.
Since a negotiable instrument is only a substitute for Issue: W/N delivery of checks produces payment only when
money and not money, the delivery of such an instrument does it is cashed.
not, by itself, operate as payment (See Art. 1249). A check, Ruling: NO. It is an undisputed fact that respondents Valencia
whether a manager's check or ordinary cheek, is not legal tender, and Pearroyo had given petitioner Myron C. Papa the amounts
and an offer of a check in payment of a debt is not a valid tender of (P5,000.00) in cash, and (P40,000.00) in check, in payment of
of payment and may be refused receipt by the obligee or creditor. the purchase price of the subject lot. After more than ten (10)
Mere delivery of checks does not discharge the obligation under a years from the payment in party by cash and in part by check, the
presumption is that the check had been encashed, since failure to but rather at the rate of exchange prevailing at the time the
do so result to unreasonable and unexplained delay. complainant's cause of action accrued or at the time he was
While it is true that the delivery of a check produces the illegally dismissed on 21 July 1988.
effect of payment only when it is cashed, pursuant to Art. 1249 of Issue: W the rate of exchange to be applied should be the
the Civil Code, the rule is otherwise if the debtor is prejudiced by prevailing rate of exchange at the time of payment?
the creditor's unreasonable delay in presentment. This is in Ruling: YES. In the case of Republic Resources and
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harmony with Article 1249 of the Civil Code under which payment Development Corporation v. Court of Appeals, reiterating our
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by way of check or other negotiable instrument is conditioned on decision in Kalalo v. Luz, with regard to obligations incurred
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its being cashed, except when through the fault of the creditor, after enactment of RA No. 529 on June 16, 1950, we also held
the instrument is impaired. The payee of a check would be a that the rate of exchange to be applied should be that prevailing
creditor under this provision and if its no-payment is caused by at the time of payment.
his negligence, payment will be deemed effected and the As a consequence of our affirmance of the POEA award, we find
obligation for which the check was given as conditional payment incorrect the NLRC Resolution of March 4, 1991 to the effect that
will be discharged. the proper rate of exchange to be applied in converting the award
Considering that respondents Valencia and Pearroyo of US$11,550.00 to its equivalent in Philippine currency is that
had fulfilled their part of the contract of sale by delivering the prevailing at the time complainant's cause of action accrued and
payment of the purchase price, said respondents, therefore, had not at the time of actual payment as ruled by the POEA.
the right to compel petitioner to deliver to them the owner's
duplicate of TCT of Angela M. Butte and the peaceful possession Singson vs. CALTEX
and enjoyment of the lot in question. Facts: Petitioner and respondent entered into a contract of lease.
Petitioner asked respondent to adjust or increase the amount of
Union Bank vs. Sps. Tiu rentals citing that the country was experiencing extraordinary
Facts: Petitioner Union Bank and respondent spouses the inflation. In a letter, respondent refused petitioner's request.
spouses Tiu entered into a Credit Line Agreement. The spouses Petitioner instituted a complaint the payment by
Tiu took out various loans pursuant to this CLA in the total respondent of adjusted rentals based on the value of the
amount of three million six hundred thirty-two thousand dollars Philippine peso at the time the contract of lease was executed.
(US$3,632,000.00), as evidenced by PNs. The complaint invoked Article 1250 of the Civil Code, stating that
Asserting that the spouses Tiu failed to comply with the payment since the execution of the contract of lease in 1968 an
schemes set up in the Restructuring Agreement, Union Bank extraordinary inflation had supervened resulting from the
initiated extrajudicial foreclosure proceedings on the residential deterioration of worldwide economic conditions, a circumstance
property of the spouses Tiu. that was not foreseen and could not have been reasonably
The spouses Tiu claim that from the beginning the loans were in foreseen by the parties at the time they entered into contract.
pesos, not in dollars. Their office clerk, Lilia Gutierrez, testified Issue: Whether there existed an extraordinary inflation during the
that the spouses Tiu merely received the peso equivalent of their period 1968 to 1983 that would call for the application of Article
US$3,632,000.00 loan at the rate of US$1=P26.00. 1250 of the Civil Code and justify an adjustment or increase of the
Issue: W/N the loan should be paid in pesos? rentals between the parties.
Ruling: No. The testimony of Lila Gutierrez, which merely attests Ruling: NO. Article 1250.
to the fact that the spouses Tiu received the peso equivalent of We have held extraordinary inflation to exist when there
their dollar loan, proves the intention of the parties that such loans is a decrease or increase in the purchasing power of the
should be paid in pesos. If such had been the intention of the Philippine currency which is unusual or beyond the common
parties, the promissory notes could have easily indicated the fluctuation in the value of said currency, and such increase or
same. decrease could not have been reasonably foreseen or was
Such stipulation of payment in dollars is not prohibited manifestly beyond the contemplation of the parties at the time of
by any prevailing law or jurisprudence at the time the loans were the establishment of the obligation.
taken. In this regard, Article 1249. The supervening of extraordinary inflation is never
On July 5, 1996, RA No. 8183 took effect, expressly assumed. The party alleging it must lay down the factual basis for
repealing RA No. 529 in Section 2 thereof. The same statute also the application of Article 1250.
explicitly provided that parties may agree that the obligation or While there was a decline in the purchasing power of the
transaction shall be settled in a currency other than Philippine Philippine currency from the period 1966 to 1986, such cannot be
currency at the time of payment. considered as extraordinary; rather, it is a normal erosion of the
Although the Credit Line Agreement between the value of the Philippine peso which is a characteristic of most
spouses Tiu and Union Bank was entered into on November 21, currencies.
1995, when the agreement to pay in foreign currency was still "Erosion" is indeed an accurate description of the trend
considered void under Republic Act No. 529, the actual loans, as of decline in the value of the peso in the past three to four
shown in the promissory notes, were taken out from September decades. Unfortunate as this trend may be, it is certainly distinct
22, 1997 to March 26, 1998, during which time RA No. 8183 was from the phenomenon contemplated by Article 1250.
already in effect. Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an official
Cases: declaration thereof by competent authorities.
Philippine Manpower Services vs. NLRC
Facts: Petitioners herein appealed said POEA decision before Cases:
public respondent (NLRC). The NLRC, in its Resolution modified Sps. Tan vs. China Banking Corp.
the decision of the POEA but only insofar as it corrected the Facts: On several occasions, Lorenze Realty represented by
POEA on the proper rate of exchange to be applied in converting petitioners obtained from China Bank various amounts of loans
the award of US$11,550.00 to its equivalent in Philippine and credit accommodations.
currency. As a security for the said obligations, Lorenze Realty executed
It thus held: simple fairness dictates that the payment of the Real
awards in the Philippine Currency should not be "at the rate of Estate Mortgages. Subsequently, Lorenze Realty incurred in
exchange at the time of payment," as mandated by the POEA, default in the payment of its amortization prompting China Bank
to cause the extra-judicial foreclosure. Mortgaged properties were claim solely on the testimony of Marciano Tan that he proposed to
sold at a public auction wherein China Bank emerged as the extinguish petitioners obligation by the surrender of the nine
highest bidder for the amount of P85M. buses to the respondent acceded to as shown by receipts its
In its effort to collect the deficiency obligation, China Bank representative made. However, the receipts executed by
initiated an action for the collection of sum of money against the respondents representative as proof of an agreement of the
Lorenze Realty. parties that delivery of the buses to private respondent would
Issue: Whether lorenze realty's obligation is fully settled when the result in extinguishing petitioners obligation do not in any way
real properties constituted as securities for the loan were sold at reflect the intention of the parties that ownership thereof by
the public auction for 85M. respondent would be complete and absolute. The receipts show
Ruling: NO. Lorenze Realty argues that the proceeds of the sale that the two buses were delivered to respondent in order that it
of the foreclosed properties in the amount of P85M is more than would take custody for the purpose of selling the same. The
enough to cover the principal amount of the loan. receipts themselves in fact show that petitioners deemed
China Bank maintains that the obligation of Lorenze respondent as their agent in the sale of the two vehicles
Realty is not extinguished by the foreclosure and sale of real whereby the proceeds thereof would be applied in payment
properties constituted as securities citing Article 1253 payment of of petitioners indebtedness to respondent. Such an
the principal shall not be deemed to have been made until the agreement negates transfer of absolute ownership over the
interests have been covered. By first applying the proceeds of the property to respondent, as in a sale.
sale to the interest, penalties and expenses of the sale, there
yields a balance in the principal obligation in the amount of P29M. PNB vs. Dee
Obligations are extinguished, among others, by payment Facts: respondent Teresita Tan Dee (Dee) bought from
or performance, the mode most relevant to the factual situation in respondent Prime East Properties Inc. (PEPI) on an
the present case. Under Article 1232, 1233. In contracts of loan, installment basis a residential lot. PEPI obtained a loan from
the debtor is expected to deliver the sum of money due the petitioner, secured by a mortgaged including Dees property.
creditor. The provisions must be read in relation with the other The petitioner claims that it has a valid mortgage over Dees
rules on payment, such as the application of payment Article property, as part of the property mortgaged by PEPI to it to
1252. secure its loan obligation, and that Dee and PEPI are bound by
In the event that the debtor failed to exercise the right to such mortgage.
elect, the creditor may choose to which among the debts the Respondent PEPI, on the other hand, claims that the title over the
payment is applied as in the case at bar. It is noteworthy that after subject property is one of the properties due for release by the
the sale of the foreclosed properties at the public auction, petitioner as it has already been the subject of a Memorandum of
Lorenze Realty failed to manifest its preference as to which Agreement and dacion en pago entered into between them.
