University of Asia & the Pacific

OBLIGATIONS AND CONTRACTS

2nd Semester 2016-2017
Prof. Gerard L. Chan, LL.M, M.B.A.

OBLIGATIONS

I. Concept and Sources

A. Concept, Elements and Transmissibility
ART. 1423. Obligations are civil or natural. Civil obligations give a right of action
to compel their performance. Natural obligations, not being based on positive
law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason thereof. Some
natural obligations are set forth in the following articles.

Kinds of Obligations
From the viewpoint of sanction
a. Civil Obligation an obligation, which if not fulfilled when it becomes due and
demandable, may be enforced in court through an action
b. Natural Obligations not based on positive law but on equity and natural law; do
not grant a right of action to enforce their performance, but after voluntary
fulfillment by the obligor, they authorize retention of what has been delivered or
rendered by reason thereof

CIVIL OBLIGATION NATURAL OBLIGATIONS

As to Governing Law
Art. 1156 based on positive law, arise Art. 1423. Based on equity and natural
from law, contracts, quasi-contracts, law
delicts quasi-delicts
As to Enforceability
Enforceable by court action or coercive Not enforceable by court action
power/authority

Art. 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

Meaning of obligation
Manresa defines the term as a legal relation established between one party and
another, whereby the latter is bound to the fulfillment of a prestation which the
former may demand of him.
Meaning of juridical necessity
In case of noncompliance, there will be legal sanctions
the debtor must comply with his obligation whether he likes it or not; otherwise,
his failure will be visited with some harmful or undesirable legal consequences

Prestation
Not the thing or object, but the particular conduct of the debtor which may consist in
giving, doing, or not giving, or not doing something.

ELEMENTS OF OBLIGATION
1. Passive Subject - debtor or obligor, person who is bound to perform the
prestation or to the fulfillment of the obligation; he who has a duty

Note: Subjects pertain to both natural and juridical persons. They need not be
determined in the act constituting the obligation, but they must be determinable in
some manner. When either subject cannot be determined, the obligatory tie can
have no effect.

2. Active Subject creditor or oblige, person who is entitled to demand the

fulfillment of the obligation; he who has a right

Note: The active subject may be temporarily indefinite, as in the case of a

negotiable instrument payable to bearer.

3. Juridical Tie or Vinculum Juris efficient cause which creates the relation
between obligor/debtor and oblige/creditor, that which binds or connects the
parties to the obligation; established by
a. Law
b. Bilateral Acts contracts giving rise to the obligations stipulated therein
c. Unilateral Acts crimes and quasi-delicts

4. Prestation/Object the particular conduct of the debtor which may consist in

giving, doing, or not doing something which constitutes the object of the
obligation
Kinds:
a. To give the obligation to deliver a movable or an immovable thing in order
to create a real right, or fort he use of the recipient or for its simple
possession, or in order to return to its owner
b. To do covers all kinds of works or services whether physical or mental. I
may involve some work on the part of the debtor such as in contracts of
employment or professional services, but in other cases, it may be merely
the necessity of concluding a juridical operation, such as, when a person
promises to give a bond
 c. Not to do consists in abstaining from doing some act. This obligations
includes the obligation not to give

MAKATI STOCK EXCHANGE, INC. V. CAMPO

Facts:

1. 10 February 1994: Miguel Campos, Chairman Emeritus of the MSKE, filed a petition with the
Securities, Investigation, and Clearing Department (SICD) and Securities and Exchange
Commission (SEC). He sought to nullify the MSKE Board of Directors Resolution, which
allegedly deprived him of the his right to participate equally in the allocation of Initial Public
Offerings (IPO) of corporations registered with the MSKE.
2. The SICD granted Campos application for a Writ of Preliminary Injunction and issued a TRO in his
favor.
3. The MSKE then filed a petition for certiorari with the SEC and a motion to dismiss Campos petition
therein.
4. The SEC nullified the SICDs TRO and grant of a Writ of Preliminary Injunction.
5. Campos brought the case before the CA, which rendered the SECs Orders null and void.
6. Now, MSKE contends that the grant of IPO allocations in favor of Campos was a mere
accommodation given to him and that IPO allocations granted to brokers in the MSKE are to
be distributed to the investing public.

Issue:

Whether or not a right and obligation arising from a practice or custom may be legally
demandable or enforceable.

Held:

No, a practice or custom is not a source of a legally demandable or enforceable right. As provided in
Art. 1157, obligations arise from: 1) law; 2) contracts; 3) quasi-contracts; 4) acts or omissions
punished by law; and 5) quasi-delicts. Also, given that a right is a claim or title to an interest in
anything whatsoever that is enforceable by law and an obligation (Art. 1156) is a juridicial necessity
to give, to do, or not to do, therefore the assertion of a right and claim of an obligation must be
rooted in at least one of the five sources enumerated in Art. 1157. Otherwise, such claim is
merely a conclusion of fact and law.
In the case at bar, the Court cannot deduce that Campos, by virtue of his position as Chairman
Emeritus of the MSKE, was granted by law, contract, or any other legal source the right to subscribe
to the IPOs of corporations listed in the stock market. Furthermore, even though IPO shares were
customarily allocated to brokers, a practice is not a source of a legally demandable right. There is
also no law that acknowledges such practice and even par. 11 of the MSKE amended articles of
incorporation only creates the position of Chairman Emeritus and does not confer upon such title
holder the right to receive IPO allocations.

ART. 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary. (1112)

Transmissibility of rights
General Rule: all rights acquired in virtue of an obligation are transmissibile
Exceptions:
1. Prohibited by law - When prohibited by law, like the rights in partnership,
agency, and commodatum which are purely personal in character.
a. Contract of partnership - two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention
of dividing the profits among themselves
b. Contract of agency - a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or
authority of the latter.
c. Contract of commodatum - one of the parties delivers to another
something not consumable so that the latter may use the same for a certain
time and return it. Commodatum is essentially gratuitous.

2. Prohibited by stipulation of parties ex. Stipulation that upon the death of the
creditor, the obligation shall be extinguished or that creditor cannot assign his
credit to another
a. Cannot be contrary to public policy
b. Should never be implied, but clearly proved

STRONGHOLD INSURANCE CO., INC. V REPUBLIC-ASAHI

Facts:
Republic Asahi Glass contracts with Jose D. Santos (JDS) for the construction of roadways
and drainage systems in Republic Asahi Glass (Republic) compound.
JDS does so and files the required compliance bond with Stronghold Insurance (Stronghold)
acting as surety. The contract is Php5.3M the bond is Php795,000.
JDS falls behind schedule, prompting Republic to rescind the contract and demand the
compliance bond.
The owner of JDS died and Stronghold refused to pay the bond claiming that the death of JDS
owner extinguishes the obligation.

Issue: Whether the Obligation of Stronghold was extinguished upon the death of JDS.

Held: No. Since death is not a defense that a party or his estate can set up to wipe out the obligations
under a performance bond, the surety cannot use such partys death to escape its monetary
obligation. In the present case, whatever monetary liabilities or obligations Santos had under his
contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which
merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the
obligations under the performance bond. Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance bond.

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if
there has been no stipulation to the contrary.
 B. Sources of Obligations
ART. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.(1089a)

The list is exclusive

1. Law

ART. 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be
regulated by the precepts of the law which establishes them; and as to what has
not been fore- seen, by the provisions of this Book. (1090)

Law (ex-lege)
Obligations derived from law are not presumed, Only those expressly determined in
the New Civil Code or in Special Laws are demandable and shall be regulated by the
precepts of the law which establishes them

In the case of conflict between the Civil Code and a special law, the latter prevails
unless the contrary has been stipulated.

In obligations arising from law, the law creates obligations and the act upon which it is
based is nothing more than a mere factor for determining the moment when it becomes
demandable, however, when the law merely acknowledges the existence of an
obligation generated by an act which may constitute a contract, quasi-contract, criminal
offense, or quasi-delict and its only purpose is to regulate such obligation, then the act
itself is the source of the obligation and not the law.

Note: in the other sources of obligation, there is always some individual act which gives
rise to the obligation: the law intervenes only to provide a sanction or to prevent injustice

OSG VS. AYALA LAND, INC.

G.R. No. 177056 | 18 September 2009
FACTS:
Respondents maintain and operate shopping malls in various locations in Metro Manila, and
such have parking facilities for all kinds of motor vehicles, either found inside the mall buildings
or in separate or adjacent lots. In providing such service, respondents collect parking fees from
persons who make use of their parking facilities.
The parking tickets/cards issued contain the stipulation that respondents shall not be
responsible for any loss or damage to the vehicles parked in their parking facilities.
 In 1999, the Senate Committees on Trade and Commerce and on Justice and Human Rights
conducted a joint investigation for the following purposes:
o (1) inquire into the legality of the prevalent practice of shopping malls charging of
parking fees;
o (2) assuming that such collection was legally authorized, to find out the basis and
reasonableness of the parking rates charged; and
o (3) to determine the legality of the policy of denying liability in cases of theft, robbery, or
carnapping, by invoking the waiver clause in the parking tickets/cards.
The Committees concluded that such collection of fees is contrary to the National Building
Code (NBC) and is therefore illegal; and recommended that:
o (1) OSG should institute the necessary action to enjoin the collection of parking fees as
well as to enforce penal sanction provisions of the NBC. The OSG shall likewise study
how refund can be exacted from mall owners who continue to collect parking fees.
o (2) DTI pursuant to Consumer Act of the Philippines should enforce the provisions of the
Code relative to parking. DTI should formulate the IRR on parking in shopping malls,
and to coordinate with DPWH to regulate and supervise construction and maintenance
of parking establishments.
o (3) Congress should amend and update the NBC to expressly prohibit collection of
parking fees and from invoking the waiver of liability.
Respondent SM filed for declaratory relief. OSG then filed a petition for declaratory relief and
injunction (with Prayer for TRO and Writ of Preliminary Injunction) against respondents. The 2
were consolidated.
RTC ruled that OSG has capacity to institute said action and that the NBC and its IRR does
not impose that parking spaces shall be provided free of charge. Thus, respondents are not
obligated to provide them for free.
CA affirmed in toto.

ISSUE: Whether the NBC is a source of an obligation on the part of respondents to provided free
parking.
HELD: No. Petition denied, CA decision affirmed.
Article 1158 of NCC states that [o]bligations derived from law are not presumed. Only those
expressly determined in this Code or in special laws are demandable, and shall be regulated
by the precepts of the law which establishes them; and as to what has not been foreseen, by
the provisions of this Book.
The Building Code, which is the enabling law and the Implementing Rules and Regulations do
not impose that parking spaces shall be provided by the mall owners free of charge. Absent
such directive, Ayala Land, Robinsons, Shangri-la and SM are under no obligation to provide
them for free

2. Contracts

ART. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. (1091a)

ART. 1305. A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some
service. (1254a)
Contracts
Generally, contracts are perfected by mere consent, and from that moment, the parties
are bound not only to the fulfillment of what has been expressly stipulated but also to
all of the consequences which according to their nature may be in keep with good faith,
usage, and law. Whether the contract is consensual or real, the rule is that from the
moment it is perfected, obligations, which my either be reciprocal or unilateral, arise.

Note: compliance in good faith is performance in accordance with the stipulation,

clauses, terms and conditions of the contract.

Well-settled rule: in case of doubt, it is the intention of the contracting parties prevails.
If the terms of a contract are clear and leave no doubt upon the contracting parties
intention, such terms should be applied in their literal meaning.

3. Quasi-Contracts

ART. 1160. Obligations derived from quasi-contracts shall be subject to the

provisions of Chapter 1, Title XVII, of this Book. (n)

Quasi-Contract Defined
Juridical relations arising from lawful, voluntary, and unilateral acts by virtue of which
the parties become bound to each other based on the principle that no one shall be
unjustly enriched

Quasi-contracts are based on the principles that:

a. No one must be unjustly enrich himself at anothers expense
b. If one benefits, he must reimburse
c. Justice and equity

Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly enriched or
benefited at the expense of another.

LAO CHIT V. SECURITY BANK AND TRUST CO.

G.R. No. L-11028 | 17 April 1959

FACTS:
On May 1949, Consolidated Investments Inc. leased to Domingo Dikit part of the lobby of
the lobby on the ground floor of the Consolidated Building in Plaza Goiti, Manila to be
used as offices of the proposed Bank of Manila then being organized by Dikit and Jose
Silva.
Under the contract the lessee undertook to construct, at their expense, such walls, partitions
and other improvements which shall become the property of the lessor upon the termination
and/or recission of said contract.
In another contract entered into on June 1949 between Dikit and Silva on one hand and
plaintiff Laoi Chit on the other hand, who furnished the materials and the work for the said
 walls and improvements at a total cost of P59,365 payable as soon as the Bank of Manila
opens for Business and is given a permit by the Central Bank. However the permit was never
issued and the Bank of Manila did not open hence the rentals due under the said lease
contract were never paid.
On May 1951, after a civil case against Dikit and Silva were filed and were ordered to
relinquish whatever rights of possession on the leased premises and disclaim of all right to and
over any and all improvements introduced therein, Lao Chit filed a case in the CFI of Manila
against Dikit and Silva for the recovery of what was due from them by reason of the
improvements introduced by Lao Chit. On June 1953, judgment was rendered sentencing
Dikit and Silva to pay Lao Chit but the corresponding writ of execution was returned unsatisfied
because Dikit and Silva had no properties registered in their name. Hence, Lao Chit brought
the action against Security Bank and Trust Company, to whom the lessor, since July 1951, had
leased the premises.

ISSUE: Whether or not Lao Chit was a bound by the contract between Dikit and Silva and Security
Bank and Trust Company.
HELD: YES.

RATIO:
Security Bank and Trust Company had occupied and used the premises in question including
the partitions and improvements made therein by Lao Chit pursuant to a contract of lease
entered into with the lessor. SBTC had paid the rental sand fulfilled its other obligation under
said contract. On the other hand, it cannot be denied that the improvements introduced by Lao
Chit had become property of the lessor because the contract between the lessor and Dikit and
Silva provided explicitly that the latter shall own those improvement upon the expiration and/or
recission of said contract, and the same had already been resolved.
Although Lao Chit was not a party to said contract, the stipulation is binding upon him, since he
only derived his right to enter the premises from his contract with DIkit and Silva. In short,
insofar as the construction thereof, Lao Chit was, vis--vis the lessor, a mere agent or
representative of Dikit and was privy to the undertakings of Dikit and Silva under his contract of
lease with lessor.

PNB V. CA AND B.P. MATA

G.R. No. 979995 | 21 January 1993
FACTS:
B.P. Mata ad Co., Inc. provides goods and services to shipping companies.
One of B.P. Matas clients is Star Kist Foods, Inc.
Star Kist through its account in Security Pacific National Bank (SEPAC), transfers its
reimbursements to B.P. Mata's account in Insular Bank of Asia and America (IBAA).
Star Kists reimbursement to B.P. Mata for February 1975 was arranged by SEPAC to be
transferred from the Philippine National Bank to B.P. Matas account in IBAA.
But there was an error in the cable message from SEPAC to PNB, which stated that the
payment be $14,000 when it should only be $1,400.
This was clarified by SEPAC to PNB, and Star Kist was able to reimburse B.P. Mata with
$1,400 on 25 February 1975.
However, on 11 March 1975, PNB effected a second payment as reimbursement of Star Kist
to B.P. Mata amounting to $14,000.
13 May 1981: PNB requested B.P. Mata to refund $14,000.
4 February 1982: PNB filed a civil case under Art. 1456 on constructive trust against B.P.
Mata, asserting their right to refund the amount of $14,000.
The RTC ruled that the case is not based on constructive trust but on solutio indebiti.
 The CA affirmed the RTC ruling but dismissed the case because it was barred by prescription.
Current petition seeks the PNBs right to refund the amount of $14,000 either under Art. 1456
on constructive trust or Art. 2142 on solutio indebiti.

ISSUE: Whether or not a quasi-contractual relationship exists in the absence of express consent
between the parties.
HELD: Yes
Consent is presumed despite the absence of a pre-existing relationship and contract between
the parties to avoid a case of unjust enrichment. According to Art. 2142, certain lawful, voluntary
and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall
be unjustly enriched or benefitted at the expense of another.
In the case, PNB and B.P. Mata have a quasi-contractual relationship of solutio indebiti because
PNB delivered a second payment by mistake to B.P. Mata when the latter had no right to
demand it. A mistake in payment is presumed when something (i.e. money) which had never
been due or had already been paid was delivered. Therefore, a quasi-contractual relationship
between PNB and B.P. Mata was created by operation of law through Art. 2142, not because of
any intention on their part but in order to prevent unjust enrichment. The quasi-contractual
relationship gives rise to certain obligations not within the contemplation of the parties.

PADCOM V. ORTIGAS
G.R. No. 146807 | 9May 2002
FACTS:
Padcom Condominium Corporation (hereafter PADCOM) owns and manages the Padilla
Office Condominium Building (PADCOM Building) located at Emerald Avenue, Ortigas
Center, Pasig City.
The land on which the building stands was originally acquired from the Ortigas &
Company, Limited Partnership (OCLP), by Tierra Development Corporation(TDC) under a
Deed of Sale dated 4 September 1974.
Among the terms and conditions in the deed of sale was the requirement that the
transferee and its successor-in-interest must become members of an association for
realty owners and long-term leases in the area later known as the Ortigas Center.
Subsequently, the said lot, together with improvements thereon, was conveyed by TDC in
favor of PADCOM.
In 1982, respondent Ortigas Center Association, Inc. (hereafter the Association) was
organized.
It sought the collection of membership dues in the amount of P2, 724.40 per month
from PADCOM. The corporate books showed that PADCOM owed the Association
P639,961.47, representing membership dues, interests and penalty charges from April 1983 to
June 1993.
In view of PADCOM's failure and refusal to pay its arrears in monthly dues, including interests
and penalties thereon, the Association filed a complaint for collection of sum of money before
the trial court.
The Association averred that purchasers of lands within the Ortigas Center complex from
OCLP are obligated under their contracts of sale to become members of the Association. This
obligation was allegedly passed on to PADCOM when it bought the lot from TDC, its
predecessor-in-interest.
The trial court dismissed the case. However, the Court of Appeals reversed the same in favor
of the Association.

ISSUE: Whether PADCOM is a member of the Ortigas Center Association, Inc. and therefore has an
obligation to pay the monthly dues of the Association.
HELD: Yes.
As a lot owner, PADCOM is a regular member of the Association. No application for
membership is necessary. Having ruled that PADCOM is a member of the Association, it is
obligated to pay its dues incidental thereto. Article 1159 of the Civil Code mandates:
Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
Assuming in gratis argument that PADCOM is not a member of the Association, it cannot
evade payment without violating the equitable principles underlying quasi-contracts. Article
2142 of the Civil Code provides:
Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of
another.
Generally, it may be said that a quasi-contract is based on the presumed will or intent of the
obligor dictated by equity and by the principles of absolute justice. Examples of these
principles are: (1) it is presumed that a person agrees to that which will benefit him; (2) nobody
wants to enrich himself unjustly at the expense of another; or (3) one must do unto others what
he would want others to do unto him under the same circumstances.

a. Negotiorum Gestio

Art. 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to
continue the same until the termination of the affair and its incidents, or to require
the person concerned to substitute him, if the owner is in a position to do so. This
juridical relation does not arise in either of these instances:

(1) When the property or business is not neglected or abandoned;

(2) If in fact the manager has been tacitly authorized by the owner.

In the first case, the provisions of Articles 1317, 1403, No. 1 and 1404 regarding
unauthorized contracts shall govern.

In the second case, the rules on agency in Title X of this Book shall be applicable.

Essential Requisites of Negotiorum Gestio:

1. no meeting of the minds

2. taking charge of anothers business or property
3. the property or business must have been ABANDONED OR NEGLECTED
(otherwise, the rule on unauthorized contracts would apply)
4. the officious manager must NOT have been expressly or implicitly authorized
(otherwise, the rules on AGENCY would apply)
 5. the officious manager (gestor) must have VOLUNTARILY taken charge (that is,
there must be no vitiated consent, such as error in thinking that he owned the
property or the business). (TS, Nov. 26, 1926).

b. Solutio Indebiti

Art. 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

Solutio Indebiti Defined

If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.

Essential Requisites of Solutio Indebiti

1. Receipt (not mere acknowledgement of something)
2. There was no right to demand it (because the giver had no obligation)
3. The undue delivery was because of mistake (either of fact, or of law, which may
be helpful or difficult)

Note: A quasi-contract is a unilateral contract created by the sole at or acts of the

gestor; no express content given by the other party. The consent needed is provided
by law through presumption.

The consent is referred to as presumptive consent. It gives rise to multiple juridical

relations which result in obligations for the delivery of the thing or rendition of service.

ANDRES v. MANUFACTURERS HANOVER

G.R. No. 82670 | 15 September 1989

FACTS:
Petitioner, engaged in the manufacture of ladies garments, childrens wear, mens apparel
and linens for local and foreign buyers, had Facets Funwear (FACETS) as one of its foreign
buyers.
FACETS remitted certain amounts of money to petitioner as payment for items it purchased.
Sometime in Aug.1980, FACETS instructed First Natl. State Bank of New Jersey (FNSB) to
transfer $10,000.00 to petitioner via PNB.
FNSB then instructed respondent to effect the transfer through its facilities and to charge the
amount to the account of FNSB with respondent.
Although respondent was able to send a telex to PNB to pay petitioner, such was not effected
immediately because the payee designated was in the telex was only Wearing Apparel.
25 Aug. 1980: FACETS informed FNSB about the delay in the remittance.
27 Aug. 1980: Another telex was sent with the payee designated as Irenes Wearing Apparel.
28 Aug. 1980: Petitioner was able to receive the remittance through Demand Draft No. 225654
of PNB.
 8 Sept. 1980: Unaware that petitioner already received the remittance, FACETS informed
respondent about the delay and at the same time amended its instruction by instructing that
payment should be effected through PCIB.
Respondent, also unaware that petitioner received payment, instructed PCIB to pay petitioner.
11 Sept. 1980: petitioner received a second $10,000.00.
Respondent recredited the account of FNSB when the latter discovered the duplication of the
remittance.
Respondent asked petitioner for the return of the second remittance, which the latter refused.
Respondent filed a complaint against petitioner with RTC, which decided in favor of petitioner.
RTC ruled that Art. 2154 NCC does not apply since the second remittance was made not by
mistake but by negligence, so petitioner was not unjustly enriched.
CA reversed.

ISSUE: Whether a quasi-contract of solution indebiti arose in this case.

HELD: Yes. Petition denied, CA decision affirmed.
Art. 2154 NCC provides that [i]f something received when there is no right to demand it and it
was unduly delivered through mistake, the obligation to return it arises.
This legal provision, which determines the quasi-contract of solution indebiti, is one of the
concrete manifestations of the ancient principle that no one shall enrich himself unjustly at the
expense of another.
For this article to apply the following requisites must concur:
o (1) That he who paid was not under obligation to do so; and
o (2) That payment was made by reason of an essential mistake of fact.
Petitioner had no right to demand and retain the second $10,000.00 remittance based on the
balance of FACETS with petitioner.
Respondent was never a party to the contract of sale between the petitioner and FACETS; and
there being no contractual relation between them, petitioner had no right to apply the second
remittance delivered by mistake to the outstanding account/balance of FACETS.
It is also evident that respondent was not negligent because both remittances have the same
reference invoice number. Thus, the second remittance was made by mistake.
Lastly, the principles of equity cannot be applied if there is a provision of law specifically
applicable to a case.

TITAN-IKEDA V. PRIMETOWN
G.R. No. 158768 | 12 February 2008

FACTS:
1992 - respondent Primetown Property Group, Inc. awarded the contract for the structural
works of its 32-storey Makati Prime Tower (MPT) to petitioner Titan-Ikeda Construction and
Development Corporation
January 31, 1994 - the parties executed a supplemental agreement:
o the payment terms shall be full swapping or full payment in condominium units.
o Respondent shall transfer and surrender to petitioner the condominium units in
accordance with the following schedule:
80% of units - upon posting and acceptance by respondent of the performance
bond
20% or remaining balance - upon completion of the project as provided in the
construction contract and simultaneous with the posting by [petitioner] of the
reglementary guarantee bond.
 June 30, 1994 - respondent executed a deed of sale in favor of petitioner pursuant to the
full-swapping payment provision of the supplemental agreement.
Shortly thereafter, petitioner sold some of its units to third persons
Sep. 1995 - respondent engaged the services of Integratech, Inc. (ITI), an engineering
consultancy firm, to evaluate the progress of the project
Sep. 7, 1995 ITI report: petitioner at that point had only accomplished 31.89% of the
project (11 months and six days behind schedule)
o Meanwhile, petitioner and respondent were discussing the possibility of the latters take
over of the projects supervision.
Oct. 12, 1995 - petitioner sought to confirm respondents plan to take over the project. In
a letter, it stated:
o This mutual agreement on the take over should not be misconstrued in any other way
except that the take over is part of the long range plan of [respondent] that [petitioner],
in the spirit of cooperation, agreed to hand over the construction supervision to
[respondent] as requested.
Petitioner qualifiedly admitted that it did not finish the project at the time of the takeover
date
July 2, 1997 - respondent filed a complaint for collection of sum of money against petitioner
(prayed for the reimbursement of the value of the projects unfinished portion amounting to
P66,677,000)
RTC ruled against respondent, respondent appealed to the CA
CA reversed the decision
Hence this petition
ISSUE: Whether the petitioner has the duty to return the respondents payment of condominiums.
HELD: Yes.
The parties entered into two contracts. The first was the supplemental agreement which
obliged the respondent to pay the entire contract price if the petitioner completed the project.
The parties then agreed to extinguish the supplemental agreement through the October 12,
1995 letter-agreement where respondent took over the project. Because of this they were no
longer required to fully perform their respective obligations.
However, respondent, by executing the June 30, 1994 deed of absolute sale, was deemed to
have paid petitioner P112,416,716.88. Nevertheless, because petitioner applied part of what it
received to respondents outstanding liabilities, it admitted overpayment. Petitioner is obliged
to return the excess to respondent. Embodying the principle of solutio indebiti in Article 2154:
Article 2154. If something is received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises. For the extra-contractual obligation
of solutio indebiti to arise, the following requisites must be proven: 1. the absence of a right to
collect the excess sums and 2. the payment was made by mistake.

METROBANK V. ABSOLUTE MANAGEMENT CORP.

G.R. No. 170498 | 09 January 2013
FACTS:
1998
Sherwood Holdings Corp., Inc. (SHCI) purchased plywood and plyboards from Absolute
Management Corporation (AMC).
SCHI paid AMC in advance through Metrobank checks amounting to P12,277,500.
The checks were given to AMC manager, Chua.
1999
Chua died and SHCI demanded from AMC alleged undelivered items worth P8,311,700.
 AMC said the transactions cannot be found in their record, that they had no knowledge of
Chuas transactions with Metrobank, and they recently discovered that Chua received from SHCI,
18 Metrobank checks amounting to P31,807,500.
AMC asked the RTC to hold Metrobank liable for the subject checks in case AMC is adjudged
liable to SHCI.
2003
Metrobank admitted that they deposited the checks to the account of Ayala Lumber and
Hardware, a sole proprietorship owned and managed by Chua.
Chuas records showed that the proceeds of the checks were remitted to AMC.
Metrobank filed a fourth party complaint against Chuas estate; that it reimburse Metrobank
in case the latter would be held liable in the third party complaint filed by AMC.
ISSUE: Whether or not a payment delivered by mistake which was received when there
was no right to demand it, creates a quasi-contractual relationship of solutio indebiti.

HELD: Yes.
Article 2154 embodies the concept of solutio indebiti, which arises when something is
delivered through mistake to a person who has no right to demand it. This obligates the
receiver to return what has been delivered by mistake.
The case fulfills the two requisites of solutio indebiti. The first requisite is that something has
been unduly delivered through mistake. Metrobank acted in a manner akin to a mistake by
depositing the AMC checks to Ayala Lumber and Hardwares account. The bank assumed,
given Chuas control over AMCs operations, the checks payable to AMC could be deposited to
Ayala Lumber and Hardwares account. Secondly, it is required that something was received
when there was no right to demand it. Here, Ayala Lumber and Hardware had no right to
demand or receive the checks deposited to its account. Despite Chuas control over AMC and
Ayala Lumber and Hardware, the two entities are distinct, thus checks exclusively and
expressly payable to one cannot be deposited in the account of the other. Therefore, the
disjunct among the parties creates a quasi-contractual relationship of solutio indebiti where
Ayala Lumber and Hardware is obliged, through its sole proprietor, Chua, to return the amount
of the checks to Metrobank.

c. Other Quasi Contracts

Art. 2164. When, without the knowledge of
the person obliged to give support, it is
given by a stranger, the latter shall have a
right to claim the same from the former,
unless it appears that he gave it out of piety
and without intention of being repaid.
Art. 2165. When funeral expenses are borne
by a third person, without the knowledge of
those relatives who were obliged to give
support to the deceased, said relatives shall
reimburse the third person, should the latter
claim reimbursement.
Art. 2166. When the person obliged to
support an orphan, or an insane or other
indigent person unjustly refuses to give
support to the latter, any third person may
furnish support to the needy individual, with
right of reimbursement from the person
obliged to give support. The provisions of
this article apply when the father or mother
of a child under eighteen years of age
unjustly refuses to support him.
Art. 2167. When through an accident or other
cause a person is injured or becomes
seriously ill, and he is treated or helped while
he is not in a condition to give consent to a
contract, he shall be liable to pay for the
services of the physician or other person
aiding him, unless the service has been
rendered out of pure generosity.
Art. 2168. When during a fire, flood, storm, or
other calamity, property is saved from
destruction by another person without the
knowledge of the owner, the latter is bound
to pay the former just compensation.
Art. 2171. The rights and obligations of the
finder of lost personal property shall be
governed by Articles 719 and 720.
Art. 2172. The right of every possessor in
good faith to reimbursement for necessary
and useful expenses is governed by Article
546.
Art. 2173. When a third person, without the
knowledge of the debtor, pays the debt, the
rights of the former are governed by Articles
1236 and 1237.

Art. 2169. When the government, upon the
failure of any person to comply with health
or safety regulations concern- ing property,
undertakes to do the necessary work, even
over his objection, he shall be liable to pay
the expenses.
Art. 2170. When by accident or other
fortuitous event, movable separately
pertaining to two or more persons are
commingled or confused, the rules on co-
ownership shall be applicable.
Art. 2174. When in a small community a
majority of the inhabitants of age decide
upon a measure for protection against
lawlessness, fire, flood, storm or other
calamity, any one who objects to the plan
and refuses to contribute to the expenses
but is benefited by the project as executed
shall be liable to pay his share of said
expenses.
Art. 2175. Any person who is constrained to
pay the taxes of another shall be entitled to
reimbursement from the latter.

4. Acts or Omissions Punished by Law

Art. 1161. Civil obligations arising from criminal offenses shall be governed by
the penal laws, subject to the provisions of Article 2177, and of the pertinent
provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII
of this Book, regulating damages.

Delicts
Civil obligations arising from criminal offence shall be governed by the penal laws

General Rule: Civil liability is a necessary consequence of criminal liability. Every

person criminally liable for a felony is also civilly liable.

Civil liability may be in the form:

a. Restitution
b. Reparation of damage caused; or
c. Indemnification for consequential damages

Reason: the commission of a crime caused not only moral evil but also material
damage
Exception: treason, rebellion, gambling

5. Quasi-Delicts
Art. 1162. Obligations derived from quasi-delicts shall be governed by the
provisions of Chapter 2, Title XVII of this Book, and by special laws.

Art. 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation between the parties, is
called a quasi-delict and is governed by the provision of this Chapter.

Another Name for Quasi-Delict: tort or culpa aquiliana.

Definition of Quasi-Delict
A quasi-delict is a fault or act of negligence (or omission of care) which causes
damages to another, there being no pre- existing contractual relations between
the parties.

Art. 2176 of the Civil Code where it refers to fault or negligence, covers not only acts
not punished by law but also acts criminal character, whether intentional or voluntary or
negligent.

It is based on the undisputed principle of equity that fault or negligence cannot

prejudice anyone else besides its author and in no case should its consequence be
borne by him who suffers the harm produced by such fault or negligence.

Requisites of quasi-delict
(1) act or omission by the defendant;
(2) fault or negligence of the defendant;
(3) damage caused to the plaintiff;
(4) direct relation or connection of cause and effect between the act or omission and
the damage; and
(5) no pre-existing contractual relation between the parties.

Fault or Negligence
Negligence is the failure to observe for the protection of the interests of another
person, that degree of care, precaution and vigilance which the circumstances justly
demand.

Test of Negligence: Would a prudent man, in the position of the person to whom
negligence is attributed, foresee harm to the person injured as a reasonable
consequence of the course about to be pursued? If so, the law imposes a duty upon him
to refrain, from that course or take precaution and failure to do so constitutes negligence.
Elements of Negligence
a. The fault or negligence of the defendant
b. The damage suffered or incurred by the plaintiff
c. The relation of cause and effect between the fault or negligence of the defendant
and the damage incurred by plaintiff

Kinds of Negligence:
1. Culpa aquiliana quasi-delict, negligence as a source of obligation
2. Culpa contractual negligence in the performance of a contract
3. Culpa criminal criminal negligence

CULPA AQUILIANA CULPA CONTRACTUAL CULPA CRIMINAL

As to Negligence
Direct, substantive and Merely incidental to the Direct, substantive and
independent. performance of an independent of a contract.
obligation already existing
because of a contract.
As to Pre-Existing Obligations
No pre-existing obligation. There is a pre-existing No pre-existing obligation
obligation (a contract,
either express or implied)
As to the Weight of Evidence
Ordinarily, the victim has to As long as it is proved that Accused is presumed
prove the negligence of the there was a contract and innocent until the contrary
defendant. This is because that it was not carried out, it is proved, so prosecution
the action is based on is presumed that the debtor has the burden of proving
alleged negligence on the is at fault, and it is his duty the negligence of the
part of the defendant. to prove that there was no accused
negligence in carrying out
the terms of the contract.
As to How it is Proved
Preponderance of Preponderance of Proof of guilty beyond
evidence. evidence. reasonable doubt.

II. Nature and Effect

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

A. Obligation to Give

Specific thing and Generic Thing Distinguished

1) Specific/Determinate- when it is particularly designated or physically
segregated from all others of the same class
 2) Generic/Indeterminate when it refers only to a class or genus to which it
pertains and cannot be pointed out with particularity.

A determinate thing is identified by its individuality. The debtor cannot substitute

it with another although the latter is of the same kind and quality without the
consent of the creditor.
A generic thing is identified only by its specie. The debtor can give anything of
the same class as long as it is of the same kind.

1. Obligation to deliver

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in

addition to the right granted him by Article 1170, may compel the debtor to make
the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be

complied with at the expense of the debtor.

If the obligor delays, or has promised to deliver the same thing to two or more
persons who do not have the same interest, he shall be responsible for
fortuitous event until he has effected the delivery.

Duties of the Obligor with Respect to Determinate or Specific Thing

1) Deliver the thing itself
General Rule: The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more valuable
than which is due.

Exceptions:
a. By agreement or consent, the debtor may deliver a different thing or perform a
different prestation in lieu of that stipulated (either a Dation in Pago or
Objective Novation)
b. Waiver of defect, the creditor with knowledge of the defect accepts the thing
without protest or disposes it.

Duties of the Obligor with respect to Indeterminate or Generic Thing

General Rule: To deliver a thing which is neither of superior or inferior quality.

Exception: When the purpose of the obligation and other circumstances shall have to
be taken into consideration

Purpose of the Obligation and Circumstance Considered

When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a
thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken into consideration.

Note: If the debtor can no longer perform the principal obligation, the creditor may ask
for compliance by a third person at the debtors expense

Duties of debtor in obligation to deliver a generic thing.

(1) To deliver a thing which is of the quality intended by the parties taking into
consideration the purpose of the obligation and other circumstances (see Art.
1246.); and
(2) To be liable for damages in case of fraud, negligence, or delay, in the
performance of his obligation, or contravention of the tenor thereof. (see Art.
1170.)

Correlative rights of the oblige

1) Right to ask for performance of the obligation
2) Right to ask that the obligation be complied with by a third person at the expense
of the debtor
3) Right to ask for rescission
4) Right to damages due to
a. Failure to deliver
b. Fraud
c. Negligence
d. Delay
e. Any matter in contravention of the tenor of the obligation

2. Obligation to Take Care of Thing

ART. 1163. Every person obliged to give something is also obliged to take care
of it with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care. (1094a)

2) Preserve the thing with Due Care

General Rule: Every person obliged to give something is also obliged to take
care of it with the proper diligence of a good father of a family. (ordinary care)

Exceptions:
a. The law or the stipulation of the parties requires another standard of care
b. Common Carriers in the case of common carriers, which from the nature of
their business and for reasons of public policy is bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case (1733)
c. Banks In case of banks, wherein the degree of diligence required is more than
that of a good father of a family, where the fiduciary nature of their depositors
 is concerned. In other words, banks are duty bound to treat the deposit accounts
to their depositors with the highest degree of care.

Basis: Absence of the duty of obligor to take care of the thing, the obligation to deliver
would be illusory.

Also, failure to preserve the specific thing would give rise to liability for damages unless
due to a fortuitous event/force majeure.

If law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.

With respect to stipulation, it is lawful for the parties to agree upon the kind of diligence
(extraordinary, slight, ordinary) or even for liability for any fortuitous event, but not for
absolute exemption from liability for negligence which is void for being contrary to public
policy.

Diligence
It is the attention and care required of a person in a given situation and is the opposite
of negligence.

Kinds:
a. Simple diligence
b. Extraordinary diligence
c. Diligence of a good father of a family or Bonus Pater Familia measure of
prudence or activity as is properly to be expected from, and ordinarily exercised by
a reasonable and prudent man under particular circumstances

3. Obligation to Deliver Fruits

ART. 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until
the same has been delivered to him. (1095)

Deliver the Fruits

General Rule: the creditor has a right to the fruits of the thing from the time the obligation
to deliver it arises. However, there is no real right until the same has been delivered to
him.

Exception: Obligations arising from contracts, a stipulation as regards the fruits shall
govern.

Note: the ownership of things is transferred not only be mere agreements but by
delivery
Kinds of Fruits:
a. Natural spontaneous products of the soil, the young and other products of
animals produced without intervention of human labro
b. Industrial those produced by lands of any kind through cultivation brought by
intervention of human labor
c. Civil those derived by virtue of juridical relation.

When obligation to deliver arises:

a. If obligation is based on law, quasi-delict, quasi-contract or crime, the specific
provisions of applicable law shall determine when the delivery shall be effected
b. If obligation is based on contracts:
General Rule: All the fruits shall pertain to the vendee from the constitution or
perfection of the obligation

Exceptions:
i. Subject to a suspensive condition, it arises from the happening of the
condition
ii. Subject to a suspensive term or period, it arises upon the lapse of the term
iii. If there is a contrary stipulation of the parties with respect to the time when
the thing or fruits shall be delivered

Correlative Rights of the Obligee

1. Right to specific performance
2. Right to rescission or resolution
3. Right to damages due to the following
a. Fraud
b. Negligence in the performance of the obligation
c. Delay or default
d. Any manner in Contravention of the tenor of the obligation

General Rule: if due to fortuitous even, the obligor is not liable for failure to
deliver

Exceptions:
a. Law
b. Stipulation to the contrary
c. Nature of the obligation requires assumption of risk
d. Fraud or malice (bad faith)
e. Debtor was already in delay when the fortuitous even took place
f. Obligation arises from a criminal offense
g. When the object of the obligation is lost and the loss is partily the fault of the
debtor
 4. Right to the fruits and interests from the time the obligation to deliver arises

4. Obligation to Deliver Accessions and Accessories

ART. 1166. The obligation to give a determinate thing includes that of delivering
all its accessions and accessories, even though they may not have been
mentioned. (1097a)

General Rule: Obligations to give a determinate thing includes that of delivering all its
accession and accessories, even though they may not have been mentioned.

Exceptions: By contrary intention of the parties

Rights by Accession right corollary to ownership of property which gives the owner
the right to everything produced by the property or which is incorporated or attached
thereto, either naturally or artificially

ACCESSIONS ACCESSORIES
Includes everything which is produced by Destined for embellishment, use or
a thing, or which is incorporated or preservation of another thing or have for
attached thereto, either naturally or their object the completion of another
artificially. thing. (ex. Key of a house, frame of a
picture, bracelet of a watch, bow of a
violin)
Includes:
Accesion natural alluvion (the action of Fault or negligence of the debtor as an
the sea or a river in forming new land by incident in the fulfillment of an existing
deposition) obligation

Accesion Industrial building, planting

B. Obligation to Do

ART. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone. (1098)

Situations contemplated in Article 1167.

(1) The debtor fails to perform an obligation to do; or
 (2) The debtor performs an obligation to do but contrary to the terms thereof; or
(3) The debtor performs an obligation to do but in a poor manner.

Obligations to Do
General Rule: In obligations to do or not to do, an act or forbearance cannot be
substituted by another act or forbearance against the obligees will

Exception: In facultative obligations, where the debtor reserves the right to substitute
another prestation.

Note: If a person is obliged to do something and fails to do it, the same shall be
executed at his cost. The same rule may be observed if he does it in contravention of
the tenor of the obligation. Furthermore, it may be decreed that what has been poorly
done be undone.

Duties of the Obligor

1. To do it
2. To shoulder the cost if someone else does it
3. To undo what has been poorly done
4. To pay damages

Remedies of creditor in positive personal obligation.

(1) If the debtor fails to comply with his obligation to do, the creditor has the right:
(a) To have the obligation performed by himself, or by another unless personal
considerations are involved, at the debtors expense; and
(b) to recover damages. (Art. 1170.)
(2) In case the obligation is done in contravention of the terms of the same or is
poorly done, it may be ordered (by the court) that it be undone if it is still possible
to undo what was done.

C. Obligation Not to Do

ART. 1168. When the obligation consists in not doing, and the obligor does what
has been forbidden him, it shall also be undone at his expense. (1099a)

Remedies of Creditor in Negative Personal Obligations

If the debtor does what has been forbidden him, the creditor shall have the following
remedies:
1) Have it undone at the expense of the debtor
2) Ask for damages, where it would be physically or legally impossible to undo what
has been undone because of:
a. The very nature of the act itself;
b. Rights acquired by third persons who acted in good faith
 c. When the effects of the acts prohibited are definite in character and will not
cease even if the thing prohibited be undone.

III. Non-Performance of Obligations

A. Kinds of Non-Performance
ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for dam- ages. (1101)

Breach of obligation may be:

1. Voluntary arises either by fraud, negligence, delay, and in amy manner
contravene to the tenor of the obligation
2. Involuntary arises due to fortuitous events
3. Substantial amount to non-performance which is the basis for rescission and
payment of damages
4. Casual a part of the obligation has been performed and gives rise to liability for
damages

5. Delay

ART. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extra-judicially demands from them the fulfillment
of their obligation.

However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation nor the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by the
other begins. (1100a)

Delay (Mora)
It refers to the non-fulfillment or obligation with respect to time
Those obliged to deliver or to do something incur delay from the time the obligee
judicially or extra-judicially demands from them the fulfillment of their obligation.

Note: There is simple delay as one fails to perform the obligation and this delay is
converted to a legal delay which arises when the oblige judicially or extra-judicially
demands their fulfillment. The delay which the law speaks about is one that is legal.

Delay in the performance of the obligation however must be either malicious or negligent.
If only due to inadvertence, the obligor cannot be liable under Art. 1170. (RCBC v. CA).

General rule: Without demand, judicial or extra-judicial, the effect of default will not
arise.

Exceptions:
a. When the obligation or law expressly so declares
b. When from the nature and circumstances of the obligation it appears that the
designation of the time when the thing to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract
c. When demand would be useless:
a. Caused by some act or fault of the debtor
b. Impossibility caused by fortuitous event

Purpose of the Demand: The presumption of good faith

Note: There can only be delay in obligations to give and to do and not in obligations
not to give or not to do

Delay in Reciprocal Obligations

In reciprocal obligations, neither party incurs delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligations, delay by the other begins

Kinds of delay (mora).

(1) Mora solvendi - the delay on the part of the debtor to fulfill his obligation (to give
or to do) by reason of a cause imputable to him;
(2) Mora accipiendi - the delay on the part of the creditor without justifiable reason to
accept the performance of the obligation; and
(3) Compensatio morae - the delay of the obligors in reciprocal obligations (like in
sale), i.e., the delay of the obligor cancels the delay of the obligee, and vice versa.

CETUS DEVELOPMENT V. CA
G.R. No. 77647. August 7, 1989
Facts:
 Respondents Ong, Teng, Liwanag, Canlas, Sudario, Nagbuya, were lessees of premises in
Quiapo, Manila, originally owned by the Susana Realty.
They were individual, verbal leases, on a month-to-month basis. Rental payments were made
to a collector of the Susana Realty who went to the premises monthly.
Premises were then sold to petitioner, Cetus Development, in 1984.
The private respondents continued to pay monthly rentals to a collector sent by the petitioner
from April to June, 1984.
In August and September, they failed to pay because no collector came.
In October, petitioner sent letters demanding they vacate the premises and payback rentals.
Immediately upon receipt of the demand letters, private respondents paid arrearages, which
were accepted subject to the condition that the acceptance was without prejudice to the filing
of an ejectment suit.
Subsequent monthly rental payments were accepted under the same condition.
For failure of the private respondents to vacate the premises as demanded in the letter,
petitioner filed with the Metropolitan Trial court complaints for ejectment. MTC dismissed the
case, and so did the RTC did as well as the CA.

Issue: Whether there was a delay of payment by the private respondents to the petitioner considering
that upon receipt of the demand letter, they immediately tendered their payments.

Held: No. It is very clear that in the case at bar, no cause of action for ejectment has accrued. There
was no failure yet on the part of private respondents to pay rents for three consecutive months. As the
terms of the individual verbal leases which were on a month-to-month basis were not alleged and
proved, the general rule on necessity of demand applies, to wit: there is default in the fulfillment of an
obligation when the creditor demands payment at the maturity of the obligation or at anytime thereafter.
This is explicit in Article 1169, New Civil Code which provides that (t)hose obliged to deliver or to do
something incur in delay from the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation. Petitioner has not shown that its case falls on any of the following
exceptions where demand is not required: (a) when the obligation or the law so declares; (b) when from
the nature and circumstances of the obligation it can be inferred that time is of the essence of the
contract; and (c) when demand would be useless, as when the obligor has rendered it beyond his power
to perform.

The demand required in Article 1169 of the Civil Code may be in any form, provided that it can be
proved. The proof of this demand lies upon the creditor. Without such demand, oral or written, the
effects of default do not arise.

RCBC V. CA
G.R. No. 133107 | 25 March 1999
FACTS:
Private respondent Atty. Felipe Lustre purchased a car (Toyota Corolla) for which he made a
down payment of P164,620.00 and the balance to be paid equally in 24 monthly installments.
o He issued 24 PDC for the amount of P14,976.00 each.
To secure the balance, Lustre executed a promissory note and contract of chattel mortgage
(which provided for an acceleration clause wherein the whole shall become due upon default,
and he shall be liable for 25% of the principal due as liquidated damages) over the vehicle in
favor of Toyota Shaw.
Toyota Shaw assigned all its rights and interests in the chattel mortgage to petitioner RCBC.
Except for one unsigned RCBC check no. 279805 (dated 10 Aug. 1991), all checks (dated 10
Apr. 1991 to 10 Jan. 1993) were encashed and debited to Lustres account with RCBC.
 o The amount of the unsigned check was previously debited but was later recalled and re-
credited to Lustres account.
o Because of this, the last 2 checks (10 Feb. 1993 and 10 Mar. 1993) were no longer
presented for payment, in conformity with RCBC procedure.
On the theory that Lustre defaulted in his payments (unsigned check), petitioner demanded the
payment of the balance of the debt and liquidated damages, which Lustre refused.
Petitioner filed an action for replevin and damages with RTC-Pasay, which dismissed the
petition.
CA affirmed.

ISSUE: Whether non-encashment of respondents check constitutes default/delay (in payment).

HELD: No. Petition denied, CA decision affirmed.
Article 1170 of the Civil Code states that those who in the performance of their obligations are
guilty of delay are liable for damages. The delay in the performance of the obligation, however,
must be either malicious or negligent.
Even if Lustre was guilty of delay in the payment of the value of the unsigned check, he cannot
be held liable for damages. There is no imputation, much less evidence, that he acted with
malice or negligence in failing to sign the check. In fact, petitioner did not object to the
unsigned check.
In view of the lack of malice or negligence on the part of private respondent, petitioners blind
and mechanical invocation of the contract of chattel mortgage was unwarranted.
As pointed out by the trial court, this whole controversy could have been avoided if only
petitioner bothered to call up private respondent and ask him to sign the check. Good faith not
only in compliance with its contractual obligations, but also in observance of the standard in
human relations, for every person to act with justice, give everyone his due, and observe
honesty and good faith, behooved the bank to do so.

AEROSPACE V. CA
G.R. No. 108129. September 23, 1999

FACTS:
The case stemmed from a complaint filed by the buyer (petitioner) against the seller
(respondent) for alleged breach of contract.
June 27, 1986 - petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred
(500) metric tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer
Corporation (Philphos)
o Petitioner as buyer committed to secure the means of transport to pick-up the
purchases from private respondents load-ports.
o Per agreement, one hundred metric tons (100 MT) of sulfuric acid should be taken from
Basay, Negros Oriental storage tank, while the remaining four hundred metric tons (400
MT) should be retrieved from Sangi, Cebu.
August 6, 1986 - private respondent sent an advisory letter to petitioner to withdraw the
sulfuric acid purchased at Basay because private respondent had been incurring incremental
expense of two thousand (P2,000.00) pesos for each day of delay in shipment.
November 19, 1986 - petitioner chartered M/T Sultan Kayumanggi, owned by Ace Bulk Head
Services. The vessel was assigned to carry the agreed volumes of freight from designated
loading areas
o M/T Kayumanggi withdrew only 70.009 MT of sulfuric acid from Basay because said
vessel heavily tilted on its port side.
o Consequently, the master of the ship stopped further loading.
 December 12, 1986 private respondent, in a demand letter, asked petitioner to retrieve the
remaining sulfuric acid in Basay tanks so that said tanks could be emptied on or before Dec.
15, 1986
Dec. 18, 1986 - M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT
of sulfuric acid. Again, the vessel tilted. Further loading was aborted.
(no date) - M/T Sultan Kayumanggi sank with a total of 227.51 MT of sulfuric acid on board.
Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT
Jan. 26 & March 20, 1987 - Melecio Hernandez, acting for the petitioner, addressed letters to
private respondent, concerning additional orders of sulfuric acid to replace its sunken
purchases
Jan. 25, 1988 - petitioners counsel, Atty. Pedro T. Santos, Jr., sent a demand letter to private
respondent for the delivery of the 272.49 MT of sulfuric acid paid by his client
May 4, 1989 - petitioner filed a complaint for specific performance and/or damages before the
Regional Trial Court
o Private respondent filed its answer with counterclaim, stating that it was the petitioner
who was remiss in the performance of its obligation in arranging the shipping
requirements of its purchases
RTC ruled in favor of petitioner
o Because the petitioner was absolved in its obligation to pick-up the remaining sulfuric
acid because its failure was due to force majeure.
o private respondent who committed a breach of contract when it failed to accommodate
the additional order of the petitioner,
On appeal, CA reversed the decision found petitioner guilty of delay and therefore liable
for damages
o the sinking of the M/T Sultan Kayumanggi did not absolve the plaintiff from its
obligation to lift the rest of the 272.481 MT of sulfuric acid at the agreed time. It was the
plaintiffs duty to charter another vessel for the purpose. It did contract for the services
of a new vessel, the M/T Don Victor
Hence this petition

ISSUE: Whether the petitioner is liable for damages for delay in pick-up of sulfuric acid.

RULING: Yes. Court finds the appellate courts conclusion that petitioner violated the subject contract
amply supported by preponderant evidence. Petitioners claim was predicated merely on the
allegations of its employee, Melecio Hernandez, that the storm or force majeure1 caused the
petitioners delay and failure to lift the cargo of sulfuric acid at the designated loadports. For on
record, the storm was not the proximate cause of petitioners failure to transport its purchases
on time. The survey report submitted by a third party surveyor, SGS Far East Limited, revealed that
the vessel, which was unstable, was incapable of carrying the full load of sulfuric acid. The
unfortunate sinking of the shipping vessel was not due to force majeure. It sunk because it was,
based on SGS survey report, unstable and unseaworthy.

When M/T Sultan Kayumanggi failed to comply with the necessary loading conditions of sulfuric acid,
it was incumbent upon petitioner to immediately replace M/T Sultan Kayumanggi with another
seaworthy vessel. However, despite repeated demands, petitioner did not comply seasonably.

Where there has been breach of contract by the buyer, the seller has a right of action for damages.
Following this rule, a cause of action of the seller for damages may arise where the buyer refuses to
remove the goods, such that buyer has to remove them. Article 1170 Those who in the performance

1
unforeseeable circumstances that prevent someone from fulfilling a contract.
of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene
the tenor thereof, are liable for damages. In the present case, private respondent required petitioner
to ship out or lift the sulfuric acid as agreed, otherwise petitioner would be charged for the consequential
damages owing to any delay. Since petitioner was aware of such, it is liable for damages due to delay.

SANTOS V. SANTOS
5 November 2004. GR No. 153004

Facts:
26 October 1990: SVHFI and Santos executed a compromise agreement which amicably settled
their pending litigations.
Compromise Agreement:
o SVHFI shall pay Santos P14.5M: P1.3M upon execution of the agreement and P13M
balance either in one lump sum or in installments within 2 years from execution of the
agreement.
o If the balance of P13M is not paid in 2 years, the payment shall be in the form of the land
or real properties in subject.
o Upon execution of the agreement: Santos shall dismiss all civil cases against SVHFI and
lift the notices of lis pendens on the subject real properties.
o Failure of compliance to the agreement shall entitle the aggrieved party to a writ of
execution.
Santos dismissed the cases, lifted the notices of lis pendens on the land, and SVFHI paid P1.5M.
30 September 1991: RTC approved the compromise agreement
28 October 1992: Santos sent a letter to SVFHI inquiring when it would pay the balance of
P13M.
SVFHI did not respond to Santos, so the latter petitioned a writ of execution which was granted
by the RTC.
10 March 1993: The subject real properties of SVFHI were auctioned and sold to Riverland, Inc.
2 June 1995: Santos and Riverland, Inc. filed a complaint for declaratory relief and damages for
the delay on part of SVFHI in paying the balance of P13M.
RTC dismissed the case, but the CA reversed the judgment and ordered SVHFI to pay legal
interest of 12% per annum from the date of demand on 28 October 1992 until the date of actual
payment of the whole obligation.
8 February 1995: SVFHI paid the balance of P13M without interest.
In the current petition, SVFHI contends that they are not liable to pay legal interest since it was
not stipulated in the compromise agreement.

