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A. PURE
AND
III. KINDS OF OBLIGATIONS
CONDITIONAL OBLIGATIONS
I. KINDS OF OBLIGATIONS
CLASSIFICATION OF OBLIGATIONS UNDER THE CIVIL CODE
1.
Pure obligations
2.
Conditional obligations
3.
Obligations with a period
4.
Alternative obligations
5.
Joint obligations
6.
Solidary obligations
7.
Divisible obligations
8.
Indivisible obligations
9.
Obligations with a penal clause
A. PURE AND CONDITIONAL OBLIGATIONS
PURE AND CONDITIONAL OBLIGATIONS DEFINED
Article 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable, without prejudice to t he effects of the
happening of the event. (1113)
PURE OBLIGATIONS
‣
When the obligation contains no term whatever upon which depends the fulfilment of the obligation, it is considered pure
‣
It is immediately demandable and there is nothing to exempt the debtor from compliance therewith.
CONDITIONAL OBLIGATIONS
‣
A conditional obligation is one which is subject to a condition.
‣
What is a condition?
‣
‣
It is a future AND uncertain event — upon which the acquisition or resolution of rights is made to depend by those
who execute the juridical act.
Is a “a past event unknown to the parties” a condition?
‣
TOLENTINO — NO. A condition must be uncertain. The uncertainty in this case is only in the mind of the parties, and
not in reality, there is no uncertainty to the event itself, for it has either already happened or has not happened. If as a
matter of fact it has happened, then the obligation immediately exists purely and simply, if it has not happened, there is
no obligation at all.
‣
BUT — What can be a condition is the future knowledge or proof of a past event unknown to the parties, but not the
event itself. Thus, the proof of an unknown past event may, by the will of the parties, be established as a condition.
This is because the proof of such fact will be received in the future.
K INDS
‣
OF
C ONDITIONS
As to the effect of the happening of the condition —
1.
Suspensive condition — the happening of the condition gives rise to an obligation
2.
Resolutory condition — the happening of the condition extinguishes rights already existing. (Art. 1181)
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CONDITIONAL OBLIGATIONS
As to the factors to which the fulfilment of the obligation depends upon —
1. Potestative condition — the happening of the condition depends upon the will of one of the parties
2.
Casual condition — the happening of the condition depends upon chance or the will of a third person
3.
Mixed condition — the happening of the condition depends partly upon the will of one of the parties and party by
chance or the will of a third person
‣
As to whether the condition, by its nature, by law, or by agreement, it can be performed by parts —
1.
Divisible condition
2.
Indivisible condition
‣
In case of multiple conditions —
1.
Conjunctive conditions — there are multiple conditions and all of them must be performed
2.
Alternative conditions — there are multiple conditions but only one of them must be performed
‣
As to whether the condition is an act or omission —
1.
Positive condition — the future event must occur
2.
Negative condition — the future event must not occur
‣
Whether they can be fulfilled or not —
1.
Possibile conditions
2.
Impossible conditions — may be legal, moral or physical impossibility
OBLIGATION TO PAY WHEN ABLE
Article 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed
to be one with a period, subject to the provisions of article 1197. (n)
‣
This is an instance when the court may exceptionally fix a period
SUSPENSIVE AND RESOLUTORY CONDITIONS
Article 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the condition. (1114)
SUSPENSIVE C ONDITIONS
‣
If the suspensive condition happens, the obligation arises. But if the condition does not happen, then the obligation does
not come into existence.
‣
It is the happening of the suspensive condition that gives birth to the obligation.
‣
This is also known as a “condition precedent”
‣
Example of an obligation subject to a suspensive condition — Contract to Sell
‣
There is a contract to sell if the ownership or title over the property sold is retained by the vendor, and is not passed to
the vendee unless and until there is full payment of the purchase price and/or upon faithful compliance with the other
terms and conditions that may lawfully be stipulated. Such payment or satisfaction of other preconditions, as the case
may be, is a positive suspensive condition, the failure of which is not a breach of contract, casual or serious, but
simply an event that would prevent the obligation of the vendor to convey title from acquiring binding force. Stated
differently, the efficacy or obligatory force of the vendor's obligation to transfer title 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. The vendor may extrajudicially terminate the operation of the contract,
refuse conveyance, and retain the sums or installments already received, where such rights are expressly provided for.
(Villamaria vs CA 2006)
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CONDITIONAL OBLIGATIONS
RESOLUTORY CONDITIONS
‣
If the resolutory condition happens, the obligations and rights are extinguished. The obligations and rights already exist
but under the threat of extinction upon the happening of the resolutory condition.
‣
The condition is not a prerequisite upon the perfection and demandability of the obligation. An obligation subject to a
resolutory condition is immediately demandable, subject to possible extinguishment upon the happening of the condition.
‣
This is also known as a “condition subsequent”
POTESTATIVE, CASUAL, AND MIXED CONDITIONS
Article 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation
shall be void. If it depends upon chance or upon the will of a third person, the obligatio n shall take effect in conformity
with the provisions of this Code. (1115)
K INDS
OF
SUSPENSIVE OR R ESOLUTORY C ONDITIONS
Potestative — the happening of the condition is dependent on the sole will of one of the parties. It is one which is in the
exclusive power of one of the parties to fulfil or prevent
1.
a.
Potestative suspensive condition
Dependent on the sole will of the debtor — obligation is VOID
i.
‣
ii.
b.
Example — I will give you a car if I want to
Dependent on the sole will of the creditor — valid
Potestative resolutory condition
i.
Dependent on the sole will of the debtor or creditor — valid
Casual — depends exclusively upon chance or upon the will of a third person
2.
‣
Example — I will give you a car if Donald Trump becomes president
Mixed — depends partly chance or upon the will of a third person and party by the will of one of the parties.
3.
‣
Example — I will give you a car if you marry her
IMPOSSIBLE CONDITIONS
Article 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall
annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the
impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a)
Article 727. Illegal or impossible conditions in simple and remuneratory donations shall be considered as not imposed. (n)
Article 873. Impossible conditions and those contrary to law or good customs shall be considered as not imposed and
shall in no manner prejudice the heir, even if the testator should otherwise provide. (792a)
‣
RULE — IMPOSSIBLE CONDITIONS,
THOSE CONTRARY TO GOOD CUSTOMS OR PUBLIC POLICY AND THOSE PROHIBITED BY LAW
SHALL ANNUL THE OBLIGATION WHICH DEPENDS UPON THEM
Physically or logically impossible conditions — when contrary to the laws of nature or logic
1.
‣
2.
Example — I will give you my car if eat the sun, or if you draw a straight circle
Juridically impossible conditions — when contrary to law, morals, good customs, or public policy
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TOLENTINO — The condition is considered contrary to public policy when it restricts certain essential rights which
are necessary for the free development of human activity, such as political and constitutional rights.
‣
Example — I will give you my car if you change your religion, or not remarry, or kill somebody, or sell your body
‣
NOTE — The entire obligation is rendered void and not merely the condition
‣
When must the impossibility of the condition exist?
‣
‣
At the time of the creation of the obligation. Thus, a supervening impossibility does not affect the existence of the
condition.
What if the condition was initially impossible (at the time of the perfection of the obligation) but subsequently
became possible?
‣
TOLENTINO — It remains void even if such condition subsequently becomes possible, unless the parties later
agree to revive the obligation again.
EXCEPT — IN THE FOLLOWING CASES, ONLY THE CONDITION IS VOID, THE OBLIGATION SUBSISTS
‣
1.
If the condition is negative (negative impossible conditions)
‣
The condition not to do an impossible thing shall be considered as not having been agreed upon.
‣
Example — I will give you my car if you do not eat the moon
‣
2.
BUT — This only applies to physically or logically impossible conditions, not juridically impossible conditions
In gratuitous obligations
‣
Such as in donations or in succession (See Art. 727, and 872)
POSITIVE CONDITIONS WITH A PERIOD
Article 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the
time expires or if it has become indubitable that the event will not take place. (1117)
Article 1185. XXXX If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably
been contemplated, bearing in mind the nature of the obligation. (1118)
‣
Example — I will give you my car if your dad goes to Haiti within one year from today. The obligation is extinguished if the
period lapses and the condition has not happened, or if the dad dies before the lapse of the period.
‣
What if the condition is not subject to a period?
‣
The condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the
nature of the obligation. (Art. 1185, 2nd par.)
NEGATIVE CONDITIONS WITH A PERIOD
Article 1185. The condition that some event will not happen at a determinate time shall render the obligation effective
from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated,
bearing in mind the nature of the obligation. (1118)
‣
Example — I will give you P1,000,000 if by Oct. 1, 2005 you have not yet married Maria. If by said date, you are not yet
married, or if prior thereto, Maria had died, the obligation is effective — in the first case, from Oct. 1, 2005; and in the
second case, from Maria’s death.
CONSTRUCTIVE FULFILMENT OF CONDITIONS
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Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119)
‣
This article covers constructive fulfilment of conditions, and refers to a condition which, although not exclusively within
the will of the debtor, may, in some way, be prevented by the debtor from happening.
‣
The mere intention of the debtor to prevent its happening, or the mere placing of ineffective obstacles to its compliance,
without actually preventing its fulfilment is not sufficient.
‣
RATIONALE — The principle underlying constructive fulfilment of conditions is that a party to a contract may not be
excused from performing his promise by the non-occurrence of an event which he himself prevented.
‣
REQUISITES —
1.
INTENT OF
THE OBLIGOR TO PREVENT FULFILMENT OF THE CONDITION
‣
The intent of the debtor to prevent the fulfilment of the condition is essential. Where the act of the debtor, although
voluntary, did not have for its purpose the prevention of fulfilment of the condition, it will not fall within the scope of
Art. 1186.
‣
Intention and prevention in the exercise of a lawful right will render the Article inapplicable — Thus, if the acts
which led to the non-fulfilment of the condition is done for a lawful purpose other than to prevent its fulfillment,
there is no constructive fulfilment.
‣
‣
Is fraud or malice essential?
‣
2.
Example — A promised to pay B a certain sum of money if the latter constructs a wall for the former within
certain number of days. Before the work is finished, A prosecutes B for a crime committed against him,
resulting in the imprisonment of B and the nonfulfillment of the condition. There is NO constructive fulfilment of
the condition in this case.
NO. TOLENTINO — Any act imputable to the debtor, whether done with or without fraud or malice will suffice,
in both cases, the debtor is responsible for his act as long as there is intent to prevent fulfilment of the
condition.
ACTUAL PREVENTION OF
COMPLIANCE
‣
There is constructive fulfilment of the condition only if the act of the debtor had in fact prevented compliance with
the condition.
‣
Intention without prevention, or prevention without intention is not sufficient.
‣
Example — A promised to sell to B a car if C could pass the bar. On the day of the examination, A caused C to be
poisoned and be hospitalized. A is still bound to sell the car. (If, however, it turns out that C was really disqualified to take
the bar, as when he had not finished high school, or had taken his first year law in the prohibited special class, A is not
bound.
‣
Does Art. 1186 apply to Resolutory Conditions?
‣
PARAS — YES. Although in general, Art. 1186 applies only to a suspensive condition, it may sometimes apply to a
resolutory condition as in this case — A sold land now to B on condition that B marries C within one year, otherwise B
should return the land. If A kills C, B does not have to return the land. This is because A is at fault.
RETROACTIVE EFFECT OF THE FULFILLMENT OF SUSPENSIVE CONDITIONS
Article 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroac t to the day
of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties,
the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and
circumstances of the obligation it should be inferred that the intention of the person constituting the same was different.
In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has
been complied with. (1120)
APPLICABILITY OF ART. 1187
‣
It refers to the effects of the happening of suspensive conditions.
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CONDITIONAL OBLIGATIONS
RULES IN ART. 1187
1.
IN OBLIGATIONS TO GIVE,
ONCE THE SUSPENSIVE CONDITION HAS BEEN FULFILLED, IT SHALL RETROACT TO THE DAY OF THE
CONSTITUTION OF THE OBLIGATION
‣
TOLENTINO — Remember that between the moment of the creation of the conditional obligation and the fulfilment of
the suspensive condition, the creditor cannot enforce the obligation, his right during that period is a mere expectancy.
The moment the suspensive condition happens however, the obligation becomes effective and enforceable. The
debtor may legally be compelled to perform from that moment. The cause of action for the enforcement of the
obligation accrues, and the period of prescription of the action has to be computed from that moment. However, the
effects of the obligation, retroact to the moment when such obligation was constituted or created. The juridical reason
for this rule is that the condition is only an accidental, and not an essential element of the obligation. The obligation is
constituted when the essential elements which give rise thereto concur. Hence, when the condition is fulfilled,
resulting in the effectivity of the obligation, it is only logical that the effects of the obligation must be deemed to
commence, not from the time the accidental element or condition was fulfilled, but from the time the obligation itself
was constituted. By the principle of retroactivity, therefore, a citron is created whereby the binding tie of the
conditional obligation is produced from the time of its perfection, and not from the happening of the condition.
‣
Thus, if the creditor, before the happening of the condition, has already disposed of his expected right, such as by
creating a mortgage over the property to be delivered to him, the happening of the suspensive condition
consolidates or makes effective the act performed pendente conditionae (pending the fulfilment of the condition).
‣
BUT —Note that this retroactive effect can apply only to consensual contracts (like sale), and not to real contracts
(such as deposit or commodatum), which are perfected only upon delivery.
‣
PARAS — Application retroactivity rule in Art. 1187 —
‣
‣
Example — Jose in 2004 promised to sell to Maria his land provided Maria passes the bar in 2006. Maria passed
the bar in 2006. Applying the rule in Art. 1187, it is as if Maria was entitled to the land beginning 2004.Therefore, (1)
any donation or mortgage made by Maria in 2004 (before passing) will be considered valid. (Under the law of
donations, future property cannot as a rule be donated, but inasmuch as Maria is entitled to the land effective 2004,
it follows that the property cannot be considered a future one. The same is true with regard to a mortgage, for
under the law, the mortgagor must be the owner). (These are acts pendente conditionae.) (2) any alienation on the
land made by Jose (pendente conditionae) should as a rule be considered invalid.
EXCEPT — There is no retroactivity with reference to —
Fruits and interests in reciprocal obligations — which are deemed mutually compensated unless there is a
contrary intent/agreement.
a.
‣
“Fruits” here refer to natural, industrial, and civil fruits (like rent). (See Art. 442)
‣
TOLENTINO — This is for reasons of practicality and convenience.