among the obligations that were all due the proceeds of the sale Issue: W/N the execution of Dacion en Pago extinguished PEPIs
should be applied. Its silence can be construed as acquiescence obligation.
to China Bank's application of the payment first to the interest and Ruling: YES. Dacion en pago or dation in payment is the delivery
penalties and the remainder to the principal which is sanctioned and transmission of ownership of a thing by the debtor to the
by Article 1253. creditor as an accepted equivalent of the performance of the
That they assume that the obligation is fully satisfied by obligation. It is a mode of extinguishing an existing obligation and
the sale of the securities does not hold any water. Nowhere in our partakes the nature of sale as the creditor is really buying the
statutes and jurisprudence do they provide that the sale of the thing or property of the debtor, the payment for which is to be
collaterals constituted as security of the obligation results in the charged against the debtors debt. Dation in payment
extinguishment of the obligation. extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be
Cases: proved, unless the parties by agreement express or implied, or
Phil. Lawin Bus vs. CA, Advance Capital by their silence consider the thing as equivalent to the
Facts: Plaintiff Advance Capital Corporation, a licensed lending obligation, in which case the obligation is totally extinguished.
investor, extended a loan to defendant Philippine Lawin Bus There is nothing on record showing that the
Company. To guarantee payment of the loan, defendant Lawin Memorandum of Agreement has been nullified or is the
executed in favor of plaintiff the following documents: (1) A Deed subject of pending litigation; hence, it carries with it the
of Chattel Mortgage wherein 9 units of buses were constituted as presumption of validity. Consequently, the execution of the
collaterals. dation in payment effectively extinguished respondent
Defendant LAWIN failed to pay. Thus, plaintiff foreclosed the PEPIs loan obligation to the petitioner insofar as it covers
mortgaged buses. "17.A. Sale of the nine (9) units passenger the value of the property purchased by Dee. This negates the
buses the proceeds of which will be credited against the loan petitioners claim that PEPI must first redeem the property before
amount as full payment thereof; or in the alternative. it can cancel or release the mortgage. As it now stands, the
Issue: Whether there was dacion en pago between the parties petitioner already stepped into the shoes of PEPI and there is no
upon the surrender or transfer of the mortgaged buses to the more reason for the petitioner to refuse the cancellation or
respondent. release of the mortgage. Whatever claims the petitioner has
Ruling: NO. In dacion en pago, property is alienated to the against PEPI and AFP-RSBS, monetary or otherwise, should not
creditor in satisfaction of a debt in money. It is "the delivery and prejudice the rights and interests of Dee over the property, which
transmission of ownership of a thing by the debtor to the creditor she has already fully paid for.
as an accepted equivalent of the performance of the obligation."
Article 1245 of the Civil Code provides that the law on Cases:
sales shall govern an agreement of dacion en pago. A contract of Sps. Ercillo vs. CA
sale is perfected at the moment there is a meeting of the minds of Facts: Private respondents spouses Benjamin Cifra and Lutgarda
the parties thereto upon the thing which is the object of the Cifra leased an apartment to herein petitioners spouses Teofilo
contract and upon the price. Ercillo.
In this case, there was no meeting of the minds between Private respondents filed an action for unlawful detainer, in the
the parties on whether the loan of the petitioners would be complaint that the petitioners failed to pay the rentals.
extinguished by dacion en pago. The petitioners anchor their
Petitioners, on the other hand, alleged that they never defaulted effect whatsoever because it was not accompanied by actual
in the payment of their rentals; that private respondents refused to payment or followed by consignation. Hence, it did not
accept their payments; that they deposited the payments with the suspend the running of interest.
Family Savings Bank.
Issue: W/N the deposit of the rentals with the bank released the Cases:
petitioners from their obligation to pay rentals. Syjuco vs. CA
Ruling: NO. The petitioners, for their part, assert that their Facts: Pilipinas Bank(PB) leased from the Syjucos. Contract of
obligation to pay rent had been extinguished in view of their Lease allows the PB, as lessee, to "sub-lease any part or portion
consignation of the rent due with the bank after the private of the premises or the whole portion thereof without obtaining the
respondents refused to accept them. consent of the lessors thereto."
The law on tender of payment and consignation as a mode of Subsequently, the PB sub-leased to Eugenio Trinidad,
extinguishing an obligation is covered by Article 1256, Article President of KDIC. Contract of Sub-lease prohibited the
1257 and Article 1258. sublessee Eugenio Trinidad from further subleasing the property
It is the requirement under Article 1258 which had not subleased to him.
been strictly complied with by petitioners. What the law requires is Inspite of the prohibition to sublease and in violation
the deposit of the thing due at the disposal of judicial authority thereof, Eugenio Trinidad "constructed stalls/stores thereon and
before whom the tender of payment shall be proved, in a proper leased the same to 12 persons who conducted their individual
case. The deposit of the rentals with the bank is not the business.
consignation contemplated by law. Depositing the rentals in the After the expiration of the lease, Syjucos filed an action for
bank does not place such rental at the disposal of the judicial unlawful detainer, against the PB.
authority. At the outset, there is no doubt that the lessee in a
contract of lease is obliged to return the thing subject of said
Sps. Bonostro vs. Sps. Luna contract upon the expiration of the period agreed upon
Facts: Spouses Luna, filed a Complaint for Rescission of Issue: W/N Article 1266 is applicable in this case.
Contract and Damages against the spouses Bonrostro praying for Ruling: NO. Article 1266 cannot validly apply to the present case
the payment by the latter of their unpaid obligation. since it makes express reference to obligations to do (or personal
In their Answer, the spouses Bonrostro averred that they obligations). This being so, it may not be invoked in exempting
were willing to pay their total balance of P630,000.00 to the Pilipinas Bank (as lessee) from returning the whole property to
spouses Luna. However, during the time that they were ready to the owners thereof for such obligation to return is in the nature of
pay the said amount. Constancia and her lawyer, Atty. Carbon, an obligation to give (or a real obligation), in which case Article
did not show up. Then, Lourdes sent Atty. Carbon a letter 1262, not Article 1266, applies. Nevertheless, for reasons already
expressing her desire to pay the balance, but received no discussed above, Pilipinas is deemed to have fully satisfied its
response from the latter. obligation to return the whole property leased.
Issue: W/N the letter amounts to tender of payment?
Ruling: NO. The spouses Bonrostro assert that Lourdes letter PNCC vs. CA
amounts to tender of payment of the remaining balance Facts: Lease contract, commencing on the date of issuance of
amounting to P630,000.00. Accordingly, thenceforth, accrual of the industrial clearance by the Ministry of Human Settlements.
interest should be suspended. Petitioner obtained from the MHS a Temporary Use Permit for the
Tender of payment "is the manifestation by the debtor of proposed rock crushing project. Private respondents wrote
a desire to comply with or pay an obligation. If refused without just petitioner requesting payment of the first annual rental.
cause, the tender of payment will discharge the debtor of the In its reply, petitioner then expressed its intention to terminate the
obligation to pay but only after a valid consignation of the sum contract, as it had decided to cancel or discontinue with the rock
due shall have been made with the proper court.Consignation is crushing project "due to financial, as well as technical, difficulties."
the deposit of the proper amount with a judicial authority in Invoking Article 1266 and the principle of rebus sic
accordance with rules prescribed by law, after the tender of stantibus, petitioner asserts that it should be released from the
payment has been refused or because of circumstances which obligatory force of the contract of lease because the purpose of
render direct payment to the creditor impossible or inadvisable. the contract did not materialize due to unforeseen events and
"Tender of payment, without more, produces no causes beyond its control, i.e., due to the abrupt change in
effect." "To have the effect of payment and the consequent political climate after the EDSA Revolution and financial
extinguishment of the obligation to pay, the law requires the difficulties.
companion acts of tender of payment and consignation." Issue: W/N Art. 1266 and the Priniciple of Rebus sic stantibus
As to the effect of tender of payment on interest, the is applicable.
accrual of interest on the obligation will be suspended from the Ruling: NO.
date of such tender. But when the tender of payment is not 1. The law recognizes exceptions to the principle of the
accompanied by the means of payment, and the debtor did not obligatory force of contracts. One exception is laid down in Article
take any immediate step to make a consignation, then interest is 1266 of the Civil Code, which reads: "The debtor in obligations to
not suspended from the time of such tender. do shall also be released when the prestation becomes legally or
Here, the subject letter merely states Lourdes physically impossible without the fault of the obligor."
willingness and readiness to pay but it was not accompanied by Petitioner cannot, however, successfully take refuge in
payment. She claimed that she made numerous telephone calls the said article, since it is applicable only to obligations "to do,"
to Atty. Carbon reminding the latter to collect her payment, but, and not to obligations "to give." An obligation "to do" includes all
neither said lawyer nor Constancia came to collect the payment. kinds of work or service; while an obligation "to give" is a
After that, the spouses Bonrostro took no further steps to effect prestation which consists in the delivery of a movable or an
payment. They did not resort to consignation of the payment with immovable thing in order to create a real right, or for the use of
the proper court despite knowledge that under the contract, non- the recipient, or for its simple possession, or in order to return it to
payment of the installments on the agreed date would make them its owner.
liable for interest thereon. The spouses Bonrostro erroneously The obligation to pay rentals or deliver the thing in a contract of
assumed that their notice to pay would excuse them from paying lease falls within the prestation "to give"; hence, it is not covered
interest. Their claimed tender of payment did not produce any within the scope of Article 1266. At any rate, the unforeseen event
and causes mentioned by petitioner are not the legal or physical contract. The cited article (Article 1267) does not grant the courts
impossibilities contemplated in the said article. (the) authority to remake, modify or revise the contract or to fix
2. The principle of rebus sic stantibus neither fits in with the division of shares between the parties as contractually
the facts of the case. Under this theory, the parties stipulate in the stipulated with the force of law between the parties. Respondent's
light of certain prevailing conditions, and once these conditions complaint for modification of contract manifestly has no basis in
cease to exist, the contract also ceases to exist. This theory is law and therefore states no cause of action. The courts cannot
said to be the basis of Article 1267 of the Civil Code. even in equity grant the relief sought.