Issue: Whether or not a debtor who delays the fulfillment of his obligations is liable to pay
interest.

Held: Yes. Provided Art. 1169, those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation and
Art. 1170, which embodies that when the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right.

In the case, the three requisites for the debtor to be in default has concurred: 1) that the obligation
be demandable and already liquidated - here the obligation of SVHFI was due and demandable after
the lapse of the 2 year period from the execution of the contract. The obligation was already liquidated
because the amount of P13M and 2 year period were expressly stated in the agreement, thus the
debtor knew exactly how much and when he is to pay; 2) that the debtor delays performance - here
SVFHI fully paid the obligation only on 8 February 1995, which is past the 2 year period agreed upon
and they even filed several motions before the CA to hinder the execution of a final judgment; and lastly
3) that the creditor requires the performance judicially or extrajudicially - here Santos letter of
demand to SVFHI dated 28 October 1992 was in accordance with an extrajudicial demand
contemplated y law.

Therefore, this is a case of a delay in fulfillment of an obligation where the creditor (Santos) has been
deprived of funds which he is entitled by virtue of the compromise agreement. Given Arts. 1169 and
1170, the creditor must be compensated for the loss of the use of those funds. This compensation is
in the form of interest, which in the absence of agreement, the legal interest of 12% per annum for
loan as forbearance of money, is to be computed from the time of judicial or extrajudicial demand.

6. Fraud (Dolo)

ART. 1171. Responsibility arising from fraud is demandable in all obligations.

Any waiver of an action for future fraud is void. (1102a)

Definition of Fraud
Voluntary execution of a wrongful act, or a willful omission which prevents the normal
realization of the prestation, knowing and intending the effects which naturally and
necessarily arise from such act or omission

Implies osme kind of malice or dishonesty and cannot cover cases of mistake and
errors in judgment made in good faith. In such case obligor can be held liable for
damages.

Test: The element of intent and not the harm done

Waiver of Fraud
Responsibility arising rom fraud is demandable in all obligations. Any waiver of action
for future fraud is void.

Note: the law prohibits the renunciation of action for damages on the ground of future
fraud but it does not prohibit fraud already committed.

Kinds of Fraud
a. In the performance of the obligation
b. In the execution/creation/birth of the contract:
a. Dolo causante
b. Dolo Incidente

LEGASPI OIL CO. V. CA

G.R. No. 96505. July 1, 1993

Facts:
 Bernard Oseraos had several transactions with Legaspi Oil Co. for the sale of copra to the
latter. The price at which appellant sells the copra varies from time to time, depending
on the prevailing market price when the contract is entered into.
On February 16, 1976, appellant's agent Jose Llover signed contract No. 3804 for the sale of
100 tons of copra at P82.00 per 100 kilos with delivery terms of 20 days effective March
8, 1976.
After the period to deliver had lapsed, appellant sold only 46,334 kilos of copra thus leaving a
balance of 53,666 kilos.
Accordingly, demands were made upon appellant to deliver the balance with a final warning
that failure to deliver will mean cancellation of the contract, the balance to be purchased at the
open market and the price differential to be charged against appellant.
On October 22, 1976, since there was still no compliance, appellee exercised its option under
the contract and purchased the undelivered balance from the open market at the prevailing
price of P168.00 per 100 kilos, or a price differential of P86.00 per 100 kilos, a net loss of
P46,152.76 chargeable against appellant.

Issue: Whether private respondent is liable for non-performance of obligation through fraud.

Held: Yes. Private respondent is guilty of fraud in the performance of his obligation under the sales
contract. Petitioner made a final demand with a warning that, should private respondent fail to
complete delivery of the balance of 53,666 kilograms of copra, petitioner would purchase the balance
at the open market and charge the price differential to private respondent. Still private respondent failed
to fulfill his contractual obligation to deliver the remaining 53,666 kilograms of copra and since there
was still no compliance by private respondent, petitioner exercised its right under the contract and
purchased the 53,666 kilograms of copra, at the open market at the then prevailing price of P168.00
per 100 kilograms, a price differential of P46,152.76.

The conduct of private respondent clearly manifests his deliberate fraudulent intent to evade his
contractual obligation for the price of copra had in the meantime more than doubled from P82.00 to
P168 per 100 kilograms. Under Article 1170 of the Civil Code of the Philippines, those who in the
performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages. Pursuant to said article, private respondent is
liable for damages.

WOODHOUSE V. HALILI
G.R. No. L-4811 31 July 1953
FACTS:
- 29 November 1947 Woodhouse entered into a written agreement with Halili the provisions of
which are:
o (1) that they shall organize a partnership for the bottling and distribution of Mission
softdrinks, plaintiff to act as industrial partner or manager, and the defendant as a
capitalist, furnishing the capital necessary therefore;
o (2) that the defendant was to decide matters of general policy regarding the business,
while the plaintiff was to attend to the operation and development of the bottling plant;
o (3) that the plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of
the proposed partnership; and
o (4) that the plaintiff was to receive 30% of the net profits of the business.
- Prior to entering this agreement, Woodhouse informed Mission Dry Corporation of LA,
California, that he had interested a prominent financier (Halili), who was willing to invest half a
million dollars in the bottling and distribution of the said beverages, and requested, in order
that he may close the deal with him, that the right to bottle and distribute be granted him for a
 limited time under the condition that it will finally be transferred to the corporation. Thus, he
was given a thirty days option on exclusive bottling and distribution rights for the Philippines.
- 3 December 1947 Woodhouse signed the contract.
- When the bottling plant was already in operation, Woodhouse demanded that the partnership
papers be executed, but Halili gave excuses and would not execute said agreement. Thus he
filed a complaint where he prays for the:
o (1) execution of the contract of partnership,
o (2) accounting of profits, and
o (3) a share thereof of 30% with damages in the amount of P200,000.
- On the other hand, Halili claims that:
o (1) his consent to the agreement, was secured by the representation of Woodhouse that
he was the owner, or was about to become owner of an exclusive bottling franchise,
which representation was false, and that no franchise was secured but was given to
himself,
o (2) he did not fail to carry out his undertakings, but that it was Woodhouse who failed,
and
o (3) Woodhouse agreed to contribute to the exclusive franchise to the partnership, but
failed to do so with a counterclaim for P200,000 as damages.

ISSUE: Whether Halili had falsely represented that he had an exclusive franchise to bottle Mission
beverages.
HELD: Yes, petitioner is primarily liable

RATIO:
- Art. 1903 provides for the obligation and/or equal liability of owners or directors of an
establishment or business for any damage caused by their employees while engaged in or in
the performance of their duties.
- The Court has held in jurisprudence that the employer is liable for the negligent acts of his
servant while the latter is performing his duties, and this liability is based on the employers
own negligence and not on that of his servant.
- Furthermore, the Court also held that a distinction between civil liability arising from criminal
negligence under the RPC and responsibility for fault or negligence under the CC must be
made/clarified, since the counsel of the petitioner alleges that he is exempt from subsidiary
liability due to criminal negligence.

GERALDEZ V. CA
G.R. No. 108253, 23 February 1994
FACTS:
Lydia Geraldez came to know about respondent Kenstar Travel Corporation (KTC) from
advertisements in newspapers regarding their tours to Europe. She then contacted KTC who
sent its representative Alberto Vito Cruz from whom she purchased a European Tour Volaire
3 which is a 22 day tour of Europe.

During the tour, Lydia claimed that she was very disappointed since contrary to what was
stated in the brochure, there was no European tour manager for the group of tourists, hotels
were not first class, the supposed highlights of the tour were not visited, likewise their tour
guide was a first timer. As such Lydia filed a case with the RTC. The RTC and the CA granted
her petition with the CA modifying the RTC decision with regard to the award of damages.
Hence this petition.

ISSUE: WON KTC acted in bad faith in discharging its obligations under the contract.
HELD: YES, petition is granted CA decision set aside with grant to damages. The Court ruled that
KTC, in performing their obligations under the contract which the petitioners adhered to, cannot be
exculpated from its fraudulent acts by reason of public policy. Art 1171 provides that responsibility
arising from fraud is demandable in all obligations. Hence, KTC cannot just substantially comply
with the obligations arising from its contract with Geraldez

INTERNATIONAL CORPORATE BANK V. GUECO

G.R. No. 141968. February 12, 2001.
Facts:
Sps. Gueco obtained a loan from ICB to purchase a car. In consideration, the debtors
executed PNs (monthly installments), and a chattel mortgage over the car as a security.
The Spouses defaulted in payment of installments. The Bank filed a Sum of Money with
Prayer for a Writ of Replevin. They were demanding the payment of P184K. This amount was
later lowered to P150K. Since they still havent paid the car was still detained within the bank.
After some negotiations and computations, the amount was lowered to P150K. Dr. Gueco then
delivered a managers check in the amount of P150K but the car was not released because of
his refusal to sign the Joint Motion to Dismiss (they have not filed a Answer to the initial case).
One of the conditions set by the bank was to sign a Joint Motion to Dismiss (standard
procedure).
After several demand letters and meetings with bank representatives, Sps. Gueco initiated a
civil action for damages before the MTC. The MTC dismissed the complaint for lack of merit.
RTC reversed the decision of MTC. RTC held that there was a meeting of the minds between
the parties as to the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as a condition sine
qua non for the effectivity of the compromise. CA assailed the decision of RTC.
Sps. Gueco stand is that petitioner should return the car or its value and that the latter,
because of its own negligence, should suffer the loss occasioned by the fact that the check
had become stale. It is their position that delivery of the managers check produced the effect
of payment and, thus, petitioner was negligent in opting not to deposit or use said check.

Issue: Whether there was fraud on the art of ICB

Held: No. Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the
Civil Code is the deliberate and intentional evasion of the normal fulfillment of an obligation.

We fail to see how the act of the petitioner bank in requiring the respondent to sign the joint motion to
dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that
the signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However,
this cannot in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit
of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed with
prejudice. The whole point of the parties entering into the compromise agreement was in order that Dr.
Gueco would pay his outstanding account and in return petitioner would return the car and drop the
case for money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a
natural consequence of the compromise agreement and simply stated that Dr. Gueco had fully settled
his obligation, hence, the dismissal of the case. Petitioners act of requiring Dr. Gueco to sign the joint
motion to dismiss cannot be said to be a deliberate attempt on the part of petitioner to renege on the
compromise agreement of the parties.
 7. Negligence
ART. 1172. Responsibility arising from negligence in the performance of every
kind of obligation is also demandable, but such liability may be regulated by the
courts, according to the circumstances. (1103)

ART. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place. When negligence
shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall
apply.

If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required. (1104a)

Negligence (Culpa)
The fault or negligence of the obligor consists in the omission of the diligence which is
required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and place.

Any voluntary act or omission, there being no malice, which prevents the normal
fulfillment of an obligation.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible
for all damages which may be reasonably attributed to the non-performance of the
obligation

Test: Whether the defendant in doing the alleged negligent act used the reasonable
care and caution which an ordinary and prudent person would have used in the same
situation.

Effects of Negligence:
a. Damages are demandable which the court may regulate according to
circumstances
b. Invalidates defense of fortuituous event

Kinds of Negligence
1. Culpa Contractual fault or negligence of obligor by virtue of which he is unable
to perform his obligation arising from a pre-existing contract
2. Culpa Aquiliana fault or negligence of a person, whose failure to observe the
required diligence to the obligation causes damage to another
 Note: the negligence of the defendant in both cases if characterized by the
omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the place

3. Culpa Criminal fault or negligence which results in the commission of a crime

Standard of Diligence Required

If law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family is required.

Note: when the negligence is so gross that it amounts to wanton attitude on the part of
the obligor, the laws in case of fraud shall apply.

If the obligor acted in good faith, he shall be liable only for natural and probable
consequences of the breach of obligation and which the parties have foreseen or could
have reasonably foreseen at the time the obligation was constituted.

If the obligor acted in bad faith, the boundaries between negligence and fraud
disappear altogether. Obligor can be held responsible for all damages which any be
reasonably attributed to the nonperformance of the obligation. Any waiver or
renunciation which is made in anticipation of such liability is null and void.

If there was contributory negligence of the oblige, the effect is to reduce or mitigate the
damages which he can recover.

If the negligent act or omission of the oblige was the proximate cause of the event
which led to damage or injury complained of, he cannot recover.

Robbery, per se, like carnapping, does not foreclose the possibility of negligence. It is
not a fortuitous event.
PICART V. SMITH
G.R. No. 12219 | 15 March 1918
FACTS:
Plaintiff Picart was riding on his pony over Carlatan Bridge, San Fernando, La Union.
Defendant Smith, in an automobile, approached from the opposite direction and as he neared
the bridge he blew his horn to give warning of his approach.
Plaintiff, thinking that he did not have sufficient time to get to the other side, pulled the pony on
the right side instead of going to the left.
Defendant then quickly turned his car to the right to escape the horse, but in doing so it frightened
the animal that it turned towards the railing. The horse fell and petitioner was thrown off; the
horse died and petitioner required medical attention for several days.
Plaintiff filed an action to recover P31,000.00 from defendant with the CFI, which ruled in favor
of the latter.

ISSUE: Whether defendant was negligent making him civilly obligated to repair the damage done.
HELD: Yes. Petition granted, CFI decision reversed.
RATIO:
The Court found that the defendant was negligent when he exposed the horse and petitioner to
the unfortunate incident i.e., defendant was still some distance away when the petitioner and
his horse moved towards the opposite side of the road, and instead of controlling the situation,
he continued on until he almost hit the horse.
The test by which to determine existence of negligence in a particular case: Did the defendant
in doing the alleged negligent act use that reasonable care and caution which an ordinarily
prudent person would have used in the same situation? If not, then he is guilty of negligence.
The law considers what would be reckless, blameworthy, or negligent in the man of ordinary
intelligence and prudence and determines liability by that.
o What constitutes the conduct of a prudent man in a given situation is always determined
in light of human experience and in view of the facts involved in a particular case.
Stated in these terms, the proper criterion for determining the existence of negligence in a given
case is this: Conduct is said to be negligent when a prudent man in the position of the tortfeasor
would have foreseen that an effect harmful to another was sufficiently probable to warrant his
foregoing the conduct or guarding against its consequences.
Based from the foregoing, defendant was negligent. However, plaintiff was not free from fault,
for he was guilty of antecedent negligence in planting himself on the wrong side of the road.
In such a case, the problem is to discover which of the two is immediately and directly
responsible. It will be noted that the negligent acts of the two parties were not contemporaneous,
since the negligence of the defendant succeeded the negligence of the plaintiff by an appreciable
interval.
o Under these circumstances, the law is that the person who has the last fair chance to
avoid the impending harm and fails to do so is chargeable with the consequences, without
reference to the prior negligence of the other party.

8. Contravention of the Tenor

ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for dam- ages. (1101)

ART. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone. (1098)

Contravention of Tenor
Under Art. 1170, the phrase in any manner contravene the tenor of the obligation
includes not only any illicit act which impairs the strict and faithful commitment of the
obligation, but also every kind of defective performance, unless excused in proper
cases by fortuitous event.

Note: The following do not excuse fulfillment:

 a. Increase in cost of performance
b. Poverty
c. War between the subjects of a neutral country

CHAVEZ V. GONZALES
No. 27454. 30 April 1970

Facts:
- July 1963 Chaves had his typewriter serviced by Gonzales. Despite constant reminders
Gonzales failed to comply. In October 1963 Gonzales asked for P6 for parts which Chaves
gave. October 26 Chaves asked for the return of the typewriter which Gonzales returned.
- Upon examining Chaves found that it was not yet done and some parts were missing. Chaves
then sent a letter demanding the return of missing parts and the P6, to which Gonzales
complied with. Chaves later had the typewriter repaired by Freixas Business Machines which
cost him P89.95.
- On August 23, 1965 Chaves demanded in an action from Gonzales a total of P1,190 as
different damages and attorneys fees. Gonzales did not deny the facts except the claim of
Chaves that the typewriter was delivered to Gonzales through Julio Bocalin. The repair invoice
shows that the missing parts had a value of P31.10, which the lower court awarded. Hence,
this appeal.

Issue: Whether Gonzales is liable to pay for the failed repair of the typewriter.

Held: Yes. Appealed judgment modified, Gonzales ordered to pay P89.85.

Ruling:
- It is clear that the defendant-appellee contravened the tenor of his obligation because he not
only did not repair the typewriter but returned in in shambles. For such contravention, he is
liable under Art 1167 of the Civil Code for the cost of executing the obligation in a proper
manner.
- For such breach Gonzales is liable for labor in the amount of P58.75 because the obligation
was to repair it. In addition, under Art 1170 which provides that those in the performance of
their obligations are guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages, Gonzales is liable for the cost of the
missing parts in the amount of P31.10 because he failed to return it in the same condition it
was when he received it.

ARRIETA V. NARIC
GR No. L-15645. 31 January 1964
Facts:
19 May 1952: Arrieta was awarded a contract to supply the National Rice and Corn Corp. (NARIC)
20,000 metric tons of Burmese Rice, at $203.00 per metric ton.
1 July 1952: Execution of the Contract of Sale of Rice entered into by Arrieta and NARIC, the latter
committed to pay immediately by means of an irrevocable, confirmed, and assignable Letter of
Credit.
However, it was only on 30 July 1952 when NARIC applied for a letter if credit with the Philippine
National Bank (PNB) and Arrieta advised NARIC of the immediate necessity for the opening of the
letter of credit since the authorities in Rangoon, Burma will confiscate the 5% F.O.B. price of the
20,000 tons of rice if the letter of credit is not received before 4 August 1952.
 NARICs correspondence with the PNB stated that the corporation did not have the required
amount of deposit to open a letter of credit.
4 August 1952: PNBs Board of Directors approved NARICs application with the condition that
56% marginal cash deposit be made by the corporation.
NARIC was in no financial position to meet the condition and they admitted this to Arrieta in a letter
sent on 2 August 1952.
8 September 1952: the letter of credit was opened but since it was delayed, Arrietas allocation
from the supplier in Burma was cancelled and the 5% deposit she made was forfeited.
Current petition: Arrieta demands compensation from NARIC for the damages in the sum of
$286,000.00 representing unrealized profit.

Issue:
Whether or not assumption of contractual obligations despite knowing ones inability to
comply with the obligation constitutes contravention of the tenor.

Held:
Yes. According to Art. 1170, not only debtors guilty of fraud, negligence, or default in the
performance of obligations are decreed liable; every debtor who fails in the performance of his
obligations is bound to indemnify for the losses and damages caused thereby. Also, the phrase in Art.
1170, in any manner contravene the tenor of the obligation includes any illicit act which impairs
the strict and faithful fulfillment of the obligation, or every kind or defective performance.

In the case, NARICs liability does not only stem from their failure to satisfy the requirement of the
bank to open the letter of credit, but also from its willful and deliberate assumption of contractual
obligations despite knowing their inability to comply with the obligation. NARIC admitted in their letters
to PNB and Arrieta that they had insufficient deposit in the bank as required for opening the letter of
credit. Thus, the Court holds that NARIC having entered into the contract, should have taken steps
immediately to arrange for the large amount involved, the letter of credit, and inquired into the
possibility of its issuance.

TANGUILIG V. CA
Facts:
Jacinto Tanguilig, under business name JMT Engineering ans
General Merchandising, proposed to construct a windmill for Vicente Herce, Jr.
They agreed on a price of P60,000 with 1-year guaranty from date of completion and
acceptance.
Herce paid downpayment of P30,000 and installment of P15,000.
Herce, however, refused to pay the remaining balance. Tanguilig filed to collect.
Herce replied that he paid the amount to San Pedro General Merchandising, which
constructed a deep well to which the windmill was connected: the deep well was part of the
windmill, so the payment to SPGM should be credited to his account, and any balance owed
should be offset by defects in the windmill, which collapsed during a strong wind.
Tanguilig denied that the deep well was part of the agreement, and claimed that the windmill's
collapse was due to fortuitous event.
Trial court held that the deep well was not included in the agreement, and that there was no
proof that defects in the windmill's construction were to blame for its collapse.
CA reversed, ruling that "deep well" was mentioned in the proposals, and that the person who
installed the deep well was told by Tanguilig that the construction cost would be deducted from
 the P60,000, and that the payment to SPGM should be applied to the remaining balance.
However, the CA also ordered Tanguilig to repair the windmill.

Issue: Whether Tanguilig is liable for the repair of the windmill.

Ruling: Yes. Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on the day the
windmill collapsed. Petitioner merely stated that there was a strong wind. But a strong wind in this
case cannot be fortuitous/unforeseeable nor unavoidable. On the contrary, a strong wind should be
present in places where windmills are constructed, otherwise the windmills will not turn.
The appellate court correctly observed that given the newly-constructed windmill system, the same
would not have collapsed had there been no inherent defect in it which could only be attributable to
the appellee

Nakpil v. CA's four (4) requisites: (a) the cause of the breach of the obligation must be independent of
the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d)
debtor must be free from any participation in or aggravation of the injury to the creditor. Evidence
does not disclose that there was a typhoon on the day the windmill collapsed, only a strong wind. CA
observed that a newly-constructed windmill system would not have collapsed had there been no
inherent defect due attributable to Tanguilig.

B. Fortuitous Events
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which, could
not be foreseen, or which, though foreseen, were inevitable.

Definition of Fortuitous Event

o An event which could not be foreseen, or which, though foreseen, was
inevitable
o Either unforeseeable or inevitable
o Broad enough to comprehend acts of God acts which are absolutely
independent of human intervention
Ex. Rains, typhoons, floods, cyclones, earthquakes or any other
similar calamity brought about by natural forces
o Includes force majeure events which arise from legitimate or illegitimate
acts of persons other than the obligor, such as commotions, riots, wars,
robbery and similar acts
o May be produced by two general causes:
(1) by nature, such as earthquakes, storms, floods, epidemics, fires,
etc. and
(2) by the act of man, such as an armed invasion, attack by bandits,
governmental prohibitions, robbery, etc.
Classifications of Fortuitous events:
 FORTUITOUS EVENT PROPER FORCE MAJEURE (FUERZA MAYOR)
an event which is absolutely independent event which arises from legitimate or
of human intervention illegitimate acts of persons other than the
obligor

Classification of foreseeable events:

ORDINARY EXTRAORDINARY
event which usually happens or which an event which does not usually happen
could have been reasonably foreseen and which could not have been
reasonably foreseen, such as fire, war,
pestilence, unusual flood, locust,
earthquake, and others of a similar nature.

Effect upon Obligation

o If the obligor is unable to comply with his obligation by reason of a
fortuitous event, the general rule is that he is exempted from any liability
Essential conditions:
1. The event must be independent of the will of the obligor
2. The event must either be unforeseeable or inevitable
3. Event must be of such a character as to render it impossible for the obligor to
fulfill his obligation in a normal manner
4. Obligor must be free from any participation in the aggravation of the injury
resulting to the oblige or creditor

General Rule: No liability in case of fortuitous event

Exceptions
1. Where such liability is expressly specified by law
2. Where it is declared by stipulation of the parties
3. Where the nature of the obligation requires the assumption of risk
a. Assumption of risk = obligor or debtor, with full knowledge of the risk
voluntarily enters into some relation with the oblige or creditor
b. Ex. obligations arising from insurance contracts, workmens
compensation acts
4. When the object of the prestation is generic.

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition,
to the right granted him by Article 1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with
at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more
persons who do not have the same interest he shall be responsible for any
fortuitous event until he has effected the delivery.

Effect of Fortuitous Events

o Another important difference between a generic and a specific obligation is
that, a specific obligation, that is, an obligation to deliver a specific thing, is,
as a rule, extinguished by a fortuitous event or act of God. Upon the other
hand, generic obligations are never extinguished by fortuitous events.

Two Instances Where a Fortuitous Event Does Not Exempt - The 3rd
paragraph of Art. 1165 gives two instances when a fortuitous event does not
excuse compliance:
a. if the obligor delays (This is really default or mora.)
b. if the obligor is guilty of BAD FAITH (for having promised to deliver the
same thing to two or more persons who do not have the same interest
as when one is not the agent merely of the other)

Art. 552. A possessor in good faith shall not be liable for the deterioration or loss of the
thing possessed, except in cases in which it is proved that he has acted with fraudulent
intent or negligence, after the judicial summons.

A possessor in bad faith shall be liable for deterioration or loss in every case, even
if caused by a fortuitous event. (457a)

Art. 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
1. If he devotes the thing to any purpose different from that for which it has
been loaned;
2. If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted;
3. If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exemption the bailee from responsibility in case of a
fortuitous event;
4. If he lends or leases the thing to a third person, who is not a member of his
household;
5. If, being able to save either the thing borrowed or his own thing, he chose
to save the latter. (1744a and 1745)

Art. 1979. The depositary is liable for the loss of the thing through a fortuitous
event:
1. If it is so stipulated
2. If he uses the thing without the depositors permission
 3. If he delays its return
4. If he allows others to use it, even though he himself may have been
authorized to use the same (n).

Art 2001. The act of a thief or robber, who has entered the hotel is not deemed
force majeure, unless it is done with the use of arms or through an irresistible
force.

Art. 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to
embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith. (1891a)

JUAN F. NAKPIL & SONS VS. COURT OF APPEALS

No. L-47851. October 3, 1986

FACTS:
Plaintiff Philippine Bar Association decided to construct an office building
The construction was undertaken by United Construction, Inc.
Plans and specifications for building were prepared by third-party defendants Juan F. Nakpil &
Sons
The building was completed in June 1966
On 2 August 1968, an unusually strong earthquake hit manila and the building sustained major
damage
o Front columns buckled, causing building to tilt forward
Plaintiff commenced action for recovery of damages arising from the partial collapse of the
building against United Construction, Inc.
o Plaintiff alleges that collapse of the building was due to defects of construction, failure of
contractors to follow plans and specifications and violations of their terms of contract
Defendants (United) then filed 3rd party complaint against architects (Nakpil) alleging that
collapse was due to defects in plans and specifications
Commissioner Hizon submitted a report to the court finding that the damage of the building
was caused:
o Directly by the earthquake
o by defects in plans and specifications of Nakpil & Sons
o Deviations from plans and failure of United Construction, Inc. to observe requisite
workmanship in construction of the bilding
Based on this report CFI held United and Nakpil liable for damages

ISSUE: Whether the damage to the building was an act of God which exempts United Construction
and Nakpil from liability due to negligence

HELD: No.
RATIO:
 An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to have
been expected, could have been prevented.
Requisites for exemption from liability due to an act of God
1. the cause of the breach of the obligation must be independent of the will of the debtor;
2. the event must be either unforseeable or unavoidable;
3. the event must be such as to render it impossible for the debtor to fulfill his obligation in a
normal manner;
4. the debtor must be free from any participation in, or aggravation of the injury to the creditor.

To be exempt from liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which that loss or damage may have been occasioned.

Having made substantial deviations from plans and specifications, having failed to observe
requisite workmanship in construction, and the architect made plans that contain defects and
inadequacies, both contractor and architect cannot escape liability for damages sustained by the
building that collapsed in the wake of an earthquake on Aug. 2, 1968.

Fact that all other buildings withstood the earthquake, except the one at bar, cannot be ignored.
Also, the lower courts found, among others, that spirals in column A5, ground floor were cut.
One who creates a dangerous condition cannot escape liability although an act of God
may have intervened.

Pedro D. Dioquino vs. Federico Laureano, Aida De Laureano and Juanito

Laureano
G.R. no. L-25906, 28 May 1970

Facts:
Federico Laureano, the sole passenger, rode on the car of the petitioner on his way to the
Provincial Commander of Masbate.
While about to reach their destination, the car driven by petitioners driver, was stoned by
some mischievous boys and the windshield was broken.
The defendant, Federico refused to file any charges against the boy and his parents because
he thought that the stone-throwing was merely accidental and due to force majeure.
The petitioner tried to convince the Federico to pay the value of the windshield and he even
came to the extent of asking the wife to convince her husband to settle the matter amicably.
Federico still refused to make any settlement, clinging to the belief that he could not be held
liable due to force majeure
The defendants raised two issues: (1) that the lower court failed to dismiss the suit since there
is no liability incurred as a result of fortuitous event, and (2) that the lower court failed to award
damages against the plaintiff for the unwarranted inclusion of the wife and the father in the
litigation.

Issue: Whether a fortuitous event may exempt a person from a liability

Held: No. Petition Dismissed.

Ruling:
Article 1174 states that in the absence of a legal provision or an express covenant, "no one
should be held to account for fortuitous cases." Where the risk is quite evident such that the possibility
of danger is not only foreseeable, but actually foreseen, then it could be said that the nature of the
obligation is such that a party could rightfully be deemed to have assumed it. It is, therefore, not enough
that the event should not have been foreseen or anticipated, as is commonly believed, but it must be
one impossible to foresee or to avoid in order that a party may be said to have assumed the risk
resulting from the nature of the obligation itself.
In the case at bar, there is no assumption by the borrower of a car to respond to damages for
the broken windshield caused by an accidental stone-throwing incident by boys playing along the road.
Some extraordinary circumstance independent of the will of the obligor, or of his employees, is an
essential element of a caso fortuito." If it could be shown that such indeed was the case, liability is ruled
out. There is no requirement of "diligence beyond what human care and foresight can provide."
For caso fortuito or force majeure (which in law are identical in so far as they exempt an obligor
from liability) by definition, are extraordinary events not foreseeable or avoidable, 'events that could not
be foreseen, or which, though foreseen, were inevitable' (Art 1174, Civ. Code of the Philippines).

Philippine Communications Satellite Corporation vs Globe Telecom, Inc.

G.R. No. 147324 May 25, 2004

Facts:
Globe Telecom, Inc., formerly known as Globe McKay Cable and Radio Corporation installed
and configured communication facilities for the exclusive use of the US Defense
Communications Agency (USDCA) in Clark Air Base and Subic Naval Base. Globe Telecom
later contracted the Philippine Communications Satellite Corporation (Philcomsat) for the
provision of the communication facilities. As both companies entered into an Agreement, Globe
obligated itself to operate and provide an IBS Standard B earth station with Cubi Point for the
use of the USDCA. The term of the contract was for 60 months, or five (5) years. In turn, Globe
promised to pay Philcomsat monthly rentals for each leased circuit involved.

The Philippine Senate passed and adopted Senate Resolution No. 141 and decided not to ratify
the Treaty of Friendship, Cooperation and Security, and its Supplementary Agreements to
extend the term of the use by the US of Subic Naval Base, among others. In other words,
the RP-US Military Bases Agreement was suddenly terminated. Because of this event,
Globe notified Philcomsat of its intention to discontinue the use of the earth station
effective 08 November 1992 in view of the withdrawal of US military personnel from Subic Naval
Base after the termination of the RP-US Military Bases Agreement.

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter in 1993
demanding payment of its outstanding obligations under the Agreement amounting to
US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to heed
Philcomsats demand. On the other hand, the latter with the Regional Trial Court of Makati a
Complaint against Globe, however, Globe filed an Answer to the Complaint, insisting that it was
constrained to end the Agreement due to the termination of the RP-US Military Bases Agreement
and the non-ratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of said
events exempted it from paying rentals for the remaining period of the Agreement. Four years
after, the trial court its decision but both parties appealed to the Court of Appeals.

Issues: Whether or not the non-ratification by the Senate of the Treaty of Friendship, Cooperation
and Security and its Supplementary Agreements constitutes force majeure which exempts Globe
from complying with its obligations under the Agreement;

Held:
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the
 Philippine Government of the RP-US Military Bases Agreement effective 31 December 1991 as
stated in the Philippine Governments Note Verbale to the US Government, are acts, directions,
or requests of the Government of the Philippines which constitute force majeure.
Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are
foreseeable, but inevitable: A fortuitous event under Article 1174 may either be an "act of God,"
or natural occurrences such as floods or typhoons,24 or an "act of man," such as riots, strikes
or wars. Philcomsat and Globe agreed in Section 8 of the Agreement that the following events
shall be deemed events constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophes or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the
parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of a
fortuitous event under Article 1174. The Supreme Court agrees with the Court of Appeals and
the trial court that the abovementioned requisites are present in the instant case. Philcomsat
and Globe had no control over the non-renewal of the term of the RP-US Military Bases
Agreement when the same expired in 1991, because the prerogative to ratify the treaty extending
the life thereof belonged to the Senate. Neither did the parties have control over the subsequent
withdrawal of the US military forces and personnel from Cubi Point in December 1992.

C. Subsidiary Remedies of Creditor

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

Remedies of Creditor to Protect Credit

3 general remedies available to creditor for the protection and enforcement of his right
against the debtor (# 2 & 3 are subsidiary to the first):
1) to exhaust the property in possession of the debtor
a. consistent with Art. 2236 of the Civil Code which states that the debtor is
liable with all his property, present and future, for the fulfillment of his
obligations, subject to exemptions provided by law
2) to be subrogated2 to all of the rights and actions of the debtor save those which
are inherent in his person
a. A debtor may simply fail, neglect or refuse to collect any credit which he
may have against a third person
2
the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by the transfer of any associated rights and duties.
 b. In order that the debtor does not do defeat the right of the creditor by
omission or inaction, law expressly grants the creditor the right to exercise
all the rights and bring all of the actions which the debtor may have against
third persons
c. the property of the debtor which can be exhausted for the payment of his
debts can be corporeal (tangible) or incorporeal (intangible)
d. Conditions for remedy of accion subrogatoria
1) The debtor to whom the right or action properly pertains must be
indebted to the creditor
2) Creditor must be prejudiced by the failure of debtor to proceed
against the third person
3) The creditor must have first pursued or exhausted all the
properties of the debtor which are not exempt from execution
3) to impugn all of the acts which the debtor may have done to defraud him
a. if creditor is defrauded or prejudiced by debtor, creditor may rescind
contract
b. A.k.a. accion pauliana
c. Is subsidiary in character: can only be availed of in the absence of any
other legal remedy to obtain reparation for the injury

Spouses Adorable v. Court of Appeals, Jose Ramos, Saturnino and Francisco

Bareng
GR No. 119466. 25 November 1999

Facts:
Saturnino Bareng owned two parcels of land in San Fabian, Echague, Isabela: Lots 661-D-5-
A and 661-E
Spouses Adorable were lessees of 200 sq.m of Lot 661-D-5-A
29 April 1985: The Barengs loaned P26,000 from spouses Adorable and promised Lot 661-
E as payment.
3 August 1986: Saturnino sold to his son, Francisco 18,500 sq.m of Lot 661-D-5-A.
27 August 1986: Francisco sold to Jose Ramos 800 sq.m of Lot 661-D-5-A which included
a portion being rented by spouses Adorable.
o Deed of sale was not registered in the Office of the Register of Deeds.
The Barengs did not pay their loan thus, spouses Adorable complained to the Integrated
National Police (INP).
o A compromise agreement was executed and the Barengs acknowledged and agreed to
pay their loan of P56,358 on or before 15 July 1987.
o However, the Barengs failed to pay on the due date even after a demand letter was sent
to them.
Adorable sued the Barengs for recission of the sale of land to Ramos claiming that it was
fraudulently prepared and executed.
15 February 1991: RTC dismissed the case for lack of cause of action.
The CA affirmed the RTC ruling with modification as to the amount of debt the Barengs owed.
Hence the current petition:
o Spouses Adorable contend that the sale between Francisco and Jose prejudiced their
interests over the property as creditors of Francisco.
 o They claim to have a preferential right as lessees under Commonwealth Act 539 to
purchase the land in question.

Issue: Whether or not a creditor who failed to exhaust other remedies to satisfy his claims, may
institute an action for rescission of the contracts executed by the debtor to defraud them.

Held: No. Under Art. 1177, the creditors after having pursued the property in the possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the actions which
the debtor may have done to defraud them. Therefore, following are the successive measures which
the creditor must take before instituting an action for rescission of an allegedly fraudulent sale:
1) exhaust the properties of the debtor through levying by attachment and execution upon all
the property of the debtor, except those exempted by law; and 2) exercise all rights and actions
of the debtor, except those personal to him (accion subrogatoria). It is only after exhausting both
remedies can a creditor seek rescission of the contracts executed by the debtor in fraud of their rights
(accion pauliana). This action for rescission is a subsidiary remedy which can only be executed
when the injured party has no other legal means to obtain reparation for the same.

In the case, the petition was dismissed for lack of cause of action because spouses Adorable did not:;
and 3) prove in this petition that the Barengs had no other property, either at the time of the sale or at
the time of the complaint, which they could have collected to satisfy their claims.

Furthermore, spouses Adorable were not parties in interest3 who could sue for rescission of the contract
because their right against the Barengs is only a personal right and not a real right over the subject lot.
A personal right is a power to demand from another, the fulfillment of an obligation to give, to do, or
not to do. While a real right is the power over a specific thing, without a passive subject individually
determined, against whom such right may be personally exercised.

Lastly, spouses Adorable cannot claim any right over the subject lot because CA 539, is only applicable
to original tenants, after the expropriation or purchase of the land by the government. This is not the
case here, given that spouses Adorable are not tenants of the land in question, nor is the land acquired
by the government.

KHE HONG CHENG VS. COURT OF APPEALS

G.R. No. 144169. March 28, 2001

FACTS:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines.
October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the vessel
M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra
Shipment of copra was covered by a marine insurance policy issued by American Home
Insurance Company (respondent Philams assured)
M/V PRINCE ERIC sank, resulting in total loss of shipment
Due to loss, American Home paid P354, 000 (value of the copra) to the consignee
Having been subrogated into the rights of the consignee, American Home instituted a civil case
to recover the money paid to the consignee based on breach of contract of carriage
Petitioner Khe Hong Cheng also executed deeds of donations of parcels of land in favor of his
children, co-petitioners Sandra Joy and Ray Steve
Trial court rendered judgment against petitioner four years after the donations were made

3
Parties in interest: one who would be benefitted or injured by the judgment or who is entitled to the avails of the suit. Interest refers to material interest directly in issue, not merely incidental.
 A writ of execution was issued but was not served because there was no property under the
name of Butuan Shipping Lines and/or Khe Hong Cheng to levy since property had been
conveyed to his children
Philam filed a complaint for the rescission of the deeds of donation and nullification of the
childrens titles
o Argued that deeds were executed in fraud of his creditors
Petitioners move for dismissal on the ground that the action had already prescribed - since the
complaint a quo was filed only on February 25, 1997, or more than four (4) years after said
registration, the action was already barred by prescription
RTC ruled that the action to rescind donations had not yet prescribed, CA affirmed the decision
stating that prescription began to run January 1997 when the sheriff went to Butuan to search
for the property. Hence this petition

ISSUE: Whether the action to rescind the donations has already prescribed.
HELD: No.
RATIO:
Article 1389 of the Civil Code simply provides that, The action to claim rescission must be
commenced within four years. Since Article 1389 of the Civil Code is silent as to when the
prescriptive period would commence, the general rule is that it is from the day the action may be
brought/when it accrues.
Art. 1383 states that An action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the same.
An action to rescind or an accion pauliana must be of last resort, availed of only after all other
legal remedies have been exhausted and have been proven futile.
Requisites of action to rescind or accion pauliana:
1) That the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later;
2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person
3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by
rescission of the conveyance to the third person
4) That the act being impugned is fraudulent
5) That the third person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud.
An accion pauliana presupposes the following1) a judgment; 2) the issuance by the trial court
of a writ of execution for the satisfaction of the judgment; and 3) the failure of the sheriff to
enforce and satisfy the judgment of the court.
the judgment creditor filed its complaint for accion pauliana barely a month from its discovery
that the defendant had no other property to satisfy the judgment award against him, its action
for rescission of the deeds of donation had not yet prescribed.

IV. Kinds of Obligations

1. Pure or Conditional
1. Pure

Art. 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at
once.
Every obligation which contains a resolutory condition shall also be demandable,
without prejudice to the effects of the happening of the event.

Definition of Pure Obligation

- One whose effectivity or extinguishment does not depend upon the fulfillment or
nonfulfillment of a condition or upon the expiration of a term or period
- Characterized by the quality of immediate demandability

HSBC VS. SPOUSES BROQUEZA

G.R. No. 178610. November 17, 2010

Facts:
Petitioners Gerong and Editha Broqueza are employees of Hongkong and Shanghai Banking
Corporation (HSBC). They are also members of HSBC, Ltd. Staff Retirement Plan.
The Plan is a retirement plan established by HSBC through its Board of Trustees for the
benefit of the employees.
On Oct. 1, 1990, petitioner Broqueza obtained a car loan in the amount of P175,000.00.
On Dec. 12, 1991, she again applied and was granted an appliance loan in the amount of
P24,000.00.
Petitioner Gerong, on the other hand applied and was granted an emergency loan in the
amount of P35,780.00 on June 2, 1993.
The loans were paid through automatic salary deductions.
A labor dispute arose between HSBC and its employees.
Majority of HSBCs employees were terminated among them the petitioners.
The employees filed an illegal dismissal case before the NLRC against HSBC, which is now
pending before the CA.
Because of the dismissal, petitioners were not able to pay the monthly amortizations of
their respective loans. They were considered delinquent. Demands to pay were made.
On July 31, 1996, HSBCL-SRP filed a civil case against the spouses.
On Sept. 19, 1996, HSBCL-SRP filed another civil case. Both suits were civil actions for
recovery and collection of sums of money.
The MeTC ruled that the nature of HSBCs demands for payment is civil and has no
connection to the ongoing labor dispute.
The loans secured by their future retirement benefits to which they are no longer entitled
are reduced to unsecured and pure civil obligations. They are immediately demandable.
The RTC reaffirmed the decision but the CA reversed it.
On Aug. 6, 2007, HSBCL-SRP filed a manifestation withdrawing the petition against Gerong
because she already settled her obligations.
Issue: Whether the loans of the Sps. Broqueza are pure obligations and demandable at once even
if they were dismissed by HSBC.
Ratio : Yes. The RTC is correct in ruling that since the Promissory Notes do not contain a period,
HSBCL-SRP has the right to demand immediate payment. Art. 1179 of the New Civil Code applies.
The spouses obligation to pay HSBCL-SRP is a pure obligation because they do not contain a period.
Once Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a demand to enforce a
pure obligation. Despite the spouses Broquezas protestations, the payroll deduction is merely a
convenient mode of payment and not the sole source of payment for the loans.

A definite amount is paid to HSBCL-SRP on a specific date. Editha Broqueza authorized HSBCL-SRP
to make deductions from her payroll until her loans are fully paid. Editha Broqueza, however, defaulted
in her monthly loan payment due to her dismissal. HSBCL-SRP never agreed that the loans will be paid
only through salary deductions. Neither did HSBCL-SRP agree that if Editha Broqueza ceases to
be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP can
immediately demand payment of the loans at anytime because the obligation to pay has no period.
Moreover, the spouses Broqueza have already incurred in default in paying the monthly installments.
Finally, the enforcement of a loan agreement involves debtor-creditor relation founded on contract and
does not in any way concern the employee relations. As such it should be enforced through a separate
civil action in the regular courts and not before the Labor Arbiter.

VILLANUEVA VS. ST. MARTIN

G.R. no. 156746, 23 July 2014
Facts:
The respondent filed a complaint for judicial foreclosure against the petitioner, who was a
member of the respondent, alleging that:
o The petitioner executed deed of chattel mortgage on 1 motor vehicle and the amount
of P135,000.00 was loaned and evidenced in the said deed of chattel mortgage;
o If within the period stated from and after the execution of the same, petitioner shall pay
to the respondent the amount stated therein plus the stipulated interest of 16% per
annum and the same mortgage shall be discharge, otherwise it shall remain in full force
and effect;
Besides the lack of cause of action, the petitioner claimed therein that he did not refuse to pay
his obligation, for, in fact, he had tendered payment to the respondent, but the latter's
counsel made unreasonable demands for attorney's fees; that the respondent and its
former manager had verbally agreed on an out-of-court settlement of the case; and that the
dispute was not first brought to a barangay mediation, in violation of republic act no. 7160 (ra
no. 7160), or the local government code of 1991.
The RTC denied Villanueva's motion for reconsideration or new trial and the CA dismissed the
appeal.
Issues:
1. Whether the respondent had the capacity to sue and
2. Whether the cause of action was premature

Ratio: Petition denied. Lacks merit.

1. YES
2. NO

(1) Respondent had capacity to sue. Villanueva's failure to raise in his answer the respondent's
alleged lack of capacity to sue, absence of the promissory note, and prematurity of the filing of
the complaint for lack of a definite maturity date, was fatal to his cause as he is already deemed
to have waived such defenses. Indeed, Rule 9, Section 1 of the Rules of Court provides that defenses
and objections not pleaded either in a motion to dismiss or in the answer are deemed waived.
The power of a corporation to sue and be sued is lodged in the Board of Directors, a body that
exercises the corporate powers. It necessarily follows that an individual corporate officer cannot
solely exercise any corporate power pertaining to the corporation without authority from the board of
directors. Thus, the physical acts of the corporation, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of
the Board of Directors.

(2) Although the promissory note was not offered in evidence, Villanueva admitted that his obligation
already matured when the complaint was filed. Villanueva's arguments are unworthy of consideration.
At any rate, a promissory note, albeit proof of the obligation, is not the only means of proof,
for, like now, Villanueva himself admitted his obligation. That was enough to establish his
personal liability
Even where no date of payment was indicated either in the promissory note or in the deed of
chattel mortgage, Villanueva's obligation under the law should be immediately demandable.
This is in accordance with the first paragraph of Article 1179 of the Civil Code:
Article 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at once.

The relevance of the respondent's demand letter cannot be affected by the discrepancy between
the total amount stated in the letter and the amount subject of the complaint. It is to be noted that
the demand letter dated July 25, 1996 was offered in evidence to prove that Villanueva had owed the
total amount of P900,000.00, inclusive of the P135,000.00 that is now the subject matter of this case,
and of other loans.

2. Conditional Obligations

Definition of Conditional Obligations

- when the obligation is subject to a condition which may be suspensive, in which
case the happening or fulfillment of the condition results in the birth of the
obligation, or resolutory, in which case the happening or fulfillment of the condition
results in the extinguishment of the obligation.

o Condition = future or uncertain fact or event upon which an obligation is

subordinated or made to depend
o Conditional obligation = one whose effectivity is subordinated to the
fulfillment or non-fulfillment of a future and uncertain fact or event
o 2 Requisites for the event = in the future and uncertain
o proof of the fact or event will surely come to pass, although it may not be
known when, it is clear that it constitutes a term or period

Characteristics of Condition:
1. It is a future and uncertain event upon which an obligation or provision is made to
depend
2. Even though the event is uncertain, it should be possible
3. The condition must be imposed by the will of the party and not a necessary legal
requisite
4. Past event but unknown to parties (the knowledge to be acquired in the future of a
past event which at that moment is unknown to parties interested it is only in
that sense that the event is to be deemed uncertain)

Note: When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period (1180). In this case, the creditor
must first ask the court to fix the period, otherwise the action to collect the debt would
be premature.

Effects of Failure to Comply with Condition

 1. If condition is imposed on the perfection of a contract results in the failure of the
contract;
2. If condition is imposed on the performance of the obligation gives the other
party an option either to refuse to proceed with the compliance of the obligation
or to waive the condition

Art. 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition

Art. 1187. The effects of a conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations upon the
parties, the fruits and interests during the pendency of the condition shall be
deemed to have been mutually compensated. If the obligation is unilateral,
the debtor shall appropriate the fruits and interests received, unless from the
nature and circumstances of the obligation it should be inferred that the
intention of the person constituting the same was different.

IF UNILATERAL
once the event which constitutes the condition is fulfilled thus resulting in the
effectivity of the obligation, its effects must logically retroact to the moment
when the essential elements which gave birth to the obligation have taken
place and not to the moment when the accidental element was fulfilled
AS IF THE CONDITION WAS NEVER IMPOSED
When the obligation imposes reciprocal prestations upon the parties, the fruits
and interests during the pendency of the condition shall be deemed to have
been mutually compensated
o If A agreed to sell B a parcel of land for P100, 000 subject to a condition of
a suspensive character, and such condition was fulfilled, A delivers not only
the B, but also the fruits which he may have gathered of received during the
period from the time of the perfection of the contract until the fulfillment of
the condition

In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect or the condition that has been complied with.

Art. 1188. The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right.

The debtor may recover what during the same time he has paid by mistake in case
of a suspensive condition.
Art. 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out
of commerce, or disappears in such a way that its existence is unknown or
it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment
is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity
for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor; (debtor can not demand anything)
(6) If it is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary.
a. The debtor cannot ask reimbursement for the expenses incurred for
useful improvements or for improvements for mere pleasure;5
b. he can, however, ask reimbursement for necessary expenses.
c. He can remove the improvements

Loss
Loss is understood as:
o When it perishes
o When it goes out of commerce
o When it disappears in such a way that its existence is unknown or it cannot
be recovered

Deterioration
Any reduction or impairment in the substance or value of a thing which does not
amount to loss: the thing is less then when the obligation was constituted

Improvement anything added to, incorporated in, or attached to the thing that is due.

a. Suspensive conditions
a. when the fulfillment of the condition results in the acquisition of rights
arising out of the obligation
b. Birth or effectivity of contract can only take place if and when the
event which constitutes the condition happens or fulfilled
c. Ex. I will give you P100, 000 if you marry A.
 d. Effect of Suspensive conditions: obligation shall become effective
only upon fulfillment of condition

GAITE VS. FONACIER

FACTS:
29 Sept. 1952: Defendant-appellant Isabelo Fonacier, owner and/or holder of 11 iron lode
mineral claims (a.k.a. Dawahan Group), constituted and appointed plaintiff-appellee Fernando
Gaite as his attorney-in-fact to enter into a contract with any individual or juridical person for
the exploration and development of the mining claims, on a royalty basis of not less than
P0.50 per ton of ore that might be extracted therefrom.
19 Mar. 1954: Gaite executed a general assignment conveying the development and
exploitation of said mining claims into the Larap Iron Mines, a single proprietorship owned
by him. He was then able to extract approximately 24,000 metric tons of iron ore.
For some reason, Fonacier revoked the authority he granted to Gaite, to which the latter
assented to subject to certain conditions.
Gaite transferred to Fonacier all his rights and interest, in consideration of the sum of
P75,000.00; P10,000.00 of which was paid upon the signing.
To secure payment of the balance, Fonacier promised to execute in favor of Gaite a surety
bond (Fonacier as principal & Larap Mines as sureties), which was delivered to the latter on 8
Dec. 1954.
Gaite refused to sign, unless another bond underwritten by a bonding company was put
up to secure the payment of P65,000.00. Hence, a second bond was executed with Far
Eastern Surety and Insurance Co. as additional surety, but with the condition that its
liability will only attach when there had been an actual sale of iron ore for an amount not
less than P65,000.00 and that such liability will expire on 8 Dec. 1955.
When Fonacier and his sureties failed to pay, Gaite instituted the present complaint with
CFI-Manila for the payment of P65,000.00 balance, consequential damages and attorneys
fees.
CFI ruled in favor of Gaite.
o NOTE: Defendants contended that the obligation to pay was subject to a
condition that the ores will be sold for the amount of not less than P65,000.00.

ISSUE: Whether the sale of iron ore is a condition to the payment of the balance of P65,000.00
HELD: NO. Petition denied, CA decision affirmed.
The SC upheld the findings of the trial, i.e., that the shipment/sale of the iron ore is NOT A
CONDITION precedent (or suspensive) to the payment of the balance of P65,000.00 but
was only a suspensive period or term. What characterizes a conditional obligation is the fact
that its efficacy or obligatory force is subordinated to the happening of a future and
uncertain event; so that if the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never existed. Such is supported by
several circumstances:
o The words of the contract express no contingency in the buyers obligation to pay.
There is no uncertainty that the payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By the very terms of the
contract, therefore, the existence of the obligation to pay is recognized; only its maturity
or demandability is deferred.
o A contract of sale is normally commutative and onerous: not only does each one of the
parties assume a correlative obligation (the seller to deliver and transfer ownership of
the thing sold and the buyer to pay the price), but each party anticipates performance by
the other from the very start. Records do not show that Gaite desired or assumed to run
 the risk of losing his right over the ore without getting paid for it, or that Fonacier
understood that Gaite assumed any such risk.
o To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment
of the ore as a condition precedent, would be tantamount to leaving the payment at the
discretion of the debtor, for the sale or shipment could not be made unless the
appellants took steps to sell the ore.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on
credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not
being paid at all; and that the previous sale or shipment of the ore was not a suspensive
condition for the payment of the balance of the agreed price, but was intended merely to fix the
future date of the payment.

GONZALES vs. HEIRS OF THOMAS AND PAULA CRUZ

G.R. No. 131784, September 16, 1999

Facts: Petitioner Gonzales entered into a Contract of Lease/Purchase with the heirs
of Thomas and Paula Cruz. Based on the said contract, the petitioner was given an
option to purchase the leased property after the expiration of the one-year lease. The
option was subject to a condition contained in par. 9 of the Contract which provided that:
The LESSORS (heirs) x x x shall undertake to obtain a separate and distinct TCT over
the leased portion to the LESSEE within a reasonable period of time which shall not in
any case exceed 4 years, x x x. After the expiration of the lease, petitioner Gonzales
did not exercise his option to purchase the property. He remained in possession without
paying the purchase price. Alleging breach of the provisions of the Contract, the heirs
filed a complaint for the recovery of possession of the property. For his part, the
petitioner defended that there was no breach since the heirs had not yet registered the
leased property in their names in accordance with par. 9 of the Contract.