‣
Example — In 1999, A agreed to sell B his land and B agreed to pay if C passes the bar of 2006. C passed. A
must now give the land, and B must pay. The fruits of the land for the one-year period will remain with A, i.e., A
does not have to give said fruits. Upon the other hand, B will keep the 6% legal interest on his money. This is
true even if the interests be greater or lesser than the fruits.
‣
BUT — In unilateral obligations, debtor gets the fruits and interests unless there is a contrary intent/agreement.
‣
TOLENTINO — This is but just because the debtor does not get anything from the creditor in a unilateral
obligation
‣
b.
c.
2.
Example — In 2005, A promised to give B his (A’s) land if B passes the bar in 2006. If the condition is
fulfilled, does A also give the fruits for the period of one year? NO, by express provision of the law unless
there is a contrary intent.
Period of prescription — Here the period runs from the day the condition was fulfilled, because it can be
enforced only from said date.
In case of fortuitous events — thus, if the thing is lost due to a fortuitous event before the happening of the
condition, the debtor suffers the loss because he is still the owner.
IN OBLIGATIONS TO DO AND NOT TO DO,
ONCE THE SUSPENSIVE CONDITION HAS BEEN FULFILLED, THE COURTS SHALL
DETERMINE, IN EACH CASE, THE RETROACTIVE EFFECT OF THE CONDITION THAT HAS BEEN COMPLIED WITH
‣
The court use sound discretion in this case. It may permit retroactivity or refuse its application, depending on the
circumstances of each case. The intent of the parties should be taken into account.
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PRESERVATION OF THE CREDITOR’S RIGHTS PENDING THE FULFILMENT OF THE CONDITION
Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of
his right.
XXXXXXX
‣
RATIONALE — Inasmuch as pending the happening of the suspensive condition, the creditor has only an expectancy and
cannot compel the debtor to perform, acts or events may take place which might render his right illusory when the
condition happens. Hence the law allows him to take appropriate steps or bring the proper actions for the preservation of
his right.
‣
The actions for the preservation of the creditor’s rights may have for their objects —
1.
To prevent the loss or deterioration of the things which are the objects of the obligations by enjoining or restraining
acts of alienation or destruction by the debtor himself or by third persons
2.
To prevent concealment of the debtor’s properties which constitute guaranty in case of non-performance of the
obligation
3.
To demand security if the debtor becomes insolvent
4.
To compel the acknowledgement of the debtor’s signature on a private document or the execution of the proper
public documents for registration so as to affect third persons
5.
To register the deeds of sale or mortgages evidencing the contract
6.
To set aside fraudulent alienations made by the debtor
7.
To interrupt the period of prescription, by actions against adverse possessors of the things which are the objects of
the obligation.
‣
NOTE —
‣
The “appropriate actions” contemplated here does not necessarily refer to judicial actions, it may cover other
remedies such as recording with the Register of Deeds. (Citing JBL Reyes)
‣
This article does not grant any preference of creditor but only allows the bringing of the proper action for the
preservation of the creditor’s rights.
‣
‣
The law says “preservation,” not “preference” over other creditor. (Jacinto v. de Leon)
Does this article also apply to obligations with a resolutory condition?
‣
TOLENTINO — YES. The party who would be entitled to restitution from the other in the event the resolutory condition
is fulfilled stands in the same position as a creditor in a obligation with a suspensive condition, in that he has an
expectancy of recovery of the thing. Thus, pending the fulfilment of the resolutory condition, he could bring the same
actions allowed to the creditor under the first paragraph of Art. 1188 for the protection of his rights. This is only just.
RECOVERY IN CASE OF PAYMENT BY MISTAKE PENDING THE FULFILMENT OF THE SUSPENSIVE
CONDITION
Article 1188. XXXXXX The debtor may recover what during the same time he has paid by mistake in case of a suspensive
condition. (1121a)
Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or
shall be liable for fruits received or which should have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the
person who delivered the thing, until it is recovered. (1896a)
‣
This article permits the debtor who paid before the happening of the condition to recover only when he paid by mistake
and provided the action to recover is brought before the condition happens.
‣
Proper actions —
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1.
Accion reinvidicatoria — if the payment was of a determinate thing and it still exists in the hands of the creditor.
2.
Action based on solutio indebiti — If the payment was of a generic thing
‣
What if the debtor pays with knowledge of the condition (in other words, there was no mistake)?
‣
‣
TOLENTINO — There is an implied waiver of the condition, and whatever has been paid cannot be recovered.
What if the debtor pays by mistake, but subsequently the suspensive condition was happened?
‣
‣
TOLENTINO — The subsequent fulfilment of the condition will bar recover of what has been prematurely paid,
because the retroactivity of the obligation consolidates the right of the creditor to what is paid from the moment of the
obligation was constituted.
What about the fruits and interests which accrued during the time when the thing was in the possession of the
creditor, can the debtor recover them as well?
‣
TOLENTINO — YES. The silence of the law should not bar recovery of the fruits or interest by the debtor. The
provisions on solutio indebiti under Art. 2159 can be applied.
LOSS, DETERIORATION, AND IMPROVEMENT BEFORE THE FULFILMENT OF SUSPENSIVE
CONDITIONS
Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to
give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is
lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and
its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122)
Article 579. The usufructuary may make on the property held in usufruct such useful improvements or expenses for mere
pleasure as he may deem proper, provided he does not alter its form or substance; but he shall have no right to be
indemnified therefor. He may, however, remove such improvements, should it be possible to do so without damage to the
property. (487)
Article 580. The usufructuary may set off the improvements he may have made on the property against any damage to
the same. (488)
APPLICABILITY OF ART. 1189
1.
It applies only in obligations to give a determinate or specific thing
2.
It applies only in the case the obligation is subject to a suspensive condition, which is later fulfilled.
3.
It comprehends the following events which occur prior to the happening of the suspensive condition —
Loss of the thing — A thing is lost when it either —
a.
b.
i.
Perishes (such as when an animal dies, a house is destroyed by fire, or crop washed away by flood)
ii.
Goes out of commerce of man (such a when a thing is declared as contraband)
iii.
When it disappears in such a manner that its existence is unknown or it cannot be recovered (such as when a ship
sinks, or a thing is stolen by thieves)
Deterioration of the thing — any reduction or impairment in the substance or value of a thing which does not
amount to a loss. In other words, the thing still exists at the time the condition is fulfilled, but it is no longer intact, or
is less than what it was when the obligation was constituted.
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Improvement of the thing — Anything added to, incorporated in, or attached to the thing that is due, is an
improvement. Apply the principle of accretion.
c.
RULES IN ART. 1189
1.
LOSS
a.
If the thing is lost without the fault of the debtor — the obligation shall be extinguished
b.
If the thing is lost through the fault of the debtor — he shall be obliged to pay damages
2.
DETERIORATION
a.
When the thing deteriorates without the fault of the debtor — the impairment is to be borne by the creditor
b.
If it deteriorates through the fault of the debtor — the creditor may choose between —
3.
i.
Rescission (resolution/cancellation) of the obligation and damages
ii.
Fulfilment (specific performance) and damages
IMPROVEMENT
a.
If the thing is improved by its nature, or by time — the improvement shall inure to the benefit of the creditor
b.
If it is improved at the expense of the debtor — he shall have no other right than that granted to the usufructuary
(See Art. 579 and 580)
EFFECT OF THE FULFILLMENT OF RESOLUTORY CONDITIONS
Article 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the
fulfillment of said conditions, shall return to each other what they have received.
In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid
down in the preceding article shall be applied to the party who is bound to return.
As for the obligations to do and not to do, the provisions of the second paragraph of article 118 7 shall be observed as
regards the effect of the extinguishment of the obligation. (1123)
Article 1187. XXXXXX In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of
the condition that has been complied with.
APPLICABILITY OF ART. 1190
‣
This article applies to obligations subject to a resolutory condition and it gives the effects of the happening of such
conditions.
EFFECTS OF THE FULFILLMENT OF RESOLUTORY CONDITIONS
1.
MUTUAL RESTITUTION
‣
The parties, upon the fulfillment of resolutory conditions, shall return to each other what they have received.
‣
TOLENTINO — In obligations with resolutory conditions, the rights are always in the danger of being extinguished by
the happening of the resolutory condition. If the condition does not happen, those rights are consolidated and they
become absolute in character. But if the condition happens, such rights are extinguished, and the obligation is treated
as if it did not exist. Hence each party is bound to return whatever he has received, so that they may be returned to
their original condition before the creation of the obligation. Every vestige of the obligation is wiped out as much as
possible through the process of mutual restitution
‣
What about the fruits and interests, should these also be returned?
‣
TOLENTINO — Apply the rules in Art 1187
a. Reciprocal obligations — no need to return, apply principle of mutual compensation
Unilateral obligations — they should be returned
b.
‣
BUT — Apply Art. 443, in determining the fruits to be returned, it should be remember that he who received
the fruits has the obligation to pay the expenses made by a third person in their production, gathering and
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B. OBLIGATIONS WITH A PERIOD
preservation, therefore, these expenses incurred by the person obliged to return should be deducted from
the gross value of the fruits to be returned.
2.
IN
CASE OF LOSS, DETERIORATION OR IMPROVEMENT OF DETERMINATE THINGS IN OBLIGATIONS TO GIVE
‣
Apply the rules in Art. 1189
‣
TOLENTINO — Before the resolutory condition happens, the party who has a right is practically in the same position
as one who has an obligation subject to a suspensive condition. There is the possibility that he may have to return or
deliver the thing to the other party, and that possibility becomes a positive duty when the resolutory condition is
fulfilled. Therefore, in case of loss of the thing, or deteriorations suffered by it, or improvements made thereon, the
provisions of Art. 1189 are applicable, the party who has to make restitution being considered as the debtor.
3.
IN CASE
‣
OF OBLIGATIONS TO DO OR NOT TO DO
Apply the rule in Art. 1187 — The courts shall determine, in each case, the incidental effects of the happening of the
resolutory condition.
B. OBLIGATIONS WITH A PERIOD
DEFINITION OF A PERIOD OR TERM
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day
comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day
certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by
the rules of the preceding Section. (1125a)
NATURE OF A PERIOD
‣
A period is a certain length of time which determines the effectivity or the extinguishment of obligations.
‣
A period has reference to a “day certain” which is understood to be that which must necessarily come, although it may not
be known when.
‣
NOTE — When we know that something will happen but we are uncertain as to the time it will happen, this is a term.
When we are not even sure if something will happen as a fact or not, this is a condition.
‣
A term or a period consists in a space of time which has an influence on obligations as a result of a judicial act, and either
suspends their demandableness, or produces their extinguishment. Obligations with a period are, therefore, those whose
consequences are subjected in one way or another to the expiration of said term.
‣
REQUISITES — A period must be —
1. Future — It must refer to the future.
2.
Certain — It must be certain (sure to come) but can be extended. (If eliminated subsequently by mutual agreement,
the obligation becomes pure and immediately demandable).
3.
Possible — It must be physical and legally possible, otherwise the obligation is void.
PERIOD
CONDITION
As to their
fulfillment
A period is an event which must happen sooner or later, at a
date known beforehand, or a time which cannot be determined.
A condition is an uncertain event
As to time
A period always refers to the future
A condition may under the law refer even to the past.
As to influence on
the obligation
A period merely fixes the time or the efficaciousness of an
obligation
A condition causes an obligation to arise or to cease
As to the will of
the debtor
A period left to the debtor’s will merely empowers the court to
fix the period
A condition which depends exclusively on the will of
the debtor annuls the obligation
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B. OBLIGATIONS WITH A PERIOD
K INDS
1.
OF
PERIODS
As to when the period will expire
a.
Definite — the exact date or time is known and given.
b.
Indefinite — something that will surely happen, but the date of happening is unknown (as in the case of death).
2.
As to the source of the period
a.
Legal — a period granted under the provisions of the law.
b.
Conventional or Voluntary — period agreed upon or stipulated by the parties.
c.
Judicial — the period or term fixed by the courts for the performance of an obligation or for its termination.
3.
As to the effect of the expiration of the period
a.
Suspensive period (ex die) — a period with a suspensive effect. Here, the obligation begins only from a day certain, in
other words, upon the arrival of the period.
b.
Resolutory period (in diem) — a period or term with a resolutory effect. Up to a time certain, the obligation remains
valid, but upon the arrival of said period, the obligation terminates
As to how the period is created by the parties —
4.
a.
Express — when specifically stated and agreed upon by the parties
b.
Implied — when the period is tacit, such as when a person undertakes to do some work which can be done only
during a particular season
EFFECT OF THE PERIOD
Suspensive period — Suspends the demandability of the obligation until the period expires
1.
‣
Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.
Resolutory Period — The expiration of the period terminates the obligation, which is already immediately demandable
2.
‣
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
SUSPENSION OF THE PERIOD IN THE EVENT OF A FORTUITOUS EVENT
‣
SEE — Victorias Planters Association vs Victorias Milling, G.R. No. L-6648, July 25, 1955
‣
‣
The stipulation that in the event of a fortuitous event or force majeure, the contract shall be deemed suspended during
the said period does not mean that the happening of any of those events stops the running of the period the contract
has been agreed upon to run. It only relieves the parties from the fulfilment of their respective obligations during that
time.
Example — If during 6 of the 30 years fixed as the duration of the contract, one of the parties is prevented by force
majeure to perform his obligation during those years, he cannot after the expiration of the 30-year period, be
compelled to perform his obligation for 6 more years to make up for what he failed to perform during the said 6 years,
because it would in effect be an extension of the term of the contract. The contract is stipulated to run for 30 years,
and the period expires on the force majeure cannot be deducted from the period stipulated.
LOSS, DETERIORATION, AND IMPROVEMENT BEFORE THE EXPIRATION OF THE PERIOD
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B. OBLIGATIONS WITH A PERIOD
Article 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in
article 1189 shall be observed. (n)
Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to
give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) 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;
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B. OBLIGATIONS WITH A PERIOD
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and
its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122)
RECOVERY IN CASE OF PAYMENT BY MISTAKE PENDING THE EXPIRATION OF THE SUSPENSIVE
PERIOD
Article 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or
believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. (1126a)
‣
This article allows the recovery of the thing or money itself, plus the fruits or interests, which must be understood as those
accusing from the moment of payment to the date of recovery. If the action to recover, however, is not brought by the
debtor before the date of maturity, then the right to recover the thing or money will cease but it is submitted, the reason
for the law will still justify the recovery of the fruits from the time of payment to the date of maturity.
