MID-TERM EXAMINATION

Obligations [Art. 1156-1304]

March 27, 2018

I
The share of W in the estate of her deceased husband, including a real property, was sold by the
deputy sheriff under an execution issued on a judgment against W in favor of X. The sheriff’s
certificate of sale purported to convey not only the real estate but all the shares, actions, or
interest of any kind which W might have in the estate of her deceased husband, including
usufructuary and conjugal rights.

X contends that by virtue of the sale, he is entitled not only to appear as the owner of the
property in the proceedings for the settlement of her deceased husband’s estate but also to
exclude W from further participation therein. Did the sale subrogate X to all the rights of W in
the estate?

Answer: De Leon, pp. 100-101; In re Estate of Ceballos, 12 Phil. 271 [1908]

No. In the real estate at least, W retained the right of redemption from the execution sale (see
Sec. 29, Rule 39, Rules of Court) which gave her a standing in the estate proceedings. Moreover,
the creditor is not clothed with such rights as inherent in the person of his debtor and in this case,
W’s strictly personal rights would have alone entitled her to a representation in the estate
proceedings. The existence of the right of redemption would suffice to prevent an entire
subrogation.

II
A sold a parcel of land to B for P20,000. In the deed of sale, there is a stipulation that the
purchase price shall be paid on a certain date and that in case of failure to pay on such date, A
can rescind the contract. Suppose that B fails to pay on the date stipulated in the contract, is
Article 1191 of the Civil Code applicable? Why?

Answer: Jurado, p. 622; Hanlon vs. Hausermann, 40 Phil. 796; De la Rama Steamship Co. vs.
Tan, 99 Phil. 1034

No. Art. 1191 is not applicable. Where the contract itself contains a resolutory provision by
virtue of which the obligation may be cancelled or extinguished in case of breach, judicial
permission to rescind the contract is no longer necessary. The use of the word “implied” in the
article supports this conclusion. The right to rescind is “implied” only if not expressly granted;
no right can be said to be implied if expressly recognized. Consequently, in the instant case, Art.
1191 is not applicable. The rule that is applicable is found in Art. 1592 under the law on sales.

III
In a contract for the construction of a condominium building, it was expressly agreed that should
there be any dispute, a board of liquidators must first be resorted to before taking any judicial
action. The owner went to court because the building was not finished on time, but there was no
prior resort to arbitration. Will the case now be dismissed?

Answer: Paras, p. 200; Bengson vs. Chan, L-27283, July 29, 1977

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No, the case will not be dismissed, although there was no prior resort to arbitration. This is so
because under the Arbitration Law (RA876), in a case like this, what the Court should do is to
refer the matter to the arbitrators who are supposed to be selected by the parties.

My further explanation is that though there is a condition that before taking of any judicial action prior
resort to arbitration must be done which in the instant case was not done, Bengson vs. Chan
teaches us that in case of differences in the law (Arbitration Law) and the agreement of the parties,
the law must prevail. Art. 1306 of the New Civil Code essentially provides that contracting parties
may establish such terms and conditions but the same should not be contrary to law.
I read some of your answers, I noticed that you were not able to spot the core issue which is whether
or not the condition set for in the agreement is in accordance with law. If we follow their agreement,
the case should be dismissed because the case was filed with no prior resort to arbitration as agreed
upon. But the provision in the Arbitration Law provides for another procedure wherein arbitration can
be done even when the case is filed in court. The law should be followed instead of their agreement.

IV
The parties entered into a Memorandum of Agreement whereby A has to purchase 100% of B's
shareholdings. The Memorandum of Agreement shows that what the parties agreed to was the
execution of a share purchase agreement to effect the transfer of 100% of B’s shareholdings to
A. as seen in clause 3 stating “As soon as possible, but not more than 60 days after the signing
hereof, the parties shall endeavor to prepare and sign a share purchase agreement covering 100%
of the shareholdings of Sellers to be transferred to Buyer, i.e. 10,000,000 fully paid common
shares of the par value of ₱1.00 per share and subscription of an additional 100,000,000 common
shares of the par value of ₱1.00 per share of which ₱36,740,755.00 has been paid, but not yet
issued. The second paragraph of clause 4 likewise makes the execution of a share purchase
agreement a condition before the purchase price can be paid to B, since the payment of the
purchase price becomes due only after five years from the date of execution of the share
purchase agreement. The evidence on record show that the share purchase agreement was not
formally executed because A claimed that the accounts of B had to be reviewed and cleared up
before the share purchase agreement is signed. While B made its financial records available to A
for his review, the latter never made any serious effort to review the financial accounts of B,
hence, effectively preventing the execution of the share purchase agreement. B is now claiming
payment because according to him, the obligation became immediately demandable. Is B
correct?