Issues: Whether or not the obligation was subject to a condition

Held: YES.
The clear intent of the 9th par. was for respondents to obtain a separate and
distinct TCT in their names. This was necessary to enable them to show their
ownership of the stipulated portion of the land and their concomitant right to
dispose of it. It is a well-settled principle in law that no one can give what one
does not have nemo dat quod non habet.
Accordingly, one can sell only what one owns or is authorized to sell, and the
buyer can acquire no more that what the seller can transfer legally. Because the
9th clause required respondents to obtain a separate and distinct TCT in their
names and not in the name of petitioner, it logically follows that such under taking
was a condition precedent to the latters obligation to purchase and pay for the
land.
Put differently, petitioners obligation to purchase the land is a conditional one
and is governed by Article 1181 of the Civil Code. Condition has been defined as
every future and uncertain event upon which an obligation or provision is made
to depend. Without it, the sale of the property under the Contract cannot be
 perfected, and the petitioner cannot be obliged to purchase the property. The
obligatory force of a conditional obligation is subordinated to the happening of a
future and uncertain event, so that if that event does not take place, the parties
would stand as if the conditional obligation had never existed.

b. Resolutory
a. when the fulfillment of the condition results in the
extinguishment of rights arising out of the obligation.
i. Ex. If a person donates a parcel of land to the City of Manila if
the City shall transform it into a public park within a period of one
year. If the city does not, its rights over the land as a result of the
donation are extinguished
ii. Ex. A person sells a parcel of land with right of repurchase
1. Once sale is perfected, vendee becomes owner

Art. 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return
to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions

which, with respect to the debtor, are laid down in the preceding article shall be
applied to the party who is bound to return.

As for obligations to do and not to do, the provisions of the second paragraph of
Article 1187 shall be observed as regards the effect of the extinguishment of the
obligation.

Rules of 1187 regarding loss, deterioration and improvement shall apply.

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA) V. TUDTUD

GR No. 174012. 14 November 2008

Facts:
Predecessors-in-interest of respondents, Benjamin Tudtud et al. owned a parcel of
land in Cebu, Lot No. 988 covered by TCT No. 27692.
In 1949, National Airports Corp. (NCA) planned to expand Cebu Lahug Airport and
sought to acquire several lots including the subject property owned by Tudtud.
NCA acquired the subject lot and the same was issued under TCT No. 27919 in the
name of the Republic of the Philippines.
However, no structure related to the operation of the Cebu Lahug Airport were
constructed on Lot No. 988.
 It was then transferred to the Airport Transportation Office (ATO) and then later to
the MCIAA in 1990 through RA No 6958.
After which, the Cebu Lahug Airport was closed and a portion of the property was
sold to Cebu Property Ventures, Inc. for development as a commercial complex.
7 October 1996: Tudtud demanded to repurchase the lot at the same price paid at
the time of the taking without interest, there being no structures or improvements
erected thereon and the Cebu Lahug Airport closed.
Tudtuds party claimed that the NAC assured that the original owner and /or
successor in interest would be entitled to repurchase the lot when in the event that it
was no longer used for airport purposes.
The MCIAA disputed that the NAC acquired the subject property by final judicial
decree of expropriation and not by deed of sale thus it cannot be modified by parole
evidence nor subject for reconveyance.
RTC ruled in favor of Tudtud and the CA affirmed said ruling.
Hence, current petition where the MCIAA contests the unconditional acquisition of
Lot No. 988.

Issue: Whether or not the MCIAA is obliged to reconvey the subject lot to its former
owner.

Held: Yes. The rights and obligations between MCIAA and Tudtud are governed by
Art. 1190 with respect to Art. 1189. The MCIAA is obliged to reconvey Lot No. 988 to
respondents and the respondents must return to the MCIAA what they received as just
compensation for the expropriation of Lot No. 988 with legal interest to be computed
from default, which runs from the time the MCIAA complies with its obligation to the
respondents. The respondents are also obliged to pay the MCIAA the necessary
expenses it may have incurred in sustaining the lot as well as for the services it
rendered in maintaining the property to the extent that it may have benefitted the
respondents.

Under Art. 1187, the MCIAA may keep whatever income or fruits it may have obtained
from the subject lot and the respondents need not account for the interests that the
amounts they received as just compensation may have earned in the meantime.

Potestative, Casual and Mixed Condition

Art. 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon
the will of a third person, the obligation shall take effect in conformity with the
provisions of this Code.
 a. Potestative - when the fulfillment of the condition depends upon the will of
a party to the obligation
a. Effect:
i. If the fulfillment depends exclusively upon the will of the creditor
= the condition as well as the obligation is valid
ii. If the debtor = not only the condition, but even the obligation
itself is void
b. When dependent upon will of creditor it cannot have the effect of
nullifying the obligation to which it is attached
c. Potestative conditions have to be on both debtor and creditor side
b. Causal - when the fulfillment of the condition depends upon chance and/or
upon the will of a third person.
c. Mixed - when the fulfillment of the condition depends partly upon the will of
a party to the obligation and partly upon chance and/or the will of a third
person.

LAO LIM VS. COURT OF APPEALS

G.R. No. 87047. October 31, 1990

FACTS:
private respondent Benito Villavicencio Dy entered into a contract of lease with petitioner for a
period of three (3) years, that is, from 1976 to 1979.
After the stipulated term expired, private respondent refused to vacate the premises, hence,
petitioner filed an ejectment suit (CC No. 051063-CV)
The case was terminated by a judicially approved compromise agreement of the parties,
stating:
o the term of the lease shall be renewed every three years retroacting from October 1979
to October 1982; after which the abovenamed rental shall be raised automatically by
20% every three years for as long as defendant needed the premises and can meet and
pay the said increases, the defendant to give notice of his intent to renew sixty (60)
days before the expiration of the term.
Because of said compromise agreement the lease continued from 1979 to 1982, then from
1982 to 1985
On April 17, 1985, petitioner advised private respondent that he would no longer renew the
contract effective October, 1985 but private respondent refused to vacate arguing that the
contract, based on above stipulation, is not yet expired
On January 15, 1986, petitioner filed another ejectment suit
Sep. 24, 1987 - MTC dismissed the complaint on the grounds that:
o (1) the lease contract has not expired, being a continuous one the period whereof
depended upon the lessees need for the premises and his ability to pay the rents; and
CA denied petitioners motion for reconsideration. Hence this petition.

ISSUE: Whether the condition that for as long as defendant needed the premises. . . extends the
validity of the contract.

HELD: No.
RULING:
Said stipulation is invalid was wrongly interpreted
 The disputed stipulation for as long as the defendant needed the premises and can meet and
pay said increase" is a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee.
It is likewise a suspensive condition because the renewal of the lease, which gives rise to a
new lease, depends upon said condition.
It should be noted that a renewal constitutes a new contract of lease although with the same
terms and conditions as those in the expired lease.
In Encarnacion vs Baldomar, et al. lessees similarly argued that contract of lease authorized
them to continue occupying the premises as long as they paid the rents argument is
untenable because owner would never be able to discontinue the contract
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee completely depriving the owner
of any say in the matter
Furthermore, the use of the phrase the term of the lease shall be renewed every three (3)
years confirms that the contract of lease is limited to a specific period, and is not a continuing
lease. The stipulation should be construed as providing for b one renewal or extension and
was satisfied when the lease was renewed in 1982 for another three (3) years.

NAGA TELEPHONE V. CA
G.R. No. 107112. February 24, 1994

Facts:
NAGA TELEPHONE CO., INC. (NATELCO) is a telephone company who provides local and
long distance services
CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO) is an electric power
service provider.
On November 1, 1977, the parties entered into a contract for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone
connections for the use by private respondent.
Said contract also provided: That the term or period of this contract shall be as long as the party
of the first part has need for the electric light posts of the party of the second part it being
understood that this contract shall terminate when for any reason whatsoever, the party of the
second part is forced to stop, abandoned its operation as a public service and it becomes
necessary to remove the electric light post;
After the contract had been enforced for over ten (10) years, private respondent filed on January
2, 1989 with the RTC against petitioners for reformation of the contract with damages on the
ground that it is too one-sided in favor of petitioners; that it is not in conformity with the guidelines
of the National Electrification Administration (NEA) which direct that the reasonable
compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years
of petitioners' use of the posts, the telephone cables strung by them thereon have become much
heavier with the increase in the volume of their subscribers, worsened by the fact that their
linemen bore holes through the posts at which points those posts were broken during typhoons;
that a post now costs as much as P2,630.00; so that justice and equity demand that the contract
be reformed to abolish the inequities thereon.
The RTC concluded that while in an action for reformation of contract, it cannot make another
contract for the parties, it can, however, for reasons of justice and equity, order that the contract
be reformed to abolish the inequities therein. Thus, said court ruled that the contract should be
reformed by ordering petitioners to pay private respondent compensation for the use of their
 posts in Naga City, while private respondent should also be ordered to pay the monthly bills for
the use of the telephones also in Naga City.
CA affirmed RTC decision but based on different grounds to wit: (1) that Article 1267 of the New
Civil Code is applicable and (2) that the contract was subject to a potestative condition which
rendered said condition void.

Issue: Whether the Court of Appeals erred in ruling that the contract was subject to a potestative
condition in favor of petitioners.

Held: No.

Ratio: A potestative condition is a condition, the fulfillment of which depends upon the sole will of the
debtor, in which case, the conditional obligation is void. Based on this definition, respondent court's
finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has
need for the electric light posts of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions in the
same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of
the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public
service and it becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third person.

In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor
and partly on chance, hazard or the will of a third person, which do not invalidate the aforementioned
provision.

Rustan Pulp & Paper Mills Inc., Bienvenido Tantoco, Sr. and Romeo Vergara vs.
Intermediate Appellate Court and Iligan Diversified Projeccts, Inc, Romeo Lluch
and Roberto Borromeo
G.R. No. 70789, 19 October 1992

Facts:
When petitioners informed herein private respondents to stop the delivery of pulp wood supplied
by the latter pursuant to a contract of sale between them, private respondents sued for breach
of their covenant.
The court of origin dismissed the complaint but at the same time enjoined petitioners to respect
the contract of sale if circumstances warrant the full operation in a commercial scale of
petitioners Baloi plant and to continue accepting and paying for deliveries of pulp wood products
from Romeo Lluch
During the test run of the pulp mill, major defects on the machinery were discovered prompting
the Japanese supplier of the machinery to recommend the stoppage of the deliveries. The
suppliers were informed to stop deliveries, but were not informed as to the reasons for the
stoppage.
Lluch sought to clarify the tenor of the notice as to whether stoppage of delivery or termination
of the contract of sale was intended, but Rustan Pulp failed to reply. This alleged ambiguity
regarding the stoppage of delivery or termination of the contract of sale, Lluch and the other
suppliers resumed deliveries after a series of talks between Lluch and Romeo Vergara, the
manager of Rustan Pulp.
 Later, Lluch filed a complaint for breach of contract. The case was dismissed, but at the same
time, the court enjoined Rustan Pulp to honor the contract. On appeal to the Intermediate
Appellate Court (IAC), the court ruled that Rustan Pulps suspension of deliveries was not in the
lawful exercise of its rights under the contract of sale
Issue: Whether the suspension of deliveries by Rustan a proper exercise of its rights under the contract
of sale
Held: No. Petition denied.
Ratio:
The matter of Tantocos and Vergaras joint and several liability as a result of the alleged breach of the
contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise the right
of stoppage should there be a glut of raw materials at its plant.

There is basis for the apprehension on the illusory resumption of deliveries at Rustan Pulp because the
prerogative suggests a condition solely dependent upon its exclusive will. The literal import of contested
condition is that Rustan Pulp can stop delivery of pulp wood from Lluch if the supply at the plant is
sufficient as ascertained by Rustan Pulp subject to re-delivery when the need arises as determined
likewise by Rustan Pulp.

A purely potestative imposition of this character must be obliterated from the face of the contract without
affecting the rest of the stipulations considering that the condition relates to the fulfillment of an already
existing obligation and not to its inception

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

d. Possible or Impossible
a. Possible - when the condition is capable of realization according to
nature, law, public policy or good customs.
b. Impossible - when the condition is not capable of realization
according to nature, law, public policy or good customs.

HEIRS OF SEVERINA SAN MIGUEL v. CA

G.R. No. 136054 | 05 September 2001
FACTS:
Private respondent Dominador managed to cause the subdivision (into 3) a parcel of land
claimed by Severina San Miguel.
Dominador, et. al., filed a petition with CFI-Cavite to issue title over Lots 1 and 2.
The Land Registration Commission (LRC) rendered a decision directing the issuance of OCT in
the names of Dominador, et. al.
Severina filed with CFI-Cavite a petition to review the decision, alleging that said land registration
proceedings were fraudulently concealed from her. CFI ruled in her favor, declaring the OCTs
null and void.
Register of Deeds of Cavite issued TCT in the names of Severina and her heirs.
CFI issued a Writ of Possession in favor of Severinas heirs. However, such writ was returned
unsatisfied.
 Thus, the trial court ordered that an alias Writ of Demolition be issued. Again, such writ was
not satisfied.
Severinas heirs decided not to pursue the writs and entered into a compromise with
Dominador, et. al., wherein they agreed to sell the subject lots to the latter for P1.5M, with
the delivery of TCT conditioned upon the purchase of another lot, not yet titled, at an
additional sum of P300,000.00.
Pursuant to this, both parties then executed a deed of sale, designated as kasunduan sa
bilihan ng lupa.
Private respondents filed a motion with the trial court for the heirs to deliver the owners copy of
the TCT.
o Heirs opposed, stressing that under the kasunduan, TCT would only be
surrendered upon payment of P300,000.00 within 2-months from 6 Aug. 1993,
which was not complied with.
Private respondents admitted non-payment for the reason that the heirs have not presented
proof of ownership over the untitled parcel of land. Hence, they prayed that compliance with
the kasunduan be deferred until such time that the heirs could produce proof of ownership.
Heirs countered that said argument was untenable due to the fact that in the kasunduan, private
respondents admitted their ownership over the parcel of land, hence dispensing with the
requirement that they produce actual proof of title over it. Averring further that since private
respondents have not paid the P300,000.00, then they were justified in withholding release
of the TCT.
Trial Court did not conduct any hearing, but rendered judgment on pleadings and memoranda
submitted. Ruling in favor of private respondents, it ordered the heirs to surrender the TCT and
pay for the capital gains and related expenses.
CA affirmed decision of the trial court.

ISSUE: Whether the contract of sale/kasunduan is predicated upon an impossible condition.

HELD: YES.

RATIO:
The Court held that the insistence of Severinas heirs that delivery of the TCT is predicated on
the condition that payment of P300,000.00 must first be made by private respondents, as
an impossible condition, due to the following reasons:
o In contracts of sale, the vendor need not possess title to the thing sold at the
perfection of the contract. However, the vendor must possess title and must be able
to transfer title at the time of delivery.
o In the present case, the heirs are not in a position to transfer title.
If the sellers cannot deliver the object of sale to the buyers, such contract may be
deemed inoperative.
The non-payment of P300,000.00 is not a valid justification for refusal to deliver the certificate
of title.

Art. 1184. The condition that some event happen at a determinate time shall
extinguish the obligation as soon as the time expires or if it has become
indubitable that the event will not take place.
Art. 1185. The condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time indicated has
elapsed, or if it has become evident that the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as
may have probably been contemplated, bearing in mind the nature of the
obligation.

e. Positive or Negative
a. Positive - when the condition involves the performance of an act.
i. some event happen at a determinate time shall extinguish
the obligation as soon as the time expires or if it becomes
indubitable that the event will not take place
ii. ex. A binds himself to give to B P2,000 if the latter passes the
bar examinations in his first attempt, and B flunks the
examinations, the obligation is extinguished
iii. ex. If X binds himself to give a new Studebaker car to Y if the
latter gets married to Z within a period of five years from the time
of the constitution of the obligation, and at the expiration of five
years, Y had not yet complied with the condition, the obligation
is also extinguished
b. Negative - when the condition involves the omission of an act.
i. condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time
indicated has elapsed, or if it has become evident that the event
cannot occur
ii. ex. A binds himself to give P5,000 to B provided that the latter
shall not get married before reaching the age of twenty-five, the
condition is negative. If B is not yet married at the time when he
finally reaches the age of twenty-five, the obligation becomes
effective.

Note: If there is no period fixed in the foregoing, Art. 1185, par. 2 shall apply.
Intention of the parties is controlling and the time shall be that which the parties
may be probably contemplated, taking into account the nature of the obligation

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.

f. Reciprocal
a. obligations where the parties are mutually or reciprocally obliged to
do or to give something
b. mutually debtors and creditors of each other
c. obligations which are created or established at the same time, out of
the same cause, and which result in mutual relationships of creditor
and debtor between the parties
d. outstanding characteristic: reciprocity arising from identity of cause by
virtue of which one obligation is correlative to another
e. ex. Contract of sale = obligation of vendee to pay is correlative to
obligation of vendor to deliver the thing sold

Tacit Resolutory Condition

Art. 1191 has established that if one of the parties fails to comply with what is
incumbent upon him, there is a right on the part of the other to rescind the
obligation
Necessity of Judicial Action right to rescnd the obligation is a right which
belongs to the injured party alone but MUST BE INVOKED JUDICIALLY by filing
a proper action for rescission
o ex. Contract of sale if vendee failed to pay the price of the thing sold,
does not mean that vendor can just take possession of a thing already
delivered, he must first file an action for rescission
EXCEPTION: judicial action for rescission of contract is not necessary where the
contract provides that it may be cancelled for violation of any of its terms and
conditions
Nature of Breach: a slight or casual breach is insufficient for rescission, the
breach must be substantial and fundamental as to defeat the object of the parties
in making the agreement

JAIME G. ONG v. COURT OF APPEALS, SPOUSES MIGUEL K. ROBLES and

ALEJANDRO M. ROBLES
G.R. No. 97347. 6 Jul. 1999.
Facts:
Petitioner Jaime Ong and Respondent spouses Robles an Agreement of Purchase and Sale
with regards two parcels of land with a rice mill and piggery in Quezon for P2M.
The terms and conditions states that the petitioner shall
o advance downpayment of 300K,
o shall pay the loan of the spouses of the bank, and
 o will pay the balance of the purchase price in 4 equal quarterly instalments.
Petitioner was able to pay the downpayment and subsequently possession of the subject
property and everything else thereon.
However, petitioner failed to comply with the payment for the loan, and he gave postdated
checks to the couple, as payment for the balance, which were dishonored due to insufficient
funds.
To make it worse, he was not able to fully pay the loan of the spouses in the bank. To avoid
foreclosure, the respondent couple sold the ricemill with the knowledge and conformity of
petitioner.
Respondents now want to rescind the contract on account of Ongs non-fulfillment of obligation
and seek to recover the property with damages.
RTC upheld the rescission and ordered mutual restitution as well as awarded exemplary
damages. The CA deleted the award of exemplary damages.
Respondents sought for the rescission of the properties due to the latters failure to comply
with the terms and conditions on the contract.
RTC ordered the restitution of the properties. CA affirmed the decision in contemplation of
Article 1191 of The New Civil Code

Issue: Whether the contract entered into by the parties may be validly rescinded under Article 1191 of
the New Civil Code as distinguished to Article 1383 of the same.

Held: Yes, the contract entered into by the parties may be validly rescinded under Article 1191 of the
New Civil Code and not 1381.

Ratio:
The Robles spouses bound themselves to deliver a deed of absolute sale and clean title covering
the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00.
The Contract entered into by the parties was a Contract to Sell which means that the payment
of the purchase price is a positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force. This promise to sell was subject to the
fulfillment of the suspensive condition of full payment of the purchase price by the petitioner.
Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective and without force and effect.
In Article 1191 of the New Civil Code is the obligors failure to comply with an obligation.
Failure to pay, in this instance, is not even a breach but merely an event which prevents the
vendors obligation to convey title from acquiring binding force.
Hence, the agreement of the parties in the case at bench may be set aside, but not because of
a breach on the part of petitioner for failure to complete payment of the purchase price. Rather,
his failure to do so brought about a situation which prevented the obligation of respondent
spouses to convey title from acquiring an obligatory force.
The case at bar failed to show the following indespensable requisites in order for novation to
take place: (1) there must be a previous valid obligation; (2) there must be an agreement of the
parties concerned to a new contract; (3) there must be the extinguishment of the old contract;
and (4) there must be the validity of the new contract. The aforesaid requisites are not found
in the case at bench.
As to which article will govern the rescission, rescission under Article 1191 is a principal action
which is based on breach of a party, while rescission under Article 1381 is a subsidiary action
limited to cases of rescissible contracts.

RESCISSION IN TWO SENSES 1191 AND 1381 (

 DEL CASTILLO VDA. DE MISTICA V. SPOUSES NAGUIAT
GR No. 137909. 11 December 2003
Facts:
Eulalio Mistica, predecessor-in-interest of the petitioner, owned a parcel of land which a portion
thereof was leased to respondent, Naguiat sometime in 1970.
5 April 1979: Mistica sold 200 sq.m of the said lot to Naguiat.
They signed a Kasulatan sa Pagbibilihan (contract of sale) where it was stated that:
- an initial payment P2,000 be made;
- the remaining Balance of P18,000 be paid within 10 years; and
- in case of failure to pay, the buyer shall pay 12% interest annually until full payment.
The downpayment of P2,000 and a partial payment of P1,000 was made, however the
respondent failed to make any payments after.
October 1986: Eulalio Mistica passed away.
4 December 1991: petitioner filed a complaint for rescission for the failure of the respondent to
pay the balance.
Respondents contended that the contract cannot be rescinded because of the condition in the
contract stating that in case of failure to pay, the buyer shall pay 12% annul interest until full
payment.
- That the respondent also offered to pay the petitioner the remaining balance during the wake of
the late Eulalio. But the petitioner refused said offer.
RTC: Disallowed rescission but ordered the respondents to pay the remaining balance of P17,000
with 12% annul interest from 12 April 1989 until full payment is made.
CA: affirmed RTC ruling.
Current petition: Petitioner seeking rescission of the contract.
Issue: Whether there was a breach of obligation given the lapse of the 10 year period to pay the
remaining balance as stipulated in the contract of sale between petitioners late husband and the
respondent.

Held: No. Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil
Code, because respondents committed a substantial breach when they did not pay the balance of the
purchase price within the ten-year period. The transaction between Eulalio Mistica and respondents,
as evidenced by the Kasulatan, was clearly a Contract of Sale.
A deed of sale is considered absolute in nature when there is neither a stipulation in the deed
that title to the property sold is reserved to the seller until the full payment of the price; nor a
stipulation giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to
pay within a fixed period. In a contract of sale, the remedy of an unpaid seller is either specific
performance or rescission. Under Article 1191 of the Civil Code, the right to rescind an obligation
is predicated on the violation of the reciprocity between parties, brought about by a breach of
faith by one of them. Rescission, however, is allowed only where the breach is substantial and
fundamental to the fulfillment of the obligation.

In the case, the failure of respondents to pay the balance of the purchase price within ten years from
the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it was stipulated
that payment could be made even after ten years from the execution of the Contract, provided
the vendee paid 12 percent interest. it is undisputed that during the ten-year period, petitioner
and her deceased husband never made any demand for the balance of the purchase price.
Petitioner even refused the payment tendered by respondents during her husbands funeral, thus
showing that she was not exactly blameless for the lapse of the ten-year period. Had she accepted
the tender, payment would have been made well within the agreed period.

CANNU VS. GALANG

G.R. No. 139523. May 26, 2005

FACTS:
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings
& Loan Association for P173,800.00 to purchase a house and lot
National Home Mortgage Finance Corporation (NHMFC) purchased the mortgage loan of
respondents-spouses from Fortune Savings & Loan Association for P173,800.00.
Respondents Spouses Galang then sold the subject house and lot
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the
balance of the mortgage obligations with the NHMFC and with CERF Realty (the Developer of
the property).
Petitioners paid respondents installments amounting to P75, 000 in November 1991, leaving a
balance of P45, 000.00
A deed of sale with Assumption of Mortgage Obligation was made between spouses Galang
and Cannu stating that:
o It is a special condition of this contract that the vendees shall assume and
continue with the payment of the amortization with the National Home Mortgage
Finance Corporation Inc.
However, petitioners refused to pay the balance of P45, 000
Petitioner Leticia Cannu informed the NHMFC that the ownership rights over the land had
been ceded to her and her husband therefore they were obligated to assume the mortgage
and pay remaining unpaid loan balance
Because the Cannus failed to fully comply with their obligations, respondent Fernandina
Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan
with NHMFC
Petitioners opposed the release of the title in favor of respondent-spouses, insisting that the
property is already theirs
Thereupon, a Complaint for Specific Performance and Damages was filed asking that
petitioners be declared the owners of the property subject to reimbursements of the amount
made by respondents-spouses in preterminating the mortgage loan with NHMFC.
Respondent-spouses alleged that they paid their existing obligation with NHMFC as an initial
step in the rescission and annulment of the Deed of Sale with Assumption of Mortgage
RTC held that petitioners have no cause of action which the CA affirmed

ISSUE: Whether the petitioners committed a substantial breach of contract leading to rescission of
contract
HELD: Yes.
RATIO:
Petitioners failure to pay the remaining balance of P45,000.00 to be substantial.
Art. 1191 states that Rescission will not be permitted for a slight or casual breach of the
contract. Rescission may be had only for such breaches that are substantial and fundamental
as to defeat the object of the parties in making the agreement
 Rescission or, more accurately, resolution, of a party to an obligation under Article 1191 is
predicated on a breach of faith by the other party that violates the reciprocity between them;
due to the fact that full payment has not been paid and that the monthly amortizations
with the NHMFC have not been fully updated, Fernandina Galang made her intentions
clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with
Assumption of Mortgage.
Petitioners relying on Art. 1383 for rescission is also misplaced - rescission under Article 1191
is a principal action, while rescission under Article 1383 is a subsidiary action. The former is
based on breach by the other party that violates the reciprocity between the parties, while the
latter is not.

When is a breach substantial: dependent upon attending circumstances and not merely on the
percentages of the amount not paid

PRYCE CORP. V. PAGCOR

G.R. No. 157480. May 6, 2005
Facts:
Pryce (PPC) executed a contract of lease with Philippine Amusement and Gaming
Corporations (PAGCOR) casino operation involving the ballroom of the hotel for a period of 3
yrs.
On Dec 18,1992, just before the actual opening of casino operation, public rally was staged
by some local officials, residents & religious leader which PAGCOR was constrained to
suspend casino operation.
On July 15 1993, PAGCOR resumed casino operation but, later indefinitely suspended due to
the demonstrations. Per verbal advice from the office of the President, PAGCOR decided to
stop prior to Sept 1993.
PPC appraised PAGCOR of its outstanding accounts for the quarter Sept. 1, to Nov. 30, 1993.
However, PAGCOR sent PPC a letter stating that it was not amenable to the payment of
the full rentals citing as reasons unforeseen legal & other circumstances which prevented
it from complying with its obligation.
PAGCOR formally demanded from PPC the payment of its claim for reimbursement on
rental deposits & improvement expenses.
On Nov. 25, 1993, PPC terminated its contract of lease due to PAGCORS continuing
breach of contract.

Issue: Whether Pryce is entitled to future rentals or lease payments for the unexpired period of the
contract?

Held: Yes
Ratio:
- Under Art. 1159, obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. The law allows to enter into stipulations, terms &
conditions for as long as these are not contrary to law, moral, good customs, public order or public
policy.
- Under Art. 20, of the parties contract of lease provides that 1) PPC has the right to terminate &
cancel the contract in the event of a default or breach by the lessee and 2) to make PAGCOR
fully liable for rentals for the remaining term of the lease, despite the exercise of such right
to terminate. Thus, the parties have voluntarily bound themselves to require strict compliance with
the provisions. The court has no alternative but to enforce the contractual stipulations in the manner
they have been agreed upon.
- Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of
the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the
courts.
- On the other hand, termination refers to an end in time or existence; a close, cessation or
conclusion. With respect to a lease or contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be effected by mutual agreement or by one
party exercising one of its remedies as a consequence of the default of the other.
- Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the
parties to their original situation prior to the inception of the contract. Applying this principle to this
case, it means that PPC would re-acquire possession of the leased premises, and PAGCOR would
get back the rentals it paid the former for the use of the hotel space.
- In this case the actions of petitioner shows that it never intended to rescind the contract from the
beginning because it sought to collect the accrued rentals, as it actually demanded the
enforcement of lease contract prior to termination.

ERNESTO DEIPARINE, JR. VS. THE HON. COURT OF APPEALS, CESARIO CARUNGAY AND
ENGR. NICANOR TRINIDAD
G.R. No. 96643, 23 April 1993

Facts:
Respondent Carungay entered to a construction contract with the contractor petitioner
Deiparine for the construction of a three-storey dormitory in Cebu City.
The respondent agreed to pay P970,000 inclusive of contractors fee, and the petitioner bound
himself to erect the said building in strict accordance to plans and specifications. The Plan
specified that the building must have 3,000 psi (pounds per square inch) as the acceptable
minimum compressive strength.
Through Engr. Trinidad, it came to the knowledge of the respondents that the petitioner is not
following the plans and that the construction works are faulty and haphazardly in order to
maximize his personal profit.
The respondent sent memorandums to the petitioner complaining about the work done by the
latter, but the same were ignored.
The respondent asked for a core testing to examine the compressive strength of the building, to
which the result was against the petitioner since the building failed to bear the minimum 3,000
psi compressive strength.
The respondent moved to rescind the contract.
RTC ruled in the favor of the respondents and CA affirmed.
Issue: Whether Carungay is entitled to rescission
Held: Yes
Ruling: There is also a right of rescission under the law on obligations as granted in Article 1191,
providing as follows: Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him. xxx
The violation of reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused
by Deiparines failure to follow the stipulated plans and specifications, has given the Carungay spouses
the right to rescind or cancel the contract.
The contention of the petitioner that the specification was not included in their contract is
untenable. The explicit deviance to the specifications, in his initial refusal to undergo core testing, and
his preference to his personal profit than that of the proper execution of the contract, shows bad faith.
The court sees no reason to disturb the ruling of CA that Deiparine did not deal with the Carungays in
good faith. His breach if this duty constituted a substantial violation of the contract correctible by judicial
rescission. When the structure failed under this test, the respondents were left with no other
recourse than to rescind their contract.

*There can be rescission if the injured party is left without other recourse but to rescind the contract

LAPERAL v. SOLID HOMES

G.R. No. 130913. 21 June 2005
FACTS:
Filipinas Gold Sales and Devt. Corp., predecessor-in-interest of Filipinas Gold and Country Club,
Inc, represented by its then president, petitioner Laperal, entered into a Devt. and Mgt.
Agreement with respondent Solid Homes Inc., wherein the latter, at its own expense, undertook
the conversion of a land into a first-class residential subdivision, and as consideration will
get 45% of the lot titles of the saleable area in the entire project.
(After 2 years) Respondent Solid Homes, thru its president and general manager, wrote to
petitioner Laperal to furnish them the owners duplicate copies of the Torrens titles covering
the subject land in order to facilitate the processing of their application with the Human
Settlements Regulatory Commission (HSRC) for a license to sell the lots.
Despite repeated requests, Laperal did not comply.
Agreement was cancelled by the parties, and in lieu thereof, both parties entered into 2 Revised
Agreements, which omitted the obligation of Laperal to make available to Solid Homes the
owners duplicate copies of the titles.
Due to other matters omitted in the said Revised Agreements, the parties executed an
Addendum wherein the Revised Agreements will be automatically rescinded in case of
breach of the terms and conditions, and that upon showing that respondent deliberately
abandoned or discontinued work in the project, all the improvements introduced shall be
forfeited in favor of petitioners without any obligation to pay the respondent.
Despite being provided in the Revised Agreements, respondent persisted in its request for the
delivery of the owners duplicate copies of the titles.
Respondent, thru its president and treasurer, explained to petitioner that it was unable to meet
the 30 Nov. 1983 deadline for the payment of P1M provided in the Revised Agreements
because there was delay in the processing of its license to sell due to petitioners refusal
to deliver the duplicate copies of titles.
o Respondent in order to demonstrate its commitment to the Revised Agreements,
proposed to assign P1M to petitioners, which the latter refused and instead insisted on
the payment of P1M for each of the Revised Agreements.
Respondent continued to press petitioners for the delivery of the owners duplicate copies of
titles.
Petitioners served to respondent notices of rescission of the Revised Agreements, with
a demand to vacate the properties and surrender possession to them. Petitioners
contended that the rescission is due to respondents failure to (1) pay P1M for each Revised
Agreement, (2) completed the development of the project and (3) obtain license from
HSRC.
Respondent objected to the rescission, since the proximate cause of the failure was the
petitioners own failure and refusal to deliver the owners duplicate copies of title.
Respondent filed with RTC for reformation of the Revised Agreements and Addendum, on the
ground that said contracts failed to express true intent of the parties. RTC dismissed.
CA affirmed with the modification that petitioners are ordered to reimburse respondent for the
actual cost of the development and the completed improvement on the project.
ISSUE: Whether the termination of the Revised Agreements and Addendum carried with it the effect
provided under Art. 1385 NCC
Whether the forfeiture clauses of the Addendum are void.
HELD: Petition is granted.
RATIO:
The Court held that mutual restitution is required in cases involving rescission under Art. 1191
o i.e., considering that the rescission of the contract is based on Art. 1191 NCC, mutual
restitution is required to bring back the parties to their original situation prior to the
inception of the contract.
o Rescission creates the obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.
Article 1191 states that the injured party may choose between fulfillment and rescission of the
obligation, with the payment of damages in either case. In other words, while petitioners are
indeed obliged to return the P5, 200, 833.27 (cost of development) to respondent under
Article 1385, assuming said figure is correct, respondent is at the same time liable to
petitioners in the same amount as liquidated damages by virtue of the forfeiture/penalty
clause as freely stipulated upon by the parties in the Addendum.

Art. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.45

THE EFFECTS OF THE 1381 MAY APPLY TO 1191. MUTUAL RESTITUTION

U.P. VS DE LOS ANGELES
No. L-28602. September 29, 1970.

FACTS:
Pursuant to Act. 3608, A Land Grant was segregated from public domain and given as an
endowment to UP to be operated and developed for additional income for its support
On 2 November 1960, UP and ALUMCO entered into a logging agreement where ALUMCO has
exclusive authority, collect and remove timber from the Land grant, in exchange for payment to
UP of royalties, forest fees, etc.
ALUMCO cut the timber, but incurred an unpaid account of P219, 362.94 and failed to pay
despite repeated demands
After receiving notice that UP would rescind or terminate the logging agreement, ALUMCO
executed Acknowledgement of Debt and Proposed Manner of Payments which was approved
by the president of UP. It stipulated:
o In the event that the DEBTOR fails to comply with any of its promises or undertakings in
this document, the DEBTOR agrees without reservation that the CREDITOR shall have
the right and the power to consider the Logging Agreement dated December 2, 1960 as
rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled
 as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated
damages
ALUMCO continued its logging operations, but again incurred an unpaid account
on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had
entered in 1960
UP filed a complaint against ALUMCO for the collection of the sums, had prayed for a preliminary
injunction restraining ALUMCO from continuing its logging operations and had a new concession
awarded to Sta. Clara Lumber Company after bidding
ALUMCO, meanwhile, filed several motions to discharge the writs of attachment and preliminary
injunction
respondent Judge thus issued 3 orders now sought to be annulled by UP:
o First order: enjoined UP from awarding logging rights over its timber concession in
provinces of Laguna and Quezon
o Second order: adjudged UP in contempt of court and directed Sta. Clara Lumber
Company, Inc. to refrain from exercising logging rights or conducting logging operations
on the concession
o Third order: denied reconsideration of the order of contempt.
ALUMCO in its answer argues that UPs unilateral rescission of the logging contract, without a
court order, was invalid

ISSUE: Whether judicial action for rescission of contract was necessary.

RULING: No.
In the first place, UP and ALUMCO had expressly stipulated in the Acknowledgment of Debt and
Proposed Manner of Payment that, upon default by the debtor ALUMCO, the creditor (UP) has the
right and the power to consider the Logging Agreement dated 2 December 1960 as rescinded without
the necessity of any judicial suit. As to such special stipulation, and in connection with Article 1191 of
the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., there is nothing in the
law that prohibits the parties from entering into agreement that violation of the terms of the contract
would cause cancellation thereof, even without court intervention. In other words, it is not always
necessary for the injured party to resort to court for rescission of the contract.

ANGELES V. CALASANZ
GR No. L-42283. 18 March 1985

Facts:
19 December 1957: Angeles bought a piece of land from Calasanz for P3,920.00 plus 7% interest
annually.
Angeles made a downpayment of P392.00 and promised to pay the balance in installments of
P41.20 until full payment.
Angeles paid monthly installments until July 1966, when their aggregate payment totalled
P4,533.38.
There were several occasions where Calasanz received delayed payments from Angeles.
7 December 1966: Calasanz cancelled the contract because Angeles failed to make
subsequent payments after July 1966.
Angeles sent Calasanz a letter of plea for reconsideration of the cancellation, which was denied.
 Angeles filed a civil case against Calasanz seeking the latter to execute a final deed of sale
given that they have paid a total of P4,533.38 including interests, realty taxes, and incidental
expenses for registration and transfer of the land.
Calasanz alleged that Angeles had no cause of action and that Angeles violated their contract for
not paying for more than five month since August 1966.
RTC: Ruled in favor of Angeles, that the contract was not validly cancelled by Calasanz and
that the latter should execute a final deed of sale in favor of Angeles.
CA certified the case before the SC considering the case involving pure questions of law.
Issue: Whether Calasanz validly cancelled the contract to sell and rightfully refused to execute the final
deed of sale in favor of Angeles.

Held: No. Under Art. 1191 on the rescission of reciprocal obligations, the law is explicit that that either
parties in a contract have the right to rescind the same upon failure of the other to perform the obligation
assumed thereunder. There is also nothing in the law that prohibits the parties from entering into an
agreement that violation of the terms of the contract would cause its cancellation even without court
intervention. However, the right to rescind the contract for non-performance of one of its stipulations is
not absolute because the rescission of a contract will not be permitted for a slight or casual breach but
only for substantial and fundamental breach which would defeat the very object of the parties in making
the agreement.

In the case, the breach of contract is so slight and casual because Angeles paid the initial
downpayment of P392.00 and as well as the monthly installments for almost nine years.
Furthermore, the obligation was only P3,920.00 excluding the 7% annual interest yet Angeles
had already paid an aggregate amount of P4,533.38. Hence, observing Art. 12344, to sanction the
rescission made by Calasanz would be injustice to Angeles, whereby Calasanz would be unjustly
enriched.

IRINGAN VS. CA
G.R. No. 129107. September 26, 2001

FACTS:
On March 22, 1985 private respondent Antonio Palao sold to petitioner Alfonso Iringan, an
undivided portion of Lot No. 992 of the Tuguegarao Cadastre
The parties executed a Deed of Sale on the same date with the purchase price of P295,000.00
payable in 3 installments: P10, 000, P140, 000 and P145, 000
When the second payment was due, Iringan paid only P40, 000
Thus, on July 18, 1985, Palao sent a letter to Iringan stating that he considered the contract as
rescinded since Iringan failed to pay the full amount of the second installment.
Iringan replied that he did not oppose this but asked for the reimbursement of the following
amounts: P50, 000 (cash Palao received), P3, 200 (geodetic engineers fee), P500 (attorneys
fee) and the current interest on P53, 700.
Palao disagreed to the requested reimbursements
Iringan then proposed that only the P50, 000 which already been paid be reimbursed or that
Palao would sell to Iringan the equivalent portion of the land
Palao replied that the Iringans standing obligation reach P61, 600 in arears for rentals

4
If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict
and complete fulfillment, less damages suffered by the obligee.
 The parties failed to arrive at an agreement
On July 1, 1991, Palao filed a Complaint for Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife
Iringans answer: contract of sale was a consummated contract, hence, remedy of Palao was
for collection of balance and not rescission
RTC ruled in favor of Palao and affirmed rescission of the contract, affirmed by CA
In this petition, Iringan asserts that a judicial or notarial act is necessary before one party can
unilaterally effect a rescission.

ISSUE: Whether the respondent filed a proper judicial or notarial act necessary for rescission to take
effect.

HELD: Yes.
RATIO:
A judicial or notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. When private respondent filed an action for Judicial
Confirmation The complaint categorically stated that the purpose was 1) to compel appellants
to formalize in a public document, their mutual agreement of revocation and rescission; and/or
2) to have a judicial confirmation of the said revocation/rescission under terms and conditions
fair proper and just for both parties
An action for Judicial Confirmation of Rescission and Damages complies with the requirement
of the law for judicial decree of rescission; Even a crossclaim found in the Answer could
constitute a judicial demand for rescission that satisfies the requirement of the law.

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

YAO V. MATELA
G.R. No. 167767. August 29, 2006

Facts:
Spouses Yao contracted the services of Matela, a licensed architect, to manage and supervise
the construction of a two-unit town house at a total cost of P5 million more or less.
The construction started in the first week of April 1997 and was completed in April 1998, with
additional works costing P300,000.
Matela alleged that the spouses Yao paid him the amount of P4.6 million, thereby leaving a
balance of P741,000.
When his demand for payment went unheeded, Matela filed a complaint for sum of money with
the RTC.
In their answer, the spouses Yao denied that the project was completed in April 1998.
Instead, they alleged that Matela abandoned the project without notice. They claimed that
they paid Matela the sum of P4.7M which should be considered as sufficient payment
considering that Matela used sub-standard materials causing damage to the project which
needed a substantial amount of money to repair.
Issue: Whether Matela may collect actual damages and the additional construction cost?

Held: No. Both parties are guilty of breach.

Ratio: In reciprocal obligations, the general rule is that fulfillment by both parties should be
simultaneous or at the same time.
- The rule then is that in reciprocal obligations, one party incurs in delay from the moment the
other party fulfills his obligation, while he himself does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. If neither party complies or is ready to comply with
what is incumbent upon him, the default of one compensates for the default of the other. In such
case, there can be no legal delay.
- Both the trial court and the Court of Appeals found that Matelas delivery of the project constitutes
a faithful discharge of his duties. We find otherwise. Our evaluation of the records reveal that Matela
failed to comply with his obligation to construct the townhouses based on the agreed
specifications. As such, he cannot be discharged from his obligations by mere delivery of the same
to the spouses Yao.
- However, we find that the spouses Yao likewise failed to comply with their undertakings. As alleged
by Matela, the spouses Yao made periodic payments to him based on progress billings. However,
the spouses Yao refused to pay the balance of the agreed construction cost despite
demands. The spouses Yao justified their non-payment by arguing that Matela abandoned
the project and that there were defects in its construction.
- in situation such as the one discussed above, where it cannot be conclusively determined which of
the parties first violated the contract, equity calls and justice demands that we apply the solution
provided in Article 1192 of the Civil Code:
- In the instant case, the losses to be incurred by the parties will come, as far as Matela is concerned,
in the form of the alleged unpaid balance of the construction cost that he is seeking to collect from
the spouses Yao. For the latter, the losses that they will bear is the cost of repairing the defects in
the project. We consider the amount of P4,699,610.93 which Matela has already received from
the spouses Yao, as sufficient payment for his services and the materials used in the project

ONG VS. BOGALBAL

G.R. No. 149140. September 12, 2006
FACTS:
ISSUE:
RULING: In the absence of a stipulation to the contrary, the power to rescind must be invoked
judiciallyit cannot be exercised solely on the partys own judgment that the other has committed a
breach of the obligation

Article 1192, in making the first infractor liable for mitigated damages and in exempting the second
infractor from liability for damages, presupposes that the contracting parties are on equal footing with
respect to their reciprocal principal obligations.

Both of them were in breach, but they were able to pinpoint who infracted first

g. Constructive Fulfillment

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
Constructive Fulfillment of Suspensive Conditions
1) Condition is deemed fulfilled when the obligor actually prevented the obligee from
complying with the condition; prevention must have been voluntary or willful in
character.
Reason: One must not profit by his own fault.
2) Doctrine applies only to suspensive condition. It can have no application to an
external contingency which is lawfully within the control of the obligor
3) The mere intention of the debtor to prevent its happening or the mere placing of
ineffective obstacles to its compliance, without actually preventing fulfillment is not
sufficient.
Note: When the voluntary act of the debtor did not have for its purpose the
prevention of the fulfillment of the condition, it will not fall under constructive
fulfillment. The same is true when the debtor acts pursuant to a right.

Ex. the conditions which are imposed by a certain company in order that its employees
will be entitled to retirement benefits can no longer be complied with because the
retirement or pension plan was willfully abrogated by a unilateral act of the Board of
Directors of the company such employees are now entitled to retirement benefits.

Requisites of Constructive Fulfillment:

1) Condition is suspensive
2) Debtor actually prevents the fulfillment of the condition
3) He acts voluntarily
INTERNATIONAL HOTEL CORPORATION (IHC) v. FRANCISCO B. JOAQUIN, JR. and RAFAEL
SUAREZ
G.R. No. 158361| 10 APRIL 2013

FACTS:
Respondent Joaquin, Jr. submitted a proposal to the Board of Directors of petitioner IHC for him
to render technical assistance in securing a foreign loan for the construction of a hotel, to
be guaranteed by the DBP.
Said proposal encompassed 9 phases, which the IHC Board of Directors approved (phase 1-6)
and earmarked P2M for the project.
IHC applied with DBP for a foreign loan guaranty. DBP approved the application subject to
several conditions.
After the submission of the application to DBP, Joaquin requested from IHC P500,000.00 for
services he provided and would be providing in relation to the project that were outside the scope
of the technical proposal.
o He implied his amenability to receive shares of stock instead of cash.
IHC stockholders granted Joaquins request, allowing payment for both respondents (Joaquin &
Suarez).
Joaquin presented to Board of Directors of IHC the results of his negotiations with potential
foreign financiers, and narrowed the financiers to Roger Dunn & Co. and Materials Handling
Corp.
 o He recommended Materials Handling based on its more beneficial terms, and such
recommendation was accepted.
Negotiations with Materials Handling and later on, with its principal, Barnes International ensued.
o While such negotiations were ongoing, Joaquin & Jose Valero (IHC Executive Director)
met with another financier, Weston International Corporation, to explore possible
financing.
When Barnes failed to deliver, IHC informed DBP that it would submit Weston for DBPs
consideration, which resulted in the cancellation of its previous guaranty.
IHC then entered into an agreement with Weston, and communicated this development with
DBP, which denied the application for guaranty for failure to comply with the conditions.
Due to this failure to secure the needed loan, IHC through its President Bautista,
cancelled the 17,000 shares of stock it previously issued to respondents.
Thus, respondents filed an action with the RTC for specific performance, annulment, damages
and injunction against IHC and its Board of Directors.
RTC rendered judgment in favor of respondents and held petitioner liable.
CA affirmed with modification
Hence, this petition.

ISSUE: Whether constructive fulfillment was present in this case

HELD: No.

RATIO:
IHCs argument: it is not liable because: (a) it was Joaquin who had recommended Barnes; and (b)
IHCs negotiation with Barnes had been neither intentional nor willfully intended to prevent Joaquin
from complying with his obligations.

Article 1186 of the Civil Code reads: The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, whose application
calls for two requisites:
o (a) the intent of the obligor to prevent the fulfillment of the condition, and
o (b) the actual prevention of the fulfillment.
Mere intention of the debtor to prevent the happening of the condition, or to place ineffective
obstacles to its compliance, without actually preventing the fulfillment, is insufficient.
The error lies in the CAs failure to determine IHCs intent to preempt Joaquin from meeting his
obligations, i.e., the latter impressed upon the members of the Board that Materials
Handling was offering more favorable terms for IHC.
IHC only relied on the opinion of its consultant in deciding to transact with Materials
Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no intention, willful
or otherwise, to prevent Joaquin and Suarez from meeting their undertaking.

Such absence of any intention negated the basis for the CAs reliance on Article 1186 of the Civil Code.

2. With a Period
1. Definition

Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
 Obligations with a resolutory period take effect at once, but terminate
upon arrival of the day certain.

A day certain is understood to be that which must necessarily come,

although it may not be known when.

If the uncertainty consists in whether the day will come or not, the
obligation is conditional, and it shall be regulated by the rules of the
preceding section

Period = a term or period is an interval of time, which, exerting an influence on an

obligation as a consequence of a juridical act, either suspends its demandability or
produces its extinguishment.

Obligations with a period = those whose demandability or extinguishment is subject

to the expiration of a term or period.
Obligations whose fulfillment a day certain has been fixed shall only be
demandable when that day comes

TERM/PERIOD VS. CONDITION

TERM/PERIOD CONDITION
Interval of time which is future and certain Fact or event which is future and
uncertain
Must necessarily come, although it may May or may not happen
not be known when
Exerts an influence upon the time of Exerts an influence upon the very
demandability or extinguishment of an existence of the obligation itself
obligation
No retroactive effect unless there is an Has retroactive effect
agreement to the contrary
When it is exclusively to the will of the When it is left exclusively to the will of the
debtor, the existence of the obligation is debtor, the very existence of the
not affected; empowers the court to fix obligation is affected
the duration of the obligation
Must be possible, otherwise obligation is void

SOLANTE VS. COA

GR No. 2073448 ; 19 August 2014

Facts:
- On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F. Cruz) entered into a
Contract of Reclamation wherein F.F.Cruz undertook the reclamation of more or less 180
hectares of foreshore and submerged lands.
- It was agreed that the reclamation shall commence not later than July 1989, after the contract
had been ratified by the Sangguniang Panlungsod and that the project is estimated to be
completed in six (6) years.
- Subsequently, the parties entered into a MOA whereby the City of Mandaue allowed F.F. Cruz to
put up structures on a portion of land owned by the city for the use of F.F. Cruz and that upon
completion of the reclamation project, all improvements introduced by F.F. Cruz shall ipso facto
belong to the City of Mandaue as compensation for the use of said parcel of land.
- However, in the course of the reclamation, a road widening project of the DPWH would hit the area
covered by the MOA hence Mr. Darza, project director of DPWH entered into an Agreement to
Demolish, Remove and Reconstruct improvement with F.F. Cruz whereby F.F. Cruz would
demolish the improvements outside of the boundary of the road widening project and in return
receive 1.08 million in compensation.
- Petitioner Rowena B. Rances-Solante then prepared and issued disbursement voucher amounting
to 1.08 million on July 1997 (or 8 years after the commencement of the project) in favor of F.F.
Cruz and certified that the expense was necessary, lawful and incurred in her direct supervision.
- Darza thereafter addressed a letter-complaint to the Office of the Ombudsman, Visayas, inviting
attention to several irregularities regarding the implementation of the project and a COA
audit followed soon after.
- COA findings disallowed the payment and found F.F. Cruz, Darza and Solante liable for the
transaction since COA said that F.F. Cruz was no longer the lawful owner of the properties at
the time the payment was made.
- The Legal and Adjudication Office jointly denied the reconsideration sought by Solante and the
appeal by F.F. Cruz. The Ombudsman case against Darza was likewise dismissed, hence this
appeal.

Issue: Whether the MOA between F.F. Cruz and City of Mandaue is an obligation with a period.

Ruling: No.
- Art 1193 of the NCC provides that obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes. Obligations with a resolutory period take
effect at once, but terminate upon arrival of the day certain.
- A day certain is understood to be that which must necessarily come, although it may not
be known when. A plain reading of the Contract of Reclamation reveals that the 6-year period
provided for project completion was a mere ESTIMATE and cannot be considered a period
or a day certain in the context of Art. 1193, as such, the lapse of 6 years from the perfection
of the contract did not, by itself, make the obligation to finish the reclamation project
demandable, such as to put the obligor in a state of actionable delay for its inability to finish and
bring about the fulfillment of the condition stipulated in the MOA.
- It can be said that F.F. Cruz was still the owner of the structures along Plaridel extension
and it was only equitable that they get compensated for the damages caused by the demolition.
Hence, the payment of compensation for the demolition is justified and disallowance by COA is
without factual and legal bases thus the petition is granted and the COA resolution is reversed
and set aside.

2. When courts may fix a period

Art. 1197. If the obligation does not fix a period, but from its nature and the
circumstances, it can be inferred that a period was intended, the courts may fix
the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will
of the debtor.

In every case, the courts will determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.

Judicial Term or Period

- when the duration thereof is fixed by a competent court in accordance with the
causes expressly recognized by law
- Once fixed by a competent court, the period can no longer be judicially changed

WHEN THE COURT MAY FIX TERM

General Rule: Courts are without power to fix term.

Exceptions:
1) If the obligation does not fix a period, but from its nature and circumstances it can
be inferred that a period was intended
2) If the duration of the period depends upon the will of the debtor
3) If under the circumstances the parties have contemplated a period
4) If the debtor binds himself when his means permit him to do so

ARANETA, INC. VS. PHIL SUGAR ESTATES DEVELOPMENT, CO.

GR No. L-22558. 31 May 1967

Facts:
28 July 1950: J.M. Tuason & Co. sold a portion of its Quezon City property through Gregorio
Araneta, Inc. to the Phil. Sugar Estates Development, Co. for a sum of P430,514.00.
The contract of purchase and sale with mortgage stipulated that:
- The buyer (Phil. Sugar) will build on the parcel of land the Sto. Domingo Church and Convent
- The seller (Araneta) will construct streets on the NE, NW, and SW sides of the land; the NE side
shall be named Sto. Domingo Ave.
Phil. Sugar finished the construction of the Sto. Domingo Church and Convent, but Araneta failed to
finish the construction of the street on the NE side.
- Failure was due to a third party, Manuel Abundo, who occupied a middle portion of the land and
refused to vacate the same.
7 May 1958: Phil. Sugar sued Araneta and J.M. Tuason for failure to comply with the contract.
- Phil. Sugar sought to compel Araneta and J.M. Tuason to comply with their obligation and/or pay
damages if they failed or refused to perform their obligation.
 - Araneta and J.M. Tuason contend that the action was premature because the obligation in
question was without a definite period. Thus, a proper suit must first be filed for the court to fix the
definite period before a complaint for specific performance will prosper.
31 May 1960: Court of First Instance (CFI) dismissed the case upholding J.M. Tuason and Aranetas
defense.
16 July 1960: CFI granted Phil. Sugars motion for reconsideration and held that Araneta is obliged
to comply with their obligation in a period of 2 years from the notice.
Araneta contended before the CA that the 2 year period fixed by the CFI was not justified by the
pleadings nor supported by the facts submitted in court.
- CA: Affirmed CFI decision.
Hence, current petition for review by certiorari.