This article, which enunciates the doctrine of unforeseen The ruling in the Occea case is not applicable because
events, is not, however, an absolute application of the principle we agree with respondent court that the allegations in private
of rebus sic stantibus, which would endanger the security of respondent's complaint and the evidence it has presented
contractual relations. The parties to the contract must be sufficiently made out a cause of action under Article 1267. We,
presumed to have assumed the risks of unfavorable therefore, release the parties from their correlative obligations
developments. It is therefore only in absolutely exceptional under the contract. However, we have to take into account the
changes of circumstances that equity demands assistance for the possible consequences of merely releasing the parties therefrom:
debtor. petitioners will remove the telephone wires/cables in the posts of
In this case, petitioner wants this Court to believe that private respondent, resulting in disruption of their service to the
the abrupt change in the political climate of the country after the public; while private respondent, in consonance with the contract
EDSA Revolution and its poor financial condition "rendered the will return all the telephone units to petitioners, causing prejudice
performance of the lease contract impractical and inimical to the to its business. We shall not allow such eventuality. Rather, we
corporate survival of the petitioner." require, as ordered by the trial court: 1) petitioners to pay private
This Court cannot subscribe to this argument. As pointed out by respondent for the use of its posts and 2) private respondent to
private respondents: pay petitioner the monthly dues of all its telephones. The peculiar
It is a matter of record that petitioner PNCC entered into circumstance of the present case, as distinguished further from
a contract with private respondents. Prior thereto, it is of judicial the Occea case, necessitates exercise of our equity
notice that after the assassination of Senator Aquino, the country jurisdiction. By way of emphasis, we reiterate the rationalization of
has experienced political upheavals, turmoils, almost daily mass respondent court that: we are not making a new contract for the
demonstrations, unprecedented, inflation, peace and order parties herein, but we find it necessary to do so in order not to
deterioration, the Aquino trial and other things that brought about disrupt the basic and essential services being rendered by both
the hatred of people even against crony corporations. Pres. parties herein to the public and to avoid unjust enrichment by
Marcos, being interviewed live on U.S. television announced that appellant at the expense of plaintiff.
there would be a snap election. Notwithstanding the Sps. Poon vs. Prime Savings Bank
above, petitioner PNCC entered into the contract of lease with Facts: Petitioners owned a commercial building. Matilde Poon
private respondents with open eyes of the deteriorating conditions and
of the country. Respondent executed a 10-year Contract of Lease over the
building for the latter's use as its branch office.
NAGATEL CO. vs. CA Barely three years later, however, the BSP placed respondent
Facts: NAGATEL is a telephone company, respondent under the receivership. Respondent vacated the leased premises
CASURECO is an electric corporation. The parties entered into and surrendered them to petitioners. Subsequently, the PDIC
a contract for the use by petitioners in the operation of its issued petitioners a demand letter asking for the return of the
telephone service the electric light posts of private respondent in unused advance rental on the ground that paragraph 24 of the
Naga City. In consideration therefor, petitioners agreed to install, lease agreement had become inoperative, because respondent's
free of charge, 10 telephone connections for the use by private closure constituted force majeure. The PDIC likewise invoked the
respondent. principle of rebus sic stantibus under Article 1267 as alternative
After the contract had been enforced for over ten (10) legal basis for demanding the refund.
years, private respondent filed against petitioners for reformation Petitioners, however, refused the PDIC's demand. They
of the contract, on the ground that it is too one-sided in favor of maintained that they were entitled to retain the remainder of the
petitioners. advance rentals following paragraph 24 of their Contract.
Issue: W/N Article 1267 is applicable. Issue: Whether respondent may be released from its contractual
Ruling: YES. obligations to petitioners on grounds of fortuitous event under
Article 1267 speaks of "service" which has become so Article 1174 and unforeseen event under Article 1267.
difficult. Taking into consideration the rationale behind this Ruling: NO. The closure of respondent's business was neither a
provision, the term "service" should be understood as referring to fortuitous nor an unforeseen event that rendered the lease
the "performance" of the obligation. In the present case, the agreement functus officio.
obligation of private respondent consists in allowing petitioners to Tagaytay Realty Co., Inc. v. Gacutan lays down the requisites for
use its posts in Naga City, which is the service contemplated in the application of Article 1267, as follows:
said article. Furthermore, a bare reading of this article reveals that 1. The event or change in circumstance could not have been
it is not a requirement thereunder that the contract be for future foreseen at the time of the execution of the contract.
service with future unusual change. 2. It makes the performance of the contract extremely difficult but
Article 1267 states in our law the doctrine of unforseen not impossible.
events. This is said to be based on the discredited theory of rebus 3. It must not be due to the act of any of the parties.
sic stantibus in public international law; under this theory, the 4. The contract is for a future prestation.
parties stipulate in the light of certain prevailing conditions, and The difficulty of performance should be such that the
once these conditions cease to exist the contract also ceases to party seeking to be released from a contractual obligation would
exist. Considering practical needs and the demands of equity and be placed at a disadvantage by the unforeseen event. Mere
good faith, the disappearance of the basis of a contract gives rise inconvenience, unexpected impediments, increased expenses, or
to a right to relief in favor of the party prejudiced. even pecuniary inability to fulfill an engagement, will not relieve
In a nutshell, in the Occea case respondent's complaint the obligor from an undertaking that it has knowingly and freely
seeks not release from the subdivision contract but that the court contracted.
"render judgment modifying the terms and conditions of the
In a reciprocal contract such as the lease in this case, Trans-Pacific initiated an action for specific performance.
one obligation of respondent as the lessee was to pay the agreed There it prayed that the mortgage over the two parcels of land be
rents for the whole contract period. It would be hard-pressed to released and that its obligation to the bank be declared as having
complete the lease term since it was already out of business only been fully paid.
three and a half years into the 10-year contract period. Without a Issue: Whether or not petitioner has indeed paid in full its
doubt, the second and the fourth requisites mentioned above are obligation to respondent bank.
present in this case. Ruling: Art. 1271 presumption, petitioner fully discharged, but
The first and the third requisites, however, are lacking. It rebutted by Trans-Pacifics admission on the unpaid balance
must be noted that the lease agreement was for 10 years. As representing interest.
shown by the unrebutted testimony of Jaime Poon during trial, the The surrender and return to plaintiffs of the promissory
parties had actually considered the possibility of a deterioration or notes evidencing the consolidated obligation as restructured,
loss of respondent's business within that period. produces a legal presumption that Associated had thereby
Clearly, the closure of respondent's business was not an renounced its actionable claim against plaintiffs (Art. 1271, NCC).
unforeseen event. As the lease was long-term, it was not lost on The presumption is fortified by a showing that said promissory
the parties that such an eventuality might occur, as it was in fact notes all bear the stamp "PAID", and has not been otherwise
covered by the terms of their Contract. Besides, as We have overcome.
previously discussed, the event was not independent of It may not be amiss to add that Article 1271 of the Civil
respondent's will. Code raises a presumption, not of payment, but of the
renunciation of the credit where more convincing evidence
Cases: would be required than what normally would be called for to
Victor Yam and Yek Sun Lent vs. CA prove payment. The rationale for allowing the presumption of
Facts: Petitioners subsequently obtained a second IGLF loan of renunciation in the delivery of a private instrument is that,
P300T evidenced by two promissory notes. unlike that of a public instrument, there could be just one copy of
Petitioners paid P410T by means of a PB check, receipt the evidence of credit. Where several originals are made out of a
of which was acknowledged by Destajo. The corresponding private document, the intendment of the law would thus be to
voucher for the check bears the following notation: "full payment refer to the delivery only of the original original rather than to the
of IGLF LOAN." original duplicate of which the debtor would normally retain a
Respondent demanded from petitioners the balance, copy. It would thus be absurd if Article 1271 were to be applied
however no replies, thus filed for the collection of a sum of differently.
money. As petitioner would rather vehemently deny, undisputed
In their Answer, petitioners claimed that they had fully is the fact of its admission regarding the unpaid balance
paid their obligation to private respondent, that this fact of full representing interests. Hence, petitioner's attempt to seek refuge
payment is reflected in the voucher accompanying the PB check under Art. 1271. As previously discussed, the presumption
they issued, which bore the notation "full payment of IGLF loan." generated by Art. 1271 is not conclusive and was successfully
Issue: Whether petitioners are liable for the payment of the rebutted by private respondent. Under the circumstances, i.e.,
penalties and service charges on their loan. outright and honest letters of admission vis-a-vis counsel-induced
Ruling: YES. Art. 1270, par. 2 of the Civil Code provides that recalcitrance, there could hardly be honest belief.
express condonation must comply with the forms of donation. Art.