Answer: DBP vs. Sta. Ines, et. al., G.R. No. 193068 and G.R. No. 193099, February 1, 2017

Yes. On the basis of Art. 1198(4) that is, “The debtor shall lose every right to make use of the
period when the debtor violates any undertaking, in consideration of which the creditor agreed to
the period.” the buyer lost the right to make use of the period and the obligation became
immediately demandable.

V
A, B, and C are jointly liable to give a particular car worth P1.2 million in favor of D, E, F, and
G. A is insolvent and the debtors, therefore, cannot purchase the car to give to the creditors. D
and E have renounced their rights. The debtors are not in default. How much can each of the
creditors get from each of the debtors?

Answer: Paras, pp. 293-294

Since this is a joint and indivisible obligation and since the car cannot be given, it is converted
into an obligation to give indemnity for damages. Since this is a joint obligation, each debtor is
proportionately liable and each creditor is only entitled to his proportional credit.

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P1.2M divided by 3 = P400,000 (the total debt of each debtor)

P400,000 divided by 4 = P100,000 (the credit belonging to each joint creditor, not from each
joint debtor)

A is insolvent and his share will not be included in the liability of B and C.

Therefore:

a) D and E having renounced their rights, they get nothing.

b) F has not renounced his right, so he can get P100,00 from B and P100,000 from C. Over
A, F has the rights of creditor over an insolvent debtor.
c) G has exactly the same rights as F.

VI
A,B, and C borrowed P120,000 from X. This debt is evidenced by a promissory note wherein the
three bound themselves to pay the debt jointly and severally. However, according to the note, A
can be compelled to pay only on June 1, 2010; B can be compelled to pay only on June 1, 2011
while C can be compelled to pay only on June 1, 2012. On June 1, 2010, X made a demand upon
A to pay the entire indebtedness but the latter paid only P40,000. Subsequently, because of A’s
refusal to pay the balance, X brought an action against him for collection of the amount.

a) Will such an action prosper?

b) Suppose the obligation of the parties is joint, will the action prosper?

Answer.

a) The action will not prosper. Article 1211 of the New Civil Code provides that the
solidary character is not destroyed by the fact that the debtors are bound by different
periods for payment. Thus, the solidary nature of the obligation is not affected by the fact
that the obligors in this case are liable on different dates. In the present case, the share of
each solidary debtor in the total obligation of P120,000 is presumably P40,000. It is
submitted that since each solidary debtor can be compelled to pay on different dates, the
right of the creditor to collect is limited to the solidary debtor or debtors whose
obligation/s has/have matured and the recovery is limited to the amount owned by the
debtor or debtors whose obligation/s has/have already matured. Hence, only A is liable
on June 1, 2010 and the liability is limited to P40,000. X will have to wait for June 1,
2011 when B’s obligation shall have matured, and for June 1, 2012 when C’s obligation
shall have also matured. If X was able to recover P40,000 from A on or after June 1,
2010, he can collect either P40,000 from either A or B on June 1, 2011. If X was able to
recover to collect P40,000 from either A or B on June 1, 2011 (in addition to the amount
previously collected from A), he can again collect another P40,000 from either A or B or
C on June 1, 2012. (See Ynchausti v. Yulo, 34 Phil. 978).
b) The action will still not prosper even if the obligation is joint. The difference, however, is
that on June 1, 2011, only B is liable (not A or B) and on June 1, 2012, only C may be
made liable (and not A, B, or C).

VII
Mr. A borrowed P1,000 from Mr. B payable on June 5, 2013. Later, Mr. A borrowed P800 from
Mr. B payable on June 13, 2013. On June 15, 2013, Mr. A delivered P1,000 to Mr. B designating
the debt that is payable on June 5, 2013 as the debt that is being paid. Can there be application of
payments? Why?