‣
If the payment before the period expires was made voluntarily, with knowledge of the period, the payment cannot be
recovered. The debtor can be considered as having tacitly waived the benefit of the term, hence he is not entitled to
recover anything because the obligation can then be considered as already matured.
‣
NOTE — In the following cases, however, premature payment cannot be recovered —
1.
When the obligation is reciprocal and there has been premature performance on both sides
2.
When the obligation is a loan on which the debtor is bound to pay interests
3.
When the period is exclusively for the benefit of the creditor, because the debtor by paying in advance loses nothing.
BENEFIT OF THE PERIOD
Article 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of
both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the
period has been established in favor of one or of the other. (1127)
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the
debt;
(2) When he does not furnish to the creditor the guaranties or securities which he has promised;
(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a
fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
(5) When the debtor attempts to abscond. (1129a)
‣
RULE — WHENEVER IN AN OBLIGATION A PERIOD IS DESIGNATED,
BOTH THE CREDITOR AND THE DEBTOR
IT IS PRESUMED TO HAVE BEEN ESTABLISHED FOR THE
BENEFIT OF
‣
‣
EXCEPT — When 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.
What is the consequence of the benefit of the period?
1.
If the term is for the benefit of both parties — the creditor cannot demand payment and the debtor cannot make
an effective tender and consignation of payment, before the period stipulated.
2.
If the term is for the benefit of the debtor only — He may oppose a premature demand for payment, but may
validly pay at any time before the period expires
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B. OBLIGATIONS WITH A PERIOD
If the term is for the benefit of the creditor only — He may demand performance at any time, but the debtor
cannot compel him to accept payment before the period expires
3.
CIRCUMSTANCES WHICH INDICATE FOR WHOM THE BENEFIT OF THE TERM BELONGS
For the benefit of both parties —
1.
a.
When there is interest stipulated (Here the creditor is interested in the term because of the interests that would be
earned; the debtor is interested because he is given enough time to pay).
b.
When the creditor is interested in keeping his money safely invested (thus making the debtor a sort of depository), or
when the creditor wants to protect himself from the dangers of currency depreciation
2.
For the benefit of the debtor
a.
When the loan is without interest, this is generally only for the benefit of the debtor.
b.
When payment is to be made “within” a certain period from date of contract or “on or before” a certain date.
For the benefit of the creditor — Usually, this only exists if there is a stipulation to this effect, as when the contract
provides that no payment should be made till after a certain given period
3.
‣
NOTE — Acceptance of partial payment even before the expiration of the period means a waiver on the part of the
creditor of his right to refuse payment before the end of said period. (Lopez v. Ochoa 1958)
DEBTOR’S LOSS OF THE BENEFIT OF THE PERIOD
‣
In the following cases enumerated in Art. 1198, the debtor loses the benefit of the period, thus, the creditor can demand
immediate performance of the obligation. The obligation becomes immediately due and demandable even if the period
has not yet expired. The obligation is thus converted into a pure obligation.
1.
When after the obligation has been contracted, he becomes insolvent
‣
‣
EXCEPT —when he gives a guaranty or security for the debt
2.
NOTE — The insolvency referred to does not have to be judicially declared; it is sufficient for him to find a hard
time paying off his obligations because of financial reverses that have made his assets less than his liabilities
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 the guaranties or securities after their establishment
‣
EXCEPT — when he immediately gives new ones equally satisfactory
When through a fortuitous event the guaranties or securities disappear
‣
EXCEPT — when he immediately gives new ones equally satisfactory
‣
NOTE — There must be total loss in case of a fortuitous event. But if the debtor’s is at fault, mere impairment of
the securities are sufficient.
4.
5.
When the debtor violates any undertaking, in consideration of which the creditor agreed to the period
6.
When the debtor attempts to abscond.
WHEN THE COURTS CAN FIX THE PERIOD
Article 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably contemplated
by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a)
CASES WHERE THE COURTS CAN FIX A PERIOD
1.
The obligation does not fix a period but from the nature and circumstances of the obligation, it can be inferred that a
period was intended (Art. 1197)
2.
When the period depends solely on the will of the debtor (Potestative Suspensive Period) (Art. 1197)
3.
When the debtor binds himself to pay when his means permit him to do so. (Art. 1180)
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C. ALTERNATIVE OBLIGATIONS
4.
When rescission (resolution or cancellation) is invoked in a reciprocal obligation and there is just cause to fix a period (Art.
1191)
5.
When the suspensive condition depends solely on the will of the debtor (Potestative Suspensive Condition) and such
condition was imposed on the implementation of a right or the fulfilment of the obligation, leaving the obligation valid but
the condition void. The Courts will then fix a period. (Art. 1182 in relation to Patente vs Omega)
RULE TO OBSERVE ONCE THE COURT IS CALLED UPON TO FIX A PERIOD
1.
In every case, the court shall determine such period as may under the circumstances have been probably contemplated
by the parties. (Court cannot arbitrarily fix a period)
2.
Once the period is fixed by the Courts, it becomes part of the contract. The period cannot be changed without the
consent of both parties
C. ALTERNATIVE OBLIGATIONS
OBLIGATIONS WITH SEVERAL OBJECTS
Article 1199. A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131)
Article 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only
one is
practicable. (1134)
KINDS OF OBLIGATIONS BASED ON THE PLURALITY OF OBJECTS
1.
Conjunctive — one where the debtor has to perform several prestations. This is extinguished only by the performance of
all of them.
2.
Alternative — one where out of the two or more prestations which may be given, only one is due.
3.
Facultative — one where only one prestation has been agreed upon but the obligor may render another in substitution.
WHO HAS THE RIGHT OF CHOICE IN ALTERNATIVE OBLIGATIONS
Article 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been
the object of the obligation. (1132)
‣
RULE — IN ALTERNATIVE OBLIGATIONS,
‣
‣
THE DEBTOR HAS THE RIGHT OF CHOICE WHICH PRESTATION TO PERFORM
BUT — The debtor shall have no right to choose those prestations which are either —
1. Impossible
2.
Unlawful
3.
Could not have been the object of the obligation
EXCEPT — If the right of choice has either been —
1.
Expressly granted to the creditor
2.
Expressly granted to a third person
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C. ALTERNATIVE OBLIGATIONS
HOW THE RIGHT OF CHOICE SHOULD BE MADE
Article 1201. The choice shall produce no effect except from the time it has been communicated. (1133)
Article 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from
the day when the selection has been communicated to the debtor. XXXXX
‣
‣
The notice of selection or choice may be in any form provided it is sufficient to make the other party know that the
election has been made.
It is not subject to any form and may, therefore, be made —
1.
Orally
2.
In writing
3.
Impliedly
4.
By any other unequivocal means.
‣
RATIONALE — The purpose of the notice is to inform the creditor that the obligation is now a simple one, no longer
alternative, and if already due, for the creditor to receive the object being delivered, if tender of the same has been made.
‣
TOLENTINO — When the debtor performs one of the prestations with the intent to discharge the obligation, he is
released, because the selection made may be implied in the fact of performance.
EFFECT OF CHOICE
‣
The effect of the notice of choice is to limit the obligation to the object selected, with all the consequences which the law
provides. The obligation is converted into a simple obligation to perform the presentation chosen. Once the selection has
been communicated, it becomes irrevocable. To allow a change in the selection after it has been communicated to the
other party, is to expose the latter to damages arising from preparations he may make on the assumption that the
presentation selected is the one to be performed.
IMPAIRMENT OF THE CHOICES
Article 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only
one is practicable. (1134)
Article 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of th e obligation, the
latter may rescind the contract with damages. (n)
Article 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things
which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become
impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which
last became impossible.
Damages other than the value of the last thing or service may also be awarded. (1135a)
Article 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from
the day when the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the
creditor should choose from among the remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or
the price of that which, through the fault of the former, has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of
them, also with indemnity for damages.
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C. ALTERNATIVE OBLIGATIONS
The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should
become impossible. (1136a)
IMPAIRMENT OR LOSS OF SOME CHOICES
1.
When the right of choice is with the debtor
Loss due to the fault of the creditor — the debtor may rescind the contract with damages (Art. 1203)
a.
‣
2.
Rescission only applies when the thing was lost due to the fault of the creditor if the debtor was really prejudiced
(such as when he owns the thing involved in one of such choices). If the debtor is not prejudiced, then he should
still choose from the remaining choices less damages.
b.
Loss due to fault of debtor — no effect, since the right of choice is with him, he can choose what is left.
c.
Loss due to a fortuitous event — no effect, debtor must choose from the remaining choices, if one choice is left,
then the obligation ceases to be alternative and now becomes pure, the debtor loses the right of choice (Art. 1202)
When the right of choice is with the creditor
a.
Loss due to fault of 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
IMPAIRMENT OR LOSS OF ALL CHOICES
1.
2.
When the right of choice is with the debtor
a.
Loss due to the fault of the creditor — the debtor may rescind the contract with damages (Art. 1203)
b.
Loss due to fault of debtor — the debtor is liable for damages. 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. (Art. 1204)
c.
Loss due to a fortuitous event — obligation is extinguished
When the right of choice is with the creditor
a.
Loss due to fault of debtor — the choice by the creditor shall fall upon the price of any one of them, also with
indemnity for damages.
FACULTATIVE OBLIGATIONS
Article 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the
obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him
liable. But once the substitution has been made, the obligor is liable for the loss of the substit ute on account of his delay,
negligence or fraud.
ALTERNATIVE
FACULTATIVE
As to the contents
of the obligation
Various things are due, but the
giving of one is sufficient.
Only one thing is principally due, and it is that one which generally is given, but
the other (the substitute) may be given to render payment or fulfillment easy.
As to nullity
If one of the prestations is illegal,
the others may be valid and the
obligation remains.
If the principal obligation is void, and there is no necessity of giving the
substitute. (“The nullity of the principal carries with it the nullity of the
accessory or substitute.’’ — this principle may by analogy be applied.)
As to the effect of
loss or impossibility
If it is impossible to give all except
one, that last one must still be
given.
If it is impossible to give the principal, the substitute does not have to be
given; if it is impossible to give the substitute, the principal must still be given.
As to influence on
the obligation
A period merely fixes the time or
the efficaciousness of an obligation
A condition causes an obligation to arise or to cease
As to the right of
choice
The right to choose may be given
either to debtor or creditor.
The right of choice is given only to the debtor.
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D. J OINT AND S OLIDARY OBLIGATIONS
‣
When is substitution effective in facultative obligations?
‣
‣
TOLENTINO — Apply the same rule as in alternative obligations, from the moment the debtor communicates such fact
to the creditor.
What is the effect of the loss of the principal?
‣
‣
TOLENTINO — The obligation is extinguished, the debtor does not have to give the substitute. The impossibility of the
principal presentation is sufficient to extinguish the obligation even if the substitute is possible.
What is the effect of the loss of the substitute?
‣
TOLENTINO — No effect. Before the substitution is effected, the substitute is not the presentation that is due, only the
principal presentation is due and enforceable by the creditor at that time. Therefore, if the substitute presentation
becomes impossible due to the fault or negligence of the debtor, the obligation is not affected, and he cannot be held
liable for damages.
D. JOINT AND SOLIDARY OBLIGATIONS
JOINT AND SOLIDARY OBLIGATIONS DEFINED
Article 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or
debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the
multiplicity of suits. (1138a)
Article 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does
not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire
compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity. (1137a)
PLURALITY OF SUBJECT PERSONS IN AN OBLIGATION
Joint obligation — 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. Each creditor can only recover his share of the obligation and each
debtor can only be made to pay his part.
1.
‣
Example —
‣
A and B are joint debtors of C to the amount of P1,000,000. C can demand only P500,000 from A, and only
P500,000 from B.
‣
A and B are joint debtors of C, D, E, and F, who are joint creditors to the amount of P1,000,000. C may demand
only P125,000 from A, and P125,000 from B. D, E, and F, have the same rights as C.
Solidary obligation — one in which each debtor is liable for the entire obligation, and each creditor is entitled to
demand the whole obligation. Each creditor may enforce the entire obligation, and each debtor may be obliged to pay it
in full.
2.
a.
Active solidarity — if there are multiple creditors who are bound solidarily
b.
Passive solidarity — if there are multiple debtors who are bound solidarily
‣
‣
Example —
‣
A and B are solidary debtors of C to the amount of P1,000,000. C can demand the whole P1,000,000 from A. A in
turn, after paying C, can ask reimbursement from B to the amount of P500,000.
‣
A and B are solidary debtors of C, D, E, F, solidary creditors, to the amount of P1,000,000. Any creditor, like C, can
demand from any debtor, like A, the whole P1,000,000. In turn, C has to give P250,000 each to D, E, and F. B has
to reimburse A for P500,000 which is really B’s share of the obligation.
Can an obligation be both joint and solidary?
‣
TOLENTINO — YES. In case there are multiple debtors and creditors, the debtors may be solidarily liable while the
creditors are only jointly entitled, and vice-versa. The obligation may be joint on the side of the creditors and solidary
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on the side of the debtors or vice-versa. In such cases, the rules applicable to each subject of the obligation should
be applied, the character of the creditors or the debtors determining their respective rights and liabilities.
‣
Example —
‣
A and B are joint debtors of C, D, E, and F, solidary creditors to the amount of P1,000,000. How much can C
collect from A? C is a solidary creditor, so presumably he can collect the whole debt. But since A is only a joint
debtor, C is entitled to collect only P500,000 from A.
‣
A and B are solidary debtors of C, D, E, and F, joint creditors to the amount of P1,000,000. How much can C
recover from A? Since C is only a joint creditor, he can only recover his share which is P250,000 from A, a solidary
debtor.
RULE IN CASE THERE ARE MULTIPLE SUBJECT-PERSONS
‣
‣
RULE — WHEN TWO OR MORE PERSONS ARE LIABLE ON AN OBLIGATION, THE PRESUMPTION IS THAT THEIR LIABILITY IS JOINT.
EACH DEBTOR IS LIABLE ONLY FOR A PROPORTIONATE PART OF THE OBLIGATION.
‣
Joint character is presumed. Art. 1208 provides this rule — the credit or debt shall be presumed to be divided into as
many shares as there are creditors or debtors, the credits or debts being considered distinct from one another
‣
BUT — This is subject to the Rules of Court governing the multiplicity of suits. In joint obligations, the different shares
of the debt or the credit are considered distinct from one another. But they are subject to the Rules of Court governing
the multiplicity of suits. This means that ordinarily one creditor may sue one of the debtors for the latter’s share of the
obligation. But, in view of the fact that the aim of the Rules of Court is to obtain a just, speedy, and inexpensive
determination of every action or proceeding, it would be much better to sue all the necessary parties at the same time.