748, par. 3 provides that the donation and acceptance of a Cases:
movable, the value of which exceeds P5,000,00, must be MPCC vs. CA
made in writing, otherwise the same shall be void. In the case at It is clear from the record that both corporations, petitioner
bar, it is undisputed than the alleged agreement to condone Mindanao Portland Cement Corporation (appellant) and
P266T of the second IGLF loan was not reduced in writing. respondent Pacweld Steel Corporation (appellee), were creditors
The notation in "full payment of IGLF loan" merely states and debtors of each other, their debts to each other consisting
petitioners' intention in making the payment, but in no way does it in final and executory judgments of the Court of First Instance
bind private respondent. Indeed, if private respondent really in two (2) separate cases, ordering the payment to each other of
condoned the amount in question, petitioners should have asked the sum of P10,000.00 by way of attorney's fees. The two (2)
for a certificate of full payment from respondent corporation. obligations, therefore, respectively offset each other,
As held in Villanueva v. CA "the appointment of a compensation having taken effect by operation of law and
receiver operates to suspend the authority of a [corporation] and extinguished both debts to the concurrent amount of P10,000.00,
of its directors and officers over its property and effects, such pursuant to the provisions of Arts. 1278, 1279 and 1290 of the
authority being reposed in the receiver:"Thus, Sobrepeas had no Civil Code, since all the requisites provided in Art. 1279 of the
authority to condone the debt. said Code for automatic compensation "even though the creditors
and debtors are not aware of the compensation" were duly
Trans-Pacific vs. CA present.
Facts: Petitioner applied for and was granted several financial
accommodations. The loans were evidenced and secured by four EGV Realty vs. CA
4 promissory notes, a real estate mortgage. Facts: E.G.V. Realty is the owner/develops of a seven-storey
Unable to settle its obligations in full, the released condominium. Respondent Unisphere demanded compensation
parcels of land were then sold and the proceeds were turned over and reimbursement from petitioner CCC for the losses incurred as
to the bank and applied to Trans-Pacific's restructured loan. a result of the robbery. Petitioner denied any liability for the losses
Subsequently, respondent bank returned the duplicate original claimed to have been incurred by respondent Unisphere, stating
copies of the three promissory notes to Trans-Pacific with the that the goods lost belonged to Amtrade, a third party. As a
word "PAID" stamped thereon. consequence of the denial, respondent Unisphere withheld
Despite the return of the notes, Associated Bank payment of its monthly dues.
demanded from Trans-Pacific payment representing accrued Ruling: We fully agree with the appellate court's dissertation on
interest. According to the bank, the promissory notes were the nature and character of a set-off or compensation. However,
erroneously released. we cannot subscribe to its conclusion that a set-off or
compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take Caltex vs. COA
place when two persons, in their own right, are creditors and Francia vs. IAC and Fernandez, contend that there can be no
debtors of each other. Compensation is "a mode of extinguishing offsetting of taxes against the claims that a taxpayer may have
to the concurrent amount, the obligations of those persons who in against the government, as taxes do not arise from contracts or
their own right are reciprocally debtors and creditors of each depend upon the will of the taxpayer, but are imposed by law.
other" and "the offsetting of two obligations which are reciprocally It is settled that a taxpayer may not offset taxes due from the
extinguished if they are of equal value, or extinguished to the claims that he may have against the government. Taxes cannot
8
concurrent amount if of different values." Article 1279 of the be the subject of compensation because the government and
same Code provides: taxpayer are not mutually creditors and debtors of each other and
Absent any showing that all of these requisites exist, a claim for taxes is not such a debt, demand, contract or
compensation may not take place. judgment as is allowed to be set-off.
At best, what respondent Unisphere has against petitioners is just
a claim, not a debt. Such being the case, it is not enforceable in Soriano vs. People
court. It is only the debts that are enforceable in court, there being Facts: Petitioner likewise argues that the CA also failed to
9
no apparent defenses inherent in them. Respondent Unisphere's consider Alagaos obligation to deliver to her of every harvest.
claim for its loss has not been passed upon by any legal authority Petitioner claims that her share in the harvest amounted
so as to elevate it to the level of a debt. So we held in Alfonso to P57,200 for four harvests. Therefore, applying the principle of
10
Vallarta v. Court of Appeals, et al., that: set off, it is Alagao who is indebted to petitioner in the amount
Compensation or offset takes place by operation of law when two of P26,323 (P57,200 minus P30,877).
(2) persons, in their own right, are creditor and debtor of each Respondent on the other hand contends that the amount of loan
other. For compensation to take place, a distinction must be extended to Alagao was P40,000 and not P51,730 as claimed by
made between a debt and a mere claim. A debt is a claim petitioner. Moreover, the entire value of the 398 sacks of corn
which has been formally passed upon by the highest grains shouId.not be set off with Alagaos loan since (1) the loan
authority to which it can in law be submitted and has been was not yet due and demandable at the time of delivery of the
declared to be a debt. A claim, on the other hand, is a debt in 398 sacks of corn grains.
embryo. It is mere evidence of a debt and must pass thru the Ruling: This Court rules that all the above requisites for
process prescribed by law before it develops into what is compensation are present in the instant case.
properly called a debt. First, petitioner and Alagao are debtors and creditors of each
Tested by the foregoing yardstick, it has not been sufficiently other. It is undisputable that petitioner and Alagao owe each
established that compensation or set-off is proper here as there is other sums of money. Petitioner owes P85,607 for the value of
lack of evidence to show that petitioners E.G.V. Realty and CCC the corn grains delivered to her by Alagao in September 1994
and respondent Unisphere are mutually debtors and creditors to while Alagao owes petitioner P51,730 by virtue of a loan
each other. extended by the latter in February 1994.
Second, both debts consist in a sum of money. There is no
Special Steel vs. Villareal issue as to the P85,607 debt by petitioner that it consists a sum of
Facts: Petitioner "sponsored" respondent Frederick So to attend money. As to the P51,730 received by Alagao from petitioner,
a training course in Kapfenberg, Austria conducted by BOHLER, though what was extended by petitioner consists of cash
petitioners principal company. When respondent returned nine advances and fertilizers, there is no dispute that said amount is
months thereafter, petitioner directed him to sign a memorandum payable in money.
providing that BOHLER requires trainees from Kapfenberg to Third, both debts are due. Upon delivery of the 398 sacks to
continue working with petitioner for a period of three (3) years petitioner, she was under the obligation to pay for the value
after the training. Otherwise, each trainee shall refund to thereof as buyer. As to Alagaos debt, the contract of loan
BOHLER $6K by way of set-off or compensation. Only 2 years provided that it is payable in February 1996. Though it was not
and 4 months after attending the training, respondent resigned yet due in September 1994 when she delivered the 398 sacks of
from petitioner. corn grains to petitioner, it eventually became due at the time of
In protest, respondents demanded from petitioner payment of trial of the instant case.
their separation benefits, commissions, vacation and sick leave Fourth, both debts are liquidated and demandable. A debt is
th
benefits, and proportionate 13 month pay. But petitioner refused liquidated when the amount is known or is determinable by
th
and instead, withheld their 13 month pay and other benefits. inspection of the terms and conditions of relevant
19
Ruling: Petitioner may not offset its claims against private documents. There is no dispute that the value of the 398 sacks
respondents monetary benefits. With respect to its being the of corn grains is P85,607. As to Alagaos debt, we disagree with
surety of Villareal, two requisites of compensation are lacking, to respondent People that the loan amount is only P40,000 since
wit: that each one of the obligors be bound principally, and that during pre-trial, Alagao herself admitted that she did not only
he be at the same time a principal creditor of the other and that receive P40,000 but P51,730 in the form of cash advances and
(the two debts) be liquidated and demandable (Art. 1279 (1) and fertilizers from petitioner. It is well settled that an admission made
(4), New Civil Code). And in respect to its claim for liquidated in a stipulation of facts at pre-trial by the parties is considered a
damages against So, there can be no compensation because his judicial admission and, under the Rules of Court, requires no
creditor is not petitioner but BOHLER (Art. 1278, New Civil proof. Such admission may be controverted only by a showing
Code). that it was made through a palpable mistake or that no such
20
As to respondent So, petitioner maintains that there can admission was made.
be a set-off or legal compensation between them. Consequently, And lastly, neither of the debts are subject of a controversy
th
it can withhold his 13 month pay and other benefits. commenced by a third person. There are no third-party claims
For legal compensation to take place, the requirements with respect to Alagaos P51,730 loan. As to petitioners P85,607
set forth in Articles 1278 and 1279 of the Civil Code, quoted debt representing the 398 sacks of corn grains, Alagao claims
below, must be present. In the present case, set-off or legal that she is not the sole owner of all the 398 sacks. This claim of
compensation cannot take place between petitioner and Alagao, however, was never substantiated and a perusal of the
respondent So because they are not mutually creditor and debtor information for estafa shows that the subject corn grains are all
of each other. owned by her. Moreover, the alleged other owners have not
commenced any action to protect their claim over it. Thus,
the P85, 607 debt cannot be considered subject of a controversy and (b) the direct assumption by DBP of FIs obligations to
by a third person. Bancom (assumed obligations).