Issue: Whether the period fixed by the lower court is legally tenable.

Held: No.
The SC found two errors in the lower and appellate courts rulings:
- First, the lower court fixed the assailed period of performance despite Phil. Sugars
complaint not directly seeking for the court to do so. Hence, the complaint proceeded on the
theory that the contract had been breached and Araneta was already liable for damages;
- Secondly, although the court has the power to fix the period of performance as provided under Art.
1197, the last paragraph of the provision clearly states that the period cannot be set arbitrarily:
the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. In the case, the SC finds that the decision of the lower
court failed to show the basis to support the period set at 2 years.
SC held that Art. 1197 involves a two-step process:
- First, the court must determine that the obligation does not fix a period but from the nature and
circumstances it can be inferred that that a period was intended;
- Next, the court must decide what period was probably contemplated by the parties.
Thus, the court must show that the time it fixed is in accordance with what the parties intended. In
this case, the court failed to do so since no circumstances were mentioned to justify the 2 year period.
In this case, the SC holds that in determining the period for the performance of obligation, the
lower court should have considered that the parties were aware that the subject land was occupied
by illegal settlers (as mentioned in the Petitioners Appendix). Hence, the parties must have known
that they must first resort to legal processes in evicting the squatters and the duration of such
legal process is indeterminable.
Thus, the parties must have intended to defer the performance of the obligation until the
squatters were duly evicted, which explains why the contract between the parties did not
specify the exact date of performance.
Hence, the SC holds that the time for the performance of the obligations of Araneta, Inc. is
fixed at the date that all the squatters on affected areas of the subject land are finally evicted.

MACASAET VS. MACASAET

G.R. Nos. 154391-92. September 30, 2004.

FACTS:
 Petitioners Ismael and Teresita Macasaet and Respondents Vicente and Rosario Macasaet are
first-degree relatives.
Ismael is the son of respondents, and Teresita is his wife.
On December 10, 1997, the parents filed an ejectment suit against the children
Respondents Vicente and Rosario alleged that they were the owners of two parcels of land and
by way of a verbal lease agreement, Ismael and Terestita occupied these lots as their residence
and site of their construction business
Despite repeated demands, petitioners failed to pay the agreed P500 rental
Ismael and Teresita denied the existence of any verbal lease agreement and that they were
invited to occupy said lots and that the land was an advance grant of inheritance in favor of the
children
MTCC ruled in favor of respondents and petitioners were ordered to vacate the promises as
their stay was by mere tolerance of respondents, petitioners could vacate the lots upon
demand
On appeal, the RTC upheld the MTCC, although it ruled that respondents could appropriate
the building and other improvements of petitioners after payment of the indemnity provided for
by Art. 448
On appeal, CA sustained the finding of the lower courts and that under Art. 1678, Ismael and
Teresita had the right to be reimbursed for one half the value of the improvements made
Hence this petition for review
ISSUE: Whether the petitioners were lawfully ejected.
RULING: Yes.
Petitioners were able to establish that respondents had invited them to occupy the subject lots
in order that they could all live near one other and help in resolving family problems. By
occupying those lots, petitioners demonstrated their acceptance of the invitation. Hence, there
was a meeting of minds, and an agreement regarding possession of the lots impliedly arose
between the parties.
The issue is the duration of possession. Art. 1197 allows the court to fix the duration of the
period in absence of a stipulation on this point however, this only applies to when the parties
intended a period. When Vicente and Rosario invited their children to use the lost, it was
out of parental love. No period was intended by the parties.
it can be concluded that the agreement subsisted as long as the parents and the children
mutually benefited from the arrangement.
Having been based on parental love, the agreement would end upon the dissipation of the
affection.
Petitioners lawful possession of the land became unlawful when the love and solidarity with the
respondents ceased.

3. Effect
Art 1193 (see above)

a. If suspensive ex die (when the obligation becomes demandable only upon

the arrival of a day certain)
a. The period must lapse before the performance of the obligation can
be demanded
b. What is therefore suspended by the term is not the acquisition of the right
or effectivity of the obligation but merely its demandability
 c. Note: if a fortuitous event supervenes, the obligor is merely relieved of the
obligation to fulfill at that time and does not stop the running of the period
because in effect
d. Fortituous event DOES NOT interrupt the running of the period
e. Ex. I will pay you 30 days from today suspended demandability
f. I will support you from the time your father dies
g. I will pay you when my means permit me to do so

b. If resolutory in diem (when the obligation is demandable at once, although it

is terminated upon the arrival of a day certain)
a. Obligations with a resolutory period take effect at once but terminate upon
arrival of the day certain
b. Thus the arrival of the period terminates the obligation
i. Ex. I will give you P1, 000 a month until the end of the year.
ii. I will support you unti you die.

4. Beneficiary of the Period

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

been established for the benefit of both the creditor and debtor, unless from the
tenor of the same or other circumstances it should appear that the period has
been established in favor of one or of the other.

Benefit of Term or Period

General rule: when a period is designated for the performance or fulfillment of
an obligation, it is presumed to be for the benefit of both the creditor and the
debtor
Therefore, the creditor cannot demand the performance of the obligation before
the expiration of such period, the debtor cannot perform the obligation before the
expiration of such period
o Ex. Monetary obligation contracted with a period debtor has no right,
unless the creditor consents, to accelerate the time of payment even if the
tender includes an offer to pay not only the principal but also the interests
in full
o Ex. De Leon vs. Syjuco creditor refused to accept the payment until the
date of maturity
Why can the creditor NOT be compelled to accept the payment?
Payment of interest
The creditor may want to keep his money invested safely
instead of having it in his hands (by fixing the period, the is thus
bale to protect himself against sudden decline in the purchasing
power of the currency loaned
Under the Usury Law there is a special prohibition of payment of
interest in advance for more than one year
Exception to Benefit of Term or Period
if it can be proved either from the tenor of the obligation or from other
circumstances that the period or term has been established in favor of the
creditor or of the debtor
if such period has been established for the benefit of the creditor, he may
demand the fulfillment or performance of the obligation at any time,
o but the obligor or debtor, on the other hand, cannot compel him to accept
payment before the expiration of the period.
If such period is in favor of obligor or debtor, he may oppose any premature
demand on the part of the oblige or creditor for performance of the obligation
o He may also renounce the benefit of the period by performing his obligation
in advance
o Ex. If debtor executed a promissory note promising to pay his debt
within a period of five years to be counted from that date period is
for the benefit of the debtor
He cannot compel the creditor to accept the payment at any time
within the stipulated period
o Ex. If debtor executed a promissory note promising to pay his
indebtedness four years after date, presumption: period is for
benefit of both the creditor and the debtor
Therefore, debtor cannot compel the creditor to accept the
payment until after the expiration of the four year period

Where period was presumed to be for benefit of both C and D:

Contract of loan with interest
o Ex. On January 1, D borrowed from C P10, 000 payable on December 31
at 18% interest
D cannot pay before Dec. 31 without Cs consent
C cannot compel D to pay before Dec. 31

LL AND CO. V. HUANG CHAO

G.R. No. 142378. March 7, 2000
Facts:
The case originated from an unlawful detainer case filed by petitioner before the trial court
alleging that respondents Huang Chao Chun and Yang Tung Fa violated their amended
lease contract over a 1,112 square meter lot it owns, when they did not pay the monthly rentals
thereon in the total amount of P4,322,900.00.
Terms and conditions of amended lease:
o x x x It is expressly agreed and understood that the payment of the rental herein
stipulated shall be made without the necessity of express demand and without
delay on any ground whatsoever.
o The term of this lease is FIVE (5) YEARS from the effectivity of said lease, and with
the option to renew, specifically shall commence from September 15, 1991 and shall
expire on September 16, 1996, and may be adjusted depending upon the ejectment of
tenants.
 It also alleged that the amended lease contract already expired on September 16, 1996 but
respondents refused to surrender possession thereof plus the improvements made thereon,
and pay the rental arrearages despite repeated demands.
The parties entered into the amended lease contract sometime in August 1991. The same
amended the lease contract previously entered into by the parties on August 8, 1991.
Respondent were joined by the Tsai Chun International Resources Inc. in their answer to the
Complaint, wherein they alleged that the actual lessee is the corporation. Respondents and
the corporation denied petitioners allegations.
The MTC dismissed the case. The MTC ruled that the lessees could extend the contract
entered into by the parties unilaterally for another five years for reasons of justice and
equity.
It also ruled that the corporations failure to pay the monthly rentals as they fell due was justified
by the fact that petitioner refused to honor the basis of the rental increase as stated in their
Lease Agreement.
This was affirmed by the RTC. It also held that the parties had a reciprocal obligation: unless
and until petitioner presented the increased realty tax, private respondents were not under any
obligation to pay the increased monthly rental. The decision was likewise affirmed by the Court
of Appeals.

Issue: Whether the court could still extend the term of the lease, after its expiration.

Ratio: No. In general, the power of the courts to fix a longer term for a lease is discretionary. Such
power is to be exercised only in accordance with the particular circumstances of a case: a longer term
to be granted where equities demanding extension come into play; to be denied where none
appear -- always with due deference to the parties freedom to contract. Thus, courts are not bound to
extend the lease.

Furthermore, the extension of a lease contract must be made before the term of the agreement
expires, not after. Upon the lapse of the stipulated period, courts cannot belatedly extend or make a
new lease for the parties, even on the basis of equity. Because the Lease Contract ended on
September 15, 1996, without the parties reaching any agreement for renewal, respondents can be
ejected from the premises.

The foregoing doctrine was recently reiterated in Heirs of Amando Dalisay v. Court of Appeals. Thus,
pursuant to Fernandez, Dalisay and Article 1196 of the Civil Code, the period of the lease contract is
deemed to have been set for the benefit of both parties. Its renewal may be authorized only upon
their mutual agreement or at their joint will. Its continuance, effectivity or fulfillment cannot be
made to depend exclusively upon the free and uncontrolled choice of just one party.

In a reciprocal contract like a lease, the period of the lease must be deemed to have been agreed upon
for the benefit of both parties, absent any language showing that the term was deliberately set for the
benefit of the lessee or lessor alone.
Citing Koh v. Ongsiaco and Cruz v. Alberto, the MeTC upheld by the RTC and the CAruled
that the stipulation in the Contract of Lease providing an option to renew should be
construed in favor of and for the benefit of the lessee.
This ruling has however, been expressly reversed in Fernandez v. CA, from which we quote: It
is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease
must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are
not aware of any presumption in law that the term of a lease is designed for the benefit of the
lessee alone.
 Koh and Cruz in effect rested upon such a presumption. But that presumption cannot reasonably
be indulged in casually in an era of rapid economic change, marked by, among other things,
volatile costs of living and fluctuations in the value of the domestic currency.
The longer the period the more clearly unreasonable such a presumption would be. In an age
like that we live in, very specific language is necessary to show an intent to grant a
unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the
lessor alone for that matter. We hold that the above-quoted rulings in Koh v. Ongsiaco and
Cruz v. Alberto should be and are overruled.

5. When Debtor Loses Right to Make Use of Period

Art. 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes
insolvent, unless he give a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities
which he has promised;
(3) When by his own acts he has impaired said guaranties or securities
after their establishment, and when through a fortuitous event they
disappear, unless he immediately gives new ones equally
satisfactory;
(4) When the debtor violates any undertaking, in consideration of which
the creditor agreed to the period;
(5) When the debtor attempts to abscond.

Extinguishment of Debtors Right to Period

1. Insolvency understood in its ordinary or popular sense.
a. Includes any case in which it would not be possible financially for the debtor to
comply with his obligation
b. Insolvency of the debtor arose after the constitution of the obligation
c. Hence, if there is no guaranty or security for the debt,
Ex. D owes C P10,000.00 due and payable on December 20. If D becomes
insolvent, say on September 10, C, can demand immediate payment from D
even before maturity unless D gives sufficient guaranty or security. The
insolvency in this case need not be judicially declared. It is sufficient that the assets
of D are less than his liabilities or D is unable to pay his debts as they mature. Note
that the insolvency of D must occur after the obligation has been contracted.

2. Debtor does not furnish guaranties/securities promised

d. Ex. Where the debtor failed to register the mortgage over a parcel of land in
favor of the creditor in order to secure the loan and instead mortgaged it in
favor of the Rehabilitation Finance Corporation in order to secure another loan
e. Ex. Suppose in the same example, D promised to mortgage his house to
secure the debt. If he fails to furnish said security as promised, he shall lose
his right to the period.
 3. Debtor impairs guaranties or through fortuitous event they disappear
f. Two scenarios:
i. If the guaranty or security is impaired through the fault of the debtor, he
shall lose his right to the benefit of the period; however, if it is impaired
without his fault, he shall retain his right.
ii. If the guaranty or security disappears through any cause, even without any
fault of the debtor, he shall lose his right to the benefit of the period
g. but in both scenarios, debtor does not lose the right if he gives a new guaranty
i. ex. If the debt is secured by a mortgage on the house of D, but the house
was burned through his fault, the obligation also becomes demandable
unless D gives a new security equally satisfactory. In this case, the house
need not be totally destroyed as it is sufficient that the security be impaired
by the act of D.
ii. But in case of a fortuitous event, it is required that the security must
disappear. But if the security given deteriorates in such a manner as to
become illusory, it must be deemed to have disappeared or lost as
contemplated in paragraph 3.
iii. If the debt is secured by a bond, the failure of D to renew the bond or replace
it with an equivalent guarantee upon its expiration will likewise give C the right
to demand immediate payment.

4. When debtor violates an undertaking

h. Ex. suppose that C in the example agreed to the period in consideration of the
promise of D to repair the piano of C free of charge. The violation of this
undertaking by D gives C the right to demand immediate payment of the loan.

5. When the debtor attempts to abscond

i. Ex. Before the due date of the obligation, D (debtor) changed his address
without informing C (creditor) and with the intention of escaping from his
obligation. This act of D is a sign of bad faith which results in the loss of his
right to the benefit of the period stipulated.
j. Observe that a mere attempt or intent to abscond is sufficient.

6. Loss, Deterioration, or Improvement of Thing

Art. 1194. In case of loss, deterioration or improvement of the thing before the
arrival of the day certain, the rules of Article 1189 shall be observed.

Art. 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
 (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is
to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with
indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufructuary5.

Note: Consequently, the debtor cannot ask reimbursements for the expenses
incurred for useful improvements or improvements for mere pleasure. He can
only ask reimbursement for necessary expenses

Loss
A thing is lost when it:
1. Disappears in such a way that its existence is unknown or it cannot be recovered
(ex. A thing is stolen by unknown persons)
2. Perishes (house is destroyed completely by fire)
3. Goes out of the commerce of men (a thing is declared by law as contraband)

Deterioration
Any reduction or impairment in the substance or value of a thing which does not amount
to loss; the thing is less than when the obligation was constituted

Improvement
Anything added to incorporated in, or attached to the thing that is due

7. Premature Payment/Delivery

Art. 1195. Anything paid or delivered before the arrival of the period, the obligor
being unaware of the period or believing that the obligation has become due and
demandable, may be recovered, with the fruits and interests.

Effect of Advanced Payment or Delivery

if the obligor, being UNAWARE OF THE PERIOD or believing that the obligation
HAS BECOME DUE AND DEMANDABLE paid or delivered anything before the
arrival or expiration of the period,

5
the right to enjoy the use and advantages of another's property short of the destruction or waste of its substance.
 o he may RECOVER what he has paid or delivered with fruits and interests
only applies to OBLIGATIONS TO GIVE
if the payment/delivery was made VOLUNTARILY or WITH KNOWLEDGE OF
THE PERIOD no right to recovery

3. Alternative or Facultative
1. Definition

Art. 1199. A person alternatively bound by different prestations shall completely

perform one of them.

The creditor cannot be compelled to receive part of one and part of the other
undertaking.

Definition of Alternative Obligation

One where out of two or more prestations which may be given, only one is due
Limitation: the creditor cannot be compelled to receive part of one and part of the
other undertaking

Art. 1206. When only one prestation has been agreed upon, but the obligor may
render another in substitution, the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the

negligence of the obligor, does not render him liable. But once the substitution
has been made, the obligor is liable for the loss of the substitute on account of
his delay, negligence or fraud.

Facultative Obligation
An obligation wherein only one object or prestation has been agreed upon by the
parties to the obligation, but which may be complied with by the delivery of another or
the performance of another prestation in substitution.

EXAMPLES:
I will give you my piano but I may give my television set as a substitute.
o In this obligation, only the piano is due. Hence, its loss through my fault will
make me liable
I will mortgage my land to secure my debt which shall be payable within 90 days
upon my failure to pay my debt within 30 days.
o Here, I may mortgage my land in substitution of the obligation to make
payment within 30 days.

Communication is necessary to make substitution effective

EFFECT OF LOSS OF SUBSTITUTE IN FACULTATIVE OBLIGATION

Loss of the Thing Intended as Substitute
Before the substitution is made:
1. If due to bad faith or fraud of the obligor the obligor is liable
2. If due to the negligence of the obligor obligor is not liable

EXAMPLE:
S will give B item one or if S wants, item two.
a) If item one is lost through a fortuitous event, the obligation of S is extinguished.
(Arts. 1174, 1262.)
b) If item one is lost through the fault of S, S is liable for damages. (Art. 1170.)
c) If item two is lost with or without the fault of S, S is still liable to deliver item one
(see Art. 1165.); he is not liable for damage for the loss of item two as it is not due.

Note: It is submitted that whatever may be the cause of the loss or deterioration of the
thing intended as a substitute, such loss or deterioration shall not render the debtor
liable.

After substitution is made:

1. The loss or deterioration of the substitute on account of the obligors delay,
negligence or fraud obligor is liable because once substitution is made, the
obligation is converted into a simple one with the substituted thing as the object of
the obligation

EXAMPLE:
Based on the preceding example:
a) If item one is lost with or without the fault of S, S is not liable for its loss since his
obligation is to deliver item two.
b) If item two is lost through a fortuitous event, the obligation of S is extinguished.
c) If item two is lost through the fault of S, S is liable for damages.

Note: Creditor cannot be compelled to receive part of one and part of another
undertaking.

ALTERNATIVE FACULTATIVE
As to objects due
Several objects due Only one object due
As to compliance
May be complied with by the delivery of one May be complied with by the delivery of
of the objects or by the performance of one another object or by the performance of
of the prestations which are alternatively another prestation in substitution of which
due is due
As to the Effect of Fortuitous Loss
 Only the impossibility of all the prestations Impossibility of the principle prestation is
due without the fault of the debtor sufficient to extinguish the obligation, even
extinguished the obligation. if the substitute is possible
As to Choice
Right to choose may be given to the creditor Only the debtor can choose the substitute
As to Nature
Various prestations all of which constitute Only the principal prestation constitutes
parts of the obligation the obligation, the accessory being only a
means to facilitate payment
As to the Effect of the Nullity of Prestations
Nullity of one of the prestation does not Nullity of the principal prestation
invalidate the obligation which is still in force invalidates the obligation
with respect to those which have no vice
As to the effect of culpable loss
Culpable loss of any of the objects which Culpable loss of the object which the
are alternatively due before the choice is debtor may deliver in substitution before
made may give rise to a liability on the part the substitution is effected does not give
of the debtor rise to any liability on the part of such
debtor

ARCO PULP AND PAPER CO. INC, VS. LIM

G.R. No. 206806. June 25, 2014

Facts:
Dan, under the name Quality Paper and Plastic Products, Enterprises), delivered scrap papers
worth P7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its
Chief Executive Officer and President, Candida A. Santos.
The parties allegedly agreed that Arco Pulp and Paper would either pay Dan the value of the
raw materials or deliver to him their finished products of equivalent value.
When Dan deposited the partial payment check from Arco Pulp and Paper, on April 18, 2007, it
was dishonored for being drawn against a closed account.
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement where Arco Pulp and Paper bound themselves to deliver their finished products
to Megapack Container Corporation, owned by Eric Sy, for his account.
After demanding payment from Arco Pulp and Paper, Dan filed a complaint for collection of sum
of money with prayer for attachment with the Regional Trial Court, to which, Arco Pulp failed to
attend the pretrial hearing.
The trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the
complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished Arco Pulp and Papers obligation to
Dan.
In his appeal, Dan mentioned that novation did not take place since the memorandum of
agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement
between them.
 Petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated.

Issues:
1. Whether the obligation between the parties was extinguished by novation.
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorneys fees can be awarded.

Ruling: No. Petition denied.

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
A person alternatively bound by different prestations shall completely perform one of them. The
creditor cannot be compelled to receive part of one and part of the other undertaking.
In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election. The right of
election is extinguished when the party who may exercise that option categorically and
unequivocally makes his or her choice known. The choice of the debtor must also be
communicated to the creditor who must receive notice of it since: The object of this notice
is to give the creditor . . . opportunity to express his consent, or to impugn the election made
by the debtor, and only after said notice shall the election take legal effect when consented by
the creditor, or if impugned by the latter, when declared proper by a competent court.
Novation extinguishes an obligation between two parties when there is a substitution of
objects or debtors or when there is subrogation of the creditor. It occurs only when the new
contract declares so in unequivocal terms or that the old and the new obligations be
on every point incompatible with each other.
The consent of the creditor must also be secured for the novation to be valid: Novation must
be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce
a clear and unequivocal intent by the parties to novate the old agreement.
Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious
or in bad faith, and oppressive or abusive.

2. Right to Choose

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly
granted to the creditor.

The debtor shall have no right to choose those prestations which are impossible,
unlawful or which could not have been the object of the obligation.

Right of Choice in Alternative Obligations

General Rule: right of choice belongs to the debtor
o Ex. Debtor borrowed amount from creditor, the promissory note which he
executed expressly stipulated that he can fulfill his obligation either by the
 payment of the amount of the indebtedness or by the delivery of a house
and lot at an appraised valuation
Upon maturity of the note: debtor has a right to make a choice
Exceptions:
o Expressly granted to the creditor
o Expressly granted to third person

Limitations upon the Right of Choice

The debtor shall have no right to choose those prestations which are
1. Impossible
2. Unlawful
3. Which could not have been the object of the obligation
4. Those by reason of Accident or some other cause, have acquired a new character
distinct or different from that contemplated by the parties whne the obligation was
constituted
5. Those which are not yet Due or demandable at the time the selection was made
6. Undertakings that are not included among others from those which the obligor may
select

3. When Right to Choose Lost

Art. 1202. The debtor shall lose the right of choice when among the prestations
whereby he is alternatively bound, only one is practicable.

When Only One Prestation is Practicable

If only one prestation is practicable among the several alternative prestations, the
debtor loses his right of choice
Obligation becomes a simple obligation and loses its alternative character

Loss of Debtors Right to Choose in an Alternative Obligation

1202 1200 (2nd par.)
There is only one prestation that can be There are still two or more which can be
performed performed
Obligation is converted into a simple one Obligation is still alternative beause the
because debtor loses his right of election debtor can still exercise his right of
election

4. When Choice Effective

Art. 1201. The choice shall produce no effect except from the time it has been
communicated.

When notice produces effect

The choice shall produce effect ONLY UPON COMMUNICATION of the choice to the
other party

Notice of selection may be in any form provided that it is sufficient to make the other
party know that the election has been made. It may be:
1. Orally
2. In Writing
3. Tacitly
a. Performance by the debtor who has the right to choose or in the acceptance
of prestation by the creditor when he has a right of selection
b. When the creditor sues the debtor for the performance of one of the
prestation

Communication of notice that choice has been made

1. Effect of notice until the choice made and communicated, the obligation remains
alternative
k. Once the notice of the election has been given to the creditor, the obligation
ceases to be alternative and becomes simple
l. Such choice once properly made and communicated is irrevocable and
cannot, therefore, be renounced, such rule is inherent in the nature of the choice
its purpose being to clarify and render definite the rights of the one exercising
the choice, so that the other party may act in consequence
m. Where the choice has been expressly given to the creditor, such choice shall
likewise produce legal effects upon being communicated to the debtor.
2. Proof and form of notice. The burden of proving that such communication has
been made is upon him who made the choice. The law does not require any
particular form regarding the giving of notice. It may, therefore, be made orally or in
writing, expressly or impliedly.

A person alternatively bound by different prestations shall completely perform one of

them.

Limitation: the creditor cannot be compelled to receive part of one and part of the other
undertaking

Effect of Notice of Choice:

1. Limits the obligation to the object or prestation selected with all the
consequences which the law provided
2. The obligation is converted to a simple obligation to perform the prestation
chosen
3. Once the selection has been communicated, it becomes irrevocable
Note: the law does not require the other party to consent to the choice made by the party
entitled to choose unless the debtor has chosen prestation which could not have been
the object of the obligation and the creditor consents thereto which amount to a novation.

The right to choose is not lost by the mere fact that the party entitled to choose
delays in making his selection.

In case the person entitled to choose, does not make his selection, the other party
can ask the court for a 3rd party to choose.

5. When Creditor Makes Choice Impossible

Art. 1203. If through the creditors acts the debtor cannot make a choice according
to the terms of the obligation, the latter may rescind the contract with damages.

When Choice is Rendered Impossible

Since the debtors right of choice is rendered ineffective through the creditors
fault, his only possible recourse is rescission of contract with damages

When debtor may rescind contract

Rescission creates the obligation to return the things which were the object of the
contract together with their fruits, and the price with its interest
It is the very nature of an alternative obligation that the debtor can make his
choice without the consent of the creditor
Hence, the right given the debtor to rescind the contract and recover damages if,
through the credtiors fault, he cannot make a choice according to the terms of
the obligation
THE DEBTOR HOWEVER IS NOT BOUND TO RESCIND

EXAMPLE:
- D borrowed from C P20,000.00. It was agreed that instead of P20,000.00, D could
deliver item one, or item two, or item three.
- If through the fault of C, item one is destroyed, D can rescind the contract if he
wants. In case of rescission, the amount of P20,000.00 must be returned by D with
interest. C, in turn, must pay D the value of item one plus damages.
- D, instead of rescinding the contract, MAY CHOOSE ITEM TWO OR THREE WITH
A RIGHT TO RECOVER THE VALUE OF ITEM ONE WITH DAMAGES. If D
chooses item one, his obligation is extinguished. C is not liable for damages.

6. When Creditor Entitled to Damages

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

The indemnity shall be fixed taking as a basis the value of the last thing which
disappeared, or that of the service which last became impossible.

Damages other than the value of the last thing or service may also be awarded.

When creditor is entitled to indemnity for damages

When through the fault of the debtor:
1. All the things which are alternatively the object of the obligation have been lost
2. Compliance of the obligation has become impossible unless due to fortuitous event

Note: The indemnity shall be fixed based on the value of the last thing which
disappeared or that of the service which last became impossible

Effect of Loss of Objects of Alternative Obligation

1. Due to Fortuitous Event
a. All are lost debtor is released from the obligation
b. Some but not all are lost deliver that which he shall choose from among
the remainder
c. Only one remains deliver that which remains
2. Debtors fault
a. All are lost creditor shall have a right to indemnity for damages based on
the value of the last thing which disappeared or service which become
impossible
b. Some but not all are lost deliver that which he shall choose from among
the remainder without damages
c. Only one deliver that which remains

EXAMPLE:
- S agreed to deliver item one, or item two, or item three.
- If item one is lost through the fault of S, he can still select either item two or item three.
The loss of item one and two with or without the fault of S will reduce the obligation to
a simple one.
- If all the items are lost through his fault, liability will attach; if through a fortuitous event,
the obligation will be extinguished.

Basis of Indemnity
the value of the last thing which disappeared (referring to obligations to give)
that of the service which last became impossible (referring to obligations to do)
 In case of disagreement, it is incumbent upon the creditor to prove such value, or
which thing last disappeared or which service last became impossible.

EXAMPLE:
- In the above example, if items one and two are lost, S will be bound to deliver item
three.
- If subsequently, item three is also lost through the fault of S, the basis for indemnity
is the value of item three since S would have been bound to deliver it had it not
also been lost. The liability of S is not affected although the loss of items one and
two was through a fortuitous event.
- If item three is lost without the fault of S, his obligation is extinguished and he shall
not be liable for damages although the loss of items one and two was due to his
fault. The reason is that after the loss of items one and two, the obligation is
converted into a simple one to deliver item three. (Art. 1202.)
- S cannot be held responsible for the loss of items one and two through his fault
because having the right of choice, he was not bound to deliver either. The rule is
just since he could have been liable for damages if item three instead was lost
through his fault and items one and two, through a fortuitous event.

7. When Creditor has Right of Choice

Art. 1205. When the choice has been expressly given to the creditor, the obligation
shall cease to be alternative from the day when the selection has been
communicated to the debtor.

Until then the responsibility of the debtor shall be governed by the following rules:
1) If one of the things is lost through a fortuitous event, he shall perform the
obligation by delivering that which the creditor should choose from among
the remainder, or that which remains if one only subsists;
2) If the loss of one of the things occurs through the fault of the debtor, the
creditor may claim any of those subsisting, or the price of that which,
through the fault of the former, has disappeared, with a right to damages;
3) If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity for
damages.
4) The same rules shall be applied to obligations to do or not to do in case one,
some or all of the prestations should become impossible.

When right of choice belongs to creditor

In alternative obligations, the right of choice, as a rule, belongs to the debtor
The debtor may expressly give the right of choice to the creditor

When Choice Belongs to Creditor

1. Due to fortuitous vent
 a. All are lost debtor is released from the obligation
i. The obligation of S shall be extinguished if all the items which are
alternatively the object of the obligation are lost through a fortuitous
event. In this case, Article 1174 shall apply.
b. Some but not all are lost deliver that which he shall choose from among
the remainder
c. Only one remains deliver that which remains
i. S obliged himself to deliver to B item one, or item two or item three, or
item four. If item one is lost through a fortuitous event, B can choose
from among the remainder or that which remains if three of the items
are lost.

2. Debtors fault
a. All are lost creditor may claim the price/value of any of them with indemnity
for damages
i. Ex. If all the items are lost through the fault of S, then B can demand
the payment of the price of any one of them with a right to indemnity
for damages.
b. Some but not all are lost creditor may claim any of those subsisting without
a right to damages OR price/value of the thing lost with right to damages
i. If the loss of item one occurs through the fault of S, B may claim item
two or item three or item four with a right to damages or the price of
item one also with a right to damages.

4. Joint and Solidary

KINDS OF OBLIGATION ACCORDING TO THE NUMBER OF PARTIES.
They are:
(1) Individual obligation.one where there is only one obligor and one obligee; and
(2) Collective obligation.one where there are two or more debtors and/or two or
more creditors. It may be joint or solidary.

In a collective obligation, there are two relations involved:

a. between the creditor and the debtors (or the creditors and the debtor, or the
creditors and the debtors) and
b. that among the creditors and/or debtors themselves.

1. When Solidary

Art. 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire compliance
with the prestation. There is a solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation requires solidarity.

Solidary Obligation
Each one of the debtors is bound to render, and/or each one of the creditors has
a right to demand entire compliance with prestation

Solidary liability is determined by the tenor of the contract, not by judicial

admission by the party

Note: Even if the parties stipulated in their contract that the obligation of the debtor is
solidary, but such was superseded by a judicial decision declaring the obligation to be
merely joint, the said decision must be enforced in a joint manner

Characteristics, essence and basis of a solidary obligation

(1) Every solidary obligation has these characteristics: unity of object and plurality of
ties. The prestation due, or to which a right exists, is one and the same thing
(2) The essence of solidarity is that each and every one of the solidary creditors can
demand and each of the debtors must satisfy the same prestation, with the with
the resulting duty on the part of the creditor who received payment to pay to each
of his co-creditors what belongs to him, and the resulting right on the part of the
debtor who made payment to claim from his co-debtors the share which
corresponds to each.
(3) The basis of solidarity in either case has something of a legal fiction, i.e., that it is
a mutual agency (see 4 Sanchez Roman 50.) among those interested in the same
obligation.

When obligation solidary.

Solidary liability is not lightly inferred. Under Article 1207, there is solidary liability only
when:
(1) the obligation expressly so states; or
(2) the law requires solidarity; or
(3) the nature of the obligation requires solidarity.
Solidary liability also exists when it is imposed in a final judgment against several
defendants.

Examples of words used to indicate solidarity:

severally, jointly and/or severally
solidarily
together and/or separately
individually and/or collectively
I promise to pay signed by two or more persons
It has been held that the words individually and jointly create a solidary liability
 Solidary obligations may be used interchangeably with joint and several or
several

Solidarity not presumed.

The presumption, where there are two or more persons in the same obligation, is that it
is joint. The reason is that solidary obligations are very burdensome for they create
unusual rights and liabilities. Solidarity between debtors increases their responsibility
while solidarity between creditors increases the right of each creditor. The law tends to
favor the debtors in presuming that they are bound jointly and not solidarily.

INCIONG VS. CA
GR 96405. 26 June 1996
FACTS:
Petitioner Inciongs liability resulted from the promissory note in the amount P50,000.00 which
he signed with Rene Naybe and Gregorio Pantanosas, holding themselves jointly and
severally liable to private respondent Philippine Bank of Communications (PBCom).
Promissors failed to pay on the due date of the promissory note, despite the demand letters
sent to them. Thus, PBCom filed a complaint for collection of sum of money against the 3
promissors/obligors.
The sheriff was only able to serve summons to petitioner, because Naybe was out of the
country, while the Pantanosas was removed as a party on motion of private respondent.
In his answer, petitioner alleged that he was only a co-maker for the loan obtained, and that he
only bound himself for the amount of P5,000.00. Nevertheless, the RTC found his
claims/allegations without merit.
RTC rendered judgment in favor of PBCom and found petitioner solidarily liable to pay.
On appeal, CA affirmed the judgment of the trial court.
Hence this petition.
ISSUE: Whether the petitioner, as co-maker, maybe held liable to pay the loan
RULING: Yes.
The Court held that petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. While a guarantor may bind himself solidarily with the principal debtor, the liability of
a guarantor is different from that of a solidary debtor.
Art. 1207 (NCC) provides that when there are two or more debtors in one and the same
obligation, the presumption is that the obligation is joint so that each of the debtors is liable
only for a proportionate part of the debt. There is a solidary liability only when the obligation
expressly so states, when the law so provides or when the nature of the obligation so
requires.
In the case at bar, the promissory note involved expressly states that the three signatories
therein are jointly and severally liable, any one, some or all of them may be proceeded against
for the entire obligation. The choice is left to the solidary creditor to determine against whom
he will enforce collection.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility.
 INDIVISIBILITY SOLIDARITY
As to Nature
Refers to the prestation that is not Refers to the legal tie or vinculum juris
capable of partial performance and consequently to the subjects or
parties of the obligation
As to Plurality of Subjects
Exists even if there is only one creditor Exists only if there is more than one
and one debtor creditor or more than one debtor
As to the Rights of the Creditor
Each creditor cannot demand more than Each creditor may demand the entire
his share and each debtor is not bound to prestation and each debtor is bound to
pay more than his share pay the entire prestation
As to the Effect of Breach
Obligation is converted into indemnity for Solidarity remains
damages; indivisibility is terminated
As to the Liability of the Debtors
Only the debtors guilty of breach of All the debtors are liable for the breach of
obligation is liable for damages the obligations committed by a debtor
As to the Effect of the Insolvency of the Debtors
Other debtors are not liable if one debtor All debtors are proportionately liable for
is insolvent the insolvency of one debtor

Art. 1211. Solidarity may exist although the creditors and the debtors may not be
bound in the same manner and by the same periods and conditions.

Kinds of Solidarity
1. As to the Parties bound:
a. Active solidarity on the part of the creditors, where any one of them can
demand the fulfillment of the entire obligation
i. Effect: mutual representation among the solidary creditors with
powers to exercise the rights of others in the same manner as their
rights
b. Passive solidarity on the part of the debtors
i. Effect: mutual guaranty relationship is created
ii. Each debtor is the debtor of the entire amount, however, with respect
to his co-debtors, he is a debtor only to the extent of his share in the
obligation
iii. The liability of each debtor for the payment of the entire obligation, with
the consequent right to demand reimbursement from the others for their
corresponding shares once payments has been made
c. Mixed solidarity on the part of the debtors and the creditors, where each
one of the debtors is liable to render, and each one of the creditors has a right
to demand entire compliance with the obligation
 2. As to Uniformity
a. Uniform parties are bound by the same stipulations
b. Non-uniform or varied parties are not subject to the same stipulation
3. As to Source
a. Legal imposed by law
b. Conventional agreed upon by the parties
c. Real imposed by the nature of the obligation
Effect: Creditor can commence an action against anyone of the debtors for
compliance with the entire obligation minus the portion or share which
corresponds to the debtor affected by the condition or period

SOLIDARITY VS. SURETY

PASSIVE SOLIDARY DEBTOR SURETY (SOLIDARY GUARANTOR)
- Person who binds himself solidarily
with the principal debtor
As to Liability
Both are solidarily liable to the creditor for the payment of the entire obligation
As to the extent of the liability
Liable not only for the payment of the Liable only for the debt of another
debt of the another, but also for the
payment of a debt which is properly his
own
As to the Right of Reimbursement
Has a right to demand reimbursement Acquires a right of reimbursement from
from his co-debtors of their shares if he the principal debtor of the entire amount
pays the entire amount of the obligation. he has paid
As to the Effect of the Extension of Time
An extension of time granted by the An extension of time granted by the
creditor to one of the solidary debtors creditor to the principal debtor would
without the knowledge of the other release the surety from obligation.
solidary debtors would not have the effect
of releasing the latter from obligation

LEFARGE CEMENT VS. CONTINTENTAL CEMENT

GR 155173. 23 November 2004
FACTS:
On August 11, 1998, a Letter of Intent (LOI) executed by both parties, whereby Petitioner Lafarge
Cement Philippines, Inc. (Lafarge)on behalf of its affiliates and other qualified entities, including
Petitioner Luzon Continental Land Corporation (LCLC)agreed to purchase the cement
business of Respondent Continental Cement Corporation (CCC).
Both parties entered into a Sale and Purchase Agreement (SPA)
At this time, petitioners were well aware that CCC had a case pending with the Supreme court
(Asset Privatization Trust (APT) v. CA and CCC)
 In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties
under Clause 2 of the SPA, allegedly agreed to retain from the purchase price a portion of the
contract price in the amount of P117, 020, 846.84
o This amount was to be deposited in an interest-bearing account in the First national City
Bank of New York for payment to APT (petitioner in the case mentioned)
HOWEVER, petitioners allegedly refused to apply the sum to the payment to APT despite the
subsequent finality of the decision of the case
Fearful that nonpayment to APT would result in foreclosure, CCC filed before the RTC a
Complaint with Application for Preliminary Attachment praying that petitioners be
directed to pay the APT Retained Amount referred to Clause 2 of the SPA
Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on
forum shopping, respondent CCC allegedly made the same claim
The trial court denied the Motion to dismiss, petitioners elevated the matter to the CA
In the meantime, to avoid being in default, petitioners filed their Answer and Compulsory
Counterclaims ad Cautelam denying the allegations of the complaint
o They prayed, by way of compulsory counterclaims against respondent CCC, its
majority stockholder and president Gregory Lim and its corporate secretary
Anthony A. Mariano for actual, exemplary, moral damages and attorneys fees
o Petitioners alleged that CCC, through Lim and Mariano had filed the baseless
Complaint and procured the Writ of Attachment in bad faith
o Petitioners, based on Sapugay vs CA, prayed that both Lim and Mariano be held
jointly and solidarily liable with Respondent CCC
RTC dismissed the petitioners counterclaims holding that, among others, the Sapugay v CA
decision is inapplicable here.
ISSUE: Whether defendants in civil cases may implead in their counterclaims persons who were not
parties to the original complaints.
RULING: Yes.
In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be
included in a counterclaim, except when no complete relief can be had.
We disagree. The inclusion of a corporate officer or
stockholderCardenas in Sapugay or Lim and Mariano in the instant caseis not premised on the
assumption that the plaintiff corporation does not have the financial ability to answer for
damages, such that it has to share its liability with individual defendants. Rather, such inclusion
is based on the allegations of fraud and bad faith on the part of the corporate officer or
stockholder.
Thus, there is no debate on whether, in alleging bad faith on the part of Lim and Mariano the
counterclaims had in effect made them indispensable parties thereto; based on the
alleged facts, both are clearly parties in interest to the counterclaim.
While the Court does rule that the counterclaims against Respondent CCCs president and
manager may be properly filed, the determination of whether both can in fact be held jointly and
severally liable with respondent corporation is entirely another issue that should be ruled upon
by the trial court.
Petitioners prayed for damages characterizing their counterclaim for damages against
respondents CCC, Lim and Mariano as joint and solidary
o Obligations may be classified as either joint or solidary. Jointor jointly or conjoint
means mancum or mancomunada or pro rata obligation; on the other hand, solidary
obligations may be used interchangeably with joint and several or several. Thus,
petitioners usage of the term joint and solidary is confusing and ambiguous.
o Obligations arising from tort are, by their nature, always solidary.
 o The fact that the liability sought against the corporation is for specific performance and
tort, while that sought against the individual respondents is based solely on tort does not
negate the solidary nature of their liability for alleged tortuous acts.
In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of
the obligation, from circumstances personal to it, or even from those personal to its co-debtors.
The ambiguity in petitioners counterclaims notwithstanding, respondents liability, if proven, is
solidary.
o This characterization finds basis in Article 1207 of the Civil Code, which provides that
obligations are generally considered joint, except when otherwise expressly stated or
when the law or the nature of the obligation requires solidarity
However, obligations arising from tort are, by their nature, always solidary.
The fact that the liability sought against the CCC is for specific performance and tort, while that
sought against the individual respondents is based solely on tort does not negate the solidary
nature of their liability for tortuous acts alleged in the counterclaims.
Article 1211 of the Civil Code is explicit on this point: Solidarity may exist although the creditors
and the debtors may not be bound in the same manner and by the same periods and conditions.
The solidary character of respondents alleged liability is precisely why credence cannot be given
to petitioners assertion.
According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on
grounds that pertain solely to its individual co-debtors.
In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of
the obligation, from circumstances personal to it, or even from those personal to its co-debtors.
Article 1222 of the Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible. (Emphasis supplied).

The act of Respondent CCC as a solidary debtor - that of filing a motion to dismiss the
counterclaim on grounds that pertain only to its individual co-debtors - is therefore allowed.

2. When Joint

Art. 1208. If from the law, or the nature of the wording of the obligations to which
the preceding article refers the contrary does not appear, the credit or debt shall
be presumed to be divided into as many equal shares as there are creditors or
debtors, the credits or debts being considered distinct from one another, subject
to the Rules of Court governing the multiplicity of suits.1

Joint Obligation
The whole obligation is to be paid or fulfilled proportionately by different debtors or
demanded proportionately by different creditors

Nature of Joint/Collective Obligation

General Rule: Obligation is presumed joint if there is concurrence of several creditors
or of several debtors or of several creditors and debtors in one and the same obligation
Exceptions:
1. The Obligation expressly states that there is solidarity (i.e. Jointly and severally,
individually and collectively, I promise to pay followed by the signatures of two or
more persons)
2. The Law requires solidarity i.e. tort, quasi-contracts, liability of principals,
accomplices and accessories of a felony obligations of devisees and legatees,
bailees in commodatum
Note: Our law recognizes solidary responsibility for wrongful acts whether
they are crimes or quasi-delicts. A moral wrong cannot be divided into parts;
hence the liability for it must be solidary
3. Nature of the obligation requires solidarity
4. When a solidary responsibility is imputed by a Final judgment upon several
defendants
5. When a charge or condition is imposed upon heirs or legatees, and the Testament
expressly makes the charge or condition in solidum

EXAMPLES:
(1) A, B, and C borrowed P9,000.00 from D. The presumption is that A, B, and C are
jointly liable.
Here, there are three (3) debts and one (1) credit. D can demand only P3,000.00
each from A, B, and C or a total of P9,000.00.
Since the debts are distinct and separate from each other, the insolvency of one of
the debtors shall not make the others liable.
(2) A borrowed from B, C, and D P9,000.00. Unless the contrary appears, the obligation
is prima facie a joint one.
In this case, there is one (1) debt and three (3) credits. Each creditor can demand
only P3,000.00 from A.
(3) A and B are liable to C and D for P9,000.00. The same presumption applies. There
are two (2) debts and two (2) credits.
Each creditor can demand only P4,500.00 from either debtor. Of course, the total
liability of A or B, and the total collection of C or D, cannot exceed P4,500.00.

Principal Effects of Joint Liability

1. Vices of each obligation arising from the personal defect of a particular debtor or
creditor does not affect the obligation or right of the others
2. Insolvency of one debtor does not make others responsible for his share
3. Demand by the creditor on one joint debtor puts him in default, but not the others
since the debts are distinct
4. When the creditor interrupts the running of the prescriptive period by demanding
judicially from one, the others are not affected
5. Defenses of one debtor are not necessarily available to the others

Words used to indicate joint liability

 Mancum, mancomunada, mancomunadamente; pro rata;
Proportionately; pro rata, jointly, conjoint
we promise to pay signed by two or more persons
an admission of two debtors in their brief that their liability in the contract is a
solidary one does not convert the joint character of their obligation as appearing in
their contract for what determines the nature of the obligation is the tenor of their
contract itself, not admission of the parties

PH CREDIT VS CA.
GR No. 155173. 22 November 2001

Facts:
PH Credit sued Pacific Lloyd Corp., Carlos Farraled, Thomas H. Van Sebille, and Federico C. Lim
for a sum of money.
Judgment was rendered on 31 January 1984 in favor of PH Credit.
Dispositive portion of the decision: Pacific Lloyd Corp., Thomas H. Van Sebille, and Federico C.
Lim were odered to pay PH Credit the following:
- P118,814.49 with 18% interest yearly from 20 December 1982 until full payment;
- Surcharge (Additional payment) of 16% yearly from 20 December 1982;
- Penalty charge of 2% monthly from 20 December 1982;
- Attorneys fees and costs of suit.
Writ of execution was issued and implemented by the Deputy Sheriff.
Personal and real properties of Carlos M. Ferrales were levied and sold at public auction
wherein PH Credit Corp. was the highest bidder.
27 July 1990 and 26 October 1990 an order and writ of possession were issued respectively.
Ferrales filed an Urgent Motion for Reconsideration and/or to Suspend the Order dated 16 October
1990, to declare the order and writ of possession null and void.
However, the RTC and CA deemed the case moot because assailed order and writ were already
declared of no force and effect by the Judge who rendered the same.
Thus the CA affirmed that the auction sale of Ferrales real property and the writ of possession
thereof as null and void. Provided that the liability of Ferrales was merely joint and not solidary.
Thus, there was no legal basis for levying and selling her real and personal properties to satisfy the
whole obligation.
Hence, this petition.
Issue: Whether or not Ferrales obligation is solidary making her real and personal properties liable to
satisfy the entire obligation.

Ratio: No. According to Art. 1207 the concurrence of two or more creditors or of two or more debtors
in one and the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestations. There is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity. A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation from
any or all of the debtors. On the other hand, a joint obligation is one in which each debtors, is
liable only for a proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor. The well-entrenched rule is that solidary
obligations cannot be inferred lightly. They must be positively and clearly expressed. A liability is
solidary only when the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires.

Thus, in determining whether a debtors obligation is joint or solidary, the Court looks into the judgment
rendered by the lower court and considers Art. 1208. If from the law, or the nature or the wording of
the obligations to which the preceding article refers[,] the contrary does not appear, the credit or debt
shall be presumed to be divided into as many equal shares as there are creditors or debtors x x x. The
dispositive portion thus becomes the subject of execution and the other parts of the decision may be
resorted to in order to determine the ratio decidendi for the disposition.

In the case, the SC declares Ferrales obligation as joint because the word solidary neither appears
nor can be inferred from the dispositive portion. Furthermore, even if PH Credit argued that the CA
erred in disregarding the text of the assailed decision of the RTC, whereby they failed to infer therefrom
that Ferrales obligation is solidary, the Court has to disagree with PH Credit because where there is a
conflict between the dispositive portion and the opinion of the court in the body of the decision, the
dispositive portion must prevail.

3. Joint Indivisible Obligation

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced
only by their collective acts, and the debt can be enforced only by proceeding
against all the debtors. If one of the latter should be insolvent, the others shall not
be liable for his share.

Joint Indivisible Obligation

Midway between joint and solidary obligations, preserving the two characteristics of the
joint obligation, in that no creditor can do an act prejudicial to others and no debtor can
be made to answer for others.

Characteristics
1. No creditor can act in representation of the other
a. Note: if not all of the creditors demand the prestation, the debtor may legally
refuse to deliver to them or he can insist that all the creditors together receive
the thing, and if any of them refuses to join the others, the debtor may deposit
the thing by way of consignation
2. No debtor can be compelled to answer for the liability of others
a. Note: if there are two or more debtors, the fulfillment of or compliance with the
obligation requires the concurrence of all the debtors, although each for his
own share
 b. In case of insolvency of one of the debtors, the others shall not be liable for his
shares. To hold otherwise would destroy the joint character of the obligation.

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from
the time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the
value of the service in which the obligation consists.

Ex. Delivery of a horse or of an automobile, the obligation can be enforced only by

proceeding against all of the debtors

Breach of Joint Indivisible Obligation

Obligation can be enforced only by proceeding against all of the debtors
If anyone of the debtors should fail or refuse to comply with the obligation, it is
converted into one of indemnity for damages
Debtors who may have been ready to comply with what is incumbent upon them
shall not contribute to the indemnity beyond the corresponding portion of the price
of the thing or the value of the service in which the obligation consists
The debtor who failed or refused to comply with the prestation shall bear the
burden of paying all of the damages to the creditor/s and shall indemnify the other
debtors for damages suffered as a result of the transformation of the obligation into
one of indemnity

EXAMPLES:
(1) A, B, and C are jointly liable to give D a car valued at P240,000.00. On the date
of delivery, A and B are willing to deliver but C is not.

In this case, D has no cause of action against C for the delivery of the car because, as
a joint-debtor, C is liable only for a proportionate part of the obligation which is
P80,000.00. Since the object (car) is indivisible, the debt can only be enforced by
proceeding against all the debtors for compliance is not possible unless they act
together.

Pursuant to Article 1224 (infra.), the liability is converted into one for damages. So,
A, B, and C will be liable for P80,000.00 each or a total of P240,000.00 which is the
value of the car without increase of responsibility for A and B. C, the unwilling
debtor, shall be liable for damages to D for having violated the obligation.

If A and B suffered damages by reason of the non-fulfillment by C, they may recover

them from C.

Should anyone of the debtors be insolvent, the others shall not be liable for their share.
(Art. 1209.) D must wait until the insolvent debtor can pay.
 4. Right and Obligations of Solidary Creditors
a) Useful and Non-Prejudicial Acts

Art. 1212. Each one of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudicial to the latter.

Effects of Prejudicial and Beneficial Acts:

1. Each one of the solidary creditors may do whatever may be useful or beneficial to
the others, but not anything which may be prejudicial to the latter
2. As far as the debtor/s is/are concerned, a prejudicial act performed by a solidary
creditor is valid and binding, as between the solidary creditors, the creditors who
performed such act shall incur the obligation of indemnifying the others for
damages

Reason: Art. 1212 must be harmonized with Art. 1215 (the novation, compensation,
confusion or remission of the debt shall result in the extinguishment of the obligation, but
the solidary creditor responsible for the act shall be liable) which expressly recognizes
the effectiveness of acts of extinguishment of a solidary creditor

QUIOMBING VS. CA
GR 93010. 30 August 1990

FACTS:
In a Construction and Service Agreement concluded on August 30, 1983, Nicencio Tan
Quiombing and Dante Biscocho, (First Party) jointly and severally bound themselves to
construct a house for private respondents Francisco and Manuelita Saligo (Second Party),
for the contract price of P137, 940 which the second party agreed to pay
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written
agreement under which the latter acknowledged the completion of the house and undertook to
pay the balance of the contract price in the manner prescribed in the said second agreement.
On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50
representing the amount still due from her and her husband, payable on or before December
31, 1984, to Nicencio Tan Quiombing
October 9, 1986, Quiombing filed a complaint for recovery of the said amount which the
private respondents had acknowledged and promised to pay
Instead of filing an answer, the defendants moved to dismiss the complaint contending
that Biscocho was an indispensable party and therefore should have been included as a co-
plaintiff.
The complaint was dismissed, but without prejudice to the filing of an amended complaint to
include the other solidary creditor as a co-plaintiff
Quiombing chose to appeal the order of dismissal, where he argued that as a solidary creditor
he could act by himself alone in the enforcement of his claim against the private respondents.
Moreover, the amounts due were payable only to him under the second agreement, where
Biscocho was not mentioned at all.
 CA affirmed the trial court contending that the second agreement referred to the Construction
and Service Agreement as its basis and specifically stated that it (was) merely a part of the
original agreement.

ISSUE: Whether the second solidary creditor is an indispensable party to the complaint.

RULING: No.
- Article 1212 of the Civil Code provides: Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be prejudicial to the latter.
- Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by
himself alone.
- It does not matter who between them filed the complaint because the private respondents
were liable to either of the two as a solidary creditor for the full amount of the debt.
- Full satisfaction of a judgment obtained against them by Quiombing would discharge their
obligation to Biscocho, and vice versa; hence, it was not necessary for both Quiombing and
Biscocho to file the complaint.
- although he signed the original Construction and Service Agreement, Biscocho need not be
included as a co-plaintiff in the complaint filed by the petitioner against the private
respondents.
- Quiombing as solidary creditor can by himself alone enforce payment of the construction costs
by the private respondents and as a solidary debtor may by himself alone be held liable for any
possible breach of contract that may be proved by the private respondents.
- In either case, the participation of Biscocho is not at all necessary, much less indispensable.