EXCEPT — THERE IS A SOLIDARY LIABILITY ONLY WHEN EITHER —
1.
The obligation expressly so states
‣
Such as when the terms of the contract use words indicative of solidary liability.
‣
Example — Where parties agree to be “individually liable”; Where a contract says “I promise” and is signed by two
or more promisors (unless the “I” is particularly specified as one person); Words such as — individually, collectively,
separately, distinctly, individually and jointly liable, respectively, severally, jointly and severally guaranteed, juntos os
sepadaramente, mancomun o insolidum, mancomunada solidaria, in solidum. (See Ronquiilo vs CA)
‣
NOTE — “We promise to pay,” when there are two or more signatures means joint liability. “I promise to pay,”
when there are two or more signatures means solidary liability.
2.
The law requires solidarity
‣
3.
Such as —
a.
Joint tortfeasors (Art. 2194)
b.
When the ACP or CPG is insufficient to cover its liabilities, the separate properties of the spouses shall be
solidarily liable. (Art. 94 and 121 of the Family Code)
c.
In CSP, the liability of the separate properties of the spouses to family expenses shall be solidary (Art. 145 of
the Family Code)
d.
In cases of inheritance, when two or more heirs take possession of the estate of the deceased, they shall be
solidarily liable for the loss or destruction of a thing devised or bequeathed, even though only one of them
should have been negligent. (Art. 927)
e.
All partners are solidarily liable with the partnership for everything chargeable to the partnership in cases
provided in Art. 1822 and 1823 (Art. 1824)
f.
When the agent acted in the excess of his authority and the principal acted as though the agent had full
powers (Art. 1911)
g.
When two or more bailees in commodatum whom a thing is loaned in the same contract, they are liable
solidarity (Art. 1945)
h.
In quasi-contract of negotorium gestio, the responsibility of two or more officious managers shall be solidary
unless the management was assumed to save the thing or business from imminent danger (Art. 2146)
i.
The responsibility of two or more payees, when there has been payment of what is not due, is solidary (Art.
2157)
j.
In the case of co-participants to a crime
Nature of the obligation requires solidarity
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‣
TOLENTINO — The provisions on Human Relations (Art. 19, 20, 21) though not expressly providing for solidarity,
are nevertheless considered to give rise to soldiery obligations if violated by two or more persons
EFFECTS OF JOINT LIABILITY
1.
The demand by one creditor upon one debtor, produces the effects of default only with respect to the creditor who
demanded and the debtor on whom demand was made, but not with respect to the others. Demand by the creditor on
one joint debtor puts him in default, but not the others since the debts are distinct.
2.
The interruption of prescription by judicial demand of one creditor upon a debtor, does not benefit the other creditors nor
interrupt the prescription as to the other debtors
3.
The vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the
obligation or rights of the others. Thus, vitiated consent on the part of one debtor does not affect the others.
4.
The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorise a creditor to
demand anything from his co-debtors
5.
In the joint divisible obligation, the defense of res judicata is not extended from one debtor to another. Defenses of one
debtor are not necessarily available to the others.
KINDS OF SOLIDARITY
1.
ACTIVE SOLIDARITY
‣
One that exists among the creditors
‣
The essence of active solidarity consist in the authority of each creditor to claim and enforce the right 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. It is thus essentially a mutual agency.
‣
Effects of active solidarity —
2.
a.
Since it is a reciprocal agency, the death of a solitary creditor does not transmit the solidarity to each of his heirs
but to all of them taken together
b.
Each creditor represents the others in the act of receiving payment, and in all the other acts which tend to secure
the credit or make it more advantageous. Hence, if he receives only a partial payment, he must divide it among
the other creditors. He can interrupt the period of prescription or render the debtor in default, for the benefit of all
other creditors.
c.
One creditor, however, does not represent the others in such acts as in novation (even if the creditor becomes
more advantageous), compensation, and remission. In these cases, even if the debtor is released, the other
creditors can still enforce their rights against the creditor who made the novation, compensation, or remission.
d.
The credit and its benefits are divided equally among the creditors, unless there is an agreement among them to
divide differently. Hence, once the credit is collected, an accounting and a distribution of the amount collected
should follow.
e.
The debtor may pay to any solidary creditor, but if a judicial demand is made on him, he must pay only to the
plaintiff.
f.
Each creditor may renounce his right even agains the will of the debtor, and the latter need not thereafter pay the
obligation to the former.
PASSIVE S OLIDARITY
‣
One that exists among the debtors
‣
In passive solidarity, the essence is that each debtor can be made to answer for others, with the right on the part of
the debtor-payor to recover from the others their respective shares.
‣
In so far as the payment is concerned, this kind of solidarity is similar to a mutual guaranty.
‣
Effects of passive solidarity —
a.
Each debtor can be required to pay the entire obligation, but after payment, he can recover from the co-debtors
their respective shares.
b.
The debtor who is required to pay may set up by way of compensation his own claim against the creditor, in this
case, the effect is the same as that of payment.
c.
The total remission of the debt in favour of a debtor releases all the debtors, but when this remission affects only
the share of one debtor, the other debtors are still liable for the balance of the obligation.
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3.
d.
All the debtors are liable for the loss of the thing due, even if such loss is caused by the fault of one one of them,
or by fortuitous event after one of the debtors has incurred in delay.
e.
The interruption of prescription as to one debtor affects all the others, but the renunciation by one debtor or
prescription already does not prejudice the others, because the extinguishment of the obligation by prescription
extinguishes also the mutual representation among the solitary debtors.
f.
The interests due by reason of the delay of one of the debtors are borne by all of them.
MIXED SOLIDARITY
‣
One that exists on the part of both creditors
PASSIVE SOLIDARITY DISTINGUISHED FROM SURETYSHIP
‣
Similarities —
1. A solidary debtor, like a surety, stands for some other person
2.
‣
Both the debtor and the surety, after payment, may require that they be reimbursed
Differences —
1.
A solidary debtor, unlike a surety, is liable not only for his co-debtor’s obligation, but also for his own, hence he is
both a principal debtor and a surety
2.
A solidary debtor’s responsibility for his co-debtor is primary, not subsidiary.
3.
An extension of time given but the creditor to a debtor would not release a solitary co-debtor but would release a
surety.
JOINT INDIVISIBLE OBLIGATIONS
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility. (n)
Article 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the
debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall
not be liable for his share. (1139)
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does
not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation
consists. (1150)
R ULES
1.
WHEN THE
O BLIGATION IS INDIVISIBLE AND THERE ARE M ULTIPLE SUBJECT-PERSONS INVOLVED
T HE PRESUMPTION
‣
IS THAT THE OBLIGATION IS JOINT , EVEN IF THE PERFORMANCE IS INDIVISIBLE
When there are several debtors or creditors, but the presentation is indivisible (such as the delivery of a house or other
determinate thing), the obligation is joint, unless solidarity has been stipulated.
‣
Example — A and B are jointly liable to give C this particular car.
‣
The difference between indivisibility and solidarity lies in the fact that in solidary obligations, each creditor may
demand the full presentation and each debtor has likewise the duty to comply with the entire prestation, while in
indivisible joint obligations, each creditor cannot demand more than this share and each debtor is not liable for more
than his share.
‣
Indivisibility refers to the presentation which is not capable of partial performance, while solidarity refers to the legal tie
or vinculum defining the extent of liability.
‣
Examples —
‣
Joint divisible obligation — A and B are jointly liable to X for P1 million.
‣
Joint indivisible obligation — A and B are jointly liable to give X this car.
‣
Solidary divisible obligation — A and B are solidarily bound to give X P1 million.
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‣
‣
2.
3.
Solidary indivisible obligation — A and B are solidarily bound to give X this car.
TOLENTINO — The joint indivisible obligation is in a sense midway between the joint and the solidary, although it
preserves the characteristics of a joint obligation, in that no creditor can do an act prejudicial to the others, and no
debtor can be made to answer for the others. The peculiarity of this kind of obligation, however, is that its fulfilment
requires the concurrence of all the debtors, although each for his part. On the side of the creditors, collective action is
expressly required for acts which may be prejudicial.
IF THERE ARE SEVERAL CREDITORS IN A JOINT AND INDIVISIBLE OBLIGATION —
a.
The rights of the creditors may be prejudiced only by their collective acts — Collective action is expressly
required for acts which may be prejudicial.
b.
The acts beneficial to one of the creditors does NOT benefit the other joint creditors — As long as the
obligation is joint, the act of one creditor cannot have nay effect as to another creditor, because the creditors of each
one is separate from the credits of the others. The indivisibility requires collective action to be effective. If a written
demand is made by one creditor only, the debtor cannot pay to him alone, payment must be made to all. Hence, the
act of one alone is ineffective. It is only in solidarity that the law in Art. 1212 allows one creditor to do anything
beneficial to the others. No similar provision can be found as to join indivisible obligations. (Tolentino)
c.
The obligation can be performed only by delivering the object to all the creditors jointly — A debtor who
delivers the thing to one creditor only, becomes liable for damages because of non-performance to the other
creditors, unless they have authorized the former to receive payment for all of them.
d.
If only one or some of the creditor demand the presentation, the debtor may legally refuse to deliver to them
— 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 in court by way of consignation.
IF THERE
ARE SEVERAL DEBTORS IN A JOINT AND INDIVISIBLE OBLIGATION
—
a.
The debt can be enforced only by proceeding against all the debtors
b.
If one of the solidary debtors should be insolvent, the others shall not be liable for his share
c.
If any one of the debtors does not comply with his undertaking, the creditor may pursue an action for damages
against all the solidary debtors.
‣
BUT — 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.
‣
If anyone of the debtors its not willing to perform, the presentation is converted into an indemnification for
damages. Once so converted, the creditor can sue the debtors separately for their respective shares the
indemnity.
VARYING TERMS AND CONDITIONS IN SOLIDARY OBLIGATIONS
Article 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by
the same periods and conditions. (1140)
‣
The legal bonds in solidarity may either be —
1.
Uniform — when the debtors are bound by the same conditions and clauses
2.
Varied — where the obligors, although liable for the same prestation, are nevertheless not subject to the same terms
and conditions
‣
In this case, before the fulfilment of the condition or the arrival of the term which affects a particular debtor, an
action may be brought against such debtor or any other solidary debtor for the recovery of the entire obligation,
minus the portion corresponding to the debtor affected by the condition or term, but this latter portion cannot be
demanded from anyone until the condition happens or the term arrives. Upon the happening of the condition or
the arrival of the term, however, the creditor may claim this remaining portion form any of the debtors.
SUMMARY OF RULES GOVERNING THE RELATIONSHIP OF THE PARTIES IN SOLIDARY
OBLIGATIONS
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Article 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may
be prejudicial to the latter. (1141a)
Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with
any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them. (1143)
Article 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)
Article 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been
made by
one of them, payment should be made to him. (1142a)
Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected. (1144a)
Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for
the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be
demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a)
Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is
made after the obligation has prescribed or become illegal. (n)
Article 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release
the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before
the remission was effected. (1146a)
Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors. (n)
Article 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary
debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of
damages and interest, without prejudice to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors
has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the
preceding paragraph shall apply. (1147a)
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from
the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the
latter are responsible. (1148a)
ACTIVE SOLIDARITY — IF THERE ARE MULTIPLE CREDITORS IN A SOLIDARY OBLIGATION
EACH
1.
‣
ONE OF THE SOLIDARY CREDITORS MAY DO WHATEVER MAY BE USEFUL OR BENEFICIAL TO THE OTHERS
Thus, each creditor may —
a.
Collect the debt and give the to the others the share corresponding to them
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b.
Interrupt prescription
c.
Constitute the debtor in default, or
d.
Bring suits so that the obligation may product interest
EACH
2.
‣
‣
3.
ONE OF THE SOLIDARY CREDITORS MAY
NOT DO
ANYTHING WHICH MAY BE PREJUDICIAL TO THE OTHERS
(ART. 1212)
EXCEPT — Any of the solidary creditors may extinguish the obligation of the solidary debtors through any of the
following modes of extinguishment, but such creditor will be liable to the others for the share in the obligation
corresponding to them (Art. 1215) —
a.
Novation — the modification of an obligation by changing its object or principal conditions, or by substituting the
person of the debtor, or by subrogating the person of the debtor, or by subrogating a third person in the rights of
creditor. (Art. 1291)
b.
Compensation — that which takes place when two persons, in their own right, are creditors and debtors of each
other. (Art. 1278)
c.
Confusion or merger— that which takes place when the characters of creditor and debtor are merged in the
same person. (Art. 1275)
d.
Remission — that act of liberality whereby a creditor condones the obligation of the debtor; that where the
creditor tells the debtor to “forget about the whole thing. (Art. 1270)
TOLENTINO — By virtue of Art. 1215, the act of extinguishment, which is prejudicial to the co-creditors, will be valid,
so as to extinguish the claim against the debtors, but not with respect to the co-creditors whose rights subsists and
can be enforced agains the creditor who performed the act alone.
A SOLIDARY CREDITOR CANNOT ASSIGN HIS RIGHTS WITHOUT THE CONSENT OF THE OTHERS (ART. 1213)
‣
TOLENTINO —
‣
A solidary creditor is an agent of the others, hence, he cannot assign that agency to a third person without the
consent of the other creditors. Mutual agency, which is the essence of active solidarity, implies mutual confidence
which may take into account the personal qualifications of each creditor, hence it is only just to require the consent
of the others when one transfers his rights to another.
‣
The law has omitted to prove what the effects of an assignment made without the consent of the co-creditors
would be. The law seems to imply, however, that since such assignment cannot be made, it products no effect
whatsoever, the co-creditors and the debtor or debtors are not bound thereby, and the assignee cannot be
regarded as a solidary creditor. Thus, a payment made by the debtor to such an assignee would be a payment to a
third person and may not extinguish the obligation, and a suit filed by such assignee cannot interrupt prescription.
‣
BUT —An unauthorized assignment to a co-creditor would be effective. The consent of the others is not required
here because the assignee is one as to whom the confidence of the others already exist.
T HE 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 . (ART. 1214)
4.