With the presence of all the requisites mentioned in Article DBP, new owner of the processing plant, leased back
1279, legal compensation took effect by operation of law as the said property to FI (Lease Agreement) which was, in turn,
provided in Article 1290 of the Civil Code. obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement with
First United vs. Bayanihan Automotive Bancom (Assumption Agreement) whereby the former: (a)
Facts: Respondent learned that FUCC had ordered the payment confirmed its assumption of FIs obligations to Bancom; and (b)
stopped. That compensation was not proper because the claims undertook to remit up to 30% of any and all rentals due from FI to
of the petitioners as alleged in their counterclaim were not Bancom (subject rentals) which would serve as payment of the
liquidated and demandable. assumed obligations.
The petitioners withholding payment of the checks due to the Any balance of the Assumed Obligations after
breakdown of one of the dump trucks they had earlier purchased application of the entire rentals and or the entire sales proceeds
from respondent. That recoupment should not be restrictively actually received by Bancom on the Leased Properties shall be
interpreted but should include the concept of compensation or paid by DBP to Bancom not later than December 29, 1998.
set-off between two parties who had claims arising from different (Emphases supplied)
transactions; and that the series of purchases and the obligations Claiming that the subject rentals have not been duly
arising therefrom, being inter-related, could be considered as a remitted despite its repeated demands, Union Bank filed a
single and ongoing transaction for all intents and purposes. collection case against DBP. In opposition, DBP countered,
Ruling: Legal compensation was permissible among others, that the obligations it assumed were payable only
Legal compensation takes place when the requirements set forth out of the rental payments made by FI. Thus, since FI had yet to
in Article 1278 and Article 1279 are present. pay the same, DBPs obligation to Union Bank had not arisen.
A debt is liquidated when its existence and amount are Issue: W/N the CA correctly upheld the denial of Union Banks
12
determined. Accordingly, an unliquidated claim set up as a motion to affirm legal compensation.
counterclaim by a defendant can be set off against the Ruling: YES. The rule on legal compensation is stated in Article
plaintiffs claim from the moment it is liquidated by 1290 of the Civil Code which provides that "[w]hen all the
13
judgment. Article 1290 of the Civil Code provides that when all requisites mentioned in Article 1279 are present, compensation
the requisites mentioned in Article 1279 of the Civil Code are takes effect by operation of law, and extinguishes both debts to
present, compensation takes effect by operation of law, and the concurrent amount, even though the creditors and debtors are
extinguishes both debts to the concurrent amount. With not aware of the compensation."
petitioners expenses for the repair of the dump truck being In this case, Union Bank filed a motion to seek affirmation that
already established and determined with certainty by the lower legal compensation had taken place in order to effectively offset
courts, it follows that legal compensation could take place (a) its own obligation to return the funds it previously received
because all the requirements were present. Hence, the amount from DBP as directed under the September 6, 2005 Writ of
of P71T should be set off against petitioners unpaid obligation Execution with (b) DBPs assumed obligations under the
of P635T. Assumption Agreement. However, legal compensation could not
have taken place between these debts for the apparent reason
Cases: that requisites 3 and 4 under Article 1279 are not present. (1)
Traders Royal Bank vs. Castanares Since DBPs assumed obligations to Union Bank for remittance of
Issue: W/N petitioner validly applied, by way of the lease payments are in the Courts words in its Decision
compensation, the $4K telegraphic transfer remitted by "contingent on the prior payment thereof by [FW] to DBP," it
respondent. cannot be said that both debts are due (requisite 3 of Article
Ruling: YES. The subject promissory notes thus provide: 1279). (2) Also, in the same ruling, the Court observed that any
I/We, jointly and severally, further empower and authorize the deficiency that DBP had to make up (by December 29, 1998 as
TRADERS ROYAL BANK, at its option, and without notice, to set- per the Assumption Agreement) for the full satisfaction of the
off or to apply to the payment of this note any and all funds assumed obligations "cannot be determined until after the
Agreements for compensation of debts or any satisfaction of Foodmasters obligation to DBP." In this regard, it
obligations when the parties are mutually creditors and debtors cannot be concluded that the same debt had already been
are allowed under Art. 1282 of the Civil Code even though not all liquidated, and thereby became demandable (requisite 4 of Article
the legal requisites for legal compensation are present. Voluntary 1279).
or conventional compensation is not limited to obligations
which are not yet due. The only requirements for Cases:
conventional compensation are (1) that each of the parties can Mariano vs. People
fully dispose of the credit he seeks to compensate, and (2) that Appellant Candida Mariano, while admitting in her testimony that
they agree to the extinguishment of their mutual credits. she received from complainant Antonia Santos the subject three
Consequently, no error was committed by the trial court in holding (3) jewelries and signed a receipt of "Katibayan" (Exhibit "A")
that petitioner validly applied, by way of compensation, the $4.2K thereof on September 22, 1978, puts up the defense that the said
telegraphic transfer remitted by respondents foreign client jewelries "are one and the same jewelries" which are already in
through the petitioner. the possession of one Amelia Bote who, on September 30,
1978 executed a separate written agreement (Exhibit "4") with
Union Bank vs. Development Bank the complainant. With the agreed conditions that she (Bote) will
Facts: Foodmasters, Inc. (FI) had outstanding loan obligations to sell the said jewelries in cash within two (2) days from receipt
both Union Banks predecessor-in-interest, Bancom Development thereof and immediately turn-over the proceeds of the sale to the
Corporation (Bancom), and to DBP. complainant, or return the jewelries, if unsold, on October 2,
FI and DBP, among others, entered into a Deed of 1978. The agreed compensation or commission of Amelia Bote,
7
Cession of Property In Payment of Debt (dacion en pago) according to the agreement, shall be the overprice she makes on
whereby the former ceded in favor of the latter certain properties the value of each jewelry. It was further agreed in Exhibit "4" that
(including a processing plant) in consideration of the following: (a) Amelia Bote cannot sell the jewelries on credit or by installment,
the full and complete satisfaction of FIs loan obligations to DBP; nor can she lend, pledge or give the same as security. At the left
side margin of Exhibit "4" is the signature of appellant Candida debtor had assumed his place. In case of change in the person
Mariano as "Guarantor," which signature she admitted to be her of the debtor, the substitution must be clear and
29 30
own. express, and made with the consent of the creditor. Yet,
Ruling: YES. There was effectively a novation of the September these circumstances did not obtain herein, proving precisely that
22, 1978 agreement wherein petitioner Candida Mariano was Servando remained a solidary debtor against whom the entire or
initially obliged to sell in behalf of the complainant. The part of the obligation might be enforced.
complainant was shown to have acceded instead to the new Lastly, the extension of the maturity date did not
arrangement in which Ms. Bote would be her agent. constitute a novation of the previous agreement. It is settled that
The novation occurred through a substitution of the person of the an extension of the term or period of the maturity date does
agent and the assumption by the accused of an obligation of a not result in novation.
guarantor. (Article 1291, New Civil Code) Incidentally, the
corresponding change in the cost of each of the jewelries offered Security Bank vs. Cuenca
to the new agent according to this novation provides the Petitioner Security Bank and Trust Co. granted appellant Sta.
explanation for the discrepancy in the amount contained in the Ines Melale Corporation [SIMC] a credit line to assist the latter in
two contracts. The obligation of the accused under the September meeting the additional capitalization requirements of its logging
22, 1978 transaction was extinguished by the September 30, operations.
1978 transaction which substituted the first since the two . As additional security for the payment of the loan,
contracts are shown to have been on very point incompatible with [Respondent] Rodolfo M. Cuenca executed an Indemnity
each other. (Article 1292, Civil Code) The novation prevented the Agreement dated 17 December 1980 (Exhibit B) in favor of
rise of liability under the old contract. Upon the novation, the first [Petitioner] SBTC whereby he solidarily bound himself with SIMC.
obligation had lost all its force and effect and only the subsequent Respondent] Cuenca resigned as President and
obligation can be the basis of any action. Chairman of the Board of Directors of defendant-appellant Sta.
Ines.
Heirs of Franco vs. Sps. Gonzales "Subsequently, appellant SIMC repeatedly availed of its
Facts: The petitioners insist that the RTC could not validly credit line and obtained six (6) other loan[s] from [Petitioner]
enforce a judgment based on a promissory note that had been SBTC.
already novated; that the promissory note had been impliedly SIMC however encountered difficulty, opted for
novated when the principal obligation of P500K had been fixed restructuring loan obligations and thus executed a Loan
at P750K and the maturity date had been extended. Agreement 1989.
In contrast, the respondents aver that novation did not take place Ruling: YES. Original Obligation Extinguished by Novation.
because there was no complete incompatibility between the An obligation may be extinguished by novation, pursuant to
promissory note and the memorandum receipt. Article 1292 of the Civil Code, which reads as follows:
Ruling: NO. Novation did not transpire because no irreconcilable Novation of a contract is never presumed. It has been
incompatibility existed between the promissory note and the held that "[i]n the absence of an express agreement, novation
receipt. takes place only when the old and the new obligations are
15
In light of the foregoing, the issuance of the receipt incompatible on every point." Indeed, the following requisites
created no new obligation. Instead, the respondents only must be established.
thereby recognized the original obligation by stating in the receipt Petitioner contends that there was no absolute
that the P400K was "partial payment of loan" and by referring to incompatibility between the old and the new obligations, and that
"the promissory note subject of the case in imposing the interest." the latter did not extinguish the earlier one. It further argues that
The loan mentioned in the receipt was still the same loan the 1989 Agreement did not change the original loan in respect to
involving the P500K extended to Servando. Advertence to the the parties involved or the obligations incurred. It adds that the
17
interest stipulated in the promissory note indicated that the terms of the 1989 Contract were "not more onerous." Since the
contract still subsisted, not replaced and extinguished, as the original credit accomodation was not extinguished, it concludes
petitioners claim. that Cuenca is still liable under the Indemnity Agreement.