Regarding joint vs. solidary obligations:

- A joint obligation is one in which each of the debtors is liable only for a proportionate part of the
debt, and each creditor is entitled only to a proportionate part of the credit.
o each creditor can recover only his share of the obligation, and each debtor can be made
to pay only his part
- A solidary obligation is one in which each debtor is liable for the entire obligation, and each
creditor is entitled to demand the whole obligation.
o each creditor may enforce the entire obligation, and each debtor may be obliged to pay
it in full.
- The same work describes the concept of active solidarity thus: The essence of active
solidarity consists in the authority of each creditor to claim and enforce the rights of all,
with the resulting obligation of paying every one what belongs to him; there is no merger, much
less a renunciation of rights, but only mutual representation.

b) Not to Assign Rights

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

Effect of Assignment of Rights in Solidary Obligations

General Rule: A solidary creditor cannot assign his right as it is predicated upon mutual
confidence, i.e., personal qualification of each creditor had been taken into consideration
Exceptions:
1. Assignment to a co-creditor
2. Assingment is with the consent of co-creditor

If the assignment is made to anyone of the other solidary creditors, it is clear that there
is no violation of the precept stated in Art. 1213, because in such case there can be no
invasion of the personal or confidential relationship existing among the solidary creditors.

However, if the assignment is made to a third person, there would be a clear violation of
the precept, in which case the other solidary creditors, as well as the debtor or debtors,
are not bound to recognize the validity or the efficacy of the assignment.

5. Who Debtor Must Pay

Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand,
judicial or extrajudicial, has been made by one of them, payment should be made
to him.

To Whom Payment Made in Solidary Obligation

General Rule: Payment may be made to any of the solidary creditors
Exception: if demand, judicial or extra-judicial, has been made by one of them, payment
should be made to him

Reason: When one creditor makes an extrajudicial or judicial demand for payments, the
tacit representation by the other creditors iss considered revoked and during the
pendency of the action, the creditors who did not sue lose their representation of the
others.

6. When Solidary Creditor Extinguishes Obligation

Art. 1215. Novation, compensation, confusion or remission of the debt, made by

any of the solidary creditors or with any of the solidary debtors, shall extinguish
the obligation, without prejudice to the provisions of Article 1219.

The creditor who may have executed any of these acts, as well as he who collects
the debt, shall be liable to the others for the share in the obligation corresponding
to them.

Novation = change or substitution of an obligation by another, resulting in its

extinguishment or modification, either by changing its object or principal condition, or by
by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor

Effect of Novation
 1. If prejudicial, the solidary creditor who effected the novation shall reimburse the
others for damages incurred by them
2. If beneficial and the creditor who effected the novation is ble to secure performance
of the obligation, such creditor shall be liable to the others for the share which
corresponds to them, not only in the obligation, but also in the benefits
3. If effected by substituting another person in place of the debtor, the solidary creditor
who effected the novation is liable for the acts of the new debtor in case there is
deficiency in performance or in case damages are incurred by the other solidary
creditors as a result of the substitution
4. If effected by subrogating a third person in the rights of the solidary creditor
responsible for the novation, the obligation of the debtor or creditors is not in reality
extinguished, because in this type of novation the relation between the other
creditors not substituted and the debtor or debtors is still maintained.
5. if the novation is effected by subrogating a third person in the rights of all the
solidary creditors, the creditor responsible for such novation is liable to the other
creditors for the share which corresponds to them in the obligation.

Compensation = a figurative operation of weighing two obligations simultaneously in

order to extinguish them to the extent that the amount of one is covered by the amount
of the other

Confusion = the merger of the qualities of creditor and debtor in one and the same
person with respect to one and the same obligation.

Compensation and Confusion

1. If partial, rules on application of payment shall apply, without prejudice to the right
of the other creditors who have not caused the confusion or compensation to be
reimbursed to the extent that their rights are diminished or affected
2. If total, the obligation is extinguished altogether and what is left is the ensuing
liability for reimbursement within each group, the creditor causing the confusion or
compensation being obliged to reimburse the other creditors, and the debtors
benefited by the extinguishment of the obligation being obliged to reimburse the
debtor who made the confusion or compensation possible.

Remission = an act of pure liberality by virtue of which the creditor, without having
received any compensation or equivalent, renounces his right to enforce the obligation,
thereby extinguishing the same either in its entirety or in the part or aspect thereof to
which the remission refers

Effect of Remission
1. If entire obligation, obligation is totally extinguished but the solidary debtor
who obtained it does not entitle him to reimbursement from his co-debtors
Reason: said debtor gives or loses nothing
 2. If for the benefit of one of the debtors and it covers his entire share in the
obligation, he is completely released from the creditor or creditors,
3. If for the benefit of one of the debtors and it covers only a part of his share in
the obligation, his character as a solidary debtor is not affected;
4. If there is total or partial remission and if the creditor/s proceed against any
one of the solidary debtors for the payment of the entire obligation, such debtor
can always avail himself of the defense of partial remission.

The above rules cannot be applied in case the debt has been totally paid by anyone of
the solidary debtors before the remission was effected.

7. Who Creditor May Proceed Against

Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.

Effect of Demand upon a Debtor

- The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others so long as the debt had not been
fully collected
- The creditor may proceed against any one of the solidary debtors or against all of
them simultaneously
- A creditors right to proceed against the surety exists independently of his right to
proceed against the principal
- Because of the unity of the legal tie in solidarity, although the solidary debtors may
be individually distinct from each other, they constitute legally one and the same
party

Note: if a claim form one of the solidary debtors has been dismissed by the court on
grounds other than the extinguishment of the whole obligation or that the claim has
prescribed, it does not necessarily mean that the solidary indebtedness cannot be
claimed against the other solidary debtors who were not impleaded in the case or against
those who were impleaded but whose liability was found by the court as proper

PNB VS. INDEPENDENT PLANTERS ASSOCIATION

GR L-28046. 16 May 1983

FACTS:

The CA dismissed PNBs complaint against the several solidary debtors for the collection of a
sum of money on the ground that one of defendants (Valencia) died during the pendency of
the case
 o Therefore: the money claim should be prosecuted in the testate or intestate proceeding
for the settlement of the estate or intestate proceeding for the settlement
The appellant assails the order of dismissal invoking its right of recourse against one, some or
all of its solidary debtors under Article 1216 of the Civil Code

ISSUE: Whether PNB may go after the other solidary debtors at the death of the one of the co-
debtors

RULING: Yes.
It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter.
Said provision gives the creditor the right to proceed against anyone of the solidary debtors or
some or all of them simultaneously.
The choice is undoubtedly left to the solidary creditor to determine against whom he will enforce
collection.
In case of the death of one of the solidary debtors, he (the creditor) may, if he so chooses,
proceed against the surviving solidary debtors without necessity of filing a claim in the estate of
the deceased debtors. It is not mandatory for him to have the case dismissed against the
surviving debtors and file its claim in the estate of the deceased solidary debtor . .

8. Payment by Solidary Debtor

Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.

He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period may
be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse
his share to the debtor paying the obligation, such share shall be borne by all his
co-debtors, in proportion to the debt of each.

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed
or become illegal.

Effect of Payment by a Debtor

Payment made by one of the solidary debtors either totally or partially extinguishes
the obligation depending upon whether the entire amount or debt is paid or only a
part thereof
If two or more solidary debtors offer to pay, the creditor may choose which offer to
accept
 Solidary debtor who made the payment merely entitles him to claim from his co-
debtors the share which corresponds to them with interest from the time of
payment; does not create a real case of subrogation, if payment was made before
the debt is due, no interest for the intervening period may be demanded

Reason: The right of the paying co-debtor to be reimbursed is not based on the original
obligation but upon the payment made by him
No reimbursement if payment is made after the obligation has prescribed or has become
illegal

The share of the insolvent solidary debtor shall be borne by all his co-debtors, in
proportion to the debt of each

VIRGILIA V PHILIPPINE COLLEGE OF CRIMINOLOGY, INC.

G.R. No. 200094. June 10, 2013

Facts:
The Philippine College of Criminology (PCCr) is a non-stock educational institution, while the
petitioners were janitors, janitresses and supervisor in the Maintenance Department of PCCr
What the petitioners know upon application with respondent school is that they were under the
Metropolitan Building Services Inc. (MBMSI,) a corporation engaged in providing janitorial
services to clients.
PCCr, through its President Bautista, citing the revocation, terminated the schools relationship
with MBMSI, resulting in the dismissal of the employees or maintenance personnel under
MBMSI, except Alfonso Bongot who was retired.
The dismissal employees then filed their respective complaints for illegal dismissal against
MBMSI, Atty. Seril (president of MBMSI), and Bautista (president of PCCr). They alleged that it
was really PCCr which was their real employer based on the following grounds:
o MBMSIs certification had been revoked
o PCCr had direct control cover MBMSIs operations
o There was no contract between MCMSI and PCCr
o And, the selection and hiring of employees were understaken by PCCr
Labor Arbiter deciison PCCr was the real principal employer of the petitioners and that MBMSI
was a mere adjunct or alter ego/ labor only contractor
NLRC decision affirmed LA decision but released PCCr and Bautista rom liability by virtue of
the quitclaims executed by petitioenrs
CA decision updated NLRC decision. Hence, this petition.

Issue: Whether the quitclaims, releases and waivers executed by the petitioners in favor of MBMSI
contribute to the benefit of PCCr

Ruling: Yes. The basis of the solidary liability of the principal with those engaged in labor-only
contracting is the last paragraph of Article 106 of the Labor Code, which in states: In such cases
[labor-only contracting], the person or intermediary shall be considered merely as an agent of
the employer who shall be responsible to the workers in the same manner and extent as if the latter
were directly employed by him.
The NLRC and the CA correctly ruled that the releases, waivers and quitclaims executed by
petitioners in favor of MBMSI redounded to the benefit of PCCr pursuant to Article 1217 of the
New Civil Code. The reason is that MBMSI is solidarily liable with the respondents for the valid
claims of petitioners pursuant to Article 109 of the Labor Code. As correctly pointed out by the
respondents, the basis of the solidary liability of the principal with those engaged in labor-only
contracting is the last paragraph of Article 106 of the Labor Code, which in part provides: In such
cases [labor-only contracting], the person or intermediary shall be considered merely as an agent of
the employer who shall be responsible to the workers in the same manner and extent as if the latter
were directly employed by him.

Payment made by one of the solidary debtors extinguishes the obligation.Considering that
MBMSI, as the labor-only contractor, is solidarily liable with the respondents, as the principal
employer, then the NLRC and the CA correctly held that the respondents solidary liability was
already expunged by virtue of the releases, waivers and quitclaims executed by each of the
petitioners in favor of MBMSI pursuant to Article 1217 of the Civil Code which provides that payment
made by one of the solidary debtors extinguishes the obligation.

ESCAO V. ORTIGAS, JR.

G.R. No. 151953. June 29, 2007
FACTS:
ISSUE: Whether the petitioners are obligated to reimburse respondent

Whether this obligation repay is solidary, as contended by respondents

RULING:

Joint and Several Debtors and Surety, Distinguished; In the case of joint and several debtors, Article
1217 makes plain that the solidary debtor who effected the payment to the creditor may claim
from his co-debtors only the share which corresponds to each, with the interest for the payment
already made, while, in contrast, even as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does not pay the creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor or debtors.

Article 1217 makes plain that the solidary debtor who effected the payment to the creditor may claim
from his co- debtors only the share which corresponds to each, with the interest for the payment
already made. Such solidary debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery extends only to the proportional
share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right to recover the full amount paid, and
not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement
falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.

DIAMOND BUILDERS CONGLOMERATION V COUNTRY BANKERS

GR No. 171820. 13 December 2007

Facts:
Original Case: Borja sued Rogelio, the sole proprietor of Diamond Builders Conglomeration
(DBC), for breach of obligation to construct a residential and commercial building.
 To end the litigation, the parties entered into a compromise agreement, which the RTC approved
and rendered a decision in accordance with the terms and conditions contained therein.
Rogelio then obtained a Surety Bond from Country Bankers in favor of the Spouses Borja.
Rogelio, his wife, and DBC employees Osias, Faiyaz, and Cutillar, signed an Indemnity
Agreement consenting to their joint and several liability to Country Bankers should the
surety bond filed by Borja.
23 April 1992: Country Bankers received a Motion for Execution of the surety bond filed by Borja
with the RTC of Caloocan for Rogelios alleged violation of the Compromise Agreement.
Country Bankers informed DBC that in case it is constrained to pay Borja, the same shall
proceed against DBC.
DBC filed an opposition to Borjas motion for execution.
RTC still issued a writ of execution.
DBC filed an Urgent Omnibus Motion to suspend the Writ of Execution.
9 June 1992: Country Bankers was served a Notice of Levy/Sheriff Sale with a list its personal
properties to be sold at the scheduled public auction.
Country Bankers was compelled to pay the amount of the surety bond.
DBC refused to reimburse Country Bankers.
Country Bankers sued DBC which the RTC dismissed.
The CA reversed the RTC decision and order DBC to pay reimbursement of P370,000 with interest
of 12% yearly from the date of judicial demand (24 July 1992) until full payment.
Hence current case where DBC assails the decision of the CA.
Issue: Whether DBC should reimburse Country Bankers for the surety bond.

Held: Yes. CA decision affirmed. Art. 2047 of the Civil Code calls for the application of the provisions
on solidary obligations to suretyship contracts. Particularly, Art. 1217 recognizes the right of
reimbursement from a co-debtor (principal codebtor in the case of suretyship) in favor of the one
who paid (the surety). In contrast, Art. 1218 is definitive on when reimbursement is unavailing such
that only those payments made after the obligation has prescribed or became illegal shall not
entitle a solidary debtor to reimbursement. In the case, the assailed CA decision was confined to
mootness of the issue considering that the writ of execution had already been satisfied.
Furthermore, the Indemnity agreement between Rogelio and Country Bankers provided an
incontestability clause stating that Rogelio and the other undersigned jointly and severally bind
themselves to indemnify Country Bankers of any and all such payments. Therefore, BDC is obliged
to reimburse Country Cankers the amount of P370,000.

9. Remission by Creditor

Art. 1219. The remission made by the creditor of the share which affects one of
the solidary debtors does not release the latter from his responsibility towards the
co- debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.249

Art. 1220. The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors.

Effect of Loss or Impossibility of Performance

1. If it is not due to the fault and before delay of the solidary debtors, the obligation is
extinguished
2. If the loss or impossibility due to the fault of one of the solidary debtors or due to a
fortuitous event after on of the solidary debtors had already incurred in delay, the
obligation is converted into an obligation of indemnity for damages but the solidary
of the obligation remains

10. When Extinguished

Art. 1221. If the thing has been lost or if the prestation has become impossible
without the fault of the solidary debtors, the obligation shall be extinguished.

If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice
to their action against the guilty or negligent debtor.

If through a fortuitous event, the thing is lost or the per- formance has become
impossible after one of the solidary debtors has incurred in delay through the
judicial or extrajudicial demand upon him by the creditor, the provisions of the
preceding paragraph shall apply.

1. If the loss of the thing or the impossibility of complying with the prestation which
constitutes the object of the obligation is not due to the fault of the solidary debtors,
the obligation is extinguished.
2. If the loss or impossibility is due to the fault of one of the solidary debtors, the
obligation is converted into an obligation of indemnity for damages, but the solidary
character of the obligation remains. The creditor can still proceed against one, or
some, or all of the debtors for the payment of the price, plus damages, without
prejudice to the subsequent right of action of the debtor or debtors who paid to
proceed against the guilty or negligent debtor for reimbursement.
3. If the loss or impossibility is due to a fortuitous event after one of the debtors had
already incurred in delay, again the obligation is converted into an obligation of
indemnity for damages, but the solidary character of the obligation remains.
Anyone, or some, or all of the debtors can be held responsible for the price, plus
damages but without prejudice to the right of action of the debtor or debtors who
paid to proceed against the debtor responsible for the delay.
 11. Defenses of Solidary Debtors

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of
all defenses which are derived from the nature of the obligation and of those which
are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.

Defenses Available to a Solidary Debtor

1. Defenses derived from the nature of the obligation total defense; all the solidary
co-debtors are benefited
a. Illustration: payment or performance, res judicata, prescription, those that
causes defects in the contracts and others of similar nature
2. Defenses Personal to him constitutes total defense and partial defense
a. Illustration of Total Defense: minority, insanity, and other defenses that
cause the annulment of consent
b. Illustration of Partial Defense special terms or conditions affecting his part
of the obligation
3. Defenses pertaining to his own Share constitutes a partial defense; only the
debtor is benefited
a. Illustration: Share of debtor is not yet due, the creditor can only compel the
share of other co-debtors
4. Defenses personal to the Others, but only as regards that part of the debt for
which the latter are responsible constitutes partial defense only for the debtor-
defendant
a. Illustration: the co-debtors share is not yet due, so the creditor can only
compel the debtor to give his share

EXAMPLE:
if a mother and her two minor children had signed a promissory note promising to pay a
certain indebtedness jointly and severally, and subsequently, the creditor proceeds
against the mother for the payment of the entire obligation, undoubtedly, the latter can
interpose the defense of minority of her co-signers, but such defense will benefit her only
with regard to that part of the debt for which the minors are responsible

OUANO ARRASTRE SERVICE, INC. V ALEONAR

G.R. No. 97664. October 10,1991

FACTS:
Private Respondent International Pharmaceuticals, Inc. (IPI) filed a complaint before the RTC
against Mercantile Insurance Company (Mercantile) and petitioner Ouano Arrastre Service
(OASI) for replacement of certain equipment imported by IPI which were insured by Mercantile
but were lost on arrival in Cebu City, allegedly because of mishandling by petitioner OASI
 Petitioners OASIs answer was filed by the law firm of Ledesma, Saludo and Associates (LSA)
The trial court rendered a decision holding Mercantile and petitioner OASI jointly and severally
liable for the cost of the replacement of the damaged equipment plus damages totaling P435,
000
Only Mercantile appealed from the decision
Ouano claims Mercantiles timely notice of appeal should benefit petitioner OASI, a solidary co-
debtor
Respondent judge denied OASIs motion for reconsideration
On appeal, CA dismissed the appeal saying that Mercantiles appeal does not inure to the benefit
of the petitioner as they do not share common defenses

ISSUE: Whether the seasonably appeal filed by codefendant Mercantile also benefits OASI due to
solidary obligation

RULING: No. Petitioner claims that execution of Mercantiles appeal would result in complexities if
the CA were to absolve Mercantile of its liabilities and that the petitioner would have no recourse against
its solidary co-debtor. However, the petitioner has only itself to blame. It allowed the period for
appeal to lapse without appealing. Article 1216 of the Civil Code provides that "[T]he creditor may
proceed against any one of the solidary debtor or some or all of them simultaneously." Thus IPI, as
solidary creditor, has the right to enforce the trial court's decision against petitioner OASI.

Petitioner also argues that under Art. 1222, a solidary co-debtor can raise the defenses personal to
his co-debtor, therefore OASI can be exempt from paying the portion of the judgment corresponding
to Mercantile. In Citytrust Banking Corporation v. IVth Division, CA, it does not matter if one
defendant was similarly absolved The fact remains that the judgment against Citytrust had already
become final and executory.

Lastly, it cannot be said that petitioner OASI's defenses are similar to, let alone "dependent on" and
"inseparable from," the defenses of Mercantile. Therefore, the cited case does not apply to them since
their rights and liabilities are not similar.

5. Divisible and Indivisible

1. Divisibility and Indivisibility of Objects

Art. 1223. The divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor and only one creditor does not alter
or modify the provisions of Chapter 2 of this Title.

Art. 1225. For the purposes of the preceding articles, obligations to give definite
things and those which are not susceptible of partial performance shall be deemed
to be indivisible.

When the obligation has for its object the execution of a certain number of days
of work, the accomplishment of work by metrical units, or analogous things which
by their nature are susceptible of partial performance, it shall be divisible.

However, even though the object or service may be physically divisible, an

obligation is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the
character of the prestation in each particular case.

Divisible = those which have as their object a prestation which is susceptible of partial
performance without the essence of the obligation being changed.

Indivisible = those which have as their object a prestation which is not susceptible of
partial performance, because, otherwise, the essence of the obligation will be changed

Three Kinds of Division

1. Quantitative the thing can be materially divided into parts and such parts are
homogenous to each other
a. Movable parts are actually separated from each other
b. Immovable the limits of the parts are fixed by metes and bounds
2. Qualitative the thing can be materially divided but the parts are not exactly
homogenous (e.g. inheritance)
3. Ideal/Intellectual the things cannot be separated into material parts

2. Joint Indivisible Obligation

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from
the time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the
value of the service in which the obligation consists.

Definition of Joint Indivisible Obligation

Midway between joint and solidary obligations, preserving the two characteristics of the
joint obligation, in that no creditor can do an act prejudicial to others, and no debtor can
be made to answer for others

Characteristics
1. No creditor can act in representation of the other;
Note: If not all of the creidtors demand the prestation, the debtor may legally refuse
to deliver to them or he can insist that all the creditors together receive the thing,
and if any of them refuses to join the others, the debtor may deposit the thing by
way

2. No debtor can be compelled to answer for the liability of others

Note: if there are two or more debtors, the fulfillment of or compliance with the
obligation requires the concurrence of all the debtors, although each for his own
share
 In case of insolvency of one of the debtors, the others shall not be liable for his
shares. To hold otherwise would destroy the joint character of the obligation

Breach of Joint Indivisible obligation

Obligation can be enforced only by proceeding against all of the debtors
If anyone of the debtors should fail or refuse to comply with the obligation, it is
converted into one of indemnity for damages
Debtors who may have been ready to comply with what is incumbent upon them
shall not contribute to the indemnity beyond the corresponding portion of the price
of the thing or the value of the service in which the obligation consists
The debtor who failed or refused to comply with the prestation shall bear the
burden of paying all of the damages to the creditor/s and shall indemnify the other
debtors for damages suffered as a result of the transformation of the obligation into
one of indemnity

6. With a Penal Clause

1. Purpose of Penalty

ART. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code. (1152a)

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

ART. 1228. Proof of actual damages suffered by the creditor is not necessary in
order that the penalty may be demanded.

Definition
An obligation to which an accessory undertaking (penal clause/penalty is attached
for the purpose of insuring its performance by virtue of which the obligor is bound
to pay a stipulated indemnity or perform a stipulated presation in case of breach
PURPOSE OF PENALTY:
1. Funcin coercitiva o de garantia to insure the performance of the obligation
2. Funcin liquidatoria to liquidate the amount of damages to be awarded to the
injured party in case of breach of the principal obligation
3. Funcin estrictamente penal in certain exceptional cases, to punish the obligor
in case of breach of the principal obligation.
- Penal clause benefits the creditor because it does not have to show proof of the
damages it sustained (If youre late to submit your book, you have to pay P5 per
day you are late)
- Actual damages are proven, if there is a penal clause, you do not need to show
proof

if the penal clause is unconscionable (too high) go to court for another

WHEN THE CREDITOR ASK FOR ACTUAL DAMAGES ASIDE FROM LIQUIDATED
DAMAGES
damages shall be paid if the obligor
(1) refuses to pay the penalty or
(2) is guilty of fraud in the fulfillment of the obligation.

CABARROGUIS VS. VICENTE

L-14304. 23 March 1960

FACTS:
Plaintiff Antonia Cabarroguis sustained physical injuries which cause permanent partial
disability in her right forearm due to an accident when AC Jeepney hit another vehicle.
Telesforo B. Vicente, the owner and operator entered into a compromise agreement to pay
Antonia the sum of P2,500 as actual and compensatory, exemplary and moral damages
P1,500 has already been paid therefore leaving an unpaid balance of P1,000
It was also stipulated that should the defendant (Vicente) fail to complete payment within
a period of 60 days, he would pay and additional amount of P200 as liquidated damages
After series of demands, defendant Vicente refused to comply with his obligation, plaintiff
Cabarroguis and husband filed a suit in the Municipal Court.
Defendant Vicente alleged that the injury sustained by plaintiff was not serious or
consequential as to entitle her to the payment of the amount stipulated in the compromise
agreement and that the agreement did not express the true intention of the parties thereto by
reason of mistake, fraud, inequitable conduct or accident, a reformation of the agreement was
in order.
Municipal Court ruled in favor of Plaintiff Cabarroguis and upheld by the Court of First Instance
citing that the defendants pretension against the due execution of the agreement was a mere
afterthought, prompted by a desire to evade payment of an obligation, voluntarily assumed and
for valid consideration.
CFI ordered defendant to pay 1,200 with legal interest from date of the filing of the
complaint until full payment and to pay costs.
 Defendant then appealed to the CA contending the interest citing that Art 1226 of the Civil Code.
He argued that in obligation with a penal clause, the penalty substitutes the indemnity for
damages and payment of interest.

ISSUE: Whether the court erred in sentencing defendant to pay interest from the date of the filing of
the complaint until full payment.

HELD: NO
Article 1226 of the NCC provides that the penalty shall substitute the indemnity for damages
and the payment of interests.
Exceptions:
o When the contrary is stipulated
o When the debtor refuses to pay the penalty imposed in the obligation, in which
case the creditor is entitled to interest on the amount of the penalty, in
accordance with Article 2209 (If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.)
o When the obligor is guilty of fraud in the fulfillment of the obligation
No interest can be awarded on the principal obligation. The 200-peso penalty having taken
the place of the payment of such interest and the indemnity for damages. No stipulation to
the contrary was made and while defendant was sued for breach of the compromise
agreement, the breach was not caused by fraud.
This case, however, takes a different aspect with respect to the penalty attached to the
principal obligation. It has been held that in obligations for the payment of a sum of money
when a penalty is stipulated for default, both the principal obligation and the penalty can be
demanded by the creditor. Defendant having refused to pay when demand was made by plaintiff,
the latter clearly is entitled to interest on the amount of the penalty.
Article 2210 of the Civil Code provides that in the discretion of the court, interest may be
alleged upon damages awarded for breach of contract. This interest is recoverable from the
time of delay that is to say, from the date of demand, either judicial or extrajudicial. And if
there is no showing as to when demand for payment was made, plaintiff must be considered to
have made such demand only from the filing of the complaint.

FILINVEST LAND INC. VS. COURT OF APPEALS

G.R. No. 138980. September 20, 2005.

Facts:
On Aug 26, 1978 FILINVEST awarded to the defendant PACIFIC the development of the
residential subdivision consisting of two lands located in Payatas, QC.
PACIFIC issued two surety bonds issued by PHILAMGEN. PACIFIC failed to finish the
contracted work, FILINVEST intended to take over the project and hold defendant liable for
damages.
On October 26, plaintiff submitted its claim against PHILAMGEN under its performance and
guarantee bond but PHILAMGEN refused to acknowledge its liability for the single reason that
its principal, defendant pacific, refused to acknowledge liability therefore.
Defendant said that the failure to finish the contracted work was due to the weather, and the grant
of extension of the work is a waiver to claim any damages.
 PHILAMGEN contends that the various amendments made on the principal contract and the
deviation in the implementation thereof which were resorted to by plaintiff and PACIFIC w/o its
consent have automatically released the latter from any liability.
The RTC dismissed the complaint, basing on the commissioner report. CA affirmed.

Issue: Whether the liquidated damages agrees upon by the parties should be reduced.

Held: Yes. Art. 1226 in obligations with a penal clause, the penalty of shall substitute the indemnity
for damages and the payment of interests in case of non-compliance, if there is no stipulation
to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation. As a general rule, courts are not at liberty to ignore
the freedom of the parties to agree on such terms and conditions as they see fit, as long as they are
not contrary to law. But the courts may equitably reduce the penalty in two instances, first, if the
principal obligation has been irregularly complied with and second, when it is iniquitous or
unconscionable.

COUNTRY BANKERS VS CA
G.R. No. 85161, 9 September 1991
Facts:
Respondent OVEC, as lessor, and the petitioner Enrique F. Sy, as lessee, entered into a 6-
year lease agreement over the Avenue, Broadway and Capitol Theaters.
After more than 2 years of operation of the said Theaters, the lessor made demands for the
repossession of the leased properties in view of the Sys arrears in monthly rentals and
non-payment of amusement taxes.
However, even though Sys rental arrears were reduced, the accrued amusement tax liability
of the 3 theaters to the City Government of Cabanatuan City had accumulated to P84,000.00
despite the fact that Sy had been deducting the amount of P4,000.00 from his monthly rental
with the obligation to remit the said deductions to the city government.
Even though OVEC took possession of the theaters already, a restraining order followed by an
order directing the issuance of a writ of preliminary injunction issued in said case, enabled Sy
to regained possession and operation of the theaters.
From the decision of the trial court, Sy and Country Bankers Insurance Corporation
(CBISCO) appealed the decision in toto while OVEC appealed insofar as the decision failed to
hold the injunction bond liable for all damages awarded by the trial court.
The trial court held that OVEC is entitled to recover the said damages in addition to the arrears
in rentals and amusement tax delinquency of Sy and the accrued interest thereon.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement
holding that the provisions are fair and reasonable.
It also held that the cancellation or termination of the agreement prior to its expiration period is
justified as it was brought about by Sys own default in his compliance with the terms of the
agreement and not motivated by fraud or greed
Main Issue: Whether the forfeiture clause in an agreement constitutes unjust enrichment at the
expense of the petitioners
- Whether the CA committed serious error of law and grave abuse of discretion in not setting off
the 100K supposed damage resulting from the injunction against the 290K remaining cash
deposit of petitioner
- Whether the CA committed serious error of law and grave abuse of discretion in not dismissing
respondents counterclaim for failure to pay the necessary docket fee
Held: No. Petition is denied.
Ruling:
The forfeiture clause stipulated in the lease agreement are not contrary to law, morals, good customs,
public order or public policy. A penal clause that may be validly entered into is a provision which calls
for the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any
other obligation still owing, in the event of the termination or cancellation of the agreement by reason
of the lessees violation of any of the terms and conditions of the agreement.
A penal clause is an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.
As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance. This is specifically provided for in
Article 1226, par. 1, New Civil Code. In such case, proof of actual damages suffered by the creditor is
not necessary in order that the penalty may be demanded (Article 1228, New Civil Code). However,
there are exceptions to the rule that the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance with the principal obligation. They are:
(1) When there is a stipulation to the contrary;
(2) When the obligor is sued for refusal to pay the agreed penalty; and
(3) When the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code).
It is evident that in all said cases, the purpose of the penalty is to punish the obligor. Therefore, the
obligee can recover from the obligor not only the penalty but also the damages resulting from the
non-fulfillment or defective performance of the principal obligation.
The undertaking assumed by CBISCO under subject injunction refers to all such damages as such
party may sustain by reason of the injunction if the Court should finally decide that the
Plaintiff was/were not entitled thereto, (Rollo, p. 101) Thus, the respondent Court correctly
sustained the trial court in holding that the bond shall and may answer only for damages which OVEC
may suffer as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of
law and grave abuse of discretion in not dismissing private respondents counterclaim for failure to
pay the necessary docket fee, which is an issue raised for the first time in this petition. Petitioners rely
on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No. 75919, May 7,
1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where the
correct docket fees are not paid should be peremptorily be considered null and void because, for all
legal purposes, the trial court never acquired jurisdiction over the case.

PAMINTUAN VS. COURT OF APPEALS

G.R. No. L-26339 | 14 DECEMBER 1979

FACTS:
Petitioner Pamintuan, holder of a barter license, entered into an agreement to ship corn to
Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings, and to sell the
plastic sheetings to respondent company Yu Ping Kun Co., Inc. for P250,500.00. The parties
also agreed that any violation of the contract would entitle the aggrieved party to collect from
the offending party liquidated damages.
Petitioner informed the president of respondent company that he was in dire need of cash
requesting from the latter that he be paid immediately. Thus, the parties adjusted the price of the
plastic sheetings regardless of the kind, quality or actual invoice thereof.
When the plastic sheetings arrived, petitioner did not deliver the full quantity to the latter. As
justification for his refusal, petitioner said that the company failed to comply with the conditions
of the contract and that it was novated with respect to the price.
 Respondent company filed its complaint against petitioner with the lower court, which rendered
judgment ordering petitioner to deliver the plastic sheetings and, if he could not do so, to pay
damages.
On appeal, the CA found that the contract between the parties was partly consummated
respondent company fulfilled its obligation and petitioner reaped certain benefits from the
contract. Hence, he is estopped to repudiate it, he would unjustly enrich himself at the expense
of the company.

ISSUE: Whether respondent is only entitled to recover liquidated damages.

HELD: No.
The Court held that the second sentence of Art. 1226 provides that damages shall be paid if the
obligor is guilty of fraud in the fulfillment of the obligation. "Responsibility arising from fraud is
demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or
wanton attitude, the obligor shall be responsible for and damages which may be reasonably
attributed to the non-performance of the obligation"
In the case at bar, both the trial court and appellate court found that petitioner was guilty of fraud
because he did not make a complete delivery of plastic sheetings and overpriced the same.
There is no justification for the Civil Code to make an apparent distinction between penalty and
liquidated damages because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be recovered
without the necessity of proving actual damages and both may be reduced when proper.

2. Reduction by the Courts

ART. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable. (1154a)

WHEN PENALTY MAY BE REDUCED

1. If the principal obligation has been partly complied with
2. If the principal obligation has been irregularly complied with
3. If the penalty is iniquitous or unconscionable even if there has been no performance

MAKATI DEVELOPMENT VS. EMPIRE

FACTS:
- Makati Development Corporation (MDC) sold a 1,589 sq.m. lot in Urdaneta Village, Makati to
Roldofo Andal for P55,615. A so-called special condition contained in the deed of sale
provides that the vendees shall start the construction and complete at least 50% of their
residence on the property within 2 years from the time of sale on 31 March 21 1959 to the
satisfaction of the vendor and in the event of their failure to so, the bond of P11,123 will be
forfeited in favor of the vendor. Thus to insure faithful compliance with the condition, Andal gave
a surety bond wherein he, as principal, and the Empire Insurance Company, as surety, jointly
 and severally undertook to pay the MDC the sum of P12,000 in case Andal fails to comply with
this obligation under the deed of sale.
- Andal did not build his house but instead he sold the lot to Juan Carlos who neither built a house,
but has started the construction, within the stipulated period of the MDC. Thus, 3 days after the
lapse of the 2-year period, MDC send a notice of claim to the Empire Insurance Co. of Andals
failure to comply with this undertaking thereby demanding the payment of the bond to which
Empire refused hence the MDC filed a complaint with the CFI. The CFI sentenced the Empire
Insurance Co. to pay the amount of P1500 with interest and Andal to pay the same to Empire
Insurance Co. Hence the appeal by the MDC to the SC.

ISSUE: Whether or not the trial court had the authority to reduce the liability of Andal.

HELD: Yes. The special condition was seen as an obligation and to secure the performance of this
obligation, a penal clause was inserted. While it is true that in obligations with a penal sanction, the
penalty takes the place of damages and the payment of interest in case of non-compliance and that
the oblige is entitled to recover upon the breach of the obligation without the need of proving damages,
it si nonetheless true that in certain instances a mitigation of the obligors liability is allowed.

Article 1229 of the Civil Code provides that the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. Even if there has been
no performance, the penalty may also be reduced by the court.

FLORENTINO VS. SUPERVALUE

Facts:
Florentino and Supervalue entered into three Contracts of Lease.
All three contracts contained similar terms and conditions covering cart-type stalls at SM North Edsa,
SM Southmall, and a store space in SM Megamall.
The term for each contract was for a period of four months and may be renewed upon agreement of
the parties.
Before the expiration of the contracts, petitioner received two letters from the respondent:
In the first letter, the respondent alleged that the petitioner violated Sec. 8 of the contract for closing
earlier than mall hours and increasing the price of merchandise without prior approval of the
respondent. Hence, the respondent gave a stern warning to the petitioner not to repeat the same to
avoid termination of contract.
In the second letter, the respondent informed the petitioner that they will no longer renew the contract.
The respondent then took possession of the petitioners store space in SM Megamall, confiscated
the equipment and personal belongings of the petitioner, and refused to return the security deposit
amounting to P192,000.00.
The petitioner demanded for the return of the security deposit but the respondent refused to do so,
stating that the forfeiture of the security deposit by the respondent was due to the petitioners breach
of contract.
Hence, petitioner sued the respondent.
RTC: ruled in favor of the petitioner.
CA: modified the RTC ruling, decided that the security deposits forfeiture was justified.
 Thus, current petition.
Issue: Whether or not Supervalue is entitled to forfeit the security deposit in their favor.
Held: Yes. CA decision is affirmed with modification.
The CA correctly relied on Sec.18 of the Contract of Lease - that the Lessor shall forfeit in its favor
the deposit tendered without prejudice to any such other appropriate action as may be legally
authorized when it ruled that the respondent may forfeit the security deposit due to the evident
contractual violations by the petitioner.
Sections 5 and 18 of the Contract of Lease are in the nature of a penal clause.
The Civil Code provisions governing penal clauses are Arts. 1226 and 1229.
A penal clause ensures the lessees faithful compliance with the terms and conditions of the contract
and to assume greater liability in case of breach.
Penal clauses are attached to an obligation in order to: 1) ensure performance and 2) serve a
double function of providing liquidated damages and strengthening the coercive force of the
obligation by the threat of greater responsibility in the vent of breach.
As a general rule, Courts cannot ignore the freedom of parties to agree on terms and conditions so
long as they are not contrary to law, morals, good customs, public order, or public policy.
However, there is an exception to the general rule which is that courts may reduce the penalty
when: 1) the principal obligation has been partly or irregularly complied with; or 2) the penalty is
iniquitous (grossly unfair and morally wrong) or unconscionable (unreasonable or not right) in
accordance with Art. 1229.
For the court to determine if the penalty is fair and reasonable, it will have to take into
consideration factors such as but not limited to: 1) type, extent, and purpose of the penalty; 2)
nature of the obligation; 3) mode of breach and its consequences; 4) supervening realities; and 5)
standing and relationship of the parties.
In the case at bar, considering the gravity of the breach by the petitioner, the total amount of the
security deposit was excessive and unconscionable. Thus, the court deems that it is equitable to
reduce the forfeiture of the security deposit to 50% only.

3. Effect of Nullity

ART. 1230. The nullity of the penal clause does not carry with it that of the principal
obligation.

The nullity of the principal obligation carries with it that of the penal clause. (1155)

If the principal obligation is void, penal clause shall also be void because the penalty is
merely an accessory obligation. But if the penal clause is void, principal is not affected.

V. Extinguishment of Obligations
A. Payment or Performance
1. In general
a. Definition
ART. 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)

fulfillment of the obligation by the delivery of a sum of money

Not only the delivery of money but also the performance, in any other manner, of
an obligation
Fulfillment or the prestation due. A fulfillment that extinguishes the obligation by
the realization of the purposes for which it was constituted
Juridical act which is voluntary, licit and made with the intent to extinguish the
obligation

b. Requirements

Art. 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or
rendered, as the case may be.

When Obligation is Understood Paid or Performed

IN OBLIGATION TO GIVE - When the debtor or obligor has completely delivered
the thing which he had obligated himself to deliver
IN OBLIGATION TO DO: when the obligor has completely rendered the service
which he had obligated himself to render
IN OBLIGATION NOT TO DO: shall be understood to have been complied with
when the obligor has completely refrained from doing that which he had obligated
himself not to do

Principle of Integrity
General rule: A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered, as
the case may be.

Payment must be in full

Exceptions:
1. When the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment1, less
damages suffered by the obligee (Art. 1234)
2. When the obligee accepts performance, knowing its incompleteness or
irregularity and without expressing any protest or objection; based on the
principle estoppel

Who Must Pay:

In General:
 1. Debtor
2. Anyone acting on the debtors behalf:
a. Duly authorized agent or legal representative
b. Hes (provided that the debtor is already dead for otherwise they are
considered as third persons interested in the obligation
c. Successors-in-interest and assignees

c. Substantial Performance

Art. 1234. If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete fulfillment,
less damages suffered by the obligee.

INTL. HOTEL CORP. V. JOAQUIN, JR.

G.R. 158361. 10 April 2013

FACTS
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to
International Hotel Corporation (IHC) for him to render technical assistance in securing a
foreign loan for the construction of a hotel, to be guaranteed DBP. The proposal encompassed
nine phases
IHC Board of Directors approved phase one to phase six of the proposal and earmarked
P2,000,000.00 for the project. Anent the financing, IHC applied with DBP for a foreign loan
guaranty. DBP approved it on October 24, 1969 subject to several conditions
Shortly after submitting the application to DBP, Joaquin wrote to IHC to request the payment
of his fees in the amount of P500,000.00 for the services that he had provided and would be
providing to IHC in relation to the hotel project that were outside the scope of the technical
proposal
Joaquin recommended that he commence negotiating with a prospective financier, Materials
handling corp. IHC allowed. So Joaquin started negotiating Materials Handling Corp and
later on with its principal, Barnes international
While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the Executive
Director of IHC, met with another financier, the Weston International Corporation (Weston),
to explore possible financing. When Barnes failed to deliver the needed loan, IHC informed
DBP that it would submit Weston for DBPs consideration. As a result, DBP cancelled its
previous guaranty.
Due to Joaquins failure to secure the needed loan, IHC, through its President Bautista,
canceled the 17,000 shares of stock previously issued to Joaquin and Suarez as payment
for their services. The latter requested a reconsideration of the cancellation, but their request
was rejected.
IHC maintains that Article 1186 of the Civil Code was erroneously applied
o that it had no intention of preventing Joaquin from complying with his obligations when it
adopted his recommendation to negotiate with Barnes
o that Article 1234 of the Civil Code applied only if there was a merely slight deviation
from the obligation, and the omission or defect was technical and unimportant
o that substantial compliance was unacceptable because the foreign loan was material
and was, in fact, the ultimate goal of its contract with Joaquin and Suarez; that
because the obligation was indivisible and subject to a suspensive condition, Article
1181 of the Civil Code27 applied, under which a partial performance was equivalent to
 non-performance; and that the award of attorneys fees should be deleted for lack of legal
and factual bases
ISSUE
Was there constructive fulfillment? NO.
Whether Joaquin be paid for substantially performing his obligations? NO.

HELD
There was no constructive fulfillment. Article 1186 states that The condition shall be deemed
fulfilled when the obligor voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, whose application
calls for two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the
condition, and (b) the actual prevention of the fulfillment. Mere intention of the debtor to prevent
the happening of the condition, or to place ineffective obstacles to its compliance, without
actually preventing the fulfillment, is insufficient.
IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling
and, later on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise,
to prevent Joaquin and Suarez from meeting their undertaking. Such absence of any intention
negated the basis for the CAs reliance on Article 1186 of the Civil Code.
Article 1234 - If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered by
the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the
contract after honestly and faithfully performing all the material elements thereof except
for some technical aspects that cause no serious harm to the obligee. IHC correctly
submits that the provision refers to an omission or deviation that is slight, or technical
and unimportant, and does not affect the real purpose of the contract.

d. Incomplete/Irregular Performance

Art. 1235. When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.

ESGUERRA V. VILLANUEVA
No. L-23191. December 19. 1967.

FACTS:
Petitioner Esguerra and respondent de Guzman entered into a contract whereby Esguerra
leased to De Guzman a portion of the Esguerra-Gueco building
De Guzman failed to pay the rental
De Guzmans mother, Mrs. De Guzman, executed a promissory note for P2, 100 in favor of the
Esguerras, however none of the payments were made when due
Esguerras commenced on a civil case against Mrs. De Guzman for the collection of the sum of
P2, 100 with interest and three days later, Esguerra instituted a Civil Case against De Guzman
to recover the unpaid rentals, liquidated damages and attorneys fees
The court issued two writs of attachment for these two cases
 A Compromise agreement was then made such that the De Guzmans agreed to pay the
amount of P2, 260 on or before Nov. 26, 1962 to the Esguerras and that if should they fail to
do such, the writ of attachments would be executed against them
The sum was never delivered by the said date and thus Judge Villanueva issued the
corresponding writs of execution
Alleging that De Guzman had delivered P800 and P1400 payments to the Esguerra, De Guzman
and his mother filed a joint motion for the release of the properties seized
This motion was granted
The Esguerras instituted a motion for certiorari, prohibition, mandamus and preliminary
injunction to annul the orders of Judge Villanueva, however, this was denied. Hence this
appeal
Respondents maintain that the receipt of the P800 and P1, 400 by the Esguerras
constituted acceptance of the Incomplete and irregular performance of respondents
obligation under the civil cases

ISSUE: Whether the receipt of the partial payment by the Esguerras is their acceptance of an
incomplete or irregular performance of the obligation

RULING: No.
De Guzmans theory based upon the premise that receipt of a partial payment is necessarily
an acceptance thereof, within the purview of Article 1235 of the Civil Code, is untenable. The
verb accept, as used in the said legal provision, means to take as satisfactory or sufficient,
or to give assent to, or to agree or accede to an incomplete or irregular performance.
Indeed, the day immediately following that of the first payment of P800.00, or on December 13,
1962, the Esguerras asked Judge Villanueva to issue the corresponding writs of execution in the
two (2) cases. Thus, the Esguerras patently manifested their dissatisfaction with said partial
payment
The Esguerras insistence also for De Guzmans attached properties to be disposed of pursuant
to the writs of execution shows that they had never regarded the partial payments as satisfactory
compliance with the obligation

PAGSIBIGAN V. CA

Facts:
On November 3, 1976, Petitioner Pilar Pagsigiban obtained a loan from Respondent Planters
Development Bank ("Bank") for P4,500.00, secured by a mortgage over a parcel of land.
The Promissory Note for the said loan stipulated for the first payment to be made on May 3,
1977 and payments every six months thereafter at P1,018.14 with 19% interest for unpaid
amortizations. It also contained an acceleration clause.
Initial payment was made in July 6, 1977, followed by several payments in the total amount of
P11,900.00. However, only four of these payments were applied to the loan, while the rest
were "temporarily lodged to accounts payable since the account was already past due".
In 1984, the property was foreclosed extrajudicially upon Petition by the bank for failure to pay
an outstanding balance of P29,554.81. This resulted in the property being sold to the bank for
P8,163.00, and later claimed a deficiency of P21,391.81.
Petitioner filed an action for annulment of sale by Petitioner, which the lower court granted.
However, it was overturned by CA.

Issues: Whether the auction sale is valid

 Whether Petitioner is entitled to recover damages

Held: No to the first and Yes to the second.

The respondent bank had the right to foreclose the mortgage upon the first default of petitioner on
May 3, 1977, but it did not. When it received payment of petitioner on July 6, 1977, the
respondent bank had clearly waived its right under the acceleration clause since instead of
claiming penalty charges on the entire amount of P4,500.00, it only computed the penalty based on
the defaulted amortization payment which is P1,018.14.

Further, for more than four years, the bank made petitioner believe that it was applying her
payment on the loan and interest. It is now bound by estoppel to apply the payments to petitioner's
debt and from foreclosing the property.

Accordingly, the legality of the foreclosure cannot be sustained because of substantial

performance on the part of petitioner (Article 1234. If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.) and acceptance of payment by the bank (Article
1235: when the creditor accepts performance, knowing its incompleteness and irregularity without
protest or objection, the obligation is deemed complied with.)..

Moral damages are warranted for the mental anguish, sleepless nights and serious anxiety that the
bank's acts have caused petitioner. The bank succeeded in taking advantage of the ignorance of
petitioner by lodging the bulk of petitioner's payment to account payable based on the flimsy reason
that she had been in default, and then considering the entire debt pursuant to an acceleration clause
as earning interest and penalty charges at an exorbitant rate of 19% each from the date of first default
up to the date of foreclosure, thus bringing the obligation to an astronomical amount of P29,554.81
instead of just P11,000.00.

Exemplary damages are also proper, to serve as a deterrent for the bank from repeating similar acts
and to set an example and correction for the public good.

DE CASTRO V. CA and ARTIGO

G.R. No. 115838, 18 July 2002
Facts:
The respondent sued the petitioners to collect the unpaid balance of his brokers commission
from the them.
The respondent was authorized by the petitioners to act as real estate broker in the sale of
these properties for the amount of P23,000,000.00, 5% of which will be given to the agent as
commission.
Upon receiving P48,893.76, the largest cut in the commission from the petitioners, respondent
felt short changed because according to him, his total commission should be P352,500.00
which is 5% of the agreed price of P7,050,000.00 paid by Times Transit Corporation to
appellants for the 2 lots, and that he introduced the buyer to respondents and unceasingly
facilitated the negotiation which ultimately led to the consummation of the sale.
Hence, the respondent sued below to collect the balance of P303,606.24 after having
received P48,893.76 in advance.
Although petitioners readily concede that it was respondent who first introduced Times
Transit Corp. to them, respondent was not designated by them as their exclusive real estate
agent but that in fact there were more or less 18 others who successfully brokered in the second
negotiation.
 Furthermore, the purchase price for the 2 lots was only P3.6 million as appearing in the deed of
sale and not P7.05 million as alleged by appellee.

Main Issue: Whether Artigos claim has been extinguished by full payment, waiver or abandonment

Held: No. Petition is meritless.

Ruling: A contract of agency which is not contrary to law, public order, public policy, morals or good
custom is a valid contract, and constitutes the law between the parties. The contract of agency entered
into by Constante with Artigo is the law between them and both are bound to comply with its terms and
conditions in good faith.

The mere fact that other agents intervened in the consummation of the sale and were paid their
respective commissions cannot vary the terms of the contract of agency granting Artigo a 5%
commission based on the selling price. These other agents turned out to be employees of Times
Transit, the buyer Artigo introduced to the De Castros.

De Castros reliance on Article 1235 of the Civil Code is misplaced. Artigos acceptance of partial
payment of his commission neither amounts to a waiver of the balance nor puts him in estoppel. (Art.
1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.)
Accept means to take as satisfactory or sufficient, or agree to an incomplete or irregular performance.
Hence, the mere receipt of a partial payment is not equivalent to the required acceptance of
performance as would extinguish the whole obligation. There is thus a clear distinction between
acceptance and mere receipt. In this case, it is evident that Artigo merely received the partial payment
without waiving the balance. Thus, there is no estoppel to speak of.

The De Castros further argue that laches should apply because Artigo did not file his complaint almost
4 years later. However, Artigo made a demand in July 1985 and filed the action in court on 29 May1989,
well within the 10-year prescriptive period. The right of action accrues from the moment the breach of
right or duty occurs.
Laches means the failure or neglect, for an unreasonable and unexplained length of time, to do that
which by exercising due diligence could or should have been done earlier. It is negligence or omission
to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it
either has abandoned it or declined to assert it. Laches is recourse in equity. Equity, however, is
applied only in the absence, never in contravention, of statutory law.

e. Partial Prestations

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot
be compelled partially to receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting
for the liquidation of the latter.72
Characteristic of a Valid Payment
1. Identity only the prestation agreed upon and no other must be complied with
2. Completeness the thin or service must be completely delivered or rendered
3. Indivisibility payment or performance must be indivisible

- Art. 1248 is applicable only to an obligation where there is only one debtor and one
creditor
- Neither is it applicable to one where the different prestations are subject to different
terms and conditions.

BARONS MARKETING CORP. V. COURT OF APPEALS and PHELPS DODGE

G.R. No. 126486| 09 FEBRUARY 1998

FACTS:
Private respondent Phelps Dodge, Philippines, Inc. appointed petitioner Barons Marketing as
one of its dealers of electrical wires and cables. As a dealer, petitioner was given 60 days credit
to purchase its electrical products. Petitioner purchased various wires and cables with a total
amount of P4,102,438.30, which were sold to MERALCO. Unfortunately, petitioner only paid
P300,000.00 to private respondent, thereby leaving unpaid amount of P3,802,478.20.
Petitioner requested from private respondent if it could pay its outstanding account in monthly
installments of P500,000.00 plus 1% interest per month, but the latter rejected this offer and
instead reiterated its demand for full payment.
Private respondent filed a complaint with RTC-Pasig against petitioner to recover said amount
and prayed for damages, expenses of litigation and attorneys fees. RTC ruled in favor of private
respondent, ordering petitioner to pay P3,108,000.00 at 12% per annum from expiration of credit
term, attorneys fees, damages and costs of suit.
On appeal, CA modified the decision of the trial court, ordering petitioner to pay P3,802,478.20
at 12% per annum from expiration of credit term, 5% of said obligation for attorneys fees.

ISSUE: Whether private respondent is guilty of creditors abuse when it rejected petitioners offer.
HELD: NO.

RATIO:
The Court held that it is an elementary rule that good faith is presumed and that the burden of
proving bad faith rests upon the party alleging the same. In the case at bar, the petitioner failed
to prove bad faith on the part of private respondent.
Private respondents right to reject petitioners offer to pay in installments is guaranteed by Article
1248 of the Civil Code which provides that, [u]nless there is an express stipulation to that effect,
the creditor cannot be compelled partially to receive the prestations in which the obligation
consists. Neither may the debtor be required to make partial payments. However, when the debt
is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the latter.
Under this provision, the prestation must be performed in one act, not in parts. Tolentino
concedes that the right has its limitations:
o Partial Prestations--Since the creditor cannot be compelled to accept partial performance,
unless otherwise stipulated, the creditor who refuses to accept partial prestations does
not incur in delay or mora accipiendi, except when there is abuse of right or if good faith
requires acceptance.
Furthermore, the private respondent was driven by very legitimate reasons for rejecting the offer
and instituting the action for collection before the trial court. The contract has the force of law
between them, thus, petitioner is bound to fulfill what has been expressly stipulated therein. In the
absence of any abuse of right, private respondent cannot be allowed to perform its obligation
under such contract in parts. Otherwise, private respondents right under Article 1248 will be negated,
the sanctity of its contract with petitioner defiled.

f. Payment by 3rd party

Art. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is
stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the debtor.14

Third Person who is NOT an Interested Party but with debtors Consent
General Rule: The creditor is not bound to accept payment or performance by a third
person who has interest in the fulfillment of the obligation

SPOUSES PUBLICO V. BAUTISTA

FACTS:
- Spouses Publico obtained a 200k loan from Teresita Bautista which was secured by a real
estate mortgage loan covered by a Transfer Certificate of Title (TCT) and a kasulatan that the
loan would bear interest and penalties would be paid should the party fail to pay which included
the sale of the property thus the Publicos surrendered the owners copy of the TCT.
- In September 1996, the Publicos borrowed the TCT from Teresita so that it may be used to
remortgage the property to secure another loan the proceeds of which would be used to pay
Teresita to which Divinia Publico executed a pagpapatunay that the loan to be obtained from the
bank would be used to pay half of the original amount loaned from Teresita and the other half
was secured by a car/taxi registration documents.
- The Publicos were able to obtain a 200k loan from Hiyas Savings and Loan Bank however
they failed to settle such obligation to Teresita. Teresita, fearing that Hiyas Bank would
foreclose the mortgage, offered to pay for the Publicos loan to which Hiyas Bank agreed with
the condition that she also pay the other obligations of the Publicos that were secured, to which
she agreed. Thus in the presence of Jose Publico, Teresita settled their obligations in the bank
amounting to 698k; receipts of payment were in the name of Jose although it contained
annotations that Teresita advanced the payments of the Publicos obligations.
- The Publicos failed to their obligations thus Teresita filed a complaint for foreclosure of
mortgage, sum of money and damages before the RTC in Bulacan to which the Publicos were
ordered to pay Teresita the amount of their original and subsequent loans totaling 898k. Upon
respondents motion amended its decision to increase the interest rate. The CA affirmed the
RTC decision reiterating the Publicos liability to Teresita with regard to the amount advanced
by Teresita to settle the Publicos debts with Hiyas Bank. The spouses Publico argue that
Teresita could not compel them to reimburse the amount paid to Hiyas Bank since such payment
was made by a third person without the knowledge of the debtor and triggers into operation para
 2 of Article 1236 of the NCC which states that: whoever pays the debt of another may demand
from the debtor what he has paid, except that if he paid without the knowledge or against the
will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor,
hence this petition.