‣
‣
TOLENTINO —
‣
The solitary creditors are tacitly mutually representative of each other for demanding payment. The equality of the
rights of the solidary creditors by virtue of this mutual representation, however, lasts only until one of them goes
ahead of the others and sues the debtor. When on creditor makes a judicial demand for payment, the tacit
representation by the other creditors is considered revoked, and during the pendency of the action, the creditors
who did not sue lose they representation of the others.
‣
Up to the moment the suit is filed or extrajudicial demand is made by a one of the creditors, the debtor could free
himself from the debt by paying it to any creditor, but once the action is filed or extrajudicial demand is made
against him by one creditor, the relation with the plaintiff as the creditor if fixed definitely, he can pay only the
plaintiff or such creditor making the demand, in whom the representation of the other creditors is thus
concentrated, and he can no longer be sued by the other creditors.
‣
Hence, a payment to any of the creditors who did not sue or did not make the extrajudicial demand would be a
payment to a third person, in so far as the shares of the others in the credit are concerned. If the payee does not
turn over to the others their shares in the payment, the debtor can still be required to pay to the plaintiff the full
amount minus the share of the creditor to whom payment was made. The action however, does not definitely
eliminate the other creditors, but only during the time that the effects of the action exist. If the action is dismissed,
the other creditors may in turn sue the debtor. If before such dismissal the debtor pays to another creditor, he does
so at his own risk.
What if all or several solidary creditors demand payment separately?
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‣
TOLENTINO — The debtor should pay to the one who first notified him. If they demand at the same time or
collectively, as when they join together in a single action or written demand upon the debtor, the latter preserves
his right to choose and may pay anyone of those demanding payment.
PASSIVE SOLIDARITY — IF THERE ARE MULTIPLE DEBTORS IN A SOLIDARY OBLIGATION
1.
THE CREDITOR
(ART. 1216)
‣
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.
‣
The solitary debtors may be sued simultaneously in one suit or successively in different actions.
2.
IF
TWO OR MORE SOLIDARY DEBTORS OFFER TO PAY, THE CREDITOR MAY CHOOSE WHICH OFFER TO ACCEPT.
3.
PAYMENT MADE BY ONE OF THE SOLIDARY DEBTORS EXTINGUISHES THE OBLIGATION. (ART. 1217)
(ART. 1217)
‣
Payment — is one of the ways by which an obligation is extinguished and consists in the delivery of the thing or the
rendition of the service which is the object of the obligation.
‣
Payment by one of the solidary debtors and his subsequent release from liability results in release from liability of the
other debtors to the creditor.
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 . (A RT. 1217)
4.
‣
BUT — If the payment is made before the debt is due, no interest for the intervening period may be demanded.
‣
Basis of the right to reimbursement — The fact of payment (and not the original contract) is the basis of the right to be
reimbursed, for not until then had he the right to be reimbursed. Hence, the obligation of the others to reimburse him
arises only from the time payment is made. (Wilson v. Berkenkotter 1953)
‣
Where one of several persons who are sued upon a joint and several liability elects to pay the while, such person may
properly be substituted in the same action as plaintiff for the purpose of enforcing contribution from his former
associates, under Art. 1217.
‣
The extinction or discharge of the solidary obligation by the payment made by the co-debtor gives birth to a right in
favour of the paying co-debtor, and imposes on the other co-debtors the duty to pay him their shares in the
discharged obligation.
‣
When a solidary co-debtor pays the entire obligation there is no real case of subrogation, because the original
obligation is extinguished and a new one is created. The paying solidary co-debtor does not step into the shoes of the
creditor as he cannot collect the whole amount of the loan from anyone but is only entitled to claim from his codebtors the share pertaining to each with interest on the amount advanced. The right of the paying co-debtor to be
reimbursed is not based on the original obligation but upon the payment made by him.
‣
What if a co-debtor merely made partial payment?
‣
He can still recover reimbursement from his co-debtors but only in so far as his payment exceed his share of the
obligation.
W HEN 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
(A RT. 1217)
5.
‣
6.
When a solidary debtor pays the entire obligation, the resulting obligation of the co-debtors to reimburse him
becomes joint. If one, by insolvency, cannot pay his share in the reimbursement, the others (including the one who
paid) shall bear such share proportionately.
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 (ART. 1218)
‣
After the obligation has prescribed or has become illegal, it is no longer due, and none of the solidary debtors can be
compelled by the creditor to pay. If one of the debtors actually pays such an obligation, he does not thereby revive the
obligation as to the co-debtors, hence they cannot be made to pay anything to the debtor who has paid.
‣
The same rule applies when the obligation has already been extinguished by other causes, such as previous payment
by, or total remission in favour of another debtor.
‣
Can the solidary debtor who paid after the obligation has prescribed recover from the creditor instead?
‣
NO. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has delivered or the value of the service he has rendered. This is a
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III. KINDS OF OBLIGATIONS
D. J OINT AND S OLIDARY OBLIGATIONS
case of natural obligations. (Art. 1424)
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III. KINDS OF OBLIGATIONS
D. J OINT AND S OLIDARY OBLIGATIONS
‣
BUT — For other grounds aside from prescription, where the obligation no longer exists, he can recover form the
creditor the amount paid, under the rules on quasi-contract. (See Art. 2154)
N OVATION , 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 (A RT. 1215)
7.
‣
The effects of this should be considered from three aspects —
i.
The relation between the creditors on one hand and the debtors on the other — such acts will extinguish the
obligation such that no creditor may thereafter sue any debtor
ii.
The relations among co-creditors themselves — the act of any of them in extinguishing the obligation with
respect tot he debtor/debtors does NOT prejudice the rights of the other creditors to recover their prospective
shares in the obligation from the creditor who effected the novation, compensation, confusion or remission of the
debt.
iii.
The relations among co-debtors themselves — the co-debtor as to whom the obligation is extinguished cannot
recover from his co-debtors more than their respective shares in whatever he may have given up or lost as the
consideration for the extinguishment of the obligation. But in case of remission, since the co-debtor in whose
favour the remission was made, gives or loses nothing, he cannot recover anything from the other co-debtors.
‣
What if the creditor gives a co-debtor an extension of time, will this extinguish the obligation of the other
solidary debtors?
‣
TOLENTINO — NO. The mere extension of time for payment given by the creditor to a solitary debtor, does not
release the others from the obligation.
‣
BUT — The rule is different in suretyship. Where the sureties are bound in solidum, a different rule applies. A
material alteration of the principal contract, effected by the creditor and the principal debtor, without the
knowledge and consent of the sureties completely discharges the sureties from all liability on the contract of
suretyship. This includes an extension of time.
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 (ART. 1219)
8.
‣
This applies to a case where a co-debtor has already paid the obligation in full when the remission of the part affecting
another co-debtor is made.
‣
‣
‣
9.
Example — Example: A and B solidarily owe X P1,000,000. A paid X the whole amount. Later, X remitted B’s share.
Can A still recover reimbursement of P500,000 from B? Yes under Art. 1219
To exempt the co-debtor who part is thus subsequently remitted will give way to fraud.
After one solidary debtor has paid the entire obligation, it is extinguished, and there is nothing more to remit, even
partially.
THE REMISSION OF THE WHOLE OBLIGATION, OBTAINED BY ONE OF THE SOLIDARY DEBTORS , DOES NOT ENTITLE HIM TO
REIMBURSEMENT FROM HIS CO-DEBTORS (ART. 1220)
‣
This is because remission is a gratuitous act.
‣
Example — A and B are solidary debtors of C to the amount of P1,000,000. C remitted the whole obligation when A
offered to pay. A here cannot get any reimbursement from B since after all, A did not pay anything to C. To allow the
contrary would be to induce fraud and to countenance partiality.
‣
What if the remission by the creditor to a co-debtor only pertains to the portion for which the latter is
ultimately liable (in other words the remission is only partial and not entire)?
‣
The co-debtor whose share has been remitted is still liable for the others’ share as the obligation is solidary, but he is
entitled to full reimbursement from the other co-debtors as to the amount he paid.
10. IF THE THING HAS BEEN LOST OR IF THE PRESTATION HAS BECOME IMPOSSIBLE (ART. 1221) —
Without the fault of the solidary debtors — the obligation shall be extinguished
a.
‣
If the loss or impossibility is due to a fortuitous event, without fault or delay on the part of any debtor, then the
obligation is extinguished, no debtor can be held liable for damages.
With fault or delay 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
b.
‣
BUT — This is without prejudice to their action against the guilty or negligent debtor.
‣
If the loss or impossibility is due to the fault of any solidary debtor, or due to a fortuitous event after a debtor has
incurred in delay, the obligation is converted into an obligation to pay indemnity, consisting of the price, damages
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III. KINDS OF OBLIGATIONS
E. DIVISIBLE AND INDIVISIBLE OBLIGATIONS
and interest. Although only one debtor may have bene at fault or guilty of delay, the entire indemnity may be
recovered by the creditor from the other debtors who were free from fault or delay.
‣
11. A
TOLENTINO — the effects are different in case of loss/impossibility or delay/ —
i.
Loss or impossibility due the a co-debtors fault —The erring co-debtor will bear the full amount. If any of
co- debtors who were not at fault should pay to the creditor, they can recover from the guilty debtor the full
amount of the indemnity they have paid to the creditor. If, on the other hand, the creditor recovers the
indemnity from the guilty debtor, the latter cannot get any contribution from his co-debtors. He must shoulder
all the consequences of the loss because of his fault or delay.
ii.
Delay, fraud, fault or negligence or some other breach of the obligation (but NO loss or impossibility) —
The erring co-debtor cannot be made to shoulder, as part of the indemnity, the share of the other co-debtors
in the original obligations. In other words, the co-debtors who were not at fault are still liable for their original
shares, any liability beyond that will be borne by the erring co-debtor.
SOLIDARY DEBTOR MAY, IN ACTIONS FILED BY THE CREDITOR, AVAIL HIMSELF OF THE FOLLOWING DEFENSES
a.
(ART. 1222) —
Defenses which are derived from the nature of the obligation (Total defenses)
‣
These constitute a total defense. These are connected with the obligation and are derived from its nature.
‣
Such as — non-existence of the obligation, because of illegal cause or object, or absolute simulation; nullity due to
defect in capacity or consent of all the debtors, such as minority, mistake, fraud or violence; unenforceability
because of lack of proper proof under the statute of frauds; non-performance of a suspensive condition;
extinguishment of the obligation; all other means of defines which may invalidate the original contract from which
the right or the action of the creditor against the debtors arises, such as res judicata, prescription, etc.
b.
Defenses which are personal to him, or pertain to his own share (Partial defenses)
‣
c.
These are personal defences which exist only for the benefit of the debtor himself
Defenses which personally belong to the others (Partial defenses)
‣
These are personal defences which exist only for the benefit of the other co-debtors
‣
BUT — This applies only as to that part of the debt for which the others are responsible
‣
Relate this with 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.”
E. DIVISIBLE AND INDIVISIBLE OBLIGATIONS
DIVISIBILITY OF THINGS AND OBLIGATIONS
Article 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one
debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. (1149)
DIVISIBILITY AND INDIVISIBILITY OF THINGS
1.
Divisibility — When each of the parts into which it is divided forms a homogenous and analogous object to the other
parts as well as to the thing itself.
Qualitative divisibility — when the thing is not entirely homogenous
a.
‣
Example — If one child inherits land, and another inherits cash
Quantitative divisibility — when the thing divided is homogenous, and the parts themselves may be separated, as in
movables, or the limits of each part may be fixed, as in the case of immovables.
b.
‣
Example — if 10 chairs are equally divided between two brothers
Intellectual or ideal divisibility — one that exists merely in the mind, and not in physical reality. When the parts are
not separated in a material way, but there are assigned to several persons the undivided portions pertaining to them,
as in co-ownership.
c.
‣
2.
Example — My brother and I own in common a car. My one-half share is only in the mind.
Indivisibility — a thing is considered indivisible when, if divided into parts, its value is diminished disproportionately.
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III. KINDS OF OBLIGATIONS
E. DIVISIBLE AND INDIVISIBLE OBLIGATIONS
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
1.
Divisible obligations — one which is susceptible of partial performance, that is, the debtor can legally perform the
obligation by parts and the creditor cannot demand a single performance of the entire obligation.
2.
Indivisible obligations — when the obligation cannot be validly performed in parts, whatever may be the nature of the
thing (divisible or indivisible) that is the object thereof.
‣
TOLENTINO — Divisibility or indivisibility of the obligation refers to the performance of the presentation and not to the
thing which is the object thereof. The divisibility of an obligation should not be confused with the divisibility of the thing.
The thing may be divisible, yet the obligation may be indivisible. For instance, the obligation to deliver 100 sacks of rice
on a fixed date.
DETERMINATION OF DIVISIBILITY OR INDIVISIBILITY
Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not
susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by
metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or
intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each parti cular
case. (1151a)
‣
The divisibility of the object does not necessarily determine the divisibility of the obligation. The test of divisibility of an
obligation is whether or not it is susceptible of partial performance. This susceptibility of partial performance should be
understood, not in the sense of whether the delivery of the things or the execution of the acts in parts is absolutely
impossible or not, but in the sense of whether such separation into parts is contrary or not to the end which the obligation
seeks to attain.
‣
Thus, while the indivisibility of the object carries with it the indivisibility of the obligation, the divisibility of the former does
not always mean that the latter is also divisibility. The obligation may be indivisible even when the object is divisible, by
reason of the provisions of law, of the express will of the parties, or of their presumed will, shown by the relation of the
distinct parts of the object, each of which may be a necessary complement of the others, or by the purpose of the
obligation which requires the realisation of all the parts.
‣
The following may be considered as facts which determine whether an obligation is divisible or indivisible —
1. Will or intention of the parties, which may be expressed or presumed
2.
Objective or purpose of the stipulated prestation
3.
Nature of the thing
4.
Provisions of law
OBLIGATIONS THAT ARE DEEMED INDIVISIBLE
1.
Obligations to give definite things
2.
Those which are not susceptible of partial performance.
3.
Even if the thing is physically divisible, it may be indivisible if so provided by law.
4.
Even if the thing is physically divisible, it may be indivisible if such was the intention of the parties concerned.
OBLIGATIONS THAT ARE DEEMED DIVISIBLE
1.
When the object of the obligation is the execution of a certain number of days of work.
‣
2.
‣
Example — When a laborer is hired to work for 10 days.
When the object of the obligation is the accomplishment of work by metrical units.
Example — When a laborer is hired to construct a street 3 meters wide and 50 meters long.
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III. KINDS OF OBLIGATIONS
F. OBLIGATIONS WITH A PENAL CLAUSE
3.