The receipt dated February 5, 1992 was only the proof of We reject these contentions. Clearly, the requisites
Servandos payment of his obligation as confirmed by the of novation are present in this case. The 1989 Loan
18
decision of the RTC. It did not establish the novation of his Agreement extinguished the obligation obtained under the 1980
agreement with the respondents. Indeed, the Court has ruled credit accomodation. This is evident from its explicit provision
that an obligation to pay a sum of money is not novated by to "liquidate" the principal and the interest of the earlier
an instrument that expressly recognizes the old, or changes indebtedness, as the following shows:
only the terms of payment, or adds other obligations not "1.02. Purpose. The First Loan shall be applied
incompatible with the old ones, or the new contract merely to liquidate the principal portion of the Borrowers present total
24
supplements the old one. A new contract that is a mere outstanding Indebtedness to the Lender (the "Indebtedness")
reiteration, acknowledgment or ratification of the old contract with while the Second Loan shall be applied to liquidate the past due
19
slight modifications or alterations as to the cause or object or interest and penalty portion of the Indebtedness." (Italics
principal conditions can stand together with the former one, and supplied.)
25 20
there can be no incompatibility between them. Moreover, a The testimony of an officer of the bank that the
creditors acceptance of payment after demand does not operate proceeds of the 1989 Loan Agreement were used "to pay-off"
26 21
as a modification of the original contract. the original indebtedness serves to strengthen this ruling.
Worth noting is that Servandos liability was joint and Furthermore, several incompatibilities between the 1989
solidary with his co-debtors. In a solidary obligation, the creditor Agreement and the 1980 original obligation demonstrate that the
may proceed against any one of the solidary debtors or some or two cannot coexist. While the 1980 credit accommodation had
27
all of them simultaneously. The choice to determine against stipulated that the amount of loan was not to exceed P8
22
whom the collection is enforced belongs to the creditor until the million, the 1989 Agreement provided that the loan
28
obligation is fully satisfied. Thus, the obligation was being was P12.2 million. The periods for payment were also
enforced against Servando, who, in order to escape liability, different.
should have presented evidence to prove that his obligation had
already been cancelled by the new obligation or that another
Likewise, the later contract contained conditions, novation are lacking. A review of the lease contract between
"positive covenants" and "negative covenants" not found in Sime Darby and Macgraphics discloses no stipulation that
the earlier obligation. Sime Darby could assign the lease without the consent of
Since the 1989 Loan Agreement had extinguished Macgraphics.
the original credit accommodation, the Indemnity Agreement, Moreover, contrary to the assertions of Sime Darby, the
an accessory obligation, was necessarily extinguished also, records are bereft of any evidence that clearly shows that
pursuant to Article 1296. Macgraphics consented to the assignment of the lease. As aptly
Alleged Extension found by the RTC and the CA, Macgraphics was never part of
Petitioner insists that the 1989 Loan Agreement was a the negotiations between Sime Darby and Goodyear. Neither
mere renewal or extension of the P8 million original did it give its conformity to the assignment after the
25
accommodation; it was not a novation. execution of the Deed of Assignment.
This argument must be rejected. To begin with, the 1989 The consent of the lessor to an assignment of lease
Loan Agreement expressly stipulated that its purpose was to may indeed be given expressly or impliedly. It need not be
"liquidate," not to renew or extend, the outstanding given simultaneously with that of the lessee and of the assignee.
indebtedness. Neither is it required to be in any specific or particular form. It
must, however, be clearly given. In this case, it cannot be
Metro Bank vs. Reynado and Andrea said that Macgraphics gave its implied consent to the
Novation not a mode of extinguishing criminal liability for assignment of lease.
estafa; Criminal liability for estafa not affected by
compromise or novation of contract. PRA vs. PRAC
Initially, it is best to emphasize that "novation is not one of the Facts: BCDA entered into a MOA with PRA, as project
grounds prescribed by the Revised Penal Code for the manager. BCDA, PRA, and PNB executed a Pool Formation
34
extinguishment of criminal liability." Trust Agreement (PFTA). PRA tasked with the development
In a catena of cases, it was ruled that criminal liability for estafa is of the park and PNB to act as trustee for the Heritage Park
not affected by a compromise or novation of contract. securitization.
Thus, the doctrine that evolved from the aforecited cases is that a PRA awarded the electrical and lighting works for the park to
compromise or settlement entered into after the commission Respondent Romago w/c it entered into a Construction
of the crime does not extinguish accuseds liability for Agreement, and began construction works.
estafa. Neither will the same bar the prosecution of said The parties of PFTA organized the Heritage Park Corp.
crime. Accordingly, in such a situation, as in this case, the (HPMC) to take over the management of the project.
complaint for estafa against respondents should not be Because the HPMC refused to recognize the PRAs contract
dismissed just because petitioner entered into a Debt with it, Romago filed a complaint seeking to collect its
Settlement Agreement with Universal. Even the OSG arrived at claims.
the same conclusion: Issue: Whether or not PRA still liable to Romago under the
Contrary to the conclusion of public respondent, the Debt Construction Agreement despite the subsequent turnover of the
Settlement Agreement entered into between petitioner and Heritage Park Project to the HPMC. Yes and thus no Novation.
Universal Converter Philippines extinguishes merely the civil Ruling: NO. In novation, a subsequent obligation extinguishes a
aspect of the latters liability as a corporate entity but not the previous one through substitution either by changing the object or
criminal liability of the persons who actually committed the principal conditions, by substituting another in place of the debtor,
crime of estafa against petitioner Metrobank. or by subrogating a third person into the rights of the
creditor. Novation requires requisites.
Sime Darby vs Goodyear There cannot be novation in this case since the
Macgraphics owned several billboards, Magallanes billboard proposed substituted parties did not agree to the PRAs
was leased to Sime Darby. supposed assignment of its obligations under the contract
Sime Darby and Goodyear executed a deed entitled "Deed of for the electrical and light works at Heritage Park to the HPMC.
Assignment in connection with Billboard Advertising, The latter definitely and clearly rejected the PRAs
through which Sime Darby assigned its leasehold rights and assignment of its liability under that contract to the HPMC.
deposits made to Macgraphics pursuant to its lease contract Romago tried to follow up its claims with the HPMC, not because
over the Magallanes billboard. of any new contract it entered into with the latter, but simply
Sime Darby then notified Macgraphics of the assignment of because the PRA told it that the HPMC would henceforth assume
the Magallanes billboard in favor of Goodyear. Macgraphics the PRAs liability under its contract with Romago.
then sent a letter to Sime Darby, informing the latter that it Section 11.07 did not say that the HPMC shall,
could not give its consent to the assignment of lease to thereafter, assume the PRAs obligations. On the contrary,
Goodyear. Section 7.01 of the PFTA recognizes that contracts that the PRA
Ruling: NO. Broadly, a novation may either be extinctive or entered into in its own name and makes it liable for the same.
modificatory. It is extinctive when an old obligation is terminated
by the creation of a new obligation that takes the place of the ACE Foods vs. Micro Pacific
8
former; it is merely modificatory when the old obligation subsists MTCL sent a letter-proposal for the delivery and sale of the
to the extent it remains compatible with the amendatory subject products to be installed at various offices of ACE Foods.
agreement. An extinctive novation results either by changing ACE Foods accepted MTCLs proposal and accordingly issued
the object or principal conditions (objective or real), or by Purchase Order. MTCL delivered the said products to ACE Foods
substituting the person of the debtor or subrogating a third person as reflected in (Invoice Receipt). The fine print of the invoice
in the rights of the creditor (subjective or personal). Under this states, inter alia, that "[t]itle to sold property is reserved in
mode, novation would have dual functionsone to extinguish an MICROPACIFIC until full compliance of the terms and conditions
existing obligation, the other to substitute a new one in its place. of above and payment of the price"(title reservation stipulation).