ISSUE: Whether the payment of a third party negates the liability of the debtor to reimburse him of the
full amount of that which was paid.

RATIO: No. In the present case, the Publicos cannot deny their indebtedness to Teresita on the
basis of Article 1236 for the following reasons: (1) such payment was expressly allowed by Jose,
who was himself a principal debtor; (2) such payment was beneficial to petitioners, and (3) when
Divinia learned about the payment, she never repudiated such payment within a reasonable
time. The NCC provides that the debtor who knows that another has paid his obligation for him and
who does not object thereto or repudiate it at any time, must pay the amount advance by the third
person. Thus, petition is denied.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or penalty.

CARANDANG V. DE GUZMAN

Facts:
De Guzman paid for the stock subscriptions of spouses Carandang amounting to P336,375.00
According to De Guzman, his payment in favor of the Carandangs was a form of loan and/or
advances, which obliges the Carandangs to pay him.
However, according to the Carandangs, they had an oral pre-incorporation agreement with De
Guzman in which they agreed that De Guzman would pay their equity shares with no costs against
the Carandangs.
Hence, current petition.
Issues:
1) Whether or nor spouses Carandang are liable for the payment made by De Guzman for their
subscriptions to increased capital stocks.
2) Whether or not spouses Carandang are jointly and solidarily liable for the debt.

Held:
1) Yes.
2) No.

Ratio:
I. Are spouses Carandang liable to pay De Guzman?
As per Arts. 1236 and 1237, payment by a third person would produce a debt in favor of
him/her. There are two consequences if such payment was made without consent or there was
a failure to inform the debtor: 1) third person can recover only insofar as the payment has
 been beneficial to the debtor; or 2) third person is not subrogated to the rights of the
creditor, such as those arising from a mortgage, guarantee or penalty.
When there is an alleged liability due to a payment by a third person, there is a presumption of
indebtedness which may be rebutted.
In the case at bar, spouses Carandang needed to prove that there was a pre-incorporation
agreement between them and De Guzman. Yet they failed to do so because Arcadio
Carandangs testimony was taken off record since he did not submit himself for cross-
examination. And they also failed to provide any documentary evidence to prove the existence of
said agreement.
Hence the Court took into consideration of De Guzmans statements about the alleged pre-
incorporation agreement. Although, De Guzmans admission was ambiguous therefore, the court
deemed that he did not admit to the existence of the pre-incorporation agreement. it is necessary
that admissions be clear and unambiguous.
Thus, the presumption of indebtedness was not disproved and so spouses Carandang are liable
to pay De Guzman for the payments he made in favor of them.

II. Are spouses Carandang jointly and solidarily liable to pay De Guzman?

Spouses Carandang were married before the effectivity of the Family Code therefore their
property regime is conjugal partnership under the civil code.
For marriages governed by conjugal partnership, an obligation enterd into by the husband and
wife is chargeable against their conjugal partnership and it is the partnership that is primarily
bound for its repayment.
Thus, spouses Carandang are impleaded in their capacity as representatives of the conjugal
partnership not as independent debtors and so the concept of joint and solidary liability does not
apply to them.

Art. 1238. Payment made by a third person who does not intend to be reimbursed
by the debtor is deemed to be a donation, which requires the debtors consent.
But the payment is in any case valid as to the creditor who has accepted it.16

MOREO-LENTFER V. JURGEN WOLFF

GR 152317. 10 Nov 2004

FACTS
Petitioners:
o Gnter Lentfer (German) and Victoria Moreo-Lentfer (Filipina wife)
o John Cross (Australian)
Respondent
o Hans Jurgen Wolff (German)

Petitioners engaged the notarial services of Atty. Dimayacyac for

o Sale of a beach house owned by petitioner Cross in Sabang, Puerto Galera
o Assignment of Cross contract of lease on the land where the house stood
 Stipulation:
o Sale of beach house and the assignment of the lease right in the name of Victoria
o Total consideration of 220,000 Deutschmarks to be paid by Wolff
Wolff issued a promissory note in favor of Cross
According to Wolff, Lentfer spouses were the confidants of Lentfer who held in trust for him a
time deposit account of 200,000 DM to Solid Bank Corporation
Wolff wanted to own a house along a beach
Lentfer couple urged him to buy Cross beach house and lease rights
Wolff paid Cross 221,700 as total considerations for the sale and assignment of the lease rights
In the deed of sale, Cross, Victoria and Atty Dimayacyac made it appear that the beach
house was sold to Victoria for only P100,000. The assignment of lease was likewise in
favor of Victoria
Wolff filed a complaint with the lower court for annulment of sale and reconveyance of property
with damages and prayer for a writ of attachment.
It was dismissed for failure to establish a cause of action
CA:
o Spouses Lentfer and Cross are jointly and severally liable to pay Wolff 220,000 DM or its
present peso equivalent with legal interest
o They are jointly and severally held liable to pay P200,000 as expenses incurred in the
repairs and maintenance of the property plus legal interest
o Case against Atty Dimayacyac is dismissed

ISSUE: Does art 1238 of the NCC apply?

RATIO: No
Art 1238 states that Payment made by a third person who does not intend to be reimbursed
by the debtor is deemed to be a donation, which requires the debtors consent. But the payment
is in any case valid as to the creditor who has accepted it.
Respondents acts contradict any intention to donate the properties to Victoria
When he learned that the sale of the beach house and assignment of the lease right were in
favor of Victoria, he immediately filed a complaint for annulment of sale and reconveyance of the
property with damages and prayer for a writ of attachment
Victoria claimed that the beach house and the lease right was donated to her but Wolff actually
stayed in the beach house in the concept of an owner and shouldered the expenses for its
maintenance and repair amounting to P200,000 for 10 weeks
Wolff trusted Lentfer spouses to keep a time deposit account for him with Solid Bank for the
purchase of the cited properties thus cash or property donation rings hollow
A donation is a simple act of liberality where a person gives freely of a thing or right in favor of
another, who accepts it. But when a large amount of money is involved, i.e. P3,297,800 based
on the exchange rate in that year, the court was constrained to take the claim of liberality with
more than a grain of salt.
Art 748 par. 3 of the NCC states that If the value of personal property donated exceeds 5,000
pesos, the donation and the acceptance shall be made in writing otherwise void.
Hence, donation is invalid for noncompliance with the formal requisites prescribed by
law.

g. Incapacity to Pay
Art. 1239. In obligations to give, payment made by one who does not have the free
disposal of the thing due and capacity to alienate it shall not be valid, without
prejudice to the provisions of Article 1427 under the Title on Natural Obligations.

h. Payee

Art. 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive
it.

TO WHOM PAYMENT MUST BE MADE:

1. The person in whose favor the obligation has been constituted
2. His successor in interest
3. Any person authorized to receive it.

CEMBRANO VS. CITY OF BUTUAN

G.R. No. 163605. September 20, 2006.
FACTS:
Cembrano, then the Marketing Manager of CVC Lumber Industries Inc., participated in a bidding
for the supply of piles and poles which were to be used for the construction of the new City
Hall of Butuan City.
The contract was awarded to CVC under which it was to deliver to the City of Butuan 757
timber piles within 60 days from the receipt of the order
to partly pay for the merchandise, petitioner Cembrano secured a P150, 000 loan from the
DBP
However, CVC failed to complete deliveries within the 60 day period
CVC through petitioner Cembrano requested for an extension to complete the delivery but City
Engineer Sanchez denied this request and recommended that a new bidding be held on the
unexecuted portion of the contract
The re-bidding was done, without notice to the CVC
CVC through Cembrano, made an investigation to the City Legal Officer regarding the
unilateral cancellation of the contract
The City Legal Officer rendered a report upholding the validity of the contract with CVC and
the purchase order issued by the City to it
CVC and Cembrano, through Go as counsel, filed a complaint of breach of contract and
damages
Trial court rendered in favor or City of Butuan since the contract had already been
terminated for failure of CVC to deliver within the original period
Cembrano appealed the decision to the CA (G.R. CV No. 55049) which reversed the
decision and awarded damages to CVC of P926, 845 (reason: because it was undisputed
that CVC won the bidding for the timber piles and poles)
To pay the damages, the City Treasurer and City Mayor signed a check for the damages with
CVC LUMBER INDUSTRIES, INC/MONICO E. PAG-ONG as payee. The check was
received by Pag-Ong (President of CVC) for CVC,
Atty. Go filed an Urgent Motion (To Direct Sheriffs to Garnish Defendants Bank
Account) alleging that the payment by the City of Butuan to Monico Pag-Ong was not in
compliance with the decision in CA
 o The creditors under the CA decision were CVC and Cembrano, not Plaza (CVC
Corporate secretary) or Pag-Ong
o It insisted that the payment made by the City to Pag-Ong did not discharge its
obligation to Cembrano.
The City opposed the motion, contending that Cembrano was merely the agent or
marketing supervisor of CVC although Cembrano was impleaded as one of the plaintiffs, the
real party-in-interest entitled to the sum of P926, 845 was CVC
On Jan. 8, 2003, the court ruled that the payment made by the City of Butuan to Pag-
Ong was illegal because it was made in a motion for writ of execution and Pag-Ong was
not a party to the case and had no personality
The trial court ordered the DBP to remit P926, 845 to Cembrano and Go in cash, DBP
complied
The City of Butuan filed a Petition for Certiorari and Prohibition with the CA against CVC Pag-
Ong, Plaza and Cembrano insisting that it had already paid respondent CVC and Cembrano
CA granted the petition
Go and Cembrano filed a Motion for Reconsideration, Cembrano arguing that since it was he
who funded the purchase and delivery of the timber poles through the P150, 000 loan he
secured, therefore the damages should be paid in his favor
CA denied the motion for reconsideration. Hence this petition

ISSUE: Whether the damages paid by the respondent had extinguished the obligation
RULING: No.
Article 1240 of the Civil Code provides that payment shall be made to the person in whose favor
the obligation has been constituted, or his successor-in-interest, or any person authorized to
receive it. Payment made by the debtor to the person of the creditor or to one authorized by him
or by the law to receive it extinguishes the obligation. When payment is made to the wrong party,
however, the obligation is not extinguished as to the creditor who is without fault or negligence
even if the debtor acted in utmost good faith and by mistake as to the person of the creditor or
through error induced by fraud of a third person.
The fallo of the CA decision where respondent City was ordered to pay P926, 845 to the
plaintiffs in Civil Case No. 3851
The plaintiffs in Civil Case No. 3851 are petitioner Gil Cembrano and Respondent CVC
THEREFORE, as presumed joint creditors, each of them is entitled to one half of the
amount of P926, 845 or P463, 422.50 each
Respondent City had remitted the P926, 845.00 to respondent CVC, and that Pag-Ong had
received the amount for and in behalf of CVC
Although the City had remitted the full amount, Cembrano did not receive any share in the
P926, 845 thus the obligation to remit one-half of the amount to petitioner Cembrano
was not extinguished
Since respondent CVC was entitled to only P490,605.955 under the CA decision but received
P926,845.00, there was, in fine, an overpayment of P490,605.955 made by respondent City
Thus, respondent CVC is obliged to return the amount of P490,605.955 to respondent City.
Since petitioner Cembrano had already assigned P490,609.955 to petitioner Go, the latter
likewise had the right to receive the P490,609.955 from DBP.
Petitioner Cembrano should thus be made to return the amount of P490,609.955 he received
from the DBP to respondent City.

You must prove that it redounded to be benefit to the other

 i. Payment to Incapacitated/Third person

Art. 1241. Payment to a person who is incapacitated to administer his property

shall be valid if he has kept the thing delivered, or insofar as the payment has been
beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to
the benefit of the creditor. Such benefit to the creditor need not be proved in the
following cases:
(1) If after the payment, the third person acquires the creditors rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditors conduct, the debtor has been led to believe that the third
person had authority to receive the payment.5

VALARAO VS. COURT OF APPEALS and ARELLANO

Facts:
On September 4, 1987, spouses Abelardo and Gloriosa Valarao, thru their son Carlos
Valarao as their attorney-in-fact, sold to [Private Respondent] Meden Arellano under a Deed
of Conditional Sale a parcel of land with an area of 1,504 square meters, for the sum of
P3,225,000.00 payable under a schedule of payment stated therein.
[Private respondent] appellant alleged that as of September, 1990, she had already paid the
amount of P2,028,000.00, although she admitted having failed to pay the installments due
in October and November, 1990. Petitioner, however, [had] tried to pay the installments due
[in] the said months, including the amount due [in] the month of December, 1990 on December
30 and 31, 1990, but was turned down by the vendors-[petitioners] thru their maid, Mary
Gonzales, who refused to accept the payment offered. [Private respondent] maintains that
on previous occasions, the same maid was the one who [had] received payments
tendered by her.
It appears that Mary Gonzales refused to receive payment allegedly on orders of her employers
who were not at home.
[Private respondent] tried to get in touch with [petitioners] over the phone and was able to talk
with [Petitioner] Gloriosa Valarao who told her that she [would] no longer accept the payments
being offered and that [private respondent] should instead confer with her lawyer, a certain Atty.
Tuazon.
When all her efforts to make payment were unsuccessful, [private respondent] sought judicial
action by filing this petition for consignation on January 4, 1991.
On the other hand, vendors-[petitioners], thru counsel, sent [private respondent] a letter dated 4
January 1991 (Exh. "C") notifying her that they were enforcing the provision on automatic
rescission as a consequence of which the Deed of Conditional Sale [was deemed] null and void,
and . . . all payments made, as well as the improvements introduced on the property, [were]
thereby forfeited. The letter also made a formal demand on the [private respondent] to vacate
the property should she not heed the demand of [petitioners] to sign a contract of lease for her
continued stay in the property.

Issue: Whether the automatic forfeiture clause is valid and binding between the parties
Held: No.
Ratio:
From the foregoing, it is clear that petitioners were not justified in refusing to accept the tender
of payment made by private respondent on December 30 and 31, 1990. Had they accepted it on
either of said dates, she would have paid all three monthly installments due. In other words, there
was no deliberate failure on her part to meet her responsibility to pay. The Court takes note of her
willingness and persistence to do so, and, petitioners cannot now say otherwise. The fact is: they
refused to accept her payment and thus have no reason to demand the enforcement of the automatic
forfeiture clause. They cannot be rewarded for their own misdeed.
Because their maid had received monthly payments in the past, it is futile for petitioners to
insist now that she could not have accepted the aforementioned tender of payment, on the
ground that she did not have a special power of attorney to do so. Clearly, they are estopped from
denying that she had such authority. Under Article 1241 of the Civil Code, payment through a third
person is valid [i]f by the creditors conduct, the debtor has been led to believe that the third person
had authority to receive the payment.

j. Payment to Possessor of Credit

Art. 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor.

EFFECT OF PAYMENT TO UNAUTHORIZED PERSONS IN OBLIGATIONS TO GIVE:

General Rule: It shall not be valid, even though made in good faith.

EXCEPTION #2: Payment to the possessor of the credit, made in good faith
This refers to the possession of credit not the document evidencing it.

Note: In obligations to give, payment to incapacitated person is valid when:

a. The incapacitated has kept the amount or thing paid or delivered
b. Payment has been beneficial to the incapacitated person

Payment made to the creditor by the debtor after the latter has been judicially ordered
to retain the debt shall not be void; unless otherwise stipulated, extrajudicial expenses
required by the payment shall be for the account of the debtor.

Ex. Promissory note

ORATA VS. INTERMEDIATE APPELLATE COURT

G.R. No. 73471, 8 May 1990
Facts:
Respondent Gertrudes, the appointed administratrix of the lot owned by her deceased husband
Florencio dela Cruz since 1961, demanded payment of rental from the petitioner who refused
because she has already paid her rental (from November 1979 to March 1980) to Celso Teodoro,
the grandson heir of Florencio dela Cruz, without knowing that Gertrudes is the administratrix.
Gertrudes then filed Civil Case No. 5083 against the petitioner for ejectment before the Municipal
Court of San Juan, Metro Manila, for non-payment of rental in the amount of P25.00 a month
Petitioner received the decision of the Regional Trial Court on 9 March 1985 and on 18 March
1985, petitioner filed a Motion for Reconsideration of the decision, which was denied in an order
dated 23 April 1985 and received by petitioner on 2 May1985.
 On 17 May1985, petitioner filed a petition for review with the Intermediate Appellate Court (IAC)
to which the IAC dismissed the resolution on 23 May 1985 for having been filed beyond the
reglementary period.
On 13 June 1985, petitioner filed a motion for Reconsideration but the Court denied the motion
on 6 January 1986. Hence, this petition

Main Issue: Whether the payment made by the debtor in good faith is valid

Other issue: Whether the petition for review filed in the Court of Appeals which was obviously filed
beyond the reglementary period, may still be considered in the interest of substantial justice.

Held: Yes. The instant petition is impressed with merit and has a good cause of action.

Ruling: (Re Main Issue) Payment in good faith to any person in possession of the credit shall release
the debtor (Article 1242, Civil Code).
When respondent Reyes sent a demand letter to the petitioner on 17 October 1979 to pay the rent to
her, and when her ejectment complaint was filed on 24 May1980, the title of the leased premises was
still in the name of Teodoro. His title was cancelled only on 9 Nov 1983, 3 years after the filing of this
case in 1980.

Since a certificate of title is conclusive evidence of ownership in favor of the person named therein
(Yumul v. Rivera, et al., 64 Phil. 13 [1937]) and every person dealing with registered land may safely
rely on its correctness (Director of Lands v. Abache, et al., 73 Phil. 606 [1942]), petitioner was in good
faith in paying the rentals to her lessor, Teodoro, who was in fact the registered owner, also up
to 9 November 1983. As a grandson and legal heir of the registered owner, Teodoro was a co-owner
of the property. Payment of the obligation to him discharged the debtor, but he (Teodoro) should
account to the other co-owners for their share of the credit (Articles 500 and 1214, Civil Code).
Even though the administratrix thereof has no cause of action for her ejectment thereof, the petitioner
should pay the rentals to the private respondent as administratrix of the estate of the deceased
registered owner, Florencio dela Cruz.

Other issue (may not be important): The case at bar was filed out of time. Counting the 15-day period
from 9 March 1985, the petition should have been filed on 24 March 1985. The running of the period
was, however, interrupted by the filing of the motion for reconsideration on 18 March1985, thereby
leaving a balance of 6 days. Said motion for reconsideration was denied and received by the petitioner
on 2 May 1985 and the period commenced to run again. Adding the balance of 6 days the petition
should have been filed on 8 May 1985 instead of 17 May 1985 which is 9 days later. In fact, a motion
for reconsideration is not a prerequisite to an appeal, a petition for review or a petition for review on
certiorari

The Court has in a number of cases, in the exercise of equity jurisdiction decided to disregard
technicalities in order to resolve the case on its merits based on the evidence (St. Peter Memorial Park,
Inc. v. Cleofas, 121 SCRA 287 [1983]).

Furthermore, it is well settled that litigations should, as much as possible, be decided on their merits
and not on technicalities (Galdo v. Rosete, 84 SCRA 239, 242-243 [1978]); that every party-litigant
must be afforded the amplest opportunity for the proper and just determination of his case, free from
unacceptable plea of technicalities (Heirs of Ceferino Morales v. Court of Appeals, 67 SCRA 304; 310
[1975]). This Court has ruled further that being a few days late in the filing of the petition for review
does not merit automatic dismissal thereof (Serrano v. Court of Appeals, 139 SCRA 179 [1985]). And
even assuming that a petition for review is filed a few days late, where strong considerations of
substantial justice are manifest in the petition, this Court may relax the stringent application of technical
rules in the exercise of its equity jurisdiction. In addition to the basic merits of the main case, such a
petition usually embodies justifying circumstances which warrant Our heeding the petitioners cry for
justice, inspite of the earlier negligence of counsel (Ibid).

k. Payment after Judicial Order to Retain

Art. 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.

l. Substitution of Prestation

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable than that
which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by

another act or forbearance against the obligees will.

m. Dation in Payment

Art. 1245. Dation in payment, wherein property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

Dation in Payment (Dacion en pago)

Delivery and transmission of ownership of a thing by the debtor to the credtor as an
accepted equivalent of the performance of the obligation.

Requisites:
1. Existence of a money obligation;
Take note, however, that it is precisely in obligations which are not money debts, in
which the truth juridical nature of dation in payment becomes manifest. The fact
there must be a prior agreement of the parties on the delivery of the thing in lieu of
the original prestation shows that there is a novation which extinguishes the original
obligation, and the delivery is a mere performance of the obligation.

Thus, if the creditor is evicted from the thing given in dation in payment, the
original obligation is not revived.

It is submitted that the question of whether the pre-existing obligation in dation in

payment is in money has significance only in determining whether the resulting
contract is that of sale and not whether the original obligation has been
extinguished.
 2. Alienation to the creditor of a property by the debtor with the consent of the
former
3. Satisfaction of the money obligation of the debtor.

TAN SHUY VS. SPOUSES MAULAWIN

FACTS:
Petitioner Tan Shuy is engaged in the business of buying copra and corn, and would issue a
pesada for each crop seller. [note: pesada is a document containing details of the transaction]
An annotation of pd on the pesada meant that the crop delivered had already been paid for
by petitioners.
Respondent Maulawin is a farmer-businessman engaged in the buy-and-sell of copra and
corn.
Petitioner extended a loan to respondent in the amount of P420,000.00, and in consideration
thereof that latter obligated himself to pay the loan and to sell lucad/copra to petitioner.
Despite repeated demands, respondent only paid a total of P28,500. When no settlement was
reached at the Lupon Tagapamayapa, petitioner brought the controversy to the RTC.
Respondent argued that he had already paid the subject loan in full, i.e. he continuously
delivered and sold the copra for 1 year and as per their arrangement, the net proceeds thereof
shall be applied as installment payments for the loan.
RTC ruled that the copra deliveries should be applied as installment payments for the loan, but
found that respondent still had not made full payment of his loan.
On appeal, CA affirmed trial court decision.

ISSUE: Whether delivery of copra amounted to installment payments for the loan obtained by
respondents from petitioner.
HELD: Yes. Petition denied, CA decision affirmed.
The Court held that pursuant to Art. 1232 NCC: an obligation is extinguished by payment or
performance. There is payment when there is delivery of money or performance of an obligation.
While Art. 1245 NCC provides for a special mode of payment called dation in payment (dacin
en pago).
There is dation in payment when property is alienated to the creditor in satisfaction of a debt in
money. Here, the debtor delivers and transmits to the creditor the formers ownership over a
thing as an accepted equivalent of the payment or performance of an outstanding debt.
In such cases, Art. 1245 provides that the law on sales shall apply, since the undertaking really
partakes of the nature of sale; that is, the creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against the debtors obligation.
Dation in payment extinguishes the obligation to the extent of the value of the thing delivered,
either as agreed upon by the parties or as may be proved, unless the parties by agreement
(express or implied), or by their silenceconsider the thing as equivalent to the obligation, in
which case the obligation is totally extinguished.
In the case at bar, the arrangement between petitioner and respondent can thus be considered
as one in the nature of dation in payment. There was partial payment every time respondent
delivered copra to petitioner, which was evident when he chose not to collect the net proceeds
of his copra deliveries, and instead applied the collectible as installment payments for his loan.

PHILIPPINE LAWIN VS. CA

G.R. No. 130972, 23 January 2002
FACTS:
 - Advance Capital Corporation, a licensed lending investor, extended a loan to Philippine Lawin
Bus Compnay for P8 million payable within one year. Through Executive Vice president
Marciano Tan executed promissory note for P8M and executed a chattel mortgage for 9 buses
as collaterals. Lawin was able to pay P1.8 million of the first loan thus they were able to avail
an additional P2M loan for one month under another promissory note.
- Lawin failed to pay the promissory notes, Lawin was granted a loan re-structuring which they
again failed to pay thus Advance sent demand letters however Lawin still failed to pay. Thus
the suit for sum of money where Advance prays that Lawin pay the amount of the loan of
P16.5 M. In their answer, Lawin assert that there was already an arrangement for the
settlement or payment of the loan obligation by way of (a) the sale of the 9 units of passenger
buses and (2) operations of the buses with the proceeds of the sale and operation to be
applied to the loan obligation of Lawin.
- The RTC dismissed the complaint of Advance particularly declaring the obligation or
indebtedness of Lawin extinguished, hence their appeal in the CA which reversed the decision
of the RTC, hence this appeal.
ISSUE: Whether or not there was dacion en pago between the parties upon the surrender or transfer
of the mortgaged buses.
HELD: No.
- In dacion en pago , property is alienated to the creditor in satisfaction of a debt in money. It is
the delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. It extinguishes the obligation up to
the extent of the value of the thing delivered, either as agreed upon by the parties or as may
be proved, unless the parties by agreement, express or implied, or by their silence consider
the thing as an equivalent to the obligation, in which case the obligation is totally extinguished.
- Article 1245 of the NCC provides that the law on sales shall govern an agreement of dacion en
pago where a meeting of the minds of the parties thereto upon the thing which is the object of
the contract and upon the price. In dacion en pago, a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an outstanding
obligation and really partakes the nature of a sale where the creditor really buys the thing or
property of the debtor, the payment for which is to be charged against the debtors debt.
- In this case there was no MEETING OF THE MINDS between the parties on whether the loan
of Lawin would be extinguished by dacion en pago. It only appeared that Lawin was an agent
in the sale of the vehicles where the proceeds was applied in the payment of petitioners
indebtedness to Advance.

n. Same Quality

Art. 1246. When the obligation consists in the delivery of an indeterminate or

generic thing, whose quality and circumstances have not been stated, the creditor
cannot demand a thing of superior quality. Neither can the debtor deliver a thing
of inferior quality. The purpose of the obligation and other circumstances shall be
taken into consideration.

Rule of the medium quality

if the obligation is to deliver a generic, the purpose of the obligation and other
circumstances shall be taken into consideration to determine the quality or kind of
thing to be delivered
Rules when the Obligation Consists in the Delivery of Indeterminate or Generic
Things
If the contract does not specify the quality and circumstances
1. Creditor cannot demand a thing of superior quality (but he may demand accept on
of inferior quality)
2. Debtor cannot deliver a thing of inferior quality, but if he so desires, he may deliver
one of superior quality (provided it is not of a different kind)

Note: the creditor cannot be compelled partially to receive the prestations in which the
obligation consists. Neither may the debtor be required to make partial payments (Art.
1248)

Exceptions:
1. When the obligation expressly stipulates the contrary
2. When the different prestations which constitute the objects of the obligation are
subject to different terms and conditions
3. When the debt is in part liquidated and in part unliquidated, the creditor may
demand and the debtor may effect the payment of the former without waiting for
the liquidation of the latter

o. Extrajudicial Expenses

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by

the payment shall be for the ac- count of the debtor. With regard to judicial costs,
the Rules of Court shall govern.

Debtor pays for extrajudicial expenses

Reason: the obligation is extinguished when payment is made and therefore the
debtor who is primarily benefited
Art 1247 does not apply to expenses incurred by the creditor in going to the
debtors domicile to collect

Judicial costs
Are the statutory amounts allowed to a party to an action for his expenses incurred
in the action
Under the Rules of Court, the costs of an action shall, as a rule, be paid by the
losing party
No costs are allowed against the government unless otherwise provided by law

p. Currency and Value

Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines.

Payment of debts in money payable in Philippine Currency

Art. 1249 par. 1 is not applicable where the contract between the parties is to pay
in the currency

Rule in Monetary Obligations

1) Must be made in the currency stipulated; if it is not possible to deliver such
currency, then in in the currency which is legal tender in the Philippines
2) Delivery of promissory notes payable to order or bills of exchange or other
mercantile documents shall not produce the effect of payment except:
1) When they have been cashed or credited
2) When through the faulty of the creditor they have been impaired

Meaning of legal tender

Currency which a debtor can legally compel a creditor to accept in payment of a
debt in money when tendered by the debtor in the right amount

Legal Tender in the Philippines would be all notes and coins issued by the Bangko
Sentral
1) P1, P5, P10 coins in the amounts not exceeding P1, 000
2) 25 centavo coin or less: in amounts not exceeding P100

bills regardless of denomination are legal tender up to whatever amounts

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated

should supervene, the value of the currency at the time of the establishment of
the obligation shall be the basis of payment, unless there is an agreement to the
contrary.

Extraordinary Inflation or Deflation

Requisites
1. There must be a decrease or increase in the purchasing power of the currency
which is unsual or beyond the common fluctuation in the value of the currency
2. Such decrease or increase could not have been reasonably foreseen or which was
manifestly beyond the contemplation of the parties at the time the obligation was
established

NOTE: Art. 1250 mentions in the currency stipulated. Thus, it applies only to
contractual obligations.
The value of currency at the time of the establishment of the obligation shall be the basis
of payment. The law does not say it should be the amount paid.

Note: Even if the price index of the goods and services may have risen during the
intervening period, this increase without more, cannot be considered as resulting in
extraordinary inflation as to justify the application of Art. 1250 (Telengtan & Sons, Inc.
vs. United States Lines, Inc.)

There must be a declaration of such extraordinary inflation or deflation by the Bangko

Sentral. Without such declaration, the creditors cannot demand and increase, and the
debtors a decrease, of what is due to or from them.

TELENGTAN BROTHERS VS. UNITED STATES

Facts:
Telengtan is a domestic corporation doing business under the name and style La Suerte Cigar
and Cigarette Factory, while respondent US Lines is a foreign corporation engaged in
overseas shipping.
Due to the enforcement of Far East Conference Tariff No. 12, consignees who fail to take delivery
of their containerized cargo within the 10-day free period are liable to pay demurrage charges.
On 22 June 1981, respondent sued petitioner seeking payment of demurrage charges plus interest
and damages, for the petitioners failure to withdraw its goods from the containers wherein
the goods had been shipped.
The RTC ruled in favor of respondent, and held that the petitioner is liable to pay the respondent
demurrage amounting to P99,408.00 with interest from the date of the filing of the complaint as well
as attorneys fees.
The RTC also ordered that all of the liabilities shall be recomputed as of the date of payment
in accordance with the provisions of Art. 1250.
The CA affirmed the RTC ruling in toto, hence current petition.
Issue: Whether or not the amount of demurrage to be paid by the petitioner should be recomputed in
accordance with the provisions of Art. 1250.

Held: No.
According to Art. 1250, in case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement to the contrary.
Extraordinary inflation or deflation exists when there is an unusual increase or decrease in the
purchasing power of the Philippine peso which is beyond the common fluctuation in the value of
said currency and such increase or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.
In the case, the Court finds that there is no plausible reason for ordering the payment of an
obligation in an amount different from what has been agreed upon because of the purported
supervention of extraordinary inflation.
 Under Art. 1250, extraordinary inflation can never be assumed, it must be proven by the
party who alleges the existence of such phenomenon.
Here, the respondent was unable to prove the occurrence of extraordinary inflation from the
time it filed its complaint in 1981.
The record lacks testimonial and documentary evidence that extraordinary inflation existed.
The effects of extraordinary inflation are not to be applied if there is no official
pronouncement or declaration by competent authorities of the existence of extraordinary
inflation during a given period.
Furthermore, Art. 1250 provides that the value of the peso at the time of the establishment of
the obligation shall control and be the basis of payment of the contractual obligation, unless there
is agreement to the contrary.
Hence, it is only when there is a contrary agreement that extraordinary inflation will make the value
of the currency at the time of payment, not at the time of the establishment of obligation, the basis
for payment.
As held in Mobil Oil Phils. v. CA, an agreement is needed for the effects of an extraordinary
inflation to be taken into account to alter the value of the currency at the time of the establishment
of the obligation which, as a rule, is always the determinative element, to be varied by agreement
that would find reason only in the supervention of extraordinary inflation or deflation.
In the case, there was no agreement between the parties that would effect a recomputation of the
liability should there be extraordinary inflation.

CITIBANK VS. SABENIANO

GR 156132. 6 Feb 2007
FACTS
Motion for Partial Consideration of Citibank
Modesta Sabeniano (respondent)
Citibank (petitioner) a banking corporation duly authorized and existing under the laws of US
and licensed to do commercial banking activities and perform trust functions in the Philippines

Respondent was a client of petitioner holding several deposits and market placements with
Citibank
o Savings account with Citibank-Manila
o Money market placements with FNCB Finance (under Citibank)
o Dollar accounts with Citibank-Geneva
Respondent had outstanding loans with Citibank-Manila amounting to P1,920,000 which
were due and demandable by May 1979 however respondent failed to pay the outstanding
loans
Petitioner used respondents desposits and money market placements to off-set and
liquidate her obligations
Respondent sought to recover her deposits and money market placements
RTC, CA and SC (first decision) all ruled in favor of respondent.

ISSUE: Whether the SC should adjust the nominal values of Sabenianos account by using the
values of currencies in 1979 as stipulated in the obligation

HELD: No.
 Though Citibank-Manila invokes Art 1250 of the NCC, the provision becomes applicable only
when there is extraordinary inflation of deflation of currency
o Inflation sharp increase of money or credit or both, without a corresponding increase
in business transaction
There is extraordinary inflation or deflation of currency when there is a decrease or increase in
the purchasing power of the Philippine currency, which is unusual or beyond the common
fluctuation in the value of said currency, and such increase/decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of
the establishment of the obligation
SC rules that Sabeniano's dollar accounts with Citibank-Geneva must be deemed to be
subsisting and continuously deposited with Citibank-Manila all this while, and will only
be withdrawn by Sabeniano herself.
Therefore, Citibank-Manila should refund to Sabeniano the $149,632.99 taken from her Citibank-
Geneva accounts, or its equivalent in Philippine currency using the exchange rate at the time
of payment, plus the stipulated interest for each of the fiduciary placements and current
accounts involved, beginning October 26, 1979 (time of obligation).
The supervening of extraordinary inflation is NEVER assumed. It must be competently
proven by the parties for Art. 1250 to apply.
Although the US Dollar - Philippine Peso exchange rate dropped by 17 points from June 1997
to 1998, the Bangko Sentral ng Pilipinas (BSP) did not categorically declare that the same
constitutes as an extraordinary inflation.
o Existence of extraordinary inflation must be officially proclaimed by competent
authorities such as the BSP. SC cannot declare extraordinary inflation.
o Art.1250 is based on equity. Citibank does not come to the SC with clean hands,
because the delay in the recovery of Sabeniano's dollar accounts with Citibank-
Geneva was due to the unlawful act of Citibank-Manila in using the dollar accounts
to liquidate Sabeniano's loans.
o Sabeniano's businesses failed and her properties were foreclosed because of Citibank-
Manila's actions.
Motion for Partial Reconsideration is Denied for lack of merit.

EQUITABLE PCI VS. NG SHEUNG

G.R. No. 171545. December 19, 2007

FACTS:
Ng Sheung Ngor, Ken Appliance Division, Inc. and Benjamin E. Go claim that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest rates
they accepted Equitables proposal and signed the banks preprinted promissory notes on
various dates beginning 1996.
They were however unaware that the documents contained identical escalation clauses
granting Equitable authority to increase interest rates without their consent
On October 7, 2001, respondents filed an action for annulment and/or reformation of documents
and contracts against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu
and Bejan Lionel Apas, in the Regional Trial Court (RTC)
Equitables answer: respondents knowingly accepted all the terms and conditions contained in
the promissory notes
RTC . . .
o Held that the promissory notes are valid but invalidated the escalation clause they
contained because it violated the principle of mutuality of contracts
o found that, in 2001 alone, Equitable restructured respondents loans amounting to
US$228,200 and P 1,000,000
 o it took judicial notice of the steep depreciation of the peso during the intervening
period and declared the existence of extraordinary deflation
o ordered the use of the 1996 dollar exchange rate in computing respondents dollar-
denominated loans
o awarded moral and exemplary damages to respondents
[for unnecessary motions read notes below ruling]
Equitable moved for reconsideration but it was denied. Hence this petition.

ISSUE: Whether extraordinary inflation affected the payment of the obligation

RULING: No.
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease
could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse
situation.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be
proven:
o that there was an official declaration of extraordinary inflation or deflation from the Bangko
Sentral ng Pilipinas (BSP)
o that the obligation was contractual in nature
o that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation
In this case, the BSP never declared a situation of extraordinary inflation
Neither did the parties agree to recognize the effects of extraordinary inflation (or deflation)
Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by
the BSP on the date of maturity

q. Payment in Negotiable Instruments

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and
if it is not possible to deliver such currency, then in the currency which is legal tender in
the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in
abeyance.78

Rule in Monetary Obligations

1) Must be made in the currency stipulated; if it is not possible to deliver such currency,
then in in the currency which is legal tender in the Philippines
2) Delivery of promissory notes payable to order or bills of exchange or other mercantile
documents shall not produce the effect of payment except:
3) When they have been cashed or credited
 4) When through the faulty of the creditor they have been impaired

NOTE: The impairment of the negotiable instrument through the fault of the creditor
contemplated by Art. 1249 is applicable only o a document executed by a third person
and delivered by the debtor to the creditor and does not apply to instruments executed
by debtor himself and delivered to the creditor.

Pending the cashing of the mercantile document, the creditor cannot bring an action
against the debtor during the intervening period as the action derived from the original
obligation shall be held in abeyance.

Payment by means of instruments of credits.

(1) Right of creditor to refuse or accept.Promissory notes, checks, bills of
exchange and other commercial documents are not legal tender and, therefore,
the creditor cannot be compelled to accept them. This is true even though the
check is certified, or is a managers check.
a. The creditor, if he chooses, may accept them, without the acceptance
producing the effect of payment. In the meantime, the demandability of the
original obligation is suspended until the payment by the commercial
document is actually realized. The creditor must cash the instrument, and
it is only when it is dishonored, that he can bring an action for non-payment
of the debt. (par. 3.)
b. The Civil Code provisions on payment of obligations, particularly Article
1245, are applicable where what is involved is the payment of a judgment
obligation.
(2) Payment for purpose of redemption.A redemption of property sold under
execution is not rendered invalid by reason of the fact that the payment to the
sheriff for the purpose of redemption is effected by means of a check for the
amount due.

Article 1249 deals with a mode of extinction of debts, while the right to redeem is not an
obligation but the exercise of a right; nor is it intended to discharge a pre-existing debt.
It is the policy of the law to be liberal in redemption cases, to aid rather than to defeat
the right of redemption.

Accordingly, the Civil Code provisions on payment of obligations may not be applied
where what applies is the settled rule that a mere tender of a checks is sufficient to
compel redemption.

PAPA VS. VALENCIA and CO., INC., FELIC PEARROYO, SPS. ARSENIO B.
REYES & AMANDA SANTOS and DELFIN YAO

Facts:
Myron Papa, acting as attorney-in-fact of Angela Butte, allegedly sold a parcel of land in
La Loma, Quezon City to Felix Penarroyo, through respondent A. U. Valencia.
 However, prior to the alleged sale, the land was mortgaged by Butte to Associated Banking
Corporation along with other properties and after the alleged sale but prior to the propertys
release by delivery, Butte died. The Bank refused to release the property despite Penarroyos
unless and until the other mortgaged properties by Butte have been redeemed and
because of this Penarroyo settled to having the title of the property annotated.
It was later discovered that the mortgage rights of the Bank were transferred to one Tomas
Parpana, administrator of the estate of Ramon Papa Jr. and he has since then been collecting
rents. Despite repeated demands of Penarroyo and Valencia, Paparna refused to deliver the
property which led to a suit for specific performance. The trial court ruled in favor of Penarroyo
and Valencia.
On appeal to the CA, and ultimately in relation to negotiable instruments, Papa averred that the
sale of the property was not consummated since the PCIB check issued by Penarroyo for
payment worth 40,000 pesos was not encashed by him. However, the CA held the contrary
and that Papa in fact encashed the check by means of a receipt.
Finally, on appeal to the SC, Papa cited that according to Art 1249 of the Civil Code, payment of
checks only produce effect once they have been encashed and he insists that he never
encashed the check. He further alleged that if check was encashed, it should have been
stamped as such or at least a microfilm copy. It must be noted that the check was in
possession of Papa for ten (10) years from the time payment was made to him.

Issue: Whether the check can be considered effective as payment

Held: Yes. The Court held that acceptance of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is received sustains loss by want of such
diligence, it will be held to operate as actual payment of the debt or obligation for which it is given. In
this case, granting that check was never encashed, Papas failure to do so for more than ten
(10) years undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.

After more than ten (10) years from the payment in part by cash and in part by check, the presumption
is that the check had been encashed.

PHILIPPINE AIRLINES VS. CA and HON. JUDGE RICARDO D. GALANO, JAIME K.

DEL ROSARIO
G.R. No. 49188, 30 January 1990

Facts:
Since the petitioner (under the name Able Printing Press) did not issue the checks intended
for Amelia Tan, in her name, she filed her complaint in 8 Nov 1967 against the petitioner.
Even though Amelia won her case after 10 years of protracted litigation in the Court of First
Instance (CFI) and the Court of Appeals (CA), she has not received any amount of what the
courts declared as rightfully hers 22 years later.
The petitioner filed a petition for review on certiorari the decision of CA dismissing the petition
for certiorari against the order of the CFI which issued an alias writ of execution against them.
Petitioner alleged that the payment in check had already been effected to the absconding
sheriff, satisfying the judgment.
The CA affirmed the judgment of the lower court with the modification that PAL is condemned
to pay the latter the sum of P25, 000.00 as damages and P5, 000.00 as attorneys fee.
Judgment became final and executory and was correspondingly entered in the case, which was
remanded to the trial court for execution.
 After 2 months the CA granted her an alias writ of execution for the full satisfaction of the
judgment rendered, when she filed another motion.
Deputy Sheriff del Rosario is appointed special sheriff for enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution stating that no return of
the writ had as yet been made by Deputy Sheriff Reyes and that judgment debt had
already been fully satisfied by the former as evidenced by the cash vouchers signed and
received by the executing sheriff.

Issue: Whether payment made in checks to the sheriff and under his name is a valid payment to
extinguish debt
Held: No, the payment made by the petitioner to the absconding sheriff was not in cash or legal tender
but in checks.
Ruling: Since a negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment

Art. 1249 par 2 and 3: The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
A check, whether a managers check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document is
actually realized.

The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money and unless the parties so agree, a debtor has no rights, except at his own peril, to
substitute something in lieu of cash as medium of payment of his debt. Strictly speaking, the acceptance
by the sheriff of the petitioners checks, in the case at bar, does not, per se, operate as a discharge of
the judgment debt.

r. Interest and Installments

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

Meaning of simple loan or mutuum

Simple loan or mutuum is a contract whereby one of the parties delivers to another
money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid. It may be gratuitous or with a stipulation to pay interest.

Meaning of usury.
Usury is contracting for or receiving interest in excess of the amount allowed by law for
the loan or use of money, goods, chattels, or credits.

Kinds of interest.
They are:
 1. Simple interest.when the rate of interest is stipulated by the parties (Art. 2209.);
2. Compound interest.when the interest earned is upon interest due (Arts. 2212,
1959.);
3. Legal interest. when the rate of interest intended by the parties is presumed by
law, as when the loan mentions interest but does not specify the rate thereof. The
same rate is allowed in judgments where there is no express contract between the
parties in anticipation of the same. Its use is not justified where there is a stipulated
rate of interest in the loan contract;
4. Lawful interest. when the rate of interest is within the maximum allowed by
(usury) law; and
5. Unlawful interest. when the rate of interest is beyond the maximum fixed by law.

Interest rules.
Under the Usury Law, they are:
(1) Legal rate. 12% per annum. The legal rate is 12% (from default until fully paid)
if the transaction is a loan or forbearance of money, goods, or credits or the
judgment involves a loan or forbearance of money, goods or credits, as prescribed
in Central Bank Circular No. 416; otherwise (e.g., indemnity for damages
occasioned by an injury to person or loss of property), it is only 6% as provided in
Article 2209 of the Civil Code.
(2) Maximum rate:
i. 12% per annum if the loan is secured in whole or in part by a
mortgage upon real estate with a Torrens Title or by any agreement
conveying such real estate (also registered) or an interest therein. For
purposes of the ceiling, loans secured by government securities such
as treasury bills, CB certificates of indebtedness, etc., qualify as
secured loans; and
ii. 14% per annum if the loan is not secured as provided above; or
iii. The rate prescribed by the Monetary Board of the Central Bank. (Secs.
1, 1-a, 2, 3, [Usury Law].)
(3) Under Section 2 (secured loan) of the Usury Law, the taking or receiving (not mere
agreeing) of usurious interest is the act penalized. Under Section 3 (unsecured
loan), the mere demanding or agreeing to charge excessive interest is also
punishable. In either case, it is only the creditor who is criminally liable. To conceal
usury, various devices (e.g., sale with right of repurchase under Art. 1602 of the
Civil Code) have been resorted to whereby the true nature of the transaction is
concealed from what may be viewed from the written agreement. (see Art. 1346.)

ART. 1176. The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said interest has
been paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installments have
been paid. (1110a)

Meaning of presumption.
By presumption is meant the inference of a fact not actually known arising from its usual
connection with another which is known or proved.

When presumptions in Article 1176 do not apply.

(1) With reservation as to interest.The presumptions established in Article 1176 do
not arise where there is a reservation as to interest or prior installments, as the
case may be. The reservation may be made in writing or verbally.
(2) Receipt for a part of principal. The first paragraph of Article 1176 only applies
to the receipt of the last installment of the entire capital, not to a mere fraction
thereof. This is logical. A receipt for a part of the principal, without mentioning the
interest, merely implies that the creditor waives his right to apply the payment first
to the interest and then to the principal, as permitted by Article 1253. (infra.) Only
when the principal is fully receipted for, may failure to reserve the claim for interest
give rise to the presumption that said interest has been paid.
(3) Receipt without indication of particular installment paid. It has been held that
the presumption in paragraph 2, Article 1176 is not applicable if the receipt does
not recite that it was issued for a particular installment due as when the receipt is
only dated. Thus, in the preceding example (No. 2), the fact alone that the receipt
issued by R is dated April 5, does not justify the inference that the rents for
February and March had been paid.
(4) Payment of taxes.Article1176doesnotapplytothepayment of taxes. Taxes
payable by the year are not installments of the same obligation.
(5) Non-payment proven.Of course,Article1176isnotapplicable where the non-
payment of the prior obligations has been proven. Between a proven fact and a
presumption pro tanto, the former stands, and the latter falls.

s. Payment Place

ART. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a

determinate thing, the payment shall be made wherever the thing might be at the
moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay,
the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court. (1171a)

Place of Payment
1. Place stipulated by the parties
2. If there is no stipulation and the obligation is to deliver a determinate thing,
payment shall be made at the place where the thing might be at the time the
obligation was constituted
3. In any other case, the payment shall be made at the domicile of the debtor.

Note: if the debtor changes his domicile in bad faith or after he has incurred in delay, the
additional expenses shall be born by him

Art. 1251 governs unilateral obligations. Reciprocal obligation are governed by special
rules.

6. Application of Payments

ART. 1252. He who has various debts of the same kind in favor of one and the
same creditor, may declare at the time of making the payment, to which of them
the same must be applied. Unless the parties so stipulate, or when the application
of payment is made by the party for whose benefit the term has been constituted,
application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the
payment is made, the former cannot complain of the same, unless there is a cause
for invalidating the con- tract. (1172a)

Meaning of application of payments

Application of payments is the designation of the debt to which should be applied the
payment made by a debtor who has various debts of the same kind

Requisites:
1) There must be only one (1) debtor and only one creditor

Under Art. 1792, application of payment may be had even if there are two creditors
the partnership and the managing partner, but the law allows such application in
favor of the managing partner only if the personal credit of the partner shoud be
more onerous to him

Neither the requirement that there must be only one debtor militates against the
possibility of extending the rules on application of payment to solidary obligations.
The solidary debtor who paid may have

2) There must be two (2) or more debts of the same kind

 It is also essential that each of the debt must be identical or homogenous specie.

Exception: When some of the obligations are not identical specie at the time of
their constitution, and at the time of designation or application is made, such
obligations had already been converted into obligations to indemnify with damages
by reason of breach or nonfulfillment.

3) All the debts must be due

Exceptions:
a. Where there is a stipulation to the contrary
b. The application of payment is made by the party for whose benefit the team
or period has been constituted

4) Amount paid by the debtor is insufficient to cover the total amount of all the
debts

Rules on Application of Payment

General Rule: The right to designate the debt to which the payment shall be applied
belongs primarily to the debtor.

The right is only available to the debtor at the time when payment is made

Exception: If the debtor does not apply, the creditor may designate which debt is paid
by specifying in the receipt. Thus, the creditor has the right to propose subject to the
express or tacit approval of the debtor.

LIGGETT & MYERS VS. ASSOCIATED INSURANCE

G.R. No. L-15643| 31 OCTOBER 1960

FACTS:
P.C. Ailmal and petitioner Liggett & Myers entered into an agreement wherein petitioner
advanced to the former 66 cases of Chesterfield cigarettes (taxes prepaid thereon), on the
condition that the former would return an equal quantity of fresh Chesterfield cigarettes
(tax free) upon arrival of his own order.
To guarantee the payment of the internal revenue taxes on the 66 cases of cigarettes to be
delivered, Ailmal, as principal, and respondent Associated Insurance & Surety Co., Inc.
(represented by the Consolidated Underwriters, Inc.), as surety, executed a bond in favor of
Liggett & Myers in the sum of P14,520.00.
Ailmal failed to pay the corresponding exchange tax and bank charges on his letter of credit,
so petitioner was compelled to remit the sum of P1.107.18 to avoid delay in the processing
of the documents. Thus, petitioner immediately demanded reimbursement of this amount
from Ailmal and respondent-surety was also advised of said demand.
Ailmal requested for an extension, which petitioner granted. However, Ailmal still failed to pay.
Petitioner then filed an action with CFI-Manila, demanding payment from Ailmal and
respondent-surety.
 While the case was pending, petitioner (with leave of court) withdrew the cigarettes from the
warehouse and finding that a great portion was in a deteriorated condition, and subsequently
sold them applying the proceeds as partial payment of Ailmals obligation.
[realized total of cigarettes sold were P15,664.80]
CFI rendered judgment ordering Ailmal to pay petitioner and dismissed the complaint against
respondent-surety
On appeal, CA affirmed the trial court decision.

ISSUE: Whether respondent-surety was relieved from liability when payment was applied to the
principal-debtor Ailmals obligation.
HELD: Yes. Petition denied, CA decision affirmed.
The Court held that Art. 1252 provides for the validity of the application of payment based
on the creditors initiative, i.e., generally such corresponds to the debtor and subsists
until he makes the payment, and if he has not made use of it, it is extinguished and the
application becomes subject to legal rules, unless the creditor should determine it and his
decision is accepted by the obligor.
While the exercise of the exclusive right of the debtor to make the application terminates at the
moment of payment, on the other hand the initiative of the creditor may be shown even after
the delivery of the receipt, either to make application of the payment, if the same has not been
done, or to modify what has been stated therein providing of course that he obtains in every
case the acceptance of the debtor. The clear basis of this difference is that while the debtor
decides for himself, the creditor only proposes and the debtor may or may not agree.
The need for the consent of the debtor is clear from the terms of the law which speak of to
accept, which supposes the liberty to reject also, and considering that the option corresponds
to the debtor, if he says nothing, it is because he accepts the legal solution, which cannot be
modified without his consent, even if it be tacit, as it is the manner established by law.
In the case at bar, principal-debtor Ailmal did not exercise the option given to him under the
law at the time the payment was made. The records show, however, that in its urgent motion,
petitioner prayed not only for authority to sell the cigarettes, but also to apply the proceeds of
the sale to the principal-debtors obligation or to pay their value.
To this motion, the debtor offered no objection; as a matter of fact, he merely filed a
manifestation reserving the right to prove at the proper time that any and all losses resulting
from the deterioration of the merchandise are chargeable to the petitioner.
This assent by the principal-debtor and respondent-surety to the application of payment prayed
for by the petitioner and granted by the court, amounted to an assent to such application which
they may no longer revoke or change. It is evident, therefore, that the proceeds of the sale
should be applied to the principal-debtors obligation to pay the value of the 66 cases of
cigarettes.