When the purpose of the obligation is to pay a certain amount in installments.
‣
4.
Example — When a debtor is required to pay in ten annual installments.
When the object of the obligation is the accomplishment of work susceptible of partial performance.
F. OBLIGATIONS WITH A PENAL CLAUSE
NATURE OF A PENAL CLAUSE
Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment
of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a)
Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded. (n)
‣
What is a penal clause?
‣
It is a coercive means to obtain from the debtor compliance from the debtor.
‣
A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to obligations in
order to insure their performance.
‣
Its principal purpose is to insure the performance of an obligation and also to substitute for damages and the payment
of interest in case of non-compliance.
‣
What benefit does a stipulation of a penal clause give?
1.
It provides for liquidated damages and thus dispenses with the need or proof of damage suffered — It
constitutes an exception to the general rules on the recovery of losses and damages. The amount stipulated as the
penal clause represents the estimate of the damages that a party might suffer from the non-performance of the
obligation, thereby avoiding difficulties in proving such damages.
2.
It strengthens the coercive force of the obligation by the threat of greater responsibility in the event of breach
‣
‣
Example — A promised to construct the house of B within 80 days. In the contract, there is a provision to the effect
that for every day’s delay after the stipulated 80 days, A would pay a fine or indemnity or penalty of P10,000. If the
house is, therefore, constructed finally at the end of 85 days — 5 days more than the time stipulated — A would have
to pay a penalty of P50,000, i.e., whatever sum B agreed to give A for the construction of the house will be given to A
minus, of course, the P50,000 imposed as penalty. The first purpose of the penal clause is, therefore, clear. Its insertion
was to give A a motive to finish the construction on time; otherwise, he would have to suffer the penalty. The second
purpose is also clear, namely, that instead of computing the actual damages that may have been caused by the five
days’ delay, and instead of computing the legal rate of interest as damages, the matter has become simplified by the
insertion of said penal clause, which in this case now assumes the part of liquidated damages.
What is the difference between a penal clause and a condition?
‣
‣
MANRESA — Between a condition and a penalty, there are notable differences: the latter constitutes an obligation
although accessory; the former does not. Therefore, the latter may become demandable in default of the unperformed
principal obligation, and sometimes jointly with it, while the former or the condition is never demandable.
What are the kinds of penal clauses?
1.
Subsidiary or alternative — upon non-performance only the penalty may be asked. (Purpose is reparation)
2.
Joint or cumulative — both the principal undertaking and the penalty may be demanded. (Purpose is punishment)
RULE IN THE EVENT OF NON-PERFORMANCE OF OBLIGATIONS WITH A PENAL CLAUSE
‣
RULE — IN OBLIGATIONS WITH A PENAL CLAUSE,
1.
THE PENALTY SHALL SUBSTITUTE THE INDEMNITY FOR BOTH
Damages
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III. KINDS OF OBLIGATIONS
F. OBLIGATIONS WITH A PENAL CLAUSE
2.
‣
‣
Interests
NOTE — even if the damages actually suffered by the creditor is far more than the amount stipulated as a penal
clause, he cannot recover such amounts.
EXCEPT — Despite the existence of a penal clause, further damages can still be demanded in the following case
—
1.
There is an express stipulation to the contrary
2.
The debtor refuses to pay the penalty
3.
The debtor is guilty of fraud in the fulfillment of the obligation.
SUBSTITUTION OF THE PENALTY FOR THE PRINCIPAL OBLIGATION
Article 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the
case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the
obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if
after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced. (1153a)
‣
Example — A promises to finish a certain piece of work within six months. The contract stipulates that in case he does not
build the house at all, he is supposed to forfeit the sum of P1,000,000. In this case, as a general rule the contractor cannot
just give the sum of P1,000,000 as a substitute for his non-performance of the obligation. It must be remembered that as a
general rule, therefore, the penal clause is not supposed to substitute the performance of the principal obligation. He may,
however, be expressly granted by the creditor the right to refrain from the execution of the contract by a forfeiture of the
penalty.
REDUCTION OF THE PENALTY BY COURTS
Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable. (1154a)
‣
When Penalty may be reduced by the Court —
1.
When the obligation has been partly complied with by the debtor. (Partial Performance)
2.
When the obligation has been irregularly complied with by the debtor. (Irregular Performance)
3.
When the penalty is iniquitous or unconscionable, even if there has been no performance at all. (Unconscionable or
Iniquitous).
NULLITY OF THE PENAL CLAUSE VIS-A-VIS THE PRINCIPAL OBLIGATION
Article 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 null and void, the penal clause will have no more use for existence and is therefore also considered null and void. Upon the other hand, just because the penal clause is not valid, it does not mean that its nullity will
also make the principal obligation null and void.
‣
This is because the principal obligation can stand alone, and the void penal clause will just be disregarded.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
II. MODES OF EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code. (1156a)
OVERVIEW OF THE MODES OF EXTINGUISHMENT (CLASSIFICATION ACCORDING TO CASTAN)
1.
VOLUNTARY CAUSES OF E XTINGUISHMENT
a.
Performance
i.
Payment or performance
ii.
Consignation
b.
Substitution of performance
i.
Compensation
ii.
Novation
iii.
Dacion en pago (dation in payment)
c.
Agreement to release
i.
Subsequent to obligation
ii.
2.
(1)
Unilateral waiver
(2)
Natural waiver
(3)
Remission or condonation
(4)
Mutual dissent or disagreement (disenso) — as when both parties to a contract refuse to go ahead with the
contract
(5)
Compromise
Simultaneous with creation of obligation
(1)
Resolutory term or extinctive period
(2)
Resolutory condition or condition subsequent
INVOLUNTARY C AUSES
a.
E XTINGUISHMENT
i.
Prescription of the right of action (Statute of limitations)
ii.
Laches
b.
c.
OF
By failure to bring an action
Resolutory condition or condition subsequent
i.
Merger or confusion
ii.
By the death of a party in purely personal obligations
iii.
Change of civil status (in obligations because of family relations)
Impossibility of performance or loss of the thing due (due to the happening of a fortuitous event)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
A. PAYMENT OR PERFORMANCE
CONCEPT AND NATURE OF PAYMENT
Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an
obligation. (n)
‣
Payment is the fulfilment of the presentation due, a fulfilment that extinguishes the obligation by the realization of the
purposes for which it was constituted. It is a juridical act which is voluntary, licit, and made with the intent to extinguish an
obligation. In this concept, payment is made not only by one who owes money or is obliged to delivery any object, but
also by one bound to do something or to refrain from doing something. Payment and fulfilment are thus identical.
‣
REQUISITES — In order the payment may product all its effects, the series of requisites pertaining to the following should
all concur —
1. The person who pays — payor must have the capacity to pay
2. The person to whom payment should be made — payee must have the capacity to accept payment
3. The thing to be paid — payment must be made in accordance with the obligation
4. The manner, time, and place of payment, etc. — payment must be made at the right time and place
K INDS
OF
PAYMENT ( WHICH EXTINGUISHES AN
OBLIGATION )
1. Complete payment (Art. 1233)
2. Incomplete payment
a. Substantial performance (Art. 1234)
b. Waiver of defect in performance (Art. 1235)
COMPLETENESS OF PAYMENT
Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case may be. (1157)
‣
REQUISITES — For payment to be deemed complete the following must be present —
1. Identity — the very thing or service due must be delivered or released
2. Integrity — the prestation must be fulfilled completely
‣
NOTE — There are rules that dictate the composition of what is included in satisfying an obligation such as —
•
The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though
they may not have been mentioned. (Art. 1166)
•
Payment of the principal includes payment of the interest
HOW PAYMENT OR PERFORMANCE IS M ADE
1. If the debt is a monetary obligation — by delivery of the money. The amount paid must be full, unless of course otherwise
stipulated in the contract.
2. If the debt is the delivery of a thing or things — by delivery of the thing or things.
3. If the debt is the doing of a personal undertaking — by the performance of said personal undertaking.
4. If the debt is not doing of something — by refraining from doing the action.
‣
NOTE — Anything less than a complete performance may essentially be considered a breach of the obligation
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
PROOF
‣
OF
PAYMENT
An alleged creditor has the burden of showing that a valid debt exists. Once he does this, the debtor has the burden of
proving that he has paid the same.
‣
Thus, if a promissory note is still in the creditor’s possession, the presumption is that it has not yet been paid
‣
One good proof is the presentation of the receipt.
‣
A debtor is justified in demanding that a creditor issue a receipt when the debt is paid.
‣
What if the creditor refuses to issue a receipt, without just cause?
‣
It is a ground for consignation of payment. (Art. 1256) The court can also order the creditor to issue a receipt.
SUBSTANTIAL PERFORMANCE
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had
been a strict and complete fulfillment, less damages suffered by the obligee. (n)
‣
REQUISITES — For incomplete payment to extinguish an obligation as though there had been a strict and complete
fulfillment, the following must be present —
1. The omission must be slight and unimportant
‣
The derivation form the obligation must be slight, and the omission or defect must be technical and unimportant,
and must not pervade the whole or be so material that the object which the parties intended to accomplish in a
particular manner is not attained.
2. The part not performed must not destroy the value or purpose of the contract
‣
The non-performance of a material part of a contract will prevent the performance from amounting to a substantial
compliance
3. Debtor is in good faith
‣
The debtor must show that he has attempted in good faith to perform his contract, but through oversight,
misunderstanding, or any excusable neglect, he failed to completely perform in certain negligible respects, for
which the other party may be adequately indemnified by an award of damages or reduction of the contract price.
‣
Substantial performance or compliance is, in a sense, a performance according to the fair intent of the contract,
with an attempt in good faith to perform. Fair dealing and equity demand a faithful compliance of one’s contractual
obligations. (Rosete, et al. v. Perober Dev. Corp. 1981)
‣
BUT — STA. MARIA — that there are contemporary views that even a conscious and intentional departure from
the contract will not necessarily defeat substantial compliance but may be considered as merely a factor in
deciding whether there has been substantial compliance. The pertinent inquiry is not simply whether the breach
was wilful but whether the behaviour of the party in default copouts with the standards of good faith and fair
dealing
Relate Art. 1234 with Resolution or Cancellation of Obligations under Art. 1191
‣
‣
‣
Inasmuch as substantial performance in good faith may already be equivalent to “fulfillment” or “payment,” it follows
that the right to rescind (mentioned in Art. 1191) cannot be used simply because there have been slight breaches of
the obligation. In fact, such right to rescind is not absolute, and therefore the Court may even grant, at its discretion, a
period to a person in default, within which the obligation can be fulfilled. (Gaboya v. Cui 1971)
Substantial performance may constitute complete fulfilment but the debtor is liable for damages to the creditor.
WAIVER OF DEFECT IN PERFORMANCE
Article 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with. (n)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
A person entering into a contract has a right to insist on its performance in all particulars, according to its meaning and
spirit. But if he choose to waive any of the terms introduced for his own benefit, he may do so.
‣
Art. 1235 connotes a waiver of the creditor of damages arising from the breach of contract which resulted in the
incompleteness or irregularity of the obligation. By not expressing any protest or objection, the creditor accepts the
performance of the obligation as fully complied with despite knowledge of such irregularity or incompleteness
‣
REQUISITES —
1. Incomplete or irregular performance
2. Knowledge of the incompleteness or irregularity by the creditor
‣
TOLENTINO — For a waiver to be valid, there must have been “an intentional relinquishment of a known right”. A
waiver will not result from a mere failure to assert a claim for defective performance when the thing or work is
received, or from mere payment in accordance with the terms of the contract. There must have been acceptance
of the defective performance with actual knowledge of the incompleteness or the defect, under circumstances that
would indicate an intention to consider the performance as complete and renounce any claim arising from the
debt.
3. Acceptance of the incomplete or irregular performance
‣
NOTE — The word “accept,” as used in Art. 1235 of the Civil Code, means to take a 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. (Constante Amor de Castro v.
CA 2002)
4. Absence of protest or objection by the creditor immediately OR after a reasonable amount of time
‣
The law does not require the protest or objection of the creditor to be made in a particular manner or at a particular
time. So long as the acts of the creditor, that the time of the incomplete or irregular payment by the debtor, or
within a reasonable time thereafter, show that the creditor is not satisfied with or agreeable to said payment or
performance, the obligation shall not be deemed fully complied extinguished. (Esguerra v. Villanueva 1967)
‣
PARAS — Qualified or conditional acceptance is NOT a waiver of defect in performance. Note that under this
Article, there is a possibility that a protest or objection can be made. Hence, there is what is called “qualified
acceptance of incomplete or irregular payment.” Be it remembered that a creditor who gives a receipt for a partial
payment does not necessarily acquiesce to such incomplete payment. His actuations may show his
dissatisfaction. (Esguerra v. Villanueva 1967) Thus, a creditor may conditionally accept performance by the debtor
after the time of maturity, but with the stipulation that the surety or the guarantor of the debtor should give
consent. This is to prevent the surety or guarantor from later on alleging that the creditor had given an extension of
time to the debtor. In this way, the surety or guarantor cannot claim that he has been released from the obligation.
(Joe’s Electrical Supply v. Alto Electronic Corp. 1958)
RULES AS TO PERSON OF THE PAYOR
Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary. XXXXXX
Article 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and
capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427 under the Title on "Natural
Obligations." (1160a)
Article 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.
(1160A)
1.
ONLY THE DEBTOR HIMSELF MAY MAKE PAYMENT. THE CREDITOR IS NOT
FROM A THIRD PERSON.
‣
BOUND TO ACCEPT PAYMENT OR PERFORMANCE
CODE COMMISSION — Under the old Civil Code, the creditor cannot refuse payment by a third person but the
Commission believes that the creditor should have a right to insist on the liability of the debtor. Moreover, the creditor
should not be compelled to accept payment from a third person whom he may dislike or distrust. The creditor may
not, for personal reasons, desire to have any business dealings with a third person; or the creditor may not have
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
confidence in the honesty of the third person who might deliver a defective thing or pay with a check which may be
honored
‣
2.
EXCEPT — In the following cases, payment by a third person is valid —
a. If there is a stipulation to the contrary
IN
b.
If the third person has an interest in the fulfilment of the obligation (such as a co-debtor, guarantor, or a joint
debtor)
c.
If the creditor voluntarily accepts payment from the third person
OBLIGATIONS TO GIVE, THE PAYOR MUST HAVE BOTH THE FOLLOWING REQUISITES FOR PAYMENT TO BE VALID
a.