This requires a conflux of four essential requisites of novation. Ruling: NO. Novation. the Court must dispel the notion that the
While there is no dispute that the first requisite is stipulation anent MTCLs reservation of ownership of the subject
present, the Court, after careful consideration of the facts and the products as reflected in the Invoice Receipt, i.e., the title
evidence on record, finds that the other requirements of a valid reservation stipulation, changed the complexion of the transaction
from a contract of sale into a contract to sell. Records are bereft A.
of any showing that the said stipulation novated the contract of We cannot see how novation can take place considering the
sale between the parties which, to repeat, already existed at the surrounding circumstances which negate the same. The principle
precise moment ACE Foods accepted MTCLs proposal. To be of novation by substitution of creditor was erroneously applied in
sure, novation, in its broad concept, may either be extinctive or the first questioned resolution involving the contract of loan
modificatory. It is extinctive when an old obligation is terminated between petitioner and respondent Eleazar. Admittedly, in order
by the creation of a new obligation that takes the place of the that a novation can take place, the concurrence of the following
7
former; it is merely modificatory when the old obligation subsists requisites is indispensable:
to the extent it remains compatible with the amendatory Upon the facts shown in the record, there is no doubt
agreement. In either case, however, novation is never presumed, that the last three essential requisites of novation are wanting
and the animus novandi, whether totally or partially, must appear in the instant case. No new agreement for substitution of
by express agreement of the parties, or by their acts that are too creditor was forged among the parties concerned which would
38
clear and unequivocal to be mistaken. take the place of the preceding contract. The absence of a new
In the present case, it has not been shown that the contract extinguishing the old one destroys any possibility
title reservation stipulation appearing in the Invoice Receipt of novation by conventional subrogation, In concluding that a
had been included or had subsequently modified or novation took place, the respondent court relied on the two
superseded the original agreement of the parties. The fact letters. Be that as it may, a cursory reading of these letters,
that the Invoice Receipt was signed by a representative of ACE however clearly and unmistakably shows that there was nothing
Foods does not, by and of itself, prove animus novandi since: (a) therein that would evince that respondent AFP-MBAI agreed to
it was not shown that the signatory was authorized by ACE Foods substitute for the petitioner as the new creditor of respondent
(the actual party to the transaction) to novate the original Eleazar in the contract of loan. It is evident that the two letters
agreement. merely gave respondent Eleazar an authority to directly settle the
obligation of petitioner to AFP-MBAI. It is essentially an
Cases: agreement between petitioner and respondent Eleazar only.
Reyes vs. CA There was no mention whatsoever of AFP-MBAI's consent to the
Facts: Petitioner, Reyes-EUROTRUST credit financing. new agreement between petitioner and respondent Eleazar much
Respondents are Eleazar-BERMIC real estate development, less an indication of AFP-MBAI's intention to be the substitute
and AFP-MBAI, welfare services for the AFP. creditor in the loan contract. Well settled is the rule that
A. novation by substitution of creditor requires an agreement
Reyes-Eurotrust entered into a loan agreement to Bermic to among the three parties concerned the original creditor,
10
finance construction of its Condominium, but Eleazar-Bermic the debtor and the new creditor. It is a new contractual
failed to make good the dishonoured checks, thus Reyes filed relation based on the mutual agreement among all the
criminal complaints against her. necessary parties, hence, there is no novation if no new
Meanwhile, in its own investigation, AFP-MBAI invested funds w/ contract was executed by the parties. Article 1301 is explicit.
Eurotrust by buying government securities, and found out that Conventional subrogation.
after Eurotrust delivered to AFP the securities purchased, The fact that respondent Eleazar made payments to
Eurotrust borrowed the same but failed to return them, and the AFP-MBAI and the latter accepted them does not ipso facto result
amounts paid by AFP to Eurotrust were in turn lent by Reyes- in novation. There must be an express intention to novate
12
Eurotrust to Bermic. animus novandi. Novation is never presumed. Article 1300 of
When Eleazar came to know that the funds loaned by Eurotrust to the Civil Code provides inter alia that conventional subrogation
Bermic-Eleazar belonged to AFP-MBAI. It had a meeting w/ must be clearly established in order that it may take effect.
Eurotrust and agreed that Bermic would settle directly their B.
obligations with the real owners of the fund AFP-MBAO. This contention is bereft of any legal and factual basis. Just like in
Agreement was in the 2 letters, whereby, Bermic already made the first questioned resolution, no novation took place in this case.
payment to AFP-MBAI. A thorough examination of the records shows that no hard
Prosecutor issued a resolution dismissing the complaints evidence was presented which would expressly and
filed by Elsa Reyes against Graciela Eleazar on the ground that unequivocably demonstrate the intention of respondent AFP-
when the latter assumed the obligation of Reyes to AFP-MBAI, it MBAI to release petitioner from her obligation to pay under the
constituted novation, extinguishing any criminal liability on the contract of sale of securities. It is a rule that novation by
part of Eleazar. substitution of debtor must always be made with the consent
B. of the creditor. Article 1293 of the Civil Code is explicit.
AFP-MBAI separate criminal complaint against Reyes. AFP-MBAI The consent of the creditor to a novation by change of
decided to purchase several securities from Eurotrust. Eurotrust debtor is as indispensable as the creditor's consent in
delivered to AFP-MBAI treasury notes. However, Eurotrust conventional subrogation in order that a novation shall legally
fraudulently borrowed all those treasury notes from the AFP-MBAI take place. The mere circumstance of AFP-MBAI receiving
for purposes of verification with the Central Bank. Despite AFP- payments from respondent Eleazar who acquiesced to assume
MBAI's repeated demands, Eurotrust failed to return the said the obligation of petitioner under the contract of sale of securities,
treasury notes. Instead it delivered 21 dishonered postdated when there is clearly no agreement to release petitioner from her
checks. Eurotrust nonetheless made partial payment to AFP- responsibility, does not constitute novation, at most, it only
MBAI amounting to P35M. However, after deducting this partial creates a juridical relation of co-debtorship or suretyship on the
payment, the amounts of P75M treasury notes with interest and part of respondent Eleazar to the contractual obligation of
P35M have remained unpaid. Consequently, AFP-MBAI filed a petitioner to AFP-MBAI and the latter can still enforce the
complaint for violation of BP 22 and estafa against Elsa Reyes. obligation against the petitioner.
Reyes interposed the defense of novation and insisted that AFP-
MBAI's claim of unreturned P73M worth of government securities Babst vs. CA
has been satisfied upon her payment of P30M. With respect to Facts: ELISCON, MULTI, and Babsts defaulted its obligations
the remaining P43M, the same was paid when Eurotrust assigned with CBTC.
its Participation Certificates to AFP-MBAI.
Ruling. NO.
BPI) and CBTC entered into a merger, wherein BPI, as the The parties did not unequivocally declare that the old
surviving corporation, acquired all the assets and assumed all the obligation had been extinguished by the issuance and the
liabilities of CBTC. acceptance of the check, or that the check would take the
ELISCON encountered financial difficulties and became heavily place of the note. There is no incompatibility between the
indebted to DBP. ELISCON and DBP executed a Deed of promissory note and the check. As the CA correctly observed,
Cession of Property in Payment of Debt. the check had been issued precisely to answer for the obligation.
DBP formally took over the assets of ELISCON, including its On the one hand, the note evidences the loan obligation; and on
indebtedness to BPI. Thereafter, DBP proposed formulas for the the other, the check answers for it. Verily, the two can stand
settlement of all of ELISCON's obligations to its creditors, but BPI together.
expressly rejected the formula submitted to it for not being Neither could the payment of interests -- which, in
18
acceptable. petitioners view, also constitutes novation -- change the
BPI, as successor-in-interest of CBTC, instituted a complaint for terms and conditions of the obligation. Such payment was
sum of money against ELISCON, MULTI and Babst. already provided for in the promissory note and, like the check,
Issue: W/N BPI consented to the assumption by DBP of the was totally in accord with the terms thereof.
obligations of ELISCON. Also unmeritorious is petitioners argument that the
Ruling: YES. obligation was novated by the substitution of debtors. In
BPI contends that in order to have a valid novation, there must be order to change the person of the debtor, the old one must be
an express consent of the creditor. expressly released from the obligation, and the third person or
Court reiterated the rule that there can be implied consent of new debtor must assume the formers place in the
19
the creditor to the substitution of debtors. relation. Well-settled is the rule that novation is never
20
In the case at bar, Babst, MULTI and ELISCON all presumed. Consequently, that which arises from a purported
21
maintain that due to the failure of BPI to register its objection to change in the person of the debtor must be clear and express. It
the take-over by DBP of ELISCON's assets, at the creditors' is thus incumbent on petitioner to show clearly and unequivocally
meeting and thereafter, it is deemed to have consented to the that novation has indeed taken place.
substitution of DBP for ELISCON as debtor. In the present case, petitioner has not shown that he was
We find merit in the argument. Indeed, there exist clear expressly released from the obligation, that a third person
indications that BPI was aware of the assumption by DBP of the was substituted in his place, or that the joint and solidary
obligations of ELISCON. In fact, BPI admits that --- BPI did not obligation was cancelled and substituted by the solitary
object to the substitution of debtors, although it objected to the undertaking of De Jesus. The CA aptly held: Plaintiffs
payment formula submitted by DBP. BPI's objection was to the acceptance of the bum check did not result in substitution by de
proposed payment formula, not to the substitution itself. Jesus either, the nature of the obligation being solidary due to the
BPI's conduct evinced a clear and unmistakable consent fact that the promissory note expressly declared that the liability
to the substitution of DBP for ELISCON as debtor. Hence, there of appellants thereunder is joint and solidary.
was a valid novation which resulted in the release of ELISCON Moreover, it must be noted that for novation to be valid and
from its obligation to BPI, whose cause of action should be legal, the law requires that the creditor expressly consent to
23
directed against DBP as the new debtor. the substitution of a new debtor. Since novation implies a
Novation, in its broad concept, may either be extinctive or waiver of the right the creditor had before the novation, such
24
modificatory. It is extinctive when an old obligation is terminated waiver must be express. It cannot be supposed, without clear
by the creation of a new obligation that takes the place of the proof, that the present respondent has done away with his right to
25
former; it is merely modificatory when the old obligation subsists exact fulfillment from either of the solidary debtors.