Answer: Aquino, p. 421

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Yes, because all the requisites for application for payments are present: 1) There are two debts,
one for P1,000 and one for P800; 2) The debtor (Mr. A) and the creditor (Mr. B) are the same in
both debts; 3) The obligations are of the same kind, payment of money; 4) The obligations are
both due before the delivery of money on June 15, 2013; and 5) The amount delivered, P1,000 is
not sufficient to pay for both which totals P1,800.

VIII
Mr. A borrowed P1,000 from Mr. B payable on June 5, 2013. Later, Mr. A borrowed P2,000
from Mr. B payable on June 10, 2013. On June 15, 2013, Mr. A delivered P1,000 to Mr. B
designating the debt that is payable on June 10, 2013 as the debt that is being paid. Is the
designation of Mr. A binding on Mr. B?

Answer: Aquino, p. 421

No. The designation of Mr. A is not binding on the creditor. Mr. A cannot compel Mr. B to
accept the application of payment because what he is paying is less than the amount that is due
on June 10, 2013. Creditors cannot be compelled to accept partial payments.

IX
Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of five
million pesos (P5,000,000.00). To buy a new car, she obtained a loan from the same bank in the
amount of P1,200,000.00, payable in twelve monthly installments. Sarah issued in favor of the
bank post-dated checks, each in the amount of P100,000.00, to cover the twelve monthly
installment payments. On the third, fourth and fifth months, the corresponding checks bounced.
The bank then declared the whole obligation due, and proceeded to deduct the amount of one
million pesos (P1,000,000.00) from Sarah’s deposit after notice to her that this is a form of
compensation allowed by law. Is the bank correct? Explain. (10%)

Answer: Aquino, p. 440; 2009 Bar Exams

No, the bank is not correct with respect to the amount of compensation. The bank is correct,
however, that compensation applies. The deposit made by Sarah is governed by the contract of
loan and the bank is considered the debtor with respect to such deposit. Sarah is also a debtor of
the bank because of the loan extended by the said bank to Sarah. In the absence of an
acceleration clause, only the unpaid third, fourth and the fifth monthly installments amounting to
P300,000 are due and demandable. Hence, compensation is only up to P300,000 and such
amount is the only amount that can be deducted from Sarah’s bank deposit.

X
A obtained a favorable judgment against B from the Court of First Instance of Manila for the
sum of P2,000. Subsequently, a writ of execution was issued and a jeep belonging to the latter
was seized by the sheriff. However, the two (A and B) arrived at an arrangement by virtue of
which B executed a chattel mortgage on the jeep stipulating, inter alia, that B shall satisfy the
judgment in two equal instalments, payable at designated periods. B failed to pay the first
instalment, and as a result, A obtained an alias writ of execution and levied upon certain personal
properties of B. The latter filed an urgent motion for suspension of the execution sale on the
ground of payment of the judgment obligation. He maintains that the execution of the deed of
chattel mortgage has extinguished the judgment debt because of implied novation? Is this
correct? Reasons. (10%)

Answer: Millar vs. Court of Appeals, G.R. No. L-29981 April 30, 1971
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No. The contention of B that the mortgage obligation has extinguished the judgment obligation
because of implied novation is not correct. The defense of implied novation requires clear and
convincing proof of complete incompatibility between the two obligations. The law requires no
specific form for an effective novation by implication. The test is whether the two obligations
can stand together. If they cannot, incompatibility arises, and the second obligation novates the
first. If they can stand together, no incompatibility results and novation does not take place.

Applying this test, we see no substantial incompatibility between the mortgage obligation and the
judgment obligation sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chattel mortgage serves only to provide
an express and specific method for its extinguishment – payment in two equal installments. The
chattel simply gave the judgment debtor a method and more time to enable him to fully satisfy
the judgment indebtedness. (Millar vs. Court of Appeals, G.R. No. L-29981 April 30, 1971).

“The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the
chattel mortgage purposely to secure the satisfaction of the then existing liability of the
respondent arising from the judgment against him in civil case 27116. As a security for the
payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial
alteration in the liability of the respondent.

The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. 2 The law requires no specific form for an effective novation by
implication. The test is whether the two obligations can stand together. If they cannot,
incompatibility arises, and the second obligation novates the first. If they can stand together, no
incompatibility results and novation does not take place.

We do not see any substantial incompatibility between the two obligations as to warrant a
finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by
explicit terms, intended the full discharge of the respondent's liability under the judgment by the
obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of
express novation.”

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