Free disposal of the thing due; and
b.
Capacity to alienate
—
‣
Persons who have no capacity to pay — minors, persons suffering from civil interdiction, insane
‣
EXCEPT — When an minor (without consent of his guardian) voluntarily pays a sum of money or delivers a fungible
thing in fulfillment of the obligation and the creditor has spent or consumed it in good faith. (Art. 1427)
PAYMENT BY A THIRD PERSON
Article 1236. XXXXX Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor. (1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)
Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a
donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted
it. (n)
EFFECTS OF PAYMENT BY THIRD PERSONS
‣
RULE — PAYMENT BY A THIRD PERSON AND
‣
Only the consent of the creditor is required before a third person may validly make payment on behalf of a debtor. The
debtor’s consent is NOT required for it to be effectual to the creditor.
‣
However, the following consequences will arise with regard to the third person and the primary debtor —
1.
2.
THE ACCEPTANCE OF THE CREDITOR PRODUCES THE EFFECT OF PAYMENT
THIRD PERSON PAYS WITH THE CONSENT OF THE DEBTOR —
a.
Full reimbursement — Third person may recover from the debtor what he has paid
b.
Subrogation — Third person can compel the creditor to subrogate him in his rights (such as those arising from a
mortgage, guaranty, or penalty)
THIRD PERSON PAYS WITHOUT THE CONSENT (KNOWLEDGE OR
AGAINST THE WILL) OF THE DEBTOR
—
Beneficial reimbursement — Third person may can recover only insofar as the payment has been beneficial to
the debtor
a.
‣
Examples —
‣
If X pays for Y’s transportation fare, without Y’s knowledge, or against Y’s will, and later discovers that Y was
entitled to half-fare, X can recover only said half-fare, even if he had paid the full-fare. This is clearly the fault
of X.
‣
A owes B P1,000,000. Later, A paid B P700,000, leaving a balance of P300,000. C, a classmate of A, and
intending to surprise A, paid B the sum of P1,000,000 thinking that A still owed B that amount. He did this
without knowledge of A. How much can C recover from A? C can recover only P300,000 from A, because it
is only up to this amount that A has been benefited. C can recover the remaining P700,000 from B who
should not have accepted complete payment for a debt already partially paid. If B incidentally is in bad faith,
B is responsible not only for the return of the P700,000 but also for the interest in lieu of damages.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
‣
b.
‣
3.
D owes C. Without D’s knowledge, X, a friend, paid C part of D’s debt. So, D still owes the remainder. Does
X’s payment of part of the debt prevent the running of the prescriptive period regarding the remaining part?
No, because in no way may D be said to have acknowledged the existence of the debt.
NOTE — Other instances when recovery can be had from the creditor and not from the innocent debtor, since
the latter was NOT benefited by the payment by the third person —
i.
When the debt had prescribed
ii.
When the debt had been completely remitted
iii.
When the debt has already been paid
iv.
When legal compensation had already taken place.
No subrogation — Third person cannot compel the creditor to subrogate him in his rights (such as those arising
from a mortgage, guaranty, or penalty)
NOTE — The law makes no distinction as to the right of recovery in case payment by a stranger was made either
without the knowlege or against the consent of the debtor. In both cases, the paying stranger “can recover only
insofar as the payment has been beneficial to the debtor.
THIRD PERSON PAYS WITHOUT THE INTENT TO BE REIMBURSED BY THE DEBTOR — THIRD PERSON CANNOT RECOVER
ANYTHING FROM THE DEBTOR IF HE ACCEPTS
‣
In this case, the payment is deemed to be a donation, which requires the debtor's consent. But the payment is in
any case valid as to the creditor who has accepted it, even if the debtor did not consent.
SUBROGATION
‣
Subrogation means the act of putting somebody into the shoes of the creditor, hence, enabling the former to exercise all
the rights and actions that could have been exercised by the latter. 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. (Art. 1303)
‣
What is the difference between reimbursement and subrogation?
‣
In subrogation, recourse can be had to the mortgage or guaranty or pledge; in reimbursement, there is no such
recourse.
‣
In subrogation, the debt is extinguished in one sense, but a new creditor, with exactly the same rights as the old one,
appears on the scene. In reimbursement, the new creditor has different rights, so it is as if there has indeed been an
extinguishment of the obligation.
‣
In subrogation, there is something more than a personal action of recovery; in reimbursement, there is only a personal
action to recover the amount.
‣
In both reimbursement and subrogation, there can be recovery of what the stranger “has paid” (not necessarily the
amount of the credit)
RULES AS TO THE PERSON OF THE PAYEE
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it. (1162a)
Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing
delivered, or insofar as the payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit
to the creditor need not be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the
payment. (1163a)
Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164)
Article 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the
obligation. (1527)
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt
shall not be valid. (1165)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
TO WHOM PAYMENT SHOULD BE MADE; PROPER PAYEES
1.
Creditor himself (person in whose favor the obligation has been constituted) — he may not necessarily be a
principal party to the contract but he has the power to demand fulfilment of the obligation.
2.
Creditor’s successors-in-interest — This refers to the creditors at the time of payment, NOT the original creditor at the
time the obligation was constituted. Such as the heirs when the creditor dies
3.
Any person authorized to receive it (creditor’s agent or legal representative) — The authorization may be by
agreement or by law
4.
Court — in cases where consignation is proper
TO
WHOM
PAYMENT SHOULD NOT
BE
M ADE; I MPROPER PAYEES
‣
NOTE — Payment to the improper parties renders the payment “voidable” subject to ratification in the proper cases.
1. THIRD PERSONS (ART. 1240)
‣
EXCEPT — Payment made to a third person shall also be valid in the following cases —
a. It has redounded to the benefit of the creditor (but only up to the extent of such benefit) (Art. 1241)
b. If after the payment, the third person acquires the creditor's rights (Art. 1241)
c. If the creditor ratifies the payment to the third person (Art. 1241)
d. If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the
payment. (Art. 1241)
e. When without notice of the assignment of the credit, he pays to the original creditor (Art. 1626)
f.
When in good faith, he pays to one in possession of the credit (Art. 1242)
‣
REQUISITES —
i.
Payment by payor must be made in good faith (this is presumed) (but payee may be in good or bad faith).
ii.
The payee must be in possession of the credit itself (not merely the document evidencing the credit).
‣
NOTE — When one possesses the credit, there is color of title to it.
‣
Examples —
‣
X, a presumed heir, entered upon an inheritance, collected the credits of the estate, but was later declared
by the court to be incapacitated to inherit. (Payment of the credit to X extinguished the obligation.)
‣
X found a negotiable promissory note payable to bearer. (If the maker thereof pays in good faith to X, the
debt is extinguished, even if X was not entitled to it.)
PERSONS INCAPACITATED TO ADMINISTER THEIR PROPERTIES (ART. 1241)
2.
‣
Such as a minor, insane or a person suffering from civil interdiction.
‣
EXCEPT — Payment to such incapacitated person is considered valid if either —
a. He has kept the thing delivered
b.
Insofar, the payment has been beneficial to him
TO THE CREDITOR,
3.
IF THE DEBTOR HAS BEEN JUDICIALLY ORDERED TO RETAIN THE DEBT
(ART. 1243)
‣
Payment in this case is VOID. (But authorities say it is merely voidable)
‣
The judicial order may have been prompted by an order of attachment, injunction or garnishment (garnishment takes
place when the debtor of a debtor is ordered not to pay the latter so that preference would be given to the latter’s
creditor).
‣
The payment to the creditor after the credit has been attached or garnished is void as to the party who obtained the
attachment or garnishment, to the extent of the amount of the judgment in his favor. The debtor can therefore be
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
made to pay again to the party who secured the attachment or garnishment, but he can recover to the same extent
what he has paid to his creditor.
‣
Example — A owes B P1,000,000. B, in turn, owes C P100,000. C brings an action against B, who, however, claims
insolvency but admits the credit which he has over A. Before A pays B, A is summoned into the proceedings, and
asked to retain the debt in the meantime. Thus, the debt is “garnished.” The reason is A should not pay B, and instead
he should pay C, should C really be adjudged the creditor of B. Any payment made by A to B in the meantime is
considered invalid under the law.
‣
Suppose in the preceding example, A and B, in the meantime, deposited the judicial order to the contrary and
supposing it should turn out that C is not really the creditor of B as a consequence of which the action and the
garnishment proceedings are dropped, should A again pay B, in view of the fact that the first payment, strictly
speaking, is not valid under the law?
‣
PARAS — It is submitted that A need not pay B a second time. True, at the beginning the payment was not
valid, but the defect here has been cured by the dismissal of the garnishment proceedings. It is as if there
never had been any judicial order asking the debtor A to retain the debt. Furthermore, why should B, the
creditor, be paid twice for the same debt? To hold that he should be is to allow a travesty of justice, an undue
enrichment of B.
‣
TOLENTINO — If the action of the attaching or garnishing creditor fails, then the garnishment his of no effect,
because not is only incidental or accessory to the main action. The payment which the garnishee has made to
his creditor must be considered valid and extinguishes the former’s liability to the latter.
RULES AS TO THE SUBJECT-MATTER OR OBJECT OF PAYMENT
Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the
same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the
obligee's will. (1166a)
Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration.
(1167a)
Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the latter. (1169a)
THE DEBTOR OF
1.
A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A DIFFERENT ONE
(ART. 1244)
‣
This is the case even if the substitute may be of the same value as, or more valuable than that which is due.
‣
Example — A is obliged to give B a Jaguar car. Not having any Jaguar car, A wants B to accept a Rolls Royce, a more
expensive car, but B refuses to accept. Is B justified legally in refusing to accept? Yes. Even if the Rolls Royce be more
valuable than the Jaguar, if B does not want the Rolls Royce, he cannot be compelled by A to accept it. The terms of
the contract form the law between the parties, and the subject matter cannot be changed without the consent of the
parties.
‣
EXCEPT — In the following cases —
a. If the creditor consents (such as in the case of facultative obligations).
b.
In case of waiver by the creditor (expressly or impliedly)
c.
In case there is another agreement resulting in either —
i.
Objective novation (Art. 1291) — where debt consist of property which is substituted by another property of a
different kind. This is governed by law on obligations under the rules on novation.
ii.
Dation in payment or dacion en pago (Art. 1245) — where the debt consists of a sum of money and is
substituted by property. This is governed by the law on sales, since what occurred was essentially a sale.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
IN OBLIGATIONS TO DO OR NOT TO DO, AN ACT OR FORBEARANCE CANNOT BE SUBSTITUTED BY ANOTHER ACT OR
FORBEARANCE AGAINST THE OBLIGEE ' S WILL. (A RT. 1244)
2.
‣
EXCEPT — If the creditor consents
‣
Same rationale as the first rule.
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. (ART. 1246)
‣
In determining the quality, the purpose of the obligation and other circumstances shall be taken into consideration.
‣
MANRESA — This Article gives a principle of equity in that it applies justice in a case where there is lack of precise
declaration in the obligation. It is always hard to find one thing that is exactly similar to another. But in this kind of
obligation, there is the question of relative appreciation in that one party appreciates the same thing as the other party
does. If there is disagreement between them, then the court steps in and declares whether the contract has been
complied with or not, according to the circumstances.
‣
PARAS — Note that the Article speaks of “quality and other circumstances”. When the “kind and quantity” (as
distinguished from quality) cannot be determined without need of a new agreement of the parties, the contract is VOID
(See Art. 1349 and Art. 1409, No. 6)
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)
‣
Remember that under 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. Hence, partial performance is
not allowed generally under Art. 1248.
‣
EXCEPT — Partial performance is allowed in the following cases —
a. When there is an express stipulation (Art. 1248)
3.
4.
b.
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. (Art. 1248)
c.
When the different prestations are subject to different conditions or different terms
d.
When a joint debtor pays his share or the creditor demands the same
e.
When a solidary debtor pays only the part demandable because the rest are not yet demandable on account of
their being subject to different terms and conditions
f.
In case of compensation, when one debt is larger than the other, it follows that a balance is left (Art. 1290)
g.
When work is to be done by parts (Art. 1720)
RULES IN CASE OF MONETARY OBLIGATIONS
Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.In
the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to
the contrary. (n)
1.
THE DELIVERY OF PROMISSORY NOTES PAYABLE TO ORDER,
OR BILLS OF EXCHANGE OR OTHER MERCANTILE DOCUMENTS
SHALL PRODUCE THE EFFECT OF PAYMENT ONLY WHEN EITHER
a.
‣
b.
(ART. 1249) —
They have been cashed (this is when the check has been cleared)
DEAN DEL CASTILLO — When the check clears, it retroacts to the time when it was issued and accepted, since
the creditor agreed to accept it.
When through the fault of the creditor they have been impaired
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
STA. MARIA — A check must be presented for payment within a reasonable time after its issue or the drawer will
be discharged from liability thereon to the extend the loss caused by the delay. Normally this is 6 months,
otherwise the check will become stale. If a creditor allows his checks to become stale, it does not mean that the
debtor who drew the check will necessarily be discharged from his debt, or that his obligation extinguished. Only
when the creditor does not present the check for payment and thereafter the bank upon which the check has been
drawn collapses or fails to the point that it cannot meet demands for payment, will the debtor be discharged.
‣
DEAN DEL CASTILLO — The fact that the check has become stale does NOT extinguish the obligation. The
debtor is still liable. The only consequence is that the debtor cannot be held liable for interests for delay of
payment, since the creditor agreed to accept the check and it was his fault that it became stale. The debtor
remains liable for the principal obligation. The case where the debt will be extinguished is when through the
creditor’s fault, the value of the check itself becomes impaired, such as when check was stolen, forged and
encashed by a third person because of the negligence of the creditor.
‣
RATIONALE — This is because negotiable instruments and other mercantile documents are NOT legal tender.
‣
In the meantime, the action derived from the original obligation shall be held in the abeyance.
2. THE PAYMENT OF DEBTS IN MONEY SHALL BE MADE IN THE CURRENCY STIPULATED. IF THE CURRENCY STIPULATED IS
IMPOSSIBLE TO DELIVER, OR IN THE ABSENCE OF SUCH STIPULATION, PAYMENT SHOULD BE MADE IN CURRENCY WHICH IS
LEGAL TENDER IN THE PHILIPPINES. (ART. 1249)
‣
Obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of
payment. (C.F. Sharp & Co. v. Northwest Airlines 2002)
‣
‣
EXCEPT — 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 (Art. 1250)
Thus, the creditor cannot be compelled to accept checks (including manager’s or cashier’s check) as payment
because they are NOT legal tender. (Roman Catholic Church of Malolos vs IAC)
‣
‣
But, the creditor may accept the checks, if he wants to. However, it is only upon the encashment of the checks will
it produce the effect of extinguishment.