PREMIERE DEVELOPMENT VS. CENTRAL SURETY

- Central surety was able to obtain an industrial loan of P6M from Premiere Bank as
evidenced by a promissory note which, upon failure to pay, Central Surety would be liable to
Premiere Bank for the unpaid interest up to maturity date, unpaid penalties up to maturity
date and unpaid balance of the principal. Central Surety executed a deed of assignment
with pledge representing its proprietary share in the Wack Wack golf club to cover for the
P6M loan. Incidentally, Central Surety had another P40.9M loan with Premier Bank which
was secured by a real estate mortgage on a condominium unit in Makati City.
- On August 2000, Premiere Bank demanded the payment of the P6M loan to which Central
surety issued a check paying the full amount but for undisclosed reasons, the check was
 returned. Hence, Premiere Bank once again demanded for the payment of the P6M loan
and now demanding payment of the P40.9 million loan. Central Surety once again paid the
P6M loan, through check, requesting Premiere to accept the payment and issue a
corresponding receipt. With regard to the 40.9M loan, another check amounting to P2.6 M
was issued as payment and which was credited by Premiere Bank as partial payments to
their due obligations of the clients which, in the end, did not release the mortgage on the
Wack Wack property since the P6M payment was not fully applied to the loan relating to
the mortgaged property.
- Strongly objecting to such application of payments, Central Surety demanded for the
application of the check payments to the corresponding loans and in turn release the
Wack Wack property, which, Premiere Bank denied, hence Central Surety filed a complaint
with the RTC, which the RTC dismissed saying that Premiere Bank had the right to apply
payment to the most onerous obligation or to the one it sees fit to be paid first among the
several obligations. On appeal, the CA reversed such ruling, hence this petition.
ISSUE: Whether the Creditor (Premiere Bank) was given the right to apply payments.
RATIO: Yes, petition is granted.
- Art 1252 of the NCC provides that as a general rule: he who has various debts of the same kind
in favor of one and the same creditor, may declare at the time of making the payment, to
which of them the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party whose benefit the term has been constituted,
application shall not be made as to debts which are not yet due. If the debtor accepts from the
creditor a receipt in which an application of the payment is made, the former cannot complain of
the same, unless there is a cause for invalidating the contract.
- The SC ruled that the debtors right to apply payment has been considered as merely
directory, and not mandatory. Art 1252 gives the right to the debtor to choose which of several
obligations to apply a particular payment that he tenders to the creditor. However, Art 1252
likewise grants to the creditor the same right to apply such payments in case the debtor fails
to direct its application as provided in para 2 of Art 1252: . If the debtor accepts from the
creditor a receipt in which an application of the payment is made, the former cannot complain of
the same... It is the directory nature of this right and the subsidiary right of the creditor to apply
payments when the debtor DOES NOT ELECT to do so that makes the right waivable.
- In the present case, Central surety, in their promissory notes, expressly granted Premiere
Bank the authority to apply any and all of Central Surety payments, without notice and in
any manner as it sees fit, any or all of their deposits and payments to any of their obligations
whether due or not, hence, Premiere Bank was expressly granted the authority by Central Surety
to apply the payments as it deemed fit to the several debts of Central Surety, hence petition is
granted.

ART. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the inter- ests have been covered. (1173)

MAGDALENA ESTATES, INC. V. RODRIGUEZ

Facts:
Rodriguez bought a parcel of land from Magdalena Estates.
There was an unpaid balance of P5,000 thus Rodriguez executed a promisory note stating:
Rodriguez promises to pay P5,000 with interest of 9% per annum, within 60 days from 7 January
1957.
 Rodriguez also executed a bond with Luzon Surety in favor of Magdalena Estates.
That the surety will pay the amount of P5,000 only should the obligation of the Rodriguez
become due and demandable.
When the obligation of the Rodriguez became due, Luzon Surety paid P5,000 to Magdalena
Estates.
Hence, Magdalena Estates demanded from Rodriguez the payment of the interest amounting to
P655.89.
Rodriguez refused to pay the interest stating that Magdalena Estates unqualified acceptance of
only P5,000 from the surety showed that it waived or condoned the interests due.

Issue: Whether or not Magdalena Estates non-protest upon receiving only the principal obligation
without interest from the surety is a form of waiving or condoning the interests as provided in Arts.
1235 and 1253.

Held: No.
It is clear in the surety bond that Luzon Surety Co., will pay the amount of P5,000 representing
balance of the purchase price of a parcel of land (bought by the Rodriguez).
Hence, Magdalena Estate did not protest nor object the payment of P5,000 without interest from
the surety because that was the only amount stipulated in the surety contract.
The suretys liability is not extended, by implication, beyond the terms of his contract.
With regards Art. 1253, it is inapplicable in the case because it only applies to persons owing
several debts of the same kind of a single creditor. They cannot be made applicable to a person
whose obligation as a mere surety is both contingent and singular.
Furthermore, Art. 1253 is merely directory and not mandatory. Thus, the court cannot say that
there was a waiver or condonation on the interest due.

ART. 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application cannot be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due, shall be deemed to have
been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied
to all of them proportionately. (1174a)

PACULDO VS. REGALADO

FACTS
Petitioner Paculdo and Respondent Regalado entered into a contract of lease over a 16,478
square meter parcel of land
Duration of the contract: 25 years commencing on 1 Jan 1991 to 31 Dec 2015
 For the 1st five years beginning 27 Dec 1990, Paculdo would pay a monthly rental of P450,000
payable within the first five days of each month with a 2% penalty for every month of late
payment
Paculdo also leased 11 other properties from Regalado
Paculdo also purchased from Regalado eight units of heavy equipment and vehicles in the
aggregate amount of P1,020,000
Paculdo failed to pay P 361,895.55 in rental for the month of May 1992 and the monthly rental
of P450,000 for the months of June and July 1992
6 July 1992, Regalado sent a demand letter to Paculdo demanding payment of the back
rentals, and if no payment was made within 15 days from receipt of the latter, the lease
contract will be cancelled.
17 July 1992, another demand letter for payment and for Paculdo to vacate the subject
premises was sent
3 August 1992, unknown to Paculdo, Regalado mortgaged the land including the
improvements which Paculdo introduced into the land amounting to P 35 million to Monte de
Piedad Savings Bank, as security for a loan in the amount of P20 million
12 August 1992 and so on, Regalado refused to accept Paculdos daily rental payments.
20 August 1992, Paculdo then filed with RTC an action for injunction and damages seeking to
enjoin respondent from disturbing his possession of the property subject of the lease contract.
On the same day, Regalado filed with MTC a complaint for ejectment attached were the two
demand letters.
Five days after the filing of ejectment complaint, Regalado moved to withdraw the complaint
on the ground that certain details had been omitted in the complaint and must be re-computed
22 April 1993, respondent re-filed the ejectment complaint with the MTC computed from Aug
1992 until 31 March 1993. Petitioner was liable for P 3,924,000

ISSUE: Whether petitioner Paculdo was in arrears in the payment of rentals at the time of the filing of
the complaint for ejectment

HELD: No.
In the letter dated 19 Nov 1991, respondent proposed that petitioners security deposit for
the Quirino lot, be applied as partial payment for his account under the subject lot as well as
to the real estate taxes on the Quirino lot. Petitioner signed in conformity.
In an earlier letter, 15 July 1991, respondent informed petitioner that the payment was to be
applied not only to petitioners accounts under the subject land and the Quirino lot but also to
the heavy equipment bought by the latter from respondent. No signature of petitioner.
Petitioner submits that his silence is not consent but is in fact a rejection.
As provided in Art 1252 of the NCC, the right to specify which among his various obligations
to the same creditor is to be satisfied first rest with the debtor.
at the time petitioner made the payment, he made it clear to respondent that they were to
be applied to his rental obligations on the Fairview wet market property. Though he
entered into various contracts and obligations with respondent, all the payments made, about
P11,000,000.00 were to be applied to rental and security deposit on the Fairview wet market
property. However, respondent applied a big portion of the amount paid by petitioner to the
satisfaction of an obligation which was not yet due and demandable- the payment of the eight
heavy equipments.
Under the law, if the debtor did not declare at the time he made the payment to which of his
debts with the creditor the payment is to be applied, the law provided the guideline; i.e. no
payment is to be applied to a debt which is not yet due and the payment has to be applied first
to the debt which is most onerous to the debtor.
 The lease over the Fairview wet market is the most onerous to the petitioner in the case at
bar.

7. Payment by Cession

ART. 1255. The debtor may cede or assign his property to his creditors in payment
of his debts. This cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the thing assigned.
The agreements which, on the effect of the cession, are made be- tween the debtor
and his creditors shall be governed by special laws. (1175a)

Difference of Payment by Cession with Application of Payments

Cession one debtor, many creditors
Application of Payments one debtor, many debts

DBP VS. CA
G.R. No. 118342. January 5, 1998.

FACTS:
Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement from the Government
she obtained loans from the Development Bank of the Philippines
As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights;
Plaintiff failed to pay her loan on the scheduled dates
Without foreclosure proceedings defendant DBP appropriated the Leasehold Rights of
plaintiff Lydia Cuba over the fishpond in question
After defendant DBP had appropriated the Leasehold Rights of plaintiff Lydia Cuba over the
fishpond, defendant DBP, executed a Deed of Conditional Sale of the Leasehold Rights in
favor of plaintiff Lydia Cuba over the same fishpond in question
Lydia negotiated for repurchase to which DBP agreed but again failed to pay the amortization
After sending a Notice of Rescission to Cuba, defendant DBP took possession of the
Leasehold Rights of the fishpond and sold the property to Agripina Caperal
Thus Lydia filed a complaint against the DBP and Agripina Caperal by Lydia Cuba in the RTC
seeking
o the declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over
the fishpond, for being violative of Art. 2088 of the CC
o the declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over
the fishpond
o the annulment of DBPs sale of the subject fishpond to Caperal
DBP stressed that in appropriating Cubas leasehold rights over the fishpond without foreclosure
proceedings, it was merely exercising its contractual right under the Assignments of
Leasehold Rights which was not a contract of mortgage
Trial court ruled in favor of Cuba such that DBPs possession and ownership of the property
without proper forseclosure was violative of Art. 2088
 On appeal, the CA affirmed the decision ruling, among others, that contrary to the claim of DBP,
the assignment was not a cession under Article 1255 of the Civil Code because DBP appeared
to be the sole creditor to CUBAcession presupposes plurality of debts and creditors

ISSUE: Whether the act DBP in appropriating Cubas leashold rights over the fishpond without
foreclosure proceedings was contrary to Art. 20886 (CC) and therefore invalid

RULING: Yes. The assignment of leasehold rights was a mortgage contract as evidenced by the
promissory notes therefore foreclosure proceedings are necessary before DBP can appropriate the
land. The assignment also did not novate the promissory notes.

LASTLY, neither did the assignment amount to payment by cession under Article 1255 of the Civil Code
for the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates
the existence of two or more creditors and involves the assignment of all the debtors property. Since
there was only one creditor involved, Art. 1255 does not apply.

8. Tender of Payment and Consignation

a. Effect

ART. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the fol- lowing cases:

(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.(1176a)

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

Before the creditor has accepted the consignation, or be- fore a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force. (1180)

SPS. CINCO V. CA
Facts:

6ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
 Petitioner Manuel Cinco obtained a loan in the amount 700,000.00 from respondent Maasin
Traders Lending Corporation (MTLC).
The loan was evidenced by the promissory note, and secured by a real estate mortgage over
the spouses Cincos land and 4-storey building. To pay the loan in favor of MTLC, the spouses
Cinco applied for a loan with the Philippine National Bank (PNB), and offered the same
properties they previously mortgage to MTLC. The PNB approved the load application for 1.3
Million; the release was, however, conditioned on the cancellation of the mortgage in favor of
MTLC.
Manuel went to Ester Servacio (Ester), MTLCs President to inform her that there was money
with PNB for Payment of his loan. Manuel executed a Special Power of Attorney (SPA)
authorizing Ester to collect the proceeds of the loan. Ester went to the PNB to inquire, the
second time around, about the proceeds.
The bank officer confirmed the existence of such loan, but they required Ester to first sign a
deed of release/cancellation of the mortgage before they could release the proceeds of the
loan to her. Outraged, Ester refused the deed and did not collect the 1.3 Million. Ester
instituted foreclosure proceeding.

Issue: Whether the loan due the MTLC had been extinguished by the act of the spouses Cinco
amounted to payment.

Held: No. While Esters refusal was unjustified and unreasonable, we cannot agree with Manuels
position that this refusal had the effect of payment that extinguished his obligation to MTLC. Article
1256 is clear and unequivocal on this point when it provides that
If the creditor to whom tender of payment has been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the consignation of the thing or sum due.

In short, a refusal without just cause is not equivalent to payment; to have the effect of payment and
the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender
of payment and consignation.

MEAT PACKING V. SANDIGANBAYAN

G. R. No. 103068, 22 June 2001
Facts:
The Petitioner MPCP leased its meat processing and packaging plant on 3 parcels of land, for
a total of P38,515,789.87 payable for 28 years, with PIMECO
This agreement contained rescission clauses that if for any reason whatsoever the lessee-
vendee should fail or default in the payment of rentals equivalent to the cumulative sum total of
3 annual installments, this agreement will be automatically cancelled and forfeited without
need of judicial intervention.
On 17 March 1986, PCGG sequestered all assets of PIMECO which included that meat
packing plant.
MPCP sought the turnover to it of the meat packaging plant on the ground that the lease-
purchase agreement had already been rescinded.
PCGG ordered the transfer of the plant to GSIS, under the condition that the PCGG
management team might continue its operations to complete outstanding orders.
Sandiganbayan found that PCGG committed grave abuse of authority, power and discretion in
unilaterally terminating the lease-purchase agreement of PIMECO and MPCP, and in turning
over its management, control, and operation to the latter.
After the sequestration, the PCGG Management Team that took over the plant became erratic
and irregular in its payments of the annual rentals to MPCP, thus presenting the danger that
 PIMECO may be declared in default in the payment of rentals equivalent to 3 annual
installments and causing the cancellation of the lease-purchase agreement.
PCGG tendered to MPCP amounting to P5,000,000, representing partial payment of accrued
rentals on the meat packing plant, which MPCP refused to accept on the theory that the lease-
purchase agreement has been rescinded. Assailed resolution: Sandiganbayan approved the
consignation by PCGG of the amount of P5,000,000 after the MPCP refused the tender of
payment of the same.
While the unpaid rentals have reached P7,530,036.21, PCGGs tender of payment and
consignation of the amount of P5,000,000 averted the accumulation of the unpaid rentals to 3
annual installments, making the petition for declaratory relief has become moot and academic.
Issue: Whether the consignation was validly made
Held: Yes
Ruling: Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior
tender of payment. It should be distinguished from tender of payment. Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which is the principal, and from which
are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is
the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender
and consignation, where validly made, produces the effect of payment and extinguishes the
obligation.

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost;

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.
There was prior tender by PCGG of P5M for payment of the rentals in arrears. MPCPs refusal to
accept the same, on the ground merely that its lease-purchase agreement with PIMECO had been
rescinded, was unjustified. As found by the Sandiganbayan, from 29 Jan 1986 to 30 Jan 1990,
PIMECO paid, and GSIS/ MPCP received, several amounts due under the lease purchase
agreement, such as annual amortizations or rentals, advances, insurance, and taxes, for a total of
P15,921,205.83

LLOBRERA V. FERNANDEZ
G.R. 142882. 2 May 2006

FACTS:
Respondent Fernandez, one of the registered co-owners of a land (which is the subject of this
controversy), served a written demand letter upon petitioner spouses Llobrera to vacate the
premises. The latter refused, necessitating respondents formal complaint against them.
Since the parties failed to reach any settlement, respondent then filed a verified Complaint for
ejectment and damages against petitioners with MTCC.
 o Petitioners alleged that they had been paying monthly rental of P20.00, but by June 1996
such were refused by the lessors representatives. Thus, they consigned the same to a
bank where they continued to maintain and update their monthly rentals.

MTCC rendered judgment in respondents favor.

On appeal, the RTC affirmed the lower courts judgment. Such judgment was also affirmed with
the CA.
Hence, this petition.

ISSUE: Whether a payment refused by the creditor extinguishes the obligation.

HELD: NO. Petition denied.

RATIO:
The Court upheld the judgment favoring the ejectment of petitioners since it is consistent with
law and jurisprudence. The alleged consignation of the P20.00 monthly rental to a bank account
in the respondents name cannot save the day for the petitioners simply because of the absence
of any contractual basis for their claim to rightful possession of the subject property.
Consignation based on Article 1256 of the Civil Code indispensably requires a creditor-debtor
relationship between the parties, in the absence of which, the legal effects thereof cannot be
availed of. Article 1256 pertinently provides: [i]f the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due. Unless there is an unjust refusal by
a creditor to accept payment from a debtor, Article 1256 cannot apply.
In the case at bar, the possession of the property by the petitioners being by mere tolerance as
they failed to establish through competent evidence the existence of any contractual relations
between them and the respondent, the latter has no obligation to receive any payment from
them. Since respondent is not a creditor to petitioners as far as the alleged P20.00 monthly rental
payment is concerned, respondent cannot be compelled to receive such payment even through
consignation under Article 1256. The bank deposit made by the petitioners intended as
consignation has no legal effect insofar as the respondent is concerned.

b. Requirements

ART. 1257. In order that the consignation of the thing due may release the obligor,
it must first be announced to the per- sons interested in the fulfillment of the
obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with

the provisions which regulate payment. (1177)

ART. 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be proved,
in a proper case, and the announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified
thereof. (1178)
SPECIAL REQUISITES OF CONSIGNATION
1. Existence of a valid debt which is due
2. Tender of payment by the debtor
3. Creditor's refusal to accept payment is without just cause or any of the cases
provided in Art. 1256, par. 2 exists.
a. Tender must precede consignation
b. It must have been unconditional
c. Refusal must be without just cause

4. Previous notice of consignation to person interested in the fulfillment of the

obligation, in order to give the creditor the opportunity to reconsider his unjustified
refusal and to accept payment to avoid consignation and the subsequent litigation.

5. Lack of previous notice does not invalidate the consignation, but simply makes the
debtor liable for the expenses occasioned thereby

a. Consignation - amount or thing due placed at the disposal of the court

6. This requirement is complied with if the debtor deposits the thing or amount with
the Clerk of Court. Normally, this requirement is accompanied by the filing of the
complaint itself.

a. Subsequent notice of consignation to enable the creditor to withdraw the

goods or money deposited.

MCLAUGHLIN VS. CA
GR No. L-57752; 10 October 1986

Facts:
- On 28 February 1977, Luisa McLaughlin entered a contract of conditional sale of real property
with respondent Ramon Flores. The total purchase price of P140K was fixed as well as its
mode of payment in installments. It was therein agreed that the balance shall bear interest 1%
per month until the full purchase price has been paid.
- On 19 June 1979, McLaughlin filed a complaint before the CFI for rescission of the contract of
conditional sale for respondents failure to pay the balance due May 1977. During the trial, the
parties entered into a Compromise Agreement upon which the court based its decision. It was
stipulated that Flores acknowledged his indebtedness of P199K and that it be paid P50K upon
signing of the Agreement, and the balance of P69K payable in two installments. Upon signing,
Flores did pay P50K as well as agreed to an escalation cost of P25K. It was also stated in the
Compromise Agreement that Flores will pay P1K monthly as rent for the use of the property
subject to the deed of conditional sale. Also, it was stipulated that on the event that Flores
defaults in any of the obligations in the Agreement, that the Deed of Conditional Sale will be
rescinded by writ of execution from the CFI.
- On 19 October 1980, petitioner sent a letter to Flores demanding payment of the P69K due the
last June. Flores replied stating his intent and willingness to pay the installment but at the
same time demanding to see the certificate of the title of the property. He also stated in his
 brief that on the first working day of November, he tendered payment to the petitioner but
refused acceptance by the same. On 7 November 1980, petitioner filed a Motion for Writ of
Execution alleging that Flores failed to pay the installment due on June 1980 and that he has
since failed to pay the monthly rental of P1K. Trial Court granted the writ of execution. On 17
November 1980, Flores filed for a motion for reconsideration tendering at the same a Pacific
Bank Corporation certified Managers Check in the amount of P76K payable to the order of
McLaughlin. Trial court, however, denied the motion of reconsideration. The trial court granted
an ex-parte motion for clarification of the order of execution rescinding the deed of conditional
sale of real property. McLaughlin filed an appeal but the CA nullified and set aside the orders
of the trial court. It ruled that for a rescission to be availed as a remedy, the breach must be
substantial of fundamental as to defeat the object of the parties in making the agreement.

Issue:
1. Whether Flores substantially complied with his obligations as to render rescission not available
as remedy.
2. Whether the managers check offered as payment by Flores was a valid tender of payment.
3. Whether Flores failure to consign with the court his payment to McLaughlin, after the latter
refused to accept the payment, would constitute as default to his obligation.

Held:
1. Yes.
2. Yes.
3. No.

Ratio:
1. After a purchaser has paid a substantial portion of the purchase price, it would be inequitable
to have the amount paid as forfeited as liquidated damages, particularly if tender of payment
has been made. In the case at bar, Flores had already paid P101K, particularly after tendered
P76K in payment of his obligation. It would be inequitable to forfeit such amount.
2. The certified check not only covered the balance of the purchase price in the amount of P69K,
but also the arrears in the rental payments from June December.
3. Where an obligor fails to follow a valid court consignation, the court may allow him time to pay
his obligation without rescinding the deed of sale. Since Flores failed to deposit the amount
with the court after it was rejected by McLaughlin, he is still not deemed free from his obligation
and therefore he is liable to pay the P1K monthly since the time of the refusal by McLaughlin.

SOCO VS. MILITANTE

Facts:

Soco and private respondent, Francisco entered into a contract of lease on 17 January 1973.
Soco leased her building for a rental of P800/month for a period of 10 years, renewable for another
period of 10 years at the option of the lessee.
In 1978, Soco alleged that Francisco failed to pay rentals beginning May 1977.
In Franciscos defense, he stated that all rentals were paid through checks issued by the Commercial
Bank and Trust Company.
However, Soco still filed a case of illegal detainer against Francisco.
The CFI found that there was a tender of payment of rentals made by Francisco through the bank
and Soco was notified of these payments by the consignation letter sent to her by Franciscos lawyer.
 Thus, the CFI held that there was substantial compliance of the requisites of consignation, making
the payments valid and effective.
Hence, the current petition.
Issue: Whether or not the essential requisites of a valid consignation were fully and strictly complied
with in accordance with Arts.1256 to 1261.

Held: No.

Ratio:
Arts. 1256 to 1261 must be accorded a mandatory construction because of the use of the words
shall and must which are imperative.
According to Article 1256, New Civil Code, if the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from responsibility by the
consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases: (1) When the creditor is
absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to
receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect; (5) When the title of the obligation has
been lost. Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior
tender of payment.
In order that consignation may be effective, the debtor must first comply with certain requirements
prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of
the obligation had been made because the creditor to whom tender of payment was made refused
to accept it, or because he was absent or incapacitated, or because several persons claimed to be
entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation
had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code);
(4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that
after the consignation had been made the person interested was notified thereof (Art. 1178, Civil
Code). Failure in any of these requirements is enough ground to render a consignation ineffective.
Without the notice first announced to the persons interested in the fulfillment of the obligation, the
consignation as a payment is void.

c. Expenses

ART. 1259. The expenses of consignation, when properly made, shall be charged
against the creditor. (1179)

d. Withdrawal

ART. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or be- fore a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force. (1180)

PABUGAIS VS. SAHIJWANI

FACTS
Pursuant to an "Agreement And Undertaking", Pabugais, in consideration of the amount
P15,487,500.00, agreed to sell to Sahijwani, a lot containing 1,239 square meters located at
Jacaranda Street, North Forbes Park, Makati City.
Sahijwani paid Pabugais the amount of P600,000.00 as option/reservation fee and the balance
of P14,887,500.00 to be paid within 60 days from the execution of the contract, simultaneous
with delivery of the owner's duplicate Transfer Certificate of Title in Sahijwani's name the Deed
of Absolute Sale; the Certificate of Non-Tax Delinquency on real estate taxes and Clearance on
Payment of Association Dues.
Paragraph 5 of the agreement said: DEFAULT In case the FIRST PARTY [Sahijwani] fails
to pay the balance of the purchase price within the stipulated due date, the sum of P600,000.00
shall be deemed forfeited, on the other hand, should the SECOND PARTY [Pabugais] fail to
deliver within the stipulated period the documents hereby undertaken, the SECOND PARTY
shall return the sum of P600,000.00 with interest at 18% per annum.
Pabugais failed to deliver the required documents. In compliance with their agreement, he
returned to Sahijwani the latter's P600,000.00 option/reservation fee by way of Far East Bank &
Trust Company which was, however, dishonored.
According to Pabugais, he twice tendered to Sahijwani, through his counsel, P672,900.00
(representing the P600,000.00 option/reservation fee plus 18% interest per annum computed
from December 3, 1993 to August 3, 1994) in the form of a check but said counsel refused to
accept the same (1st-via messenger; 2nd-via DHL). Because of these refusals, he wrote a letter
saying that he was consigning the amount tendered with the RTC Makati City.
According to Sahijwani, his office received Pabugais's letter but claimed that no check was
appended thereto. He averred that there was no valid tender of payment because no check was
tendered and the computation of the amount to be tendered was insufficient, because Pabugais
verbally promised to pay 3% monthly interest and 25% attorney's fees as penalty for default, in
addition to the interest of 18% per annum on the P600, 000.00 option/reservation fee.
On November 29, 1996, the TC rendered a decision declaring the consignation invalid for failure
to prove that Pabugais tendered payment to Sahijwani and that the latter refused to receive the
same. It further held that even assuming that Sahijwani refused the tender, the same is justified
because the managers check allegedly offered by Pabugais was not legal tender, hence, there
was no valid tender of payment.
Pabugais appealed to the CA. On January 7, 2002, Pabugais filed an Ex Parte Motion to
Withdraw Consigned Money. Pabugaiss motion to withdraw the amount consigned was denied
by the CA and the decision of the trial court was affirmed with modification as to the amount of
moral damages and attorneys fees.
On MR, the CA declared the consignation as valid in an Amended Decision. It held that the
validity of the consignation had the effect of extinguishing Pabugaiss obligation to return the
option/reservation fee to Sahijwani. Hence, Pabugais can no longer withdraw the same.
Pabugais filed the instant petition for review contending that he can withdraw the amount
deposited with the trial court as a matter of right because at the time he moved for the withdrawal
thereof, the CA has yet to rule on the consignations validity and the Sahijwani had not yet
accepted the same.
ISSUE

WON there was a valid consignation

WON Pabugais withdraw the amount consigned as a matter of right

HELD
FIRST ISSUE
o YES. The issues to be resolved in the instant case concerns one of the important
requisites of consignation, i.e, the existence of a valid tender of payment. As testified by
the counsel for Sahijwani, the reasons why his client did not accept Pabugaiss tender of
payment were (1) the check mentioned in the August 5, 1994 letter of Pabugais
manifesting that he is settling the obligation was not attached to the said letter; and (2)
the amount tendered was insufficient to cover the obligation. It is obvious that the reason
for Sahijwanis non-acceptance of the tender of payment was the alleged insufficiency
thereof and not because the said check was not tendered to Sahijwani, or because it
was in the form of managers check. While it is true that in general, a managers check is
not legal tender, the creditor has the option of refusing or accepting it. Payment in check
by the debtor may be acceptable as valid, if no prompt objection to said payment is made.
Consequently, Pabugaiss tender of payment in the form of managers check is valid.
o Anent the sufficiency of the amount tendered, it appears that only the interest of 18% per
annum on the P600,000.00 option/reservation fee stated in the default clause of the
Agreement And Undertaking was agreed upon by the parties.
o The managers check in the amount of P672,900.00 which was tendered but refused by
Sahijwani, and thereafter consigned with the court, was enough to satisfy the obligation.

SECOND ISSUE
o NO. His reliance on Article 1260 of the Civil Code is misplaced.
o The amount consigned with the trial court can no longer be withdrawn by Pabugais
because Sahijwanis prayer in his answer that the amount consigned be awarded to him
is equivalent to an acceptance of the consignation, which has the effect of extinguishing
Pabugaiss obligation.
o Moreover, Pabugais failed to manifest his intention to comply with the Agreement And
Undertaking by delivering the necessary documents and the lot subject of the sale to
Sahijwani in exchange for the amount deposited. Withdrawal of the money consigned
would enrich Pabugais and unjustly prejudice Sahijwani.

B. Loss of the Thing Due

1. When Obligation Extinguished

ART. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or be- fore a judicial declaration that
the consignation has been properly made, the debtor may withdraw the thing or the sum
depos- ited, allowing the obligation to remain in force. (1180)
ART. 1266. The debtor in obligations to do shall also be re- leased when the
prestation becomes legally or physically impossible without the fault of the
obligor. (1184a)

PNCC VS. CA
G.R. No. 116896. May 5, 1997.

FACTS:
HOW DID THE PROBLEM ARISE: Petitioner refused to pay rentals as stipulated in contract of
lease on a parcel of land owned by private respondents.
The lease contract stipulates:
o TERM OF LEASE: This lease shall be for a period of five (5) years, commencing on
the date of issuance of the industrial clearance by the Ministry of Human
Settlements, renewable for a like or other period at the option of the LESSEE under the
same terms and conditions.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary
Use Permit for the proposed rock crushing project
Private respondents wrote petitioner requesting payment of the first annual rental in the amount
of P240, 000
Petitioner argued that under paragraph 1 of the lease contract, payment of rental would
commence on the date of the issuance of an industrial clearance by the Ministry of Human
Settlements, and not from the date of signing of the contract. It then expressed its intention
to terminate the contract, as it had decided to cancel or discontinue with the rock
crushing project due to financial, as well as technical, difficulties.
Private respondents refused to accede to petitioners request for the pretermination of the lease
contract.
On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig an action
against petitioner for Specific Performance with Damages.
RTC ruled in favor of private respondents which was affirmed on appeal
Petitioner invokes Art. 1266 and the principle of rebus sic stantibus such that it should
be released from the obligatory force of the contract of lease because the purpose of the
contract did not materialize due to unforeseen events and causes beyond its control, i.e.
due to the abrupt change in political climate after the EDSA Revolution and the financial
difficulties

ISSUE: Whether the petitioner can invoke Art. 1266 to be released from the obligatory force of the
contract

RULING: No. While it is true that Article 1266 of the Civil Code is an exception to the principle of the
obligatory force of contracts. Petitioner cannot, however, successfully take refuge in the said article,
since it is applicable only to obligations to do, and not obligations to give. An obligation to do
includes all kinds of work or service; while an obligation to give is a prestation which consists in the
delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient,
or for its simple possession, or in order to return it to its owner. The obligation to pay rentals or deliver
the thing in a contract of lease falls within the prestation to give; hence, it is not covered within the
scope of Article 1266.

Re: principle of rebus sic stantibus:

The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist. Art. 1267 enunciates the doctrine of unforeseen events and is not an
absolute application of the principle of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances
that equity demands assistance for the debtor.

At the time that PNCC entered into the contract of lease with private respondents, (Nov. 18 1985)
Senator had already been assassinated (Aug. 21, 1983) and the country was experiencing
political upheavals, almost daily mass demonstrations, unprecedented inflation. . .they were
well aware of the deteriorating conditions of the country when they entered into the contract.

2. When Obligation Not Extinguished

ART. 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before
he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss
of the thing does not extinguish the obligation, and he shall be responsible for
damages. The same rule applies when the nature of the obligation requires the
assumption of risk. (1182a)

ART. 1263. In an obligation to deliver a generic thing, the loss or destruction of

anything of the same kind does not extinguish the obligation. (n)

ART. 1268. When the debt of a thing certain and determi- nate proceeds from a
criminal offense, the debtor shall not be exempted from the payment of its price,
whatever may be the cause for the loss, unless the thing having been offered by
him to the person who should receive it, the latter refused without justification to
accept it. (1185)

GAISANO VS. INSURANCE COMPANY

G.R. No. 147839 June 8, 2006

Facts:
IMC and Levi Strauss (Phils.) Inc. (LSPI) separately obtained from respondent fire insurance
policies with book debt endorsements.
The insurance policies provide for coverage on "book debts in connection with ready-made
clothing materials which have been sold or delivered to various customers and dealers of the
Insured anywhere in the Philippines."
o The policies defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this Policy." The
policies also provide for the following conditions: Warranted that the Company shall not
be liable for any unpaid account in respect of the merchandise sold and delivered by the
Insured which are outstanding at the date of loss for a period in excess of six (6) months
from the date of the covering invoice or actual delivery of the merchandise whichever
shall first occur.
 Gaisano is a customer and dealer of the products of IMC and LSPI. On February 25, 1991,
the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was
consumed by fire. Included in the items lost or destroyed in the fire were stocks of ready-
made clothing materials sold and delivered by IMC and LSPI.
Insurance of America filed a complaint for damages against Gaisano. It alleges that IMC and
LSPI were paid for their claims and that the unpaid accounts of petitioner on the sale and delivery
of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was
P535,613.00.
The RTC rendered its decision dismissing Insurance's complaint. It held that the fire was
purely accidental; that the cause of the fire was not attributable to the negligence of the
petitioner. Also, it said that IMC and LSPI retained ownership of the delivered goods and must
bear the loss.
The CA rendered its decision and set aside the decision of the RTC. It ordered Gaisano to pay
Insurance the P 2 million and the P 500,000 the latter paid to IMC and Levi Strauss.

Issues: Whether the petitioner is liable for the unpaid accounts.

Held: Yes. Petition partly granted. Accordingly, petitioner's obligation is for the payment of money.
As correctly stated by the CA, where the obligation consists in the payment of money, the failure of
the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his
liability. The rationale for this is that the rule that an obligor should be held exempt from liability when
the loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding him liable even in case of fortuitous event. It does
not apply when the obligation is pecuniary in nature.
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction
of anything of the same kind does not extinguish the obligation." This rule is based on the principle that
the genus of a thing can never perish. An obligation to pay money is generic; therefore, it is not excused
by fortuitous loss of any specific property of the debtor.

3. Partial Loss

ART. 1264. The courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to extinguish the
obligation. (n)

General Rule: partial loss does not extinguish the obligation

Exception: When the partial loss or destruction of the thing is of such importance that
would tantamount to a complete loss or destruction

Ex. Delivery of horse that subsequently lost its leg

4. Presumption of Fault

ART. 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary,
and without prejudice to the provisions of Article 1165. This presumption does not
apply in case of earthquake, flood, storm or other natural calamity. (1183a)
 JIMMY CO. V. CA
G.R. No. 124922, 22 June 1998

Facts:
The petitioner entrusted his Nissan pick-up car to private respondent which is engaged in the
sale, distribution and repair of motor vehicles for some repair services and supply of parts.
The petitioner paid in full the repair bill after the respondent returned the vehicle fully serviced
and supplied in accordance with the job contract.
The petitioner bought a new battery and delivered it to the respondent because the respondent
could not release the vehicle as its battery was weak and was not yet replaced.
3 days later, when the petitioner reclaimed his car, he was told that it was carnapped while being
road-tested by private respondents employee, and that this was already reported to the police.
Petitioner anchored his claim on the respondents alleged negligence.
Respondent contended that it has no liability because the car was lost as a result of a fortuitous
event - the carnapping.
They likewise agreed that the sole issue for trial was who between the parties shall bear the loss
of the vehicle which necessitates the resolution of whether private respondent was indeed
negligent.
After trial, the court a quo found private respondent guilty of delay in the performance of its
obligation and held it liable to petitioner for the value of the lost vehicle and its accessories plus
interest and attorneys fees.
On appeal, the Court of Appeals (CA) reversed the ruling of the lower court
Issue: Whether a repair shop can be held liable for the loss of a customers vehicle while the same is
in its custody for repair or other job services.
Held: Yes. The Court resolves the query in favor of the customer. Carnapping per se cannot be
considered as a fortuitous event. No other evidence was presented by private respondent to the effect
that the incident was not due to its fault. Even assuming arguendo that carnapping was duly
established as a fortuitous event, still private respondent cannot escape liability.
Articles 1174 and 1262 of the Civil Code state that liability attaches even if the loss was due to a
fortuitous event if the nature of the obligation requires the assumption of risk. Carnapping is a normal
business risk for those engaged in the repair of motor vehicles. Violation of the statutory duty of
registering with the DTI and securing an insurance policy constitute negligence per se. An owner who
cannot exercise the seven (7) juses or attributes of ownership - the right to possess, to use and
enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate and
to the fruits - is a crippled owner.

It must be proved and established that the event was an act of God or was done solely by third parties
and that neither the claimant nor the person alleged to be negligent has any participation. In accordance
with the Rules of evidence, the burden of proving that the loss was due to a fortuitous event rests on
him who invokes it - which in this case is the private respondent.
Article 1165 of the civil code makes an obligor who is guilty of delay responsible even for a fortuitous
event until he has effected the delivery. In this case, private respondent was already in delay as it was
supposed to deliver petitioners car 3 days before it was lost. Moreover, Article 1265 states that its
possession of the thing at the time it was lost was due to its fault.

With respect to the value of the lost vehicle and its accessories for which the repair shop is liable, it
should be based on the fair market value that the property would command at the time it was entrusted
to it or such other value as agreed upon by the parties subsequent to the loss.
 5. Unforeseen Difficulty

ART. 1267. When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part. (n)

SERVICE = performance

Doctrine of Unforeseen Events

- Parties stipulate the light of certain prevailing conditions and once these conditions
cease to exist the contract also ceases to exist

OCCENA V. CA
G.R. No. L-44349| 29 OCTOBER 1976
FACTS:
Private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and
conditions of its subdivision contract with petitioner spouses Occea (landowners of a 55,330-
square meter parcel of land), alleging that the latter would be unjustly enriched, because:
i. As per contract stipulation: petitioners will retain 40% of sales; but
ii. Cost of materials increased, modifying/changing the original basis of
aforementioned contract stipulation.
Petitioner spouses moved for the dismissal of the complaint, which was denied by the RTC.
On appeal, respondent CA affirmed the trial court decision on the ground of Art. 1267 NCC.

ISSUE: Whether the debtor (private respondent) may be released from his obligation, when the
performance for such has become so difficult as to be manifestly beyond the contemplation of the
parties?

HELD: NO. Petition granted, resolution of CA is reversed.

The Court held that the private respondents complaint did not seek for a release from the
obligation (subdivision contract) but that the court render judgment modifying the terms and
conditions of the contract, by fixing the proper shares to each of the parties.
Art. 1267 of the NCC does not grant the courts the authority to remake, modify or revise the
contract or to fix the division of shares between the parties as contractually stipulated with the
force of law between the parties, so as to substitute its own terms for those covenanted by the
parties themselves. Thus, the complaint for modification of contract has no basis in law and
therefore states no cause of action. Even with private respondents complaint and the
circumstances he alleged, the courts cannot in equity grant the relief sought.

NAGA TELEPHONE V. CA
G.R. No. 107112, 24 February 1994
Facts:
NATELCO is a telephone company offering local and long distance services in Naga and entered
into contract with Camarines Sur II Electric Cooperative for the use in operation of its telephone
service, electric light posts of CASURECO II in return for free use of 10 telephone connections
as long as NATELCO needs electric light posts, CASURECO understands that contact will
terminate when they are compelled to stop, renounce operation and remove light posts.
CASURECO filed for reformation of contract with damages on the ground that it is too one-sided
in favor of the petitioners with the Regional Trial Court (RTC) of Naga City, that it is not
 conforming to guidelines of the National Electrification Administration (NEA) which direct that the
reasonable compensation for the use of the posts is P10.00 per post, per month. NATELCO
used 319 posts without any contract at P10.00; refused to pay.
NATELCO answered that it should be dismissed because it doesnt sufficiently state a cause of
action for reformation of contract; it is barred by prescription (10 years), barred by estoppel, since
private respondent seeks to enforce the contract in the same action. The RTC ordered
reformation of the agreement ordering NATELCO to pay for electric polls sum of P10/pole from
January 1989. NATELCO appealed to the Court of Appeals (CA), CA affirmed the decision
based on the ground that Art. 1267 of the Civil Code is applicable and that the contract was
subject to potestative condition which rendered said condition void.
Issue: Whether or not Article 1267 of the Civil Code is applicable
Held: Yes. Petition denied, CA decision affirmed. Article 1267 provides that When the service has
become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also
be released therefrom, in whole or in part. The contract in this case was one-sided unjust and
detrimental to the plaintiff.

6. Creditors rights

ART. 1269. The obligation having been extinguished by the loss of the thing, the
creditor shall have all the rights of action which the debtor may have against third
person by reason of the loss. (1186)

C. Condonation or Remission
1. Nature and Requisites

ART. 1270. Condonation or remission is essentially gratuitous, and requires the

acceptance by the obligor. It may be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of
donation. (1187)

Definition of Condonation or Remission

Act of liberality by virtue of which the oblige without receiving any price or equivalent,
renounces the enforcement of the obligation

Requisites of Condonation or Remission

1. It must be gratuitous
2. It must be accepted by the obligor
3. The obligation must be demandable
4. Parties must have the capacity
5. Not Inofficious
6. Must comply with the forms of donation should it be express

YAM under PHIL. PRINTING WORKS V. CA and MANPHIL INVESTMENT CORP.

GR No. 104726. 11 February 1999
Facts:
Petitioners obtained a loan with respondent corporation amounting to P300,000.
The loan agreement stipulated:
- 14% annul interest;
- 2% monthly penalty;
- 1% monthly service charge;
- 10% attorneys fees
17 May 1986; Petitioners made a partial payment of P50,000
18 June 1986: Petitioner proposed to respondent to settle their obligation through a letter.
2 July 1986: Private respondent replied to petitioner, proposing a counter-offer to reduce the
penalty charges to P140,000 provided that the petitioner settle their obligation on or before 30 July
1986.
31 July 1986: Petitioners total liability to private respondent amounted to P727,001.35.
- On this date, petitioners paid P410,854.47 (sum of the principal: P295,469.47 and the interest:
P165,385.00 and less the partial payment: P50,000)
- 4 and 25 September 1986: Respondent demanded for payment of the balance amounting to
P266,146.88.
Petitioners claimed that they had fully paid their obligation. That upon payment of P410,854.47,
petitioners had a verbal agreement with the president of the respondent corporation that
provided the payment of the principal and interest minus the partial payment computed as of
31 July 1986 (P410,854.47) the loan was deemed fully paid where the respondent condoned the
subsequent penalties and service charges.

Issue: Whether or not the petitioners are liable for the payment of penalties and charges on their loan
amounting to P266,146.88.

Held: Yes.
Petitioners are liable for the payment of penalties and charges on their loan because the notion in
full payment of IGLF loan which was signed by the Central Bank examiner, Cristina Destajo was
merely an acknowledgement receipt of the payment of the principal and interest of the loan.
The SC held that the same cannot be considered as a condonation of the amount in question
because Destajo as Central Bank examiner, had no authority to condone any indebtedness on
behalf of the respondent corporation.
Destajos function was only limited to issuing official receipts, preparing check vouchers and
documentation.
Furthermore, as provided in Articles:
- Arts. 1270, par. 2: express condonation must comply with the forms of donation
- Art. 748, par. 3: donation and acceptance of a movable, exceeding P5,000 must be made in
writing otherwise the same shall be void
- Art. 417, par. 1: credits are considered movable property.
Applying these articles in the case at bar, the petitioners alleged agreement with the private
respondent to condone the questioned P266,146.88 was not placed into writing. The notion in full
 payment of IGLF loan merely states the petitioners intention in making the payment but in no way
does it bind the private respondent in condoning the amount in question.
According to the SC, a valid condonation in writing would have been a certificate of full payment
from the respondent corporation.

2. Implied Renunciation

ART. 1271. The delivery of a private document evidencing a credit, made

voluntarily by the creditor to the debtor, implies the renunciation of the action
which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor

and his heirs may uphold it by proving that the delivery of the document was made
in virtue of payment of the debt. (1188)

ART. 1272. Whenever the private document in which the debt appears is found in
the possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved. (1189)

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC. V. CA and ASSOCIATED BANK

G.R. No. 109172. August 19, 1994

FACTS
Petitioner Transpacific applied for and was granted several financial accommodations
amounting to P 1.3Million by respondent Associated Bank
Loans were evidenced and secured by 4 promissory notes and a real estate mortgage
covering 3 parcels of land and chattel mortgage over petitioners stock and inventories
Petitioner was unable to settle its obligation in full hence was granted a restructuring of the
remaining P 1,057,500 indebtedness
All previous payments made were applied to penalties and interests
The re-structured loan of P 1,213, 400 were secured by 3 new PNs
o PN for P 1,050,000 denominated as working capital
o PN for P 121,166 denominated as restructured interest
o PN for P 42,234 denominated similarly as restructured interest
The mortgaged parcels of land were substituted by another mortgage covering two other
parcels and a chattel on petitioners stock inventory
The released parcels of land were then sold and the proceeds of P 1,386,614.20 were turned
over to the bank and applied to Trans Pacifics restructured loan
Respondent bank then returned the duplicate original copies of the 3 PNs to Trans Pacific with
the word PAID stamped
Despite the return of the PNs, Associated Bank demanded from Trans Pacific payment of P
492, 100 representing accrued interest on one of the promissory notes. The bank said that the
PNs were erroneously released.
Initially, Trans Pacific was willing to pay the amount however had a change of heart and
initiated an action before the RTC for specific performance and damages.

ISSUE: Whether petitioner has paid in full its obligation to respondent Associated Bank
HELD: No.
Art 1271 of NCC The delivery of a private document evidencing a credit made voluntarily by
the creditor to the debtor, implies the renunciation of the action which the former had against
the latter
It is undisputed that the documents presented were duplicate originals and are therefore
admissible as evidence. Further, Associated Bank itself did not bother to challenge the
authenticity of the duplicate copies submitted by petitioner
A duplicate copy of the original may be admitted in evidence when the original is in the
possession of the party against whom the evidence is offered, and the latter fails to produce it
after reasonable notice, as in the case of respondent bank.
The presumption created by 1271 is not conclusive but merely prima facie. If there be no
evidence to the contrary, presumption stands.
Art 1271 raises a presumption, not of payment, but of the renunciation of the credit where
more convincing evidence would be required than what normally would be called for to prove
payment
o Rationale of presumption of renunciation: unlike that of a public instrument, there could
be just one copy of the evidence of credit. Where several originals are made out of a
private document, the intent of the law thus be to refer to the delivery only of the original
original rather than to the original duplicate.

Note (CA decision)

Respondent court disagreed and held, among others, that the documents found in possession
of Trans-Pacific are mere duplicates and cannot be the basis of petitioners claim that its
obligation has been fully paid. Accordingly, since the PNs submitted by petitioner were mere
duplicates and not the originals, the delivery thereof does not merit the application of Art 1271.
Respondent court is of the view that the provision must be construed to mean the original copy
of the document evidencing credit and not its duplicate PRONOUNCEMENT OF
RESPONDENT COURT MANIFESTLY GROUNDLESS

3. Renunciation of Accessory Obligations

ART. 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force. (1190)

ART. 1274. It is presumed that the accessory obligation of pledge has been
remitted when the thing pledged, after its de- livery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing. (1191a)

D. Confusion or Merger of Rights

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

Meaning of confusion or merger.

Confusion or merger is the meeting in one person of the qualities of creditor and debtor
with respect to the same obligation. (4 Sanchez Roman 421.)
Requisites of confusion.
For a valid confusion or merger to the place, it is necessary that: and
(1) It must take place between the principal debtor and creditor;
(2) It must be complete and definite.

EXAMPLES
D owes C P1,000.00 for which D executed a negotiable promissory note in favor of C. C
indorsed the note to X who, in turn, indorsed it to Y. Now, Y bought goods from the store
of D. Instead of paying cash, Y just indorsed the promissory note to D.

Here, D owes himself. Consequently, his obligation is extinguished by merger.

ART. 1276. Merger which takes place in the person of the principal debtor or
creditor benefits the guarantors. Confusion which takes place in the person of any
of the latter does not extinguish the obligation. (1193)

ART. 1277. Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two characters concur.
(1194)

Requisites of Merger
7. Merger of the characters of the creditor and the debtor must be in the same person
8. Must take place in the person of either the principal creditor or the principal debtor
9. Whether the merger refers to the entire obligation or only part thereof, there must
be complete and definite meeting of all qualities of creditor and debtor in the
obligation or in the part thereof affected by the merger

EFFECTS OF CONFUSION/MERGER
1) If confusion takes place in the person of either the principal creditor or principal
debtor extinguishment of entire obligation; or
2) If confusion takes place in the person of a subsidiary creditor or subsidiary
debtor (eg guarantor) no extinguishment of principal obligation; only
substitution of creditor or debtor; or
3) If confusion takes place in one of the joint debtors principal obligation is
extinguished up to the share which corresponds to him
4) If confusion takes place in one of the solidary debtors entire obligation is
extinguished. However, the debtor in whom confusion took place may claim
reimbursement from co-debtors for the shares which correspond to them

VALMONTE V CA
G.R. No. 41621. February 18, 1999
Facts:
Nov 5, 1951 petitioner Joaquin Valmonte sold to his daughter, co-petitioner, Pastora, 3 parcels
of land.
 A few days later, Pastora obtained a crop loan of P16k from respondent Philippine National
Bank.
o As a security, she executed a Real Estate Mortgage involving the same parcels of land.
Sept 19, 1952 Pastora executed a Special Power of Attorney in favor of Virginia V. del Castelo
for the purpose of borrowing P5k from PNB.
o A P5k loan was granted by PNB and Virginia executed a Real Estate Mortgage.
June 20, 1954 Pastora sold to her father the parcels of land.
Aug 19, 1954 an auction sale was conducted and PNB was the sole and only bidder for
P5,524.40.
Petitioners were given up to Dec 31, 1955 to purchase in cash the properties concerned in the
amount of the banks total claim (P26,926.38).
o Petitioners failed to repurchase the properties.
Jan 3, 1956 private respondent Valenton deposited with PNB P34k (plus the P1k prior deposit)
to purchase the parcels of land.
Jan 4, 1956 PNB executed the Deed of Sale in favor of Valenton.
The trial court dismissed petitioners complaint.
The CA affirmed the lower courts decision.
Issue: W/N merger took place in such a way that PNB became the creditor and debtor.
Held: Yes. The petition is DENIED.
Ratio:
Petitioners contend that the CA erred in applying the principle of merger. The two loans (P16k & P5k)
should be considered as one mortgage credit inasmuch as they were constituted between the same
parties and on the same properties. That there was NO outstanding mortgage credit for the P16k loan
and PNB being the purchaser at the auction sale, was not subrogated to answer for any encumbrance
on the subject property.
The CA did not err in applying the principle of merger.
Merger as one of the means of extinguishing an obligation has the following elements:
o Merger of the character of the creditor and debtor must be in the same person;
o It must take place in the person of either the principal creditor or the principal debtor;
o It must be complete and definite.
In the case, there were two mortgages constituted on subject properties by the petitioners.
o The first was for the loan of P16k.
o The second was for the P5k.
o What the bank did was to foreclose the 2nd mortgage (P5k) embodied in a separate
mortgage contract.
Under ordinary circumstances, if a person has a mortgage credit over a property which was sold
in an auction sale, the only right left to him was to collect its mortgage credit from the purchaser.
HOWEVER, these steps need not be taken in the present case because PNB was the
purchaser of subject properties and did it with full knowledge that it had a mortgage.
o Obligations are extinguished by the merger of the rights of the creditor and debtor.
The merger took place in the person of PNB.
o The merger took place when during the auction sale, PNB purchased the properties on
which it had another subsisting mortgage credit.
o The two loans are separate and distinct. In effect, the mortgage for the P16k loan was
deemed extinguished.
As aptly ruled by the CA:
o The purchaser in the extrajudicial sale is PNB. As such purchaser, it acquired the right to
pay off the claim of the senior mortgage. HOWEVER, the senior mortgagee is also
PNB.
Art. 1275 correctly applies to the case.
 E. Compensation
1. General Rules
a. Definition

ART. 1278. Compensation shall take place when two per- sons, in their own right,
are creditors and debtors of each other. (1195)

Compensation
Mode of extinguishing in the concurrent amount of the obligation of those persons who
are reciprocally principal debtors and creditors of each other

Effect: it extinguishes both debts to the extent that the amount covered by the amount
of the other.

EXAMPLE:
A owes B the amount of P1,000.00.
B owes A the amount of P700.00.

Both debts are due and payable today. Here compensation takes place partially, that is,
to the concurrent amount of P700.00. So, A shall be liable to B for only P300.00. If the
two debts are of the same amount, there is total compensation. (Art. 1281.)

The two debts are extinguished without actual transfer of money between the parties.

BANGKO SENTRAL NG PILIPINAS VS. COMMISSION ON AUDIT

G.R. No. 168964. January 23, 2006
FACTS:
On March 1, 1990, respondent was employed by the defunct Air Transportation Unit (ATU)
of BSPs Security Investigation and Transportation Department (SITD).
Upon respondents retirement on June 30, 1994, however, BSP refused to release his
retirement benefits (P291,555.00) for failure to settle his property accountabilities
(unaccounted spare parts worth P1, 0007, 263.59)
Respondent filed a complaint with the Human Resources Management Department
(HRMD) of BSP against ASD for the banks refusal to release his retirement benefits, but
HRMD denied the same.
On appeal to the Commission on Audit, the retirement benefits were released on the basis
that the retirement gratuities cannot be applied to the indebtedness of an employee to the
government without his/her consent
BSP filed a motion for reconsideration, it argued:
o That Valenzuela had admitted his indebtedness since he signed the list of unaccounted
properties
o that compensation should take place between it and respondent since they are both
creditors and debtors in their own right.

ISSUE: Whether BSP may validly withhold Valenzuelas retirement benefits

RULING: NO.
In Cruz v. Tantuico, 166 SCRA 670 (1988), it was held that retirement benefits accruing to a
public officer may not, without his consent, be withheld and applied to his indebtedness to
the government.
Why? Pension . . . is a bounty flowing from the graciousness of the Government
intended to reward past services and, at the same time, to provide the pensioner with the
means with which to support himself and his family. Unless otherwise clearly provided, the
pension should inure wholly to the benefit of the pensioner x x x.
o Retirement laws are liberally interpreted in favor of the retiree because the intention is to
provide for the retirees sustenance and comfort when he is no longer capable of
earning his livelihood
BSP based its argument on Sec. 21 of the Revised Administrative Code of 1917 such that
When any person is indebted to any government agency, the Commission may direct the
property officer to withhold the payment of any money due such person or his estate to be
applied in satisfaction of his indebtedness
o However, this provision assumes that there was a final judgment of a competent
court that indebtedness was admitted by the alleged debtor
Absent such categorical admission by an obligor or final judgment, no legal
compensation can take place
o Furthermore, Sec. 265 of the Government Accounting and Auditing Manual explicitly
limits the power of the COA to retain the retirement benefits of a government employee
for the purpose of satisfying his indebtedness only to instances where (1) the employee
admits his indebtedness and consents to such retention or (2) a competent court
so directs
Regarding the signed list of inventory: cannot be construed as an admission of
indebtedness since the unlocated spare parts were never shown to be included in the
inventory signed by the respondent
Compensation or offset takes place by operation of law when two (2) persons, in their
own right, are creditor and debtor of each other. For compensation to take place, a
distinction must be made between a debt and a mere claim. A debt is a claim which has
been formally passed upon by the highest authority to which it can in law be submitted
and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is
mere evidence of a debt and must pass thru the process prescribed by law before it
develops into what is properly called a debt.

b. Nature and Effect

ART. 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation. (n)

Total and partial compensations.