to the extent it remains compatible with the amendatory More important, De Jesus was not a third person to the
agreement. An extinctive novation results either by changing the obligation. From the beginning, he was a joint and solidary
object or principal conditions (objective or real), or by substituting obligor of the P400K loan; thus, he can be released from it only
the person of the debtor or subrogating a third person in the rights upon its extinguishment. Respondents acceptance of his
of the creditor (subjective or personal). Under this mode, novation check did not change the person of the debtor, because a
would have dual functions one to extinguish an existing joint and solidary obligor is required to pay the entirety of
obligation, the other to substitute a new one in its place the obligation.
requiring a conflux of four essential requisites, (1) a previous valid It must be noted that in a solidary obligation, the creditor is
obligation; (2) an agreement of all parties concerned to a new entitled to demand the satisfaction of the whole obligation from
26
contract; (3) the extinguishment of the old obligation; and (4) the any or all of the debtors. It is up to the former to determine
27
birth of a valid new obligation. against whom to enforce collection. Having made himself jointly
The original obligation having been extinguished, the contracts of and severally liable with De Jesus, petitioner is therefore
28
suretyship executed separately by Babst and MULTI, being liable for the entire obligation.
accessory obligations, are likewise extinguished
Cases:
Garcia vs. Llamas CEIC vs. CA
Respondent complaint for sum of money against Petitioner and Dynetics and Garcia filed for declaratory relief against
De Jesus, that they borrowed 400K in a promissory note they Consortium banks regarding the validity of surety agreement
bound themselves jointly and severally to pay the loan, overdue they entered into.
and have failed to pay it. Consortium alleged that the surety agreement was valid and
Petitioner Garcia, averred that he assumed no liability under the binding and Dynetics and Garcia were liable.
promissory note because he signed it merely as an Dynetics and Garcia & MMTC filed for declaratory relief
accommodation party for de Jesus; and, as the loan had been against SBTC.
paid by de Jesus by means of a check and that the issuance of On July 2, 1985, RTC, granted SBTC, and issued writ of
the check and [respondents] acceptance thereof novated or attachment and notice of garnishment covering Garcias
superseded the note. Respondent reply, thereunder asserting that share in Chemphil including the disputed shares.
the loan remained unpaid for the reason that the check issued by On July 19, 1985, RTC granted the Consortium writ of
de Jesus bounced. attachment, and various properties of Dynetics and Garcia
Ruling: NO. We hold that no novation took place. were garnished, including the disputed shares.
Meanwhile, on 15 July 1988, Antonio Garcia under a Deed of attachment lien on the disputed shares purchased by FCI. The
Sale transferred to Ferro Chemicals, Inc. (FCI) the disputed latter would then have a free and "clean" title to said shares.
shares. It was agreed upon that part of the purchase price shall In sum, CEIC, for its failure to fulfill the requirements
be paid by FCI directly to SBTC. of Art. 1302 (2), was not subrogated to the rights of SBTC
FCI, through its Garcia, issued a BA Check in favor of against Antonio Garcia and did not acquire SBTC's
SBTC. SBTC refused to accept the check claiming that the attachment lien over the disputed shares which, in turn, had
amount was not sufficient to discharge the debt, thus consigned already been lifted or discharged upon satisfaction by Garcia,
as payment in SBTC case. through FCI, of his debt to the said bank.
FCI assigned its 4,119,614 shares in Chemphil, which included
the disputed shares, to petitioner CEIC. PNB vs CA
Meanwhile, Antonio Garcia, in the consortium case, failed to To finance the acquisition of seven (7) ocean-going vessels, the
comply with the terms of the compromise agreement he entered Philippine International Shipping Corporation (hereinafter "PISC")
into with the consortium. Among Garcia's properties that were applied for and was granted by petitioner National Investment and
levied upon on execution were his shares in Chemphil (the Development Corporation (hereinafter "NIDC") the following
disputed shares) previously garnished on 19 July 1985. guaranty accommodations.
Issue: W/N CEIC have been subrogated to the rights of SBTC PISC entered into a Contract Agreement with Hong Kong United
by the payment by FCI of Garcias debts. Dockyards, Ltd. for the repair and conversion of the vessel.
Ruling: NO. CEIC's claim Central Bank of the Philippines authorized PISC to open with
CEIC traces its claim over the disputed shares to the private respondent China Banking Corporation (hereinafter
attachment lien obtained by SBTC on 2 July 1985 against Antonio "CBC") a standby letter of credit for US$545,000.00 in favor of
Garcia in Civil Case No. 10398. It avers that when FCI, CEIC's Citibank, N.A. (hereinafter "Citibank") to cover the repair and
predecessor-in-interest, paid SBTC the due obligations of Garcia partial conversion of the vessel.
to the said bank pursuant to the Deed of Absolute Sale and PISC executed an Application and Agreement for Commercial
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Purchase of Shares of Stock, FCI, and later CEIC, was Letter of Credit for $545,000.00 with private respondent CBC in
subrogated to the rights of SBTC, particularly to the latter's favor of Citibank.
aforementioned attachment lien over the disputed shares. Promissory note for US$545,000.00 was executed by PISC in
CEIC argues that SBTC's attachment lien is superior as favor of Citibank pursuant to the Loan Agreement for
it was obtained on 2 July 1985, ahead of the consortium's US$545,000.00 between PISC, as borrower, and Citibank, as
purported attachment on 19 July 1985. More importantly, said lender.
CEIC lien was duly recorded in the stock and transfer books of For failure of PISC to settle its obligations in the amount of
Chemphil. US$64,789,470.96, petitioner PNB conducted, thru the Sheriffs
CEIC's subrogation theory is unavailing. Office, an auction sale of the mortgaged vessels.
Legal subrogation is that which takes place without Claiming that the foreclosure sale of its mortgaged vessels was
agreement but by operation of law because of certain acts; this is illegal, unjust, irregular, and oppressive, PISC instituted a civil
the subrogation referred to in article 1302. Conventional case against petitioners for the annulment of the foreclosure and
subrogation is that which takes place by agreement of the parties. auction sale of its vessels.
CEIC's theory is premised on Art. 1302 (2) states. Issue: W/N private respondent stepped into the shoes of
Despite, however, its multitudinous arguments, CEIC Hongkong United Dockyards, Ltd. by legal subrogation and thus
presents an erroneous interpretation of the concept of acquired the maritime lien of the latter over the vessel.
subrogation. An analysis of the situations involved would reveal Ruling: YES. Since CBCs payment to the lienors was with the
the clear inapplicability of Art. 1302 (2). express consent of the debtor owner of the vessels repaired, legal
Antonio Garcia sold the disputed shares to FCI, subrogation took place in CBCs favor.
however, did not pay the entire amount to Garcia as it was As held by the public respondent Court of Appeals, those who
obligated to deliver part of the purchase price directly to provide credit to a master of a vessel for the purpose of
SBTC pursuant to the following stipulation in the Deed of discharging a maritime lien also acquire a lien over the said
Sale. vessel. Advances to discharge maritime liens create a lien on the
Hence, when FCI issued the BA check to SBTC in the vessel, and one advancing money to discharge a valid lien gets a
amount of P35M to pay Garcia's indebtedness to the said bank, it lien of equal dignity with the one discharged. There is no reason
was in effect paying with Garcia's money, no longer with its own, why these doctrines cannot be given persuasive application in the
because said amount was part of the purchase price which instant case considering that they do not violate or contravene
FCI owed Garcia in payment for the sale of the disputed shares any of our existing laws. Moreover, as pointed out by the
by the latter to the former. The money "paid" by FCI to SBTC, appellate court, these doctrines are in accord with our provisions
thus properly belonged to Garcia. It is as if Garcia himself on subrogation particularly Art. 1302(2).
paid his own debt to SBTC but through a third party FCI. From the foregoing, it is clear that the amount used for
It is, therefore, of no consequence that what was used to the repair of the vessel M/V "Asean Liberty" was advanced by
pay SBTC was a corporate check of FCI. As we have earlier Citibank and was utilized for the purpose of paying off the original
stated, said check no longer represented FCI funds but maritime lienor, Hongkong United Dockyards, Ltd. As a person
Garcia's money, being as it was part of FCI's payment for the not interested in the fulfillment of the obligation between
acquisition of the disputed shares. PISC and Hongkong United Dockyards, Ltd., Citibank was
Since the money used to discharge Garcia's debt subrogated to the rights of Hongkong United Dockyards, Ltd.
rightfully belonged to him, FCI cannot be considered a third as maritime lienor over the vessel, by virtue of Article
party payor under Art. 1302 (2). 1302(2). By definition, subrogation is the transfer of all the rights
FCI was merely fulfilling its obligation under the aforementioned of the creditor to a third person, who substitutes him in all his
Deed of Sale. rights. Considering that Citibank paid off the debt of PISC to
Additionally, FCI is not a disinterested party as required Hongkong United Dockyards, Ltd. it became the transferee of
by Art. 1302 (2) since the benefits of the extinguishment of the all the rights of Hongkong United Dockyards, Ltd. as against
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obligation would redound to none other but itself. Payment of PISC, including the maritime lien over the vessel M/V "Asean
the judgment debt to SBTC resulted in the discharge of the Liberty."
Private respondent CBC, as guarantor, was itself
subrogated to all the rights of Citibank as against PISC, the
latters debtor.
Private respondent, having paid off the debt of PISC to
Citibank, was therefore, subrogated to all the rights Citibank had
against its debtor PISC. Considering that Citibank had a maritime
lien over the vessel M/V "Asean Liberty," private respondent was
likewise subrogated to this right when it paid off Citibank under
the contract of guarantee.