Total or partial compensation applies to all the different kinds of compensation. (see
example under Article 278.

Total compensation results when the two debts are of the same amount. (Art. 1281.) If
they are of different amounts, compensation is total as regards the smaller debt, and
partial only with respect to the larger debt. (supra.)
 COMPENSATION CONFUSION
As to Number of Persons
Two persons who are MUTUALLY Only one person in whom the qualities of
creditors and debtors of each other. debtor and creditor are merged
As to the Number of Obligations
There must be at least two obligations. There is only one obligation

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

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

Consent of parties not required in legal compensation

Compensation occurs automatically by mere operation of law
o From the moment all the requisites mentioned in 1279 concur, legal
compensation takes place automatically even in the absence of agreement
between the parties and even against their will, and extinguishes reciprocally
both debts as soon as they exist simultaneously, to the amount of their
respective sums
o It takes place ipso jure from the day all the necessary requisites concur,
without need of any conscious intent on the part of the parties and even
without their knowledge, at the time of the co-existence of such cross debts
Full legal capacity of parties not required.
o As it takes place by mere operation of law, and without any act of the parties,
it is not required that the parties have full legal capacity to give or to receive,
as the case may be.

TRINIDAD VS. ACAPULCO

G.R. 147477. 27 June 2006.
Facts:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad.
She alleged: Sometime in February 1991, a certain Primitivo Caete requested her to sell a
Mercedes Benz for P580,000.00.
Caete also said that if respondent herself will buy the car, Caete was willing to sell it for
P500,000.00. Petitioner borrowed the car from respondent for two days but instead of returning
the car as promised, petitioner told respondent to buy the car from Caete for P500,000.00 and
that petitioner would pay respondent after petitioner returns from Davao.
 Following petitioners instructions, respondent requested Caete to execute a deed of sale
covering the car in respondents favor for P500,000.00 for which respondent issued three checks
in favor of Caete.
Respondent thereafter executed a deed of sale in favor of petitioner even though petitioner did
not pay her any consideration for the sale.
When petitioner returned from Davao, he refused to pay respondent the amount of
P500,000.00 saying that said amount
would just be deducted from whatever outstanding obligation respondent had with petitioner. D
ue to petitioners failure to pay respondent, the checks that respondent issued in favor of
Caete bounced, thus criminal charges were filed against her.
Respondent then prayed that the deed of sale between her and petitioner be declared null and
void; that the car be returned to her; and that petitioner be ordered to pay damages.

Issue:
Whether petitioners claim for legal compensation was already too late

Held: No.

RULING:
Compensation takes effect by operation of law even without the consent or knowledge of the parties
concerned when all the requisites mentioned in Article 1279 of the Civil Code are present. This is in
consonance with Article 1290 of the Civil Code which provides that: When all the requisites mentioned
in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not aware of the compensation.
Since it takes place ipso jure, when used as a defense, it retroacts to the date when all its requisites
are fulfilled.

c. Requisites

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

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor. (1196)

Requisites of Compensation
1) There must be two parties, who in their own right, are principal creditors and
principal debtors of each other, except in case of a guarantor (Art. 1279)
 2) Both debts must consist in sum of money, or if the things due are fungibles
(consumables), they must be of the same kind and quality
General Rule: Compensation is not possible in obligations to do because of the
difference in the respective capacities of the obligors.

3) Both debts must be due

Exception: Voluntary compensation or the parties may nevertheless agree upon
the compensation of the obligations.

4) Both debts must be liquidated and demandable

5) There must be no retention or controversy commenced by third persons over either

of the debts and communicated in due time to the debtor
Note: retention consists in the application of the credit of one of the parties to the
satisfaction of the claims of third persons while controversy refers to a case in
which a third person claims to be the creditor

6) The compensation must not be prohibited by law

SILAHIS V. IAC
G.R. 74027. 7 December 1989
Facts:
On various dates in October, November and December, 1975 Private respondent, Gregorio
de Leon, doing business under the name and style of Mark Industrial Sales, sold and delivered
to petitioner Silahis various items of merchandise covered by several invoices.
o All of which in the aggregate amount of P22,213.75 payable within 30days.
Due to Silahis failure to pay, de Leon filed a complaint before the CFI.
Silahis admitted the allegations insofar as the invoices were concerned but presented as
defense that:
o A debit memo for P22,200 as unrealized profit for a supposed commission that Silahis
should have received from de Leon for the sale of sprockets in the amount of P111k made
to Dole Philippines, Inc. without coursing through Silahis in violation of the usual practice
concerning sale of merchandise to Dole.
o Silahis claim that it is entitled to return the stainless steel screen which was found
defective by its client, and to have the corresponding amount cancelled from its account
with de Leon.
The CFI confirmed the debt of Silahis but ordered that the same be off-set by its counterclaim.
o That the P22,200 debit memo should necessarily off-set the debt of P22,213.75.
o But the P6k as value for the defective stainless steel screen was presented too late.
The IAC set aside the lower courts decision.
o There was no agreement, nor a contractual obligation between the parties prohibiting
direct sales to Dole by de Leon;
o Nor was there anything in the debit memo obligating de Leon to pay a commission to
Silahis for the sale of P111k worth of sprockets.
Issue: W/N the debt of Silahis should be off-set by its alleged debit memo for P22,200.
Held: No. The decision of the IAC is AFFIRMED.
 There is nothing in the debit memo to show that private respondent obligated himself to
set-off or compensate petitioners outstanding accounts with the alleged unrealized
commission from the assailed sale of the sprockets.
Compensation takes place when two persons, in their own right, are creditors and debtors to
each other.
Art. 1279 provides that, in order that compensation may be proper, it is necessary that:
o Each one of the obligors are bound principally, and at the same time a principal creditor
of the other;
o That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;
o Two debts be due;
o They be liquidated and demandable;
o That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Art. 1279 requires, among others, that in order that legal compensation takes place, the two
debts be due and they be liquidated and demandable.
o Compensation is NOT proper where the claim of the person asserting the set-off against
the other is not clear nor liquidated.
The Court agrees with the appellate court that there is NO evidence on record to show that there
was an agreement which prevented private respondent from directly selling to Dole.
The debit memo was likewise not a contract binding between the parties.
o It was not signed by private respondent;
o Nor was there any mention of any commitment by private respondent to pay any
commission to the former involving the sale to Dole.

ART. 1282. The parties may agree upon the compensation of debts which are not yet
due. (n)

Voluntary Compensation

Voluntary or conventional compensation includes any compensation which takes place by

agreement of the parties even if all the requisites for legal compensation are not present.

The only requisites are: (1) each of the parties has the right to dispose of the credit he seeks
to compensate, and (2) they agree to the mutual extinguishment of their credits.

United Planters Sugar Milling Co., Inc., (UPSUMCO) vs. The Hon. Court of Appeals,
Philippine National Bank (PNB), and Asset Privatization Trust (APT), as Trustee of the
Rep. of the Philippines
G.R. No. 126890, 2 April 2009

Facts:

In 1974, the takeoff loans obtained by UPSUMCO from respondent PNB intended to finance
the construction of a sugar milling plant was embodied in a Credit Agreement, thrice
restructured through Restructuring Agreements.
The Government subsequently transferred these rights, titles and interests over UPSUMCO
to the respondent Asset and Privatization Trust (APT).
 In 1987, the Philippines lost around 1.5 Billion Pesos after it had waived its right to collect on
an outstanding indebtedness from petitioner UPSUMCO, by virtue of friendly foreclosure
agreement that ultimately was friendly only to petitioner.
Thereafter, it is alleged that APT and UPSUMCO agreed to an uncontested or friendly
foreclosure of these mortgaged assets, in exchange for UPSUMCOs waiver of its right of
redemption.
7 days after the foreclosure sale, UPSUMCO executed a Deed of Assignment wherein it
assigned to APT its right to redeem the foreclosed properties, in exchange for or in
consideration of APT condoning any deficiency amount it may be entitled to recover from the
Corporation under the Credit Agreement
Both APT and PNB claimed in their respective comments that the extrajudicial foreclosure sale
was unconditional and mandatory under Presidential Decree No. 385.
APT likewise filed a counterclaim, seeking the recovery of over 1.6 Billion Pesos from
UPSUMCO, which was determined with the calculation that there was no condonation at all in
favor of UPSUMCO, and said sum represented the total amount of indebtedness less the 450
Million Pesos for which the foreclosed properties were sold.

Issue: Whether there is conventional compensation

Held: Yes. It might seem that APT has no right to set-off payments with UPSUMCO for under Article
1279 (1), it is necessary for compensation that the obligors be bound principally, and that he be at
the same time a principal creditor of the other. There is, concededly, no mutual creditor- debtor
relation between APT and UPSUMCO. However, the concept of conventional compensation is
recognized and defined as occurring when the parties agree to compensate their mutual obligations
even if some requisite is lacking, such as that provided in Article 1282. It is intended to eliminate or
overcome obstacles which prevent ipso jure extinguishment of their obligations.

Legal compensation takes place by operation of law when all the requisites are present, as opposed to
conventional compensation which takes place when the parties agree to compensate their mutual
obligations even in the absence of some requisites. The only requisites of conventional
compensation are (1) that each of the parties can dispose of the credit he seeks to compensate,
and (2) that they agree to the mutual extinguishment of their credits.

As soon as PNB assigned its credit to APT, the mutual creditor-debtor relation between PNB and
UPSUMCO ceased to exist. However, PNB and UPSUMCO had agreed to a conventional
compensation, a relationship which does not require the presence of all the requisites under Article
1279. And PNB too had assigned all its rights as creditor to APT, including its rights under conventional
compensation. The absence of the mutual creditor-debtor relation between the new creditor APT and
UPSUMCO cannot negate the conventional compensation. Accordingly, APT, as the assignee of credit
of PNB, had the right to set-off the outstanding obligations of UPSUMCO on the basis of conventional
compensation before the condonation took effect on 3 September 1987.

2. Application
a. When Applicable
i. In Favor of Guarantor
 ART. 1280. Notwithstanding the provisions of the preceding
article, the guarantor may set up compensation as regards what
the creditor may owe the principal debtor. (1197)

ii. Claim for Damages

ART. 1283. If one of the parties to a suit over an obligation has a

claim for damages against the other, the former may set it off by
proving his right to said damages and the amount there- of. (n)

iii. Rescissible/Voidable Debts

ART. 1284. When one or both debts are rescissible or voidable,

they may be compensated against each other before they are
judicially rescinded or avoided. (n)

iv. Assignment Before Compensation

ART. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent
thereto, the latter may set up the compensation of debts previous to the cession,
but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment. (1198a)
Effects of Assignment of Rights

1. If with consent of debtor debtor cannot set-up compensation unless he reserved

his right to compensation
2. If with knowledge but without consent of debtor debtor may set-up compensation
prior to the assignment but not subsequent ones; or
3. If without knowledge of the debtor may set-up compensation of all credits which
he may have against the assignor and which may have become demandable,
before he was notified of the assignment
PEREZ V. COURT OF APPEALS
G.R. No. L-56101| 20 FEBRUARY 1984
FACTS:
CONGENERIC, a company engaged in money market operations, issued 2 bearer
 promissory notes to Ramon Mojica on May 8, 1974:
o Bill 1298 to mature on August 6, 1974 (P111,973.58); and
o Bill 1419 to mature on August 13, 1974 (P208,666.67).
On June 5, 1974, private respondent MEVER borrowed P500,000.00 from CONGENERIC,
the former issuing negotiable certificate of indebtedness (NCI-0352) to the latter, to mature on
August 5, 1974 with interest at 19% per annum if not paid on due date.
On July 3, 1974, CONGENERIC received P200,000 from petitioner Corazon and transferred
to the latter its interest in NCI-0352.
On August 5, 1974, MEVER paid P100,000.00 to CONGENERIC on account of NCI-0352. On
same date, CONGENERIC paid Corazon P100,000.00 plus 19% interest. CONGENERIC also
paid Mojica the interest due on Bill 1298 and 1419, the principal being rolled-over to October
4 and 11, 1974, respectively.
On September 9, 1974, Mojica assigned Bill 1298 and 1419 to MEVER. MEVER then
surrendered said Bills to CONGENERIC and asked the latter to compute the balance of its
payable account.
On October 7, 1974, MEVER was served with garnishment by the Provincial Sheriff of Rizal in
collection cases filed against CONGENERIC by its creditors.
On November 15, 1974, MEVER turned over to the sheriff the sum of P79, 359, which it had
computed as the amount it was still owing CONGENERIC and which was subject to
garnishment.
On July 14, 1975, petitioner Corazon filed suit against MEVER for the recovery of P100,000.
Trial Court rendered judgment in her favor. On MEVERS appeal, the CA reversed the
judgment on the ground that there was legal compensation under Article 1279 of the New
Civil Code which caused the extinguishment of the obligation under NCI-0352.
Hence, this petition.
ISSUE: Whether there was legal compensation extinguishing the obligation of respondent.
HELD: NO. Petition granted, CA resolution reversed.
Bills 1298 and 1419 were not yet due and demandable as of the date of their assignment by
MOJICA to MEVER on September 9, 1974, nor on the date when MEVER surrendered said
Bills to CONGENERIC. As a consequence, no legal compensation could have taken place
because, for it to exist, the two debts, among other requisites, must be due and demandable.
What is involved in this case is a money market, which is a market dealing in standardized
short-term credit instruments (involving large amounts) where lenders and borrowers do not
deal directly with each other but through a middleman or dealer in the open market. The
money market is an impersonal market, free from personal considerations. It is intended to
provide quick mobility of money and securities.
The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in
advance that it would be expeditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is given to the borrower or
issuer of commercial paper of the sale or transfer to the investor.
Accordingly, we find no applicability herein of Article 1285, 3rd paragraph of the Civil Code.
Rather, it is the first paragraph of the same legal provision that is applicable: ART. 1285. The
debtor who has consented to the assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

b. When Not Applicable

i. Deposit
 ART. 1287. Compensation shall not be proper when one of the debts arises from
a depositum or from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without preju- dice to the provisions of
paragraph 2 of Article 301. (1200a)

Debts Which Cannot be Compensated

1. Debts arising from contracts of depositum

2. Debts arising from contracts of commodatum
3. Claims for support due by gratuitous title
Note: the law did not limit itself to legal support and thus would include other
rights which have for their purpose the subsistence of the debtor, such as
pensions

4. Obligations arising from criminal offenses

5. Certain obligations in favor of government (ex. Taxes, fees, duties and others of
a similar nature)
Note: But when the debts are purely contractual and are not of public interest,
compensation can take place

ii. Civil Liability Arising from Penal Offense

ART. 1288. Neither shall there be compensation if one of the debts consists in
civil liability arising from a penal offense. (n)

METROBANK VS. TONADA

Facts:
- Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter referred to as the TONDA, applied
for and were granted commercial letters of credit by petitioner Metropolitan Bank and Trust Company,
hereinafter referred to as METROBANK for a period of eight (8) months beginning June 14, 1990 to
February 1, 1991 in connection with the importation of raw textile materials to be used in the
manufacturing of garments. The TONDA acting both in their capacity as officers of Honey Tree Apparel
Corporation (HTAC) and in their personal capacities, executed eleven (11) trust receipts to secure the
release of the raw materials to HTAC. The imported fabrics with a principal value of P2,803,000.00
were withdrawn by HTAC under the 11 trust receipts executed by the TONDA.
- Due to their failure to settle their obligations under the trust receipts upon maturity, METROBANK
through counsel, sent a letter dated August 10, 1992, making its final demand upon the TONDA to
settle their past due TR/LC accounts on or before August 15, 1992. They were informed that by said
date, the obligations would amount to P4,870,499.13. Despite repeated demands therefor, the TONDA
failed to comply with their obligations stated in the trust receipts agreements, i.e. the TONDA failed to
account to METROBANK the goods and/or proceeds of sale of the merchandise, subject of the trust
receipts.
- The RTC convicted the spouses. However, the Court of Appeals citing the case of Tan Tiong Tick vs.
American Apothecaries implied that in making the deposit, the TONDA are entitled to set off, by way of
compensation, their obligations to METROBANK on their trust receipt liability.
Issue: Whether or not compensation was proper in debs arising from a penal offense.

Held: No. Compensation is not proper when one of the debts consists in civil liability arising from a
penal offense, the raison detre for this being that if one of the debts consists in civil liability arising
from a penal offense, compensation would be improper and inadvisable because the satisfaction of
such obligation is imperative.

The handwritten note by the METROBANK officer acknowledging receipt of the checks amounting to
P2.8 Million made no reference to the TONDAs trust receipt obligations, and we cannot presume that
it was anything more than an ordinary bank deposit. The Court of Appeals citing the case of Tan
Tiong Tick vs. American Apothecaries implied that in making the deposit, the TONDA are entitled to
set off, by way of compensation, their obligations to METROBANK.

However, Article 1288 of the Civil Code provides that compensation shall not be proper when one of
the debts consists in civil liability arising from a penal offense as in the case at bar. The raison detre
for this is that, if one of the debts consists in civil liability arising from a penal offense, compensation
would be improper and inadvisable because the satisfaction of such obligation is imperative.
Any compromise relating to the civil liability arising from an offense does not automatically terminate
the criminal proceeding against or extinguish the criminal liability of the malefactor. Reliance on the
negotiations for the settlement of the trust receipts obligations between the TONDA and
METROBANK is simply misplaced. The negotiations pertain and affect only the civil aspect of the
case but does not preclude prosecution for the offense already committed. It has been held that any
compromise relating to the civil liability arising from an offense does not automatically terminate the
criminal proceeding against or extinguish the criminal liability of the malefactor. All told, the P2.8
Million deposit could not be considered as having settled the trust receipts obligations of the TONDA
to the end of extinguishing any incipient criminal culpability arising therefrom.

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

F. Novation
1. Kinds of Novation

ART. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Novation
It is the substitution or change of an obligation by another, resulting in its extinguishment
or modification, either by changing its object or principal conditions or by substituting
another in the place of the debtor, or by subrogating a third person in the rights of the
creditor.
Kinds of Novation
1. As to its Essence
a. Objective/Real
b. Subjective/Personal substitution of debtor or by subrogation
c. Mixed change in the object or principal condition and change in the persons
of either creditor and debtor of an existing obligation
2. As to its form/constitution
a. Express when it is declared in unequivocal terms that the old obligation is
extinguished by a new one which substitutes the same
b. Implied when the old and the new are incompatible with each other on every
point

Test of Incompatibility
Whether or not the old and new obligations can stand together, each having its own
independent existence. If they can stand together, there is no incompatibility hence, no
novation. Changes that breed incompatibility must be essential in nature and not merely
incidental.

Note: The incompatibility must affect any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise the change is merely
modificatory in nature and insufficient to extinguish the original obligation.

KINDS OF NOVATION
1. Change of object
a. Express
b. Implied
2. Change of debtor
a. Expromision effected with the consent of the creditor at the instance of the
new debtor even without the consent or even against the will of the old debtor
(beneficial reimbursement)
Requisites
i. Initiative for substitution must emanate from the new debtor
ii. Consent of the creditor to the substitution
iii. Old debtor must be released from obligation
b. Delegacion effected with the consent of the creditor at the instance of the
old debtor (delegante), with the concurrence of the new debtor (delegante),
with the concurrence of the new debtor (delegado) (reimbursement and
subrogation)
Requisites
i. Initiative for substitution must emanate from the old debtor
ii. Consent of the new debtor
iii. Old debtor must be released from his obligation
3. Change of creditor
 a. Novation by subrogation a personal novation effected by subrogating a third
person in the rights of the creditor
b. Kinds:
i. Conventional takes place by agreement of the original creditor, the third
person substituting the original creditor; and the debtor
ii. Legal takes place by operation of law

CONCHINGYAN V. RB SURETY
No. L-47369. 30 June 1987

Facts:
Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in its line of credit from
400,000 to 800,000 with PNB.
PAGRICO subsequently submitted to PNB a Surety Bond issued by R&B Surety in the specified
amount in favor of the PNB.
The Surety Bonds conditions:
PAGRICO and R&B Surety bound themselves jointly and severally to comply with the terms and
conditions established by PNB.
PNB had the right to proceed directly against R&B Surety without necessarily first exhausting the
assets of PAGRICO.
R&B Suretys liability was to pay the principal of P400,000 with accrued interest, and all
expenses, charges, or other legal costs incident to collection of the obligation should PAGRICO
fail to settle the same.
In addition to the Surety Bond, PAGRICO and R&B entered into two Indemnity Agreements stating
that the indemnitors will jointly and severally pay an annual premium of P5,103.05 to R&B for the
Surety Bond until the same is cancelled or discharged.
Also, a Trust Agreement was entered into by PAGRICO, PNB, and the Catholic Church Mart
(CCM) where the latter undertook to pay the principal obligation of PAGRICO to the PNB.
When PAGRICO failed to comply with its principal obligation to the PNB, the latter demanded
payment from R&B Surety.
R&B Surety made a series of payments to PNB totalling P70,000.
R&B Surety then demanded from PAGRICO for reimbursement of payments made to PNB,
which PAGRICO refused to acknowledge.
R&B Surety sued PAGRICO
CFI: rendered judgment in favor of R&B Surety ordering herein petitioners to pay R&B Surety the
sum of the principal liability and interest rate of 6% per annum.
CA certified the case to the SC raising only questions of law.
Hence, current petition.
Issue: Whether or not the Trust Agreement novated the Surety Bond.

Held: No.
Concepts
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which terminates it either by changing its object or principal conditions or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor.
Kinds of novation:
Real - novation through a change of the object or principal conditions of an existing obligation.
Personal - novation by the change of either the person of the debtor or of the creditor.
Mixed - novation both subjective and objective at the same time.
Objective novation - new obligation expressly declare that the old obligation is extinguished, or that
the new obligation be on every point incompatible with the old one.
Subjective novation:
It is not enough that the juridical relation between the parties to the original contract is
extended to a third person.
It is essential that the old debtor be released from the obligation and the third person or new
debtor be take his place in the new relation.
If the old debtor is nit released, no novation occurs and the third person who has assumed the
obligation of the debtor becomes merely a co-debtor, surety, or co-surety.
Novation is never presumed - it must be established either by the discharge of the old debt by the
express terms of the new agreement or by the acts of the parties whose intention to dissolve the old
obligation as a consideration of the emergence of the new one must be clearly discernible.

Case
In novation, absent an unequivocal declaration of extinguishment of a pre-existing obligation, a
showing of complete incompatibility between the old and the new obligation would sustain a finding
of novation by implication.
However, in the case, the parties to the new obligation expressly recognize the continuing
existence and validity of the old one.
The Trust Agreement expressly provides for the continuing subsistence of the principal obligation
by stipulating that the Trust Agreement shall not in any manner release R&B from its obligation
under the Surety Bond.
Thus, there is no implied novation and so the Trust Agreement did not novate the Surety Bond.
Both agreements can co-exist since the trust agreement merely included another party obligor to
the principal obligation.
With the Trust Agreement, a Trustor which is CCM, became directly liable to PNB.
Now there are three instead of only two obligors directly and solidarily bound in favor of the PNB:
PAGRICO, R&B Surety, and CCM.
As held by the court, it is not unusual in business for a stranger to a contract to assume obligations
thereunder.
A suretyship or guarantee is a classic example.
The legal effect of such is the the increase in number of persons liable to the obligee and not the
extinguishment of the liability.
Which is precisely what happened in the case at bar.

CALIFORNIA V. STATE INVESTMENT

Facts

-State Investment House Inc is a domestic corporation engaged in quasi-banking business

- Delta Motors Corporation applied for financial assistance from respondent State Investment House
Inc.
-State Investment extend a credit line to Delta Motors for 25Million in 3 separate credit agreements
-On several occassions, Delta availed of the credit line by discounting with State Investment some of
its receivables
-eventually, delta became indebted to State Investment
-Petitioner, California Bus Lines purchased 35 buses buses to Delta Motors on installment basis
-California Bus executed 16 promissory notes in favor of Delta to secure payment of obligation
- In each promissory note, CBLI promised to pay Delta or order, P2,314,000 payable in 60 monthly
installments starting August 31, 1980, with interest at 14% per annum. CBLI further promised to pay
the holder of the said notes 25% of the amount due on the same as attorneys fees and expenses of
collection, whether actually incurred or not, in case of judicial proceedings to enforce collection. In
addition to the notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor.
-California Bus defaulted payments which resulted to a restructuring agreement with Delta to cover its
due obligations
-Delta Motors then executed a continuing deed of assignment of receivables to State Investment as.
Security for the payments of its obligations to State Investment per credit agreements
- In view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of
Agreement
-State Investment subsequently sent a deman letter to petitioner requiring remitting payments due in
the promissory notes

Issue
-Whether the Restructuring Agreement between petitioner California Bus and Delta Motors, novated
five promissory notes Delta Motors assigned to respondent State Investment

Held
-Novation did not occur.
-The restructuring agreement shows that the party did not expressly stipulate that the restructuring
agreement novated the promissory notes
- Absent an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing
of complete incompatibility between the old and the new obligation would sustain a finding of novation
by implication.

* The extinguishment of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term expressly means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.
Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by
law would be an incompatibility between the two contracts. While there is really no hard and fast rule
to determine what might constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and
the new obligations.

MILLAR V. CA
No. L-29981. April 30, 1971.

HOW DID THE PROBLEM ARISE?

Gabriel owes Millar money from a civil case judgment obligation. He could not pay so, thus his jeep
was executed. They then executed a chattel mortgage to secure payment for the judgment
obligation. Again Gabriel could not pay back the chattel mortgage. Millar asked for an alias writ of
execution upon Gabriels properties in order to pay to the judgment obligation. Gabriel argues that
they cannot do so since he had already paid the judgment obligation through the chattel mortgage.
DID NOVATION TAKE PLACE IN THIS CASE?
COURT SAID NO. The chattel mortgage did NOT impliedly novate the judgment obligation, hence,
Gabriel still owes Millar the unpaid judgment obligation.

WHY? Implied novation occurs when there is a substantial incompatibility between the first and the
second obligation. In this case, the court found no incompatibility between the judgment obligation
and the chattel mortgage. Also there is no explicit proof from the parties that by executing the chattel
mortgage, they intended to discharge of the respondents liability under the judgment obligation.
Hence, there was no novation. [MORE DETAILS BELOW]

2. Requisites

ART. 1292. In order that an obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatible with each
other. (1204)

Requisites of Novation
1. Previous valid and existing obligation
2. Capacity of the contracting parties (to the new contract)
3. Animus novandi or intent to novate (especially for implied novation and
substitution of debtors)
4. Substantial difference between the old obligation and the new obligation (especially
for implied novation), consequently, extinguishment of the obligation
5. Validity of the new obligation

RILLO V. COURT OF APPEALS

Facts:
In June 18, 1985, petitioner Rillo signed a "Contract To Sell of Condominium Unit" with private
respondent Corb Realty Investment Corporation.
Under the contract, CORB REALTY agreed to sell to RILLO a 61.5 square meter condominium
unit located in Mandaluyong, Metro Manila.
The contract price was P150,000.00, one half of which was paid upon its execution, while the
balance of P75,000.00 was to be paid in twelve (12) equal monthly installments of P7,092.00
beginning July 18, 1985.
Rillo failed to pay the initial monthly amortization.
CORB and Rillo restructured the loan, but Rillo again failed to pay his amortization.
CORB filed a complaint for cancellation of contract to sell with the RTC.
The Regional Trial Court held that CORB REALTY cannot rescind the "Contract to Sell"
because petitioner did not commit a substantial breach of its terms. It found that RILLO
substantially complied with the "Contract to Sell" by paying a total of P154,184.00.
The respondent Court of Appeals reversed the decision.

Issue: Whether Novation had taken place.

Held: No. Article 1292 of the Civil Code provides that "In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other." Novation is never
presumed. Parties to a contract must expressly agree that they are abrogating their old contract in favor
of a new one. In the absence of an express agreement, novation takes place only when the old and the
new obligations are incompatible on every point. In the case at bar, the parties executed their May 12,
1989 "compromise agreement" precisely to give life to their "Contract to Sell". It merely clarified the
total sum owed by petitioner RILLO to private respondent CORB REALTY with the view that the former
would find it easier to comply with his obligations under the Contract to Sell. In fine, the "compromise
agreement" can stand together with the Contract to Sell.

CRUZ V. COURT OF APPEALS

Facts:
Aug 22, 1977 Petitioners (mother and children) executed a notarized Deed of Partial
Partition.
o Each of them was given a share of several parcels of lands.
Aug 23, 1977 they executed a Memorandum of Agreement.
o Wherein they bound themselves to one another that they shall share alike and receive
equal shares from the proceeds of the sale of any lot allotted to and adjudicated in their
individual names.
Private respondents, sps. Malolos filed a civil suit against one Nerissa Cruz (one of the
receivers of parcels of lands).
o The CFI rendered a decision ordering Nerissa to pay.
Enforcing the writ, the sheriff levied upon the lands in question.
Nerissa failed to exercise her right of redemption so the final deed of sale was executed by
the sheriff conveying the lands in question to private respondents.
Petitioners filed a motion for leave to intervene and oppose the Maloloses motion.
o That they were co-owners of Nerissa over the lands in question.
Feb 17, 1987 petitioners filed a civil case for Partition of Real Estate against private
respondents.
The RTC rendered a decision in favor of petitioners.
The CA reversed the lower courts decision.
o The Memorandum of Agreement did not revoke, cancel or supersede the Deed of
Partial Partition.
Issue: W/N the Memorandum of Agreement novated the Deed of Partial Partition
Held: No. The petition is DENIED. The decision of the CA is AFFIRMED.
Ratio:
Petitioners claim that the MOA clearly manifested their intention to create a co-ownership.
The Court disagrees.
The provision under the MOA does not novate, much less cancel, the earlier DPP.
Novation, one of the modes of extinguishing an obligation requires that:
o There be a previous valid obligation;
o The parties concerned agree to a new contract;
o The old contract is extinguished;
o There is a valid new contract.
Novation may be express or implied.
The MOA falls short of producing novation, because it did not express a clear intent to
dissolve the obligation as a consideration for the emergence of the new one.
Petitioners failed to show that the DPP and the MOA are materially and substantially
incompatible with each other.
o The DPP granted title to the lots in question to the co-owner to whom they were
assigned;
 o The MOA created an obligation on the part of such co-owner to share with the others
the proceeds of the sale of such parcels.
There is NO incompatibility between the two contracts

SPOUSES REYES V. BPI FAMILY

G.R. Nos. 149840-41, 31 March 2006

Facts:
On 24 March 1995, petitioners Reyes spouses executed a real estate mortgage on their
property in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a P15M
loan of Transbuilders Resources and Development Corporation (Transbuilders).
When Transbuilders failed to pay its P15M loan within the stipulated period of one year, the
bank restructured the loan through a promissory note executed by Transbuilders in its favor,
on 28 June 1996
Petitioners aver that they were not informed about the restructuring of Transbuilders loan.
Petitioners claimed that the new loan novated the prior loan agreement which was without their
knowledge and consent, thus, releasing them from their obligation under the mortgage.
Issue: Whether there was novation of the mortgage loan contract between petitioners and BPI-FSP
that would result in the extinguishment of petitioners liability to the bank
(Alternative Issue just in case Sir is not satisfied where the problem arose Whether without
knowledge and consent of Novation on the part of the Sps petitioners would release them from their
obligation under the mortgage)
Held: None. No novation. Petition denied. Novation is defined as the extinguishment of an obligation
by the substitution or change of the obligation by a subsequent one which terminates the first, either
by changing the object or principal conditions, or by substituting the person of the debtor, or
subrogating a third person in the rights of the creditor. Article 1292: In order that an obligation
may be extinguished by another which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with each
other.
(Garcia, Jr. v. CA): In every novation there are 4 essential requisites:
(1) a previous valid obligation;
(2) the agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and
(4) validity of the new one.

(In simple terms) The cancellation of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. In determining what might constitute
sufficient change resulting in novation is irreconcilable incompatibility between the old and the new
obligations. There must also be consent of all the parties to the substitution, resulting in the extinction
of the old obligation and the creation of a valid new one. The acceptance of the promissory note by
the plaintiff is not novation of the contract. It is not proper to consider an obligation novated as in
the case at bar by the mere granting of extension of payment which did not even alter its
essence.
In the case at bar, there was absolutely no intention by the parties to supersede or abrogate the old
loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB.

3. Expromision and Delegation

ART. 1293. Novation which consists in substituting a new debtor in the place of
the original one, may be made even with- out the knowledge or against the will of
the latter, but not with- out the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

FORMS OF NOVATION BY SUBSTITUTION OF DEBTORS

1. Expromision effected with the consent of the creditor at the instance of the new
debtor even without the consent or even against the will of the old debtor

Requisites:
a. Initiative for substitution must emanate from the new debtor
b. Consent of the creditor to the substitution
c. Old debtor must be released from obligation

Illustration: Atoy owes Eugene P1, 000. Joey, a friend of Atoy approaches
Eugene and tells him: I will pay you what Atoy owes you. From now on, consider
me your debtor. Atoy is to be excused. Take note that in this example, there is
an agreement that Atoy will be released from the obligation. Sans such
agreement, there is no novation and the creditor (Eugene) can still enforce the
obligation against the original debtor.

Kinds of Substitution by Expromision:

a. Substitution with the knowledge and consent of the old debtor
b. Substitution without the knowledge or against the will of the old debtor

2. Delegacion - effected with the consent of the creditor, at the instance of the old
debtor (delegante), with the concurrence of the new debtor (delegado)
reimbursement and subrogation

Requisites:
a. Initiative for substitution must emanate from the old debtor
b. Consent of the new debtor
c. Acceptance by the creditor
d. Old debtor must be released from his obligation

Illustration: Atoy owes Eugene P1, 000. Atoy texted Eugene that his friend Joey
will pay the debt, and he wishes to be released from the obligation. Both Joey
and Eugene agreed to such terms. Take note again that the substitution must be
made with the intention to release the original debtor

Parties in delegacion:
a. Delegante original debtor (Atoy)
b. Delegatorio the creditor (Eugene)
c. Delegado the new debtor (Joey)
 Note: In either of the two modes of substitution, the consent of the creditor is an
indispensable requirement.

RIGHTS OF THE NEW DEBTOR:

1. Expromision
a. Substitution with knowledge and consent of original debtor and payment
made by new debtor with or without knowledge and consent of original
debtor
i. Reimbursement from the original debtor of the entire amount paid
ii. Subrogration in all the rights of the creditor
b. Substitution without the knowledge and consent of the original debtor, and
payment is made by the new debtor without the knowledge and consent of
the original debtor
i. Reimbursement from the original debtor only insofar as the payment
has been beneficial to such debtor
ii. No subrogation
2. Delegacion Since substitution was effected with the consent of all the parties,
the new debtor can demand reimbursement from the original debtor of the entire
amount which he has paid as well as compel the creditor to subrogate him to all
of his rights

Note: the mere fact that the creditor receives a guaranty or accepts payment from
a third person who accepts payment from a third person who agrees to assume
the obligation, when there is no agreement that the first debtor shall be released
from the responsibility, does not constitute novation, and the creditor can still
enforce the obligation against the original debtor. If the older debtor is not released,
there is no novation; the third person becomes merely a co-debtor, surety or co-
surety.

GARCIA V. LLAMAS
G.R. Nos. 149840-41, 31 March 2006
Facts:
On 24 March 1995, petitioners Reyes spouses executed a real estate mortgage on their
property in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a P15M
loan of Transbuilders Resources and Development Corporation (Transbuilders).
When Transbuilders failed to pay its P15M loan within the stipulated period of one year, the
bank restructured the loan through a promissory note executed by Transbuilders in its favor,
on 28 June 1996
Petitioners aver that they were not informed about the restructuring of Transbuilders loan.
Petitioners claimed that the new loan novated the prior loan agreement which was without their
knowledge and consent, thus, releasing them from their obligation under the mortgage.

Issue: Whether there was novation of the mortgage loan contract between petitioners and BPI-FSP
that would result in the extinguishment of petitioners liability to the bank
(Alternative Issue just in case Sir is not satisfied where the problem arose Whether without
knowledge and consent of Novation on the part of the Sps petitioners would release them from their
obligation under the mortgage)
Held: None. No novation. Petition denied.

Ruling: Novation is defined as the extinguishment of an obligation by the substitution or change of

the obligation by a subsequent one which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or subrogating a third person
in the rights of the creditor. Article 1292: In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other.
(Garcia, Jr. v. CA): In every novation there are 4 essential requisites:
(1) a previous valid obligation;
(2) the agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and
(4) validity of the new one.

(In simple terms) The cancellation of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. In determining what might constitute
sufficient change resulting in novation is irreconcilable incompatibility between the old and the new
obligations. There must also be consent of all the parties to the substitution, resulting in the extinction
of the old obligation and the creation of a valid new one. The acceptance of the promissory note by
the plaintiff is not novation of the contract. It is not proper to consider an obligation novated as in
the case at bar by the mere granting of extension of payment which did not even alter its
essence.

In the case at bar, there was absolutely no intention by the parties to supersede or abrogate the old
loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB.

a. Consequences of Expromision

ART. 1294. If the substitution is without the knowledge or against the will of the
debtor, the new debtors insolvency or non-fulfillment of the obligation shall not
give rise to any liabil- ity on the part of the original debtor. (n)

EFFECT OF INSOLVENCY OR NON-FULFILLMENT BY THE NEW DEBTOR

1. Expromision If the substitution was effected without the knowledge and
against the will of the original debtor, the new debtors insolvency or
nonfulfillment shall not revive the original debtors liability to the creditor

If the substitution was effected with the knowledge and consent of the original
debtor, it shall revive the original debtors liability to the creditor

b. Consequences of Delegacion

ART. 1295. The insolvency of the new debtor, who has been proposed by the
original debtor and accepted by the creditor, shall not revive the action of the
latter against the original ob- ligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when he delegated his
debt. (1206a)

2. Delegacion the right of the creditor can no longer be revived except in the
following cases:
a. Insolvency already existing and of public knowledge at the time when the
original debtor delegated his debt
b. Insolvency was already existing and known to the original debtor when he
delegated his debt.

It is submitted that actual knowledge of the creditor that new debtor was
insolvent at the time of delegation, will bar him from recovering from the old
debtor. He must bear the consequences of this acts knowingly done.

Note: A change in the incidental elements of, or an addition of such elements to an

obligation, unless otherwise expressed by the parties, will not result in its
extinguishment

4. Effect on Accessory Obligations

ART. 1296. When the principal obligation is extinguished in consequence of a

novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent. (1207)

Effects of Novation upon Accessory Obligations

General Rule: When the principal obligation is extinguished in consequence of a
novation, accessory obligation may subsist only insofar as they may benefit third
persons who did not give consent.

Exception: Art. 1296 has no application to novation effected by subrogating a third

person to the rights of the creditor. Such novation is regulated by Art. 1303-1304.

The exception refers to a case in which there is a stipulation constituted in favor of a

third person, which may be demanded separately from the principal obligation,
although subordinated to the latter.

5. Void Obligations

ART. 1297. If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event. (n)

ART. 1298. The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification validates acts
which are voidable. (1208a)
 6. Conditional Obligations

ART. 1299. If the original obligation was subject to a suspensive or resolutory

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

Effect of Condition in Novation:

1. If the original obligation was subject to suspensive or resolutory condition, the new
obligation shall be under the same condition, unless otherwise stipulated
2. If the new obligation and the old obligation are subject to different conditions
a. If the conditions can stand together:
i. If both are fulfilled the new obligation becomes demandable
ii. If only the condition affecting the old obligation is fulfilled old obligation
is revived while the new obligation loses its force
iii. If only the condition affecting the new obligation is fulfilled there is no
novation since the requisite of a previous valid and effective obligation
would be lacking
3. If the conditions are incompatible the effect is to extinguish the old obligation so
that only the new obligation remains and whose demandability/effectivity depend
upon the fulfillment/non-fulfillment of the condition affecting it.

7. Kinds of Subrogation

ART. 1300. Subrogation of a third person in the rights of the creditor is either legal
or conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it may
take effect. (1209a)

Novation by Subrogation
A personal novation effected by subrogating a third person in the rights of the creditor.

Forms of Novation by Subrogation

1. Conventional takes place by agreement of the original creditor, the third person
substituting the original creditor and the debtor
2. Legal takes place by operation of law

LEDONIO VS. CAPITOL DEVELOPMENT CORP.

Facts:
- Ledonio on a certain date obtained from a Ms. Picache two loans covered by promissory notes.
Subsequently, Ms. Picache executed an Assignment of Credit in favor of Capitol Development
Corporaiton. When the loans became due however, petitioner failed to settle his indebtedness
despite Capitols demands. Hence, Capitol instituted a Complaint for the collection of a sum of
money against herein petitioner Edgar Ledonio.
- Ledonio on the otherhand sought the dismissal of the complaint averring that Capitol had no
cause of action against him as he never consented or agreed to the said assignment. It is his
 contention that consent of the debtor to the assignment of credit is a basic/essential element in
order for the assignee to have a cause of action against the debtor. According to petitioner, the
assignment of credit constitutes conventional subrogation which requires the consent of the
original parties to the loan contract, namely, Ms. Picache (the creditor) and Ledonio (the debtor);
and the third person, Capitol(the assignee).
- Since petitioner never gave his consent to the assignment of credit, then the subrogation of
respondent in the rights of Ms. Picache as creditor by virtue of said assignment is without force
and effect. In support of said argument, petitioner invokes the following provisions of the Civil
Code. ART. 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this Code;
the latter must be clearly established in order that it may take effect. ART. 1301. Conventional
subrogation of a third person requires the consent of the original parties and the third person.

Issue: WON the consent of Ledonio to the assignment of credit is essential in order for Capitol to
have a cause of action against Him? No.

Ruling: The transaction between Ms. Picache and Capitol was an assignment of credit and not
conventional subrogation(novation), and does not require Ledonios consent as debtor for its validity
and enforceability. An assignment of credit has been defined as an agreement by virtue of which the
owner of a credit (known as the assignor), by a legal cause - such as sale, dation in payment or
exchange or donation - and without need of the debtor's consent, transfers that credit and its accessory
rights to another (known as the assignee), who acquires the power to enforce it, to the same extent as
the assignor could have enforced it against the debtor. On the other hand, subrogation, by definition,
is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It
may either be legal or conventional.

Legal subrogation is that which takes place without agreement but by operation of law because of
certain acts. Conventional subrogation is that which takes place by agreement of parties. Although it
may be said that the effect of the assignment of credit is to subrogate the assignee in the rights of the
original creditor, this Court still cannot definitively rule that assignment of credit and conventional
subrogation are one and the same.

Under our Code, conventional subrogation is not identical to assignment of credit. In the former, the
debtor's consent is necessary; in the latter, it is not required. Subrogation extinguishes an obligation
and gives rise to a new one; while assignment refers to the same right which passes from one person
to another. The nullity of an old obligation may be cured by subrogation, such that the new obligation
will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor's
right to another.

The Courts has consistently adhered to the foregoing distinction between an assignment of credit and
a conventional subrogation. Such distinction is crucial because it would determine the necessity of the
debtor's consent. In an assignment of credit, the consent of the debtor is not necessary in order that
the assignment may fully produce the legal effects. What the law requires in an assignment of credit is
not the consent of the debtor, but merely notice to him as the assignment takes effect only from the
time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories
without the debtor's consent. On the other hand, conventional subrogation requires an agreement
among the parties concerned the original creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among all the necessary parties.

b. Conventional
ART. 1301. Conventional subrogation of a third person requires the consent of
the original parties and of the third person. (n)

Conventional Subrogation
Takes place by agreement of the original creditor, the third person substituting the
original creditor and the debtor

Consent of all parties required in conventional subrogation

(1) The debtor because he becomes liable under the new obligation to a new
creditor
(2) The old or original creditor because his right against the debtor is
extinguished
(3) The new creditor because he may dislike or distrust the debtor

c. Legal

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

(1) When a creditor pays another creditor who is preferred, even without the
debtors knowledge;
(2) When a third person, not interested in the obligation, pays with the express
or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latters share. (1210a)

Legal Subrogation
General Rule: Legal subrogation is not presumed

Exceptions:
1. When the creditor pays another creditor who is preferred, without debtors
knowledge

Illustration: Atoy has two creditors, Mik who is a mortgage creditor for P15, 000
and Jerome who is an ordinary creditor for P6, 000. Jerome paid Atoys debt of
P15, 000 to Mik. Jerome will be subrogated to the rights of Mik. This means that
Jerome will now be a mortgage creditor for P15, 000 and an ordinary creditor for
P6, 000.

2. When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor
 Illustration: Atoy owes Joey P10, 000 secured by mortgage. Eugene, a classmate
of Atoy, and having no connection with the contract paid Joey with Atoy approval.
Subrogation takes place and Eugene becomes a mortgage creditor.

If Eugene pays without the knowledge or against the will of Atoy, he is only entitled
to demand reimbursement as to the extent that Atoy has been benefited by the
payment. There is no subrogation in this case

3. When even without knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the
latters share.

Illustration: Joey owes Cath P10, 000 secured by a mortgage and by a guaranty
of Atoy. If Atoy even without Joeys knowledge pays Cath, Atoy will be subrogated
in Caths place. By reason of confusion, or by reason of the fact that Atoy became
a guarantor and a creditor at the same time, the guaranty is extinguished.

Strictly speaking, there is no legal subrogation when a solidary debtor pays the
entire obligation. Solidarity terminates upon the payment of the whole obligation.
Thus, the paying debtor does not completely step into the shoes of the creditor,
as he cannot demand from any of his co-debtors the compliance of the entire
obligation but only the proportion which pertains to each.

ASTRO ELECTRONIC V. PHILIPPINE EXPORT

GR No. 136729. 23 September 2003

Facts:
Astro was granted several loans by the Philippine Trust (Philtrust) amounting to P3,000,000
with interest and secured by three promissory notes.
Petitioner Roxas signed these promissory notes twice, as President of Astro and in his personal
capacity.
In relation, respondent Philippine Export and Foreign Loan Guarantee Corp. (Philguarantee),
with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astros loan.
The guarantee was subject to the condition that upon payment by Philguarantee of said amount, it
shall be proportionally subrogated to the rights of Philtrust against Astro.
When Astro failed to pay the loan, Philguarantee paid 70% of the guaranteed loan to Philtrust
and subsequently filed a suit against Astro and Roxas for the sum of money.
The RTCs decision, which was affirmed in toto by the CA, was in favor Philguarantee. The court
ordered petittioners to pay, jointly and severally, Philguarantee the sum of P3,621,187.52.
Hence, current petition.
Issue: Whether or not Roxas acceptance of the liability to pay Philguarantee is necessary for
subrogation to occur.
Held: No.

Ratio:
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in
all his rights.
Subrogation may either be legal or conventional
Legal subrogation takes place without agreement of the parties but by operation of law because of
certain acts, as provided under Art. 1302.
Conventional subrogation takes place by agreement of the parties.
In the case, Roxas acquiescence is not necessary for subrogation to occur because this is
a case of legal subrogation where subrogation happens by operation of law and without the
need of the debtors knowledge.
Hence, Philguarantee rightfully demanded payment from Roxas and Astro given that Philguarantee
as guarantor became the transferee of all the rights of the creditor, Philtrust, when Philguarantee
paid 70% of Roxas and Astros debts to Philtrust.
As provided under Art. 2067: the guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.

METROBANK V. RURAL BANK OF GERONA

FACTS:
RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the 1970s, the
Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the loan applications of farmers-
borrowers under the Central Bank-International Bank for Reconstruction and Developments (IBRDs) 4th Rural Credit
Project. The agreement required RBG to open a separate bank account where the IBRD loan proceeds shall be
deposited. The RBG accordingly opened a special savings account with Metrobanks Tarlac Branch. As the depository
bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank representing the
proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to RBGs special savings
account for the latters release to the farmers-borrowers.

On September 27, 1978, the Central Bank released a credit advice in Metrobanks favor and accordingly credited
Metrobanks demand deposit account in the amount ofP178,652.00, for the account of RBG. The amount, which was
credited to RBGs special savings account represented the approved loan application of farmer-borrower Dominador de
Jesus. RBG withdrew the P178,652.00 from its account.

On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio Panopio,
for P189,052.00, and credited the amount to Metrobanks demand deposit account. Metrobank, in turn, credited RBGs
special savings account. Metrobank claims that the RBG also withdrew the entire credited amount from its account.

On October 3, 1978, the Central Bank approved Ponciano Lagmans loan application forP220,000.00. As with the two
other IBRD loans, the amount was credited to Metrobanks demand deposit account, which amount Metrobank later
credited in favor of RBGs special savings account. Of the P220,000.00, RBG only withdrew P75,375.00.

On November 3, 1978, more than a month after RBG had made the above withdrawals from its account with Metrobank,
the Central Bank issued debit advices, reversing all the approved IBRD loans.6 The Central Bank implemented the
reversal by debiting from Metrobanks demand deposit account the amount corresponding to all three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts from RBGs
special savings account: P189,052.00, P115,000.00, andP8,000.41. Metrobank, however, claimed that these amounts
were insufficient to cover all the credit advices that were reversed by the Central Bank. It demanded payment from RBG
which could make partial payments. As of October 17, 1979, Metrobank claimed that RBG had an outstanding balance
of P334,220.00. To collect this amount, it filed a complaint for collection of sum of money against RBG before the RTC,
docketed as Civil Case No. 6028.7

RTC: ruled for Metrobank, finding that legal subrogation had ensued:

[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBGs special savings
account] which credit advices and deposits were under its supervision. Being faulted in these acts or omissions, the
Central Bank [sic] debited these amounts against [Metrobanks] demand [deposit] reserve; thus[, Metrobanks] demand
deposit reserves diminished correspondingly, [Metrobank as of this time,] suffers prejudice in which case legal
subrogation has ensued.9
It thus ordered RBG to pay Metrobank the sum of P334,200.00, plus interest at 14% per annum until the amount is fully
paid.

CA: Noted that this was not a case of legal subrogation under Article 1302 of the Civil Code. Nevertheless, the CA
recognized that Metrobank had a right to be reimbursed of the amount it had paid and failed to recover, as it suffered loss
in an agreement that involved only the Central Bank and the RBG. It clarified, however, that a determination still had to be
made on who should reimburse Metrobank. Noting that no evidence exists why the Central Bank reversed the credit
advices it had previously confirmed, the CA declared that the Central Bank should be impleaded as a necessary party so
it could shed light on the IBRD loan reversals. Thus, the CA set aside the RTC decision, and remanded the case to the
trial court for further proceedings after the Central Bank is impleaded as a necessary party.10 After the CA denied its
motion for reconsideration, Metrobank filed the present petition for review on certiorari.

Metrobank disagrees with the CAs ruling to implead the Central Bank as a necessary party and to remand the case to the
RTC for further proceedings. It argues that the inclusion of the Central Bank as party to the case is unnecessary since
RBG has already admitted its liability for the amount Metrobank failed to recover. In two letters, 11 RBGs
President/Manager made proposals to Metrobank for the repayment of the amounts involved. Even assuming that no
legal subrogation took place, Metrobank claims that RBGs letters more than sufficiently proved its liability.
Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The transactions
involved in this case took place in 1978, and the case was commenced before the RTC more than 20 years ago. The RTC
resolved the complaint for collection in 1994, while the CA decided the appeal in 2002. To implead Central Bank, as a
necessary party in the case, means a return to square one and the restart of the entire proceedings.

ISSUE: Whether or not Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from
RBG the amounts it paid to the Central Bank, plus 14% per annum interest.

RULING: YES. The present case exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the
Civil Code which provides:

It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtors knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latters share.

Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as a conduit, and was not legally
answerable for the IBRD loans. Despite this, it was Metrobanks demand deposit account, instead of RBGs, which the
Central Bank proceeded against, on the assumption perhaps that this was the most convenient means of recovering the
cancelled loans. That Metrobanks payment was involuntarily made does not change the reality that it was Metrobank
which effectively answered for RBGs obligations.

Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank received the
Central Banks debit advices in November 1978, it (Metrobank) accordingly debited the amounts it could from RBGs
special savings account without any objection from RBG. RBGs President and Manager, Dr. Aquiles Abellar, even wrote
Metrobank, on August 14, 1979, with proposals regarding possible means of settling the amounts debited by Central Bank
from Metrobanks demand deposit account. These instances are all indicative of RBGs approval of Metrobanks payment
of the IBRD loans. That RBGs tacit approval came after payment had been made does not completely negate the legal
subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons. As the entity against which the collection was
enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from RBG the
amounts it paid to the Central Bank, plus 14% per annum interest.
 8. Effect of Subrogation

ART. 1303. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation. (1212a)

ART. 1304. A creditor, to whom partial payment has been made, may exercise his
right for the remainder, and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial payment of the same credit. (1213)

Effects of Subrogation
1. Total Subrogation - transfers to the person subrogated the credit with all the rights
the original creditor had against the debtor or third person

Accessory obligations are not extinguished; the person subrogated acquires all the
rights the original creditor had against third persons and the rule is absolute with
respect to legal subrogation. In conventional subrogation, accessory obligations
may be increased or reduced upon agreement of the parties

2. Partial subrogation A creditor, to whom partial payment has be made, may

exercise his right for the remainder, and he shall be preferred to the person who
has been subrogated in his place.

Illustration: Atoy owes Eugene P4, 000. With the consent of both, Joey pays
Eugene P2, 000. Now Eugene and Joey are the creditors of Atoy to the amount of
P2k. By reason of the preferential right to the remainder, Eugene is to be preferrerd
in case Atoy has only P2, 000. The preference, however, enjoyed by Eugene is
only in the assets remaining with the debtor (Atoy) and not those already transferred
to others.