NOTE —
‣
Art. 1249 was previously superseded RA 529. But the latter has been repealed. The repeal of RA 529 by RA 8183
has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that
obligations or transactions may now be paid in the currency agreed upon by the parties.
‣
Under Sec. 231 of Presidential Decree 72 (Amending RA 265, the “Central Bank Act”), of Martial Law, and effective
Nov. 29, 1972, the 1 centavo coin and the 5- centavo coin are valid legal tender up to P20.00; the other coins (10,
25, 50, and P1) are valid legal tender up to P50; and all bills are valid legal tender for any amount.
IN CONTRACTUAL OBLIGATIONS, 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 (ART. 1250)
3.
‣
EXCEPT — when there is an agreement to the contrary
‣
What does “extraordinary inflation or deflation” mean?
‣
‣
Inflation is a sharp sudden increase of money or credit or both without a corresponding increase in business
transaction. Since the value of money here tends to decrease, the natural result is an increase in the price of goods
and services. Deflation is the opposite of inflation.
‣
STA. MARIA — Inflation or deflation contemplated in Art. 1250 is a decrease or increase in the purchasing power
of the Philippine’s currency which is unusual or beyond the common fluctuation of the value of the said currency,
and such decrease or increase could not have been foreseen, or was beyond the contemplation of the parties. It
must be official declared by the competent authorities.
‣
TOLENTINO — The code does not expressly define what is “extraordinary inflation or deflation. Considering the
intent of the law, however, extraordinary inflation or deflation may be said to be that which is unusual or beyond
the common fluctuations in the value of the current which the parties could not have reasonable foreseen or which
was manifestly beyond their contemplation at the time when the obligation was constituted.
‣
DEAN DEL CASTILLO — The court has said that the relation of the Philippine Peso to the US Dollar has no
relevance to the question of inflation or deflation, it is merely an incidental effect. Inflation or deflation relates to the
issue of the “purchasing power” of the Philippine Peso. It is ultimately a judicial determination which may be based
on BSP reports and reports by competent financial institutions.
Art. 1250 applies only to cases where a contract or agreement is involved. It does not apply where the
obligation to pay arises from law, independent of contracts.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
SEE — Commissioner of Public Highways v. Hon. Burgos, et al. L-36706, Mar. 31, 1980
‣
Art. 1250 applies only to cases where a contract or agreement is involved. It does not apply where the
obligation to pay arises from law, independent of contracts. The taking of private property by the Government
in the exercise of its power of eminent domain does not give rise to a contractual obligation. Under the law, in
the absence of any agreement to the contrary, even assuming that there has been an extraordinary inflation
within the meaning of Art. 1250, the value of the peso at the time of the establishment of the obligation, which
in the instant case is when the property was taken possession of by the Government, must be considered for
the purpose of determining just compensation.
‣
Obviously, there can be no agreement to the contrary to speak of because the obligation of the Government
sought to be enforced in the present action does not originate from a contract, but from law which, generally, is
not subject to the will of the parties. And there being no other legal provision cited which would justify a
departure from the rule that just compensation is determined on the basis of the value of the property at the
time of the taking thereof in expropriation by the Government, the value of the property as it is when the
Government took possession of the land in question, not the increased value resulting from the passage of
time which invariably brings unearned increment to landed properties, represents the true value to be paid as
just compensation for the property taken.
PAYMENT OF LOANS OR MUTUUM
‣
This is taken in Credit Transaction but relate it to monetary obligations
Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality. (1753a)
Article 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation
on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)
Article 1955. The obligation of a person who borrows money shall be governed by the provisions of articles 1249 and
1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and
quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the
perfection of the loan shall be paid. (1754a)
Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)
Article 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against
usury shall
be void. The borrower may recover in accordance with the laws on usury. (n)
Article 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of
the products or goods at the time and place of payment. (n)
Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new
interest. (n)
Article 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n)
Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not
inconsistent with this Code. (n)
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. (1108)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
Article 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be
silent upon this point. (1109a)
Article 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty.
KINDS OF INTERESTS
1.
Monetary Interest — this is payment for the use of the money.
2.
Compensatory Interest — This is interest in the form of actual damages. It’s governed by Art. 2209-2213
RULES ON THE COMPUTATION AND PAYMENT OF INTEREST FOR LOANS OR FORBEARANCE OF MONEY
‣
NOTE — See Eastern Shipping Case and Nacar Case
1.
Generally, no interest (monetary) is due unless it is expressly stipulated in writing (Art. 1956)
‣
This also applies as to interest which accrues on interest (compounding). There must a written stipulation to such
effect
2.
If interest is stipulated but the amount is not, legal interest will apply
3.
Upon default or delay, compensatory interests will start to accrue on the principal, this is either based on the
stipulated rate or the legal rate (if none stipulated)
‣
This is upon extra-judicial or judicial demand or when such demand is not required under Art. 1169
‣
NOTE — If the basis of default is that extra-judicial demand may be dispensed with because the obligations expressly
declares it is not necessary, the obligation must not merely state the maturity date, but must state the the debtor “will
be in default” at a particular date (Rivera Case)
‣
BUT — No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. In this case, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably
ascertained).
4.
Upon judicial demand, compensatory interests will still run (still based on the stipulated rate, or if none, the legal
rate), furthermore, interest upon interest will now accrue (compounding interest). The rate of interest on interest
is the legal rate
‣
Basis is Article 2212 — “Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.”
‣
Note the wording of Art. 2212, “interest due”, it is only the interest due at the time of the judicial demand (filing of the
complaint) that will earn interest.
5.
Upon finality of judgment (final and executory), the judgment award is treated as a forbearance of credit, thus, it
will earn interest at the legal rate until satisfaction
6.
The legal rate of interest is 12% (per annum) if prior to July 1, 2013, after such date, the rate is 6% (per annum)
a.
Before July 1, 2013 — Rate is 12% per annum (BSP Circular 416)
b.
On or after July 1, 2013 — Rate is 6% (BSP Circular 779)
‣
What if judgment has already become final before July 1, 2013 (thus the court imposed 12% interest at this
point), but it is satisfied only after July 1, 2013, does the interval of time between finality and satisfaction
subject the running of the interest to “biforcation”, do you “biforcate” the period? (meaning from finality until
7/1/13 you subject it to 12%, but after only 6%?)
‣
‣
NO, remember the doctrine of immutability of judgments, once the court renders judgment providing for 12%
interest, this cannot be modified by law or BSP circulars
When then does “biforcation” apply?
‣
When there is no final decision yet, such as when the July 1, 2013 hits the interval in between judicial demand and
finality, in such case, you need to “biforcate” the period, 12% is the rate prior to 7/1/13, only 6% on and after.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
IMPORTANT JURISPRUDENCE ON THE COMPUTATION AND PAYMENT OF INTERESTS
‣
E ASTERN S HIPPING V. C OURT
‣
OF
A PPEALS , 234 SCRA 78 (1994)
With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows —
1.
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
‣
‣
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
‣
EXCEPT —No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
‣
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
‣
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
‣
N ACAR V. G ALLERY F RAMES , G.R. N O. 189871, A UGUST 13, 2013
‣
This case reiterated the rules in Eastern Shipping Case regarding computing legal interest, but changed the rate form
12% to 6%
‣
In the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be
twelve percent (12%) per annum - as reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the
Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for NonBank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per
annum effective July 1, 2013.
‣
It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.
COSTS AND EXPENSES OF PAYMENT
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account
of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)
1.
The extrajudicial expenses required by the payment shall be for the account of the debtor.
‣
‣
2.
RATIONALE — It is the debtor who benefits primarily, since his obligation is thus extinguished.
EXCEPT — When it is otherwise stipulated
With regard to judicial costs, the Rules of Court shall govern
‣
Generally, costs shall be awarded to the winning party. But this is subject to the discretion of the court. “Unless
otherwise provided in these rules, costs shall be allowed to the prevailing party as a matter of course, but the court
shall have power, for special reasons, to adjudge that either party shall pay the costs of an action, or that the same be
divided, as may be equitable.” (Sec. 1, Rule 142, Revised Rules of Court).
‣
BUT — No costs shall be allowed against the Republic of the Philippines, unless otherwise provided by law. (Sec. 1,
last sentence, Rule 142, Revised Rules of Court).
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
PLACE OF PAYMENT
Article 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)
‣
RULE — PAYMENT SHALL BE MADE IN THE PLACE DESIGNATED IN THE OBLIGATION (EXPRESSLY STIPULATED). IF THERE IS NO
STIPULATION, IT SHOULD BE MADE IN EITHER —
Wherever the thing might be at the moment the obligation was constituted — in obligations to give a
determinate thing
a.
‣
BUT — TOLENTINO — Even if the thing is determinate but its existence at the place where it was when the
obligation was constituted was temporary (such as a vehicle in transit), the performance must be made at the
domicile of the debtor.
The domicile of the debtor — in obligations to give a generic thing
b.
‣
The creditor would have to go to the debtor’s house to collect payment.
‣
NOTE — If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses
shall be borne by him.
SPECIAL FORMS OF PAYMENT
1.
Dation in Payment (Dacion en Pago) (Art. 1245)
2.
Application of Payments (Art. 1252)
3.
Payment by Cession (Art. 1255)
4.
Tender of Payment and Consignation (Art. 1256-1261)
REQUIREMENT OF CONSENT OF THE CREDITOR
1.
Consent of the creditor is required — dation in payment and payment by cession
2.
Consent of the creditor is NOT required — application of payments and consignation
DATION IN PAYMENT (DACION EN PAGO)
Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law of sales. (n)
Article 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. (1859a)
DATION IN PAYMENT (DACION EN PAGO)
‣
RULE — DATION
IN
PAYMENT IS
A VALID FORM OF PAYMENT AND IS GOVERNED BY THE LAW ON SALES
‣
Dation in payment is that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor,
property for the satisfaction of monetary debt.
‣
Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon
by the parties or as may be proved, unless the parties by agreement— express or implied, or by their silence—
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (Tan Shuy v.
Maulawin, 2012) The contractual intention determines whether the property subject of the dation will be considered as
the full equivalent of the debt and will therefore serve as full satisfaction for the debt. (Luzon Dev Bank v. Enriquez,
2011)
‣
RATIONALE — This is so because dation in payment — the transfer or conveyance of ownership of a thing as an
accepted equivalent of performance — really partakes in one sense of the nature of sale, i.e., the creditor is really
buying some property of the debtor, payment for which is to be charged against the debtor’s debt.
‣
NOTE — If the debt consists of money it is considered dation in payment and thus governed by the law on sales,
since it is akin to a sale. However, when the debt consists of things other than a sum of money, then it will be
governed by the rules on novation.
‣
REQUISITES —
‣
1.
There must be a performance of a prestation in lieu of payment of the debt (animo solvendi) which may consist in the
delivery of thing
2.
There must be transfer of ownership of the thing
3.
There must be some difference between the prestation due and that which is given is substitution
4.
There must be an agreement between the creditor and the debtor that the obligation is immediatetely extinguished
by reason of the performance of a prestation different from that due
Conditions under which a Dation in Payment would be valid —
1.
If the creditor consents, for a sale presupposes the consent of both parties.
2.
If the dation in payment will not prejudice the other creditors, for this might lead the debtor to connive with one
creditor in defrauding the other creditors.
3.
If the debtor is not judicially declared insolvent, for here his property is supposed to be administered by the assignee.
‣
Example —
‣
To pay my debt of P1,000,000 in favor of Bella, I gave her with her consent a diamond ring instead worth P1,000,000.
‣
To pay off his debt, an heir assigned his inheritance in an estate to his creditor.
SALE VS DATION IN PAYMENT
SALE
DATION IN PAYMENT
There is no pre-existing credit
There is a pre-existing credit
This gives rise to obligations
This extinguishes obligations
The cause or consideration here is the price (from the
viewpoint of the seller); or the obtaining of the object
(from the viewpoint of the buyer)
The cause or consideration here, from the viewpoint of
the debtor in dation in payment is the extinguishment of
his debt; from the viewpoint of the creditor, it its he
acquisition of the object offered in credit
There is greater freedom in the determination of the price
There is less freedom in determining the price
The giving of the price may generally end the obligation of
the buyer
The giving of the object in lieu of the credit generally
extinguishes completely the credit, unless the agreement
provides otherwise.
PACTUM COMMISSORIUM
‣
RULE — THE CREDITOR CANNOT APPROPRIATE THE THINGS GIVEN BY WAY OF PLEDGE OR MORTGAGE,
ANY STIPULATION TO THE CONTRARY IS NULL AND VOID. (ART. 2088)
OR DISPOSE OF THEM.
‣
In Pactum Commissorium, the parties agree generally in one single contract, that, in the event that the debtor fails to
pay the debt, the mortgaged or pledged property of the debtor shall automatically be appropriated or owned by the
creditor
‣
RATIONALE — This is because of the rule that any property made as a security for a load must always be foreclosed
or subjected to a sale by public bidding in case it shall be used to satisfy a debt wholly or partially of the debtor
‣
ELEMENTS —
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
1.
There must be a creditor-debtor relationship between the parties
2.
The property of the debtor was used as a security for the loan, either as a mortgage or a pledge
3.
There was automatic appropriation of the property upon failure of the debtor to pay the obligation as provided in
their agreement
APPLICATION OF PAYMENTS — PAYMENT OF SEVERAL DEBTS OF THE SAME KIND TO A SINGLE
CREDITOR
Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application
of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to
debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract. (1172a)
Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered. (1173)
Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be
inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to
have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a)
D EFINITION
‣
OF
A PPLICATION
OF
PAYMENTS
PARAS — It is the designation of the debt to which should be applied a payment made by a debtor who owes several
debts in favor of the same creditor. Stated differently, it is the phrase applied to show which debt, out of two or more
debts owing the same creditor, is being paid.
‣
It is important to know rules on application of payments because otherwise, we may not know which one, of two or
more debts, has been extinguished.
‣
Example — A owes B P1 million payable Apr. 1. A also owes B P1 million payable Apr. 5. On Apr. 10, A pays B P1
million. Here, we will not know which debt has been extinguished unless we know the rules on the application of
payments.
REQUISITES FOR APPLICATION OF PAYMENT
1.
There must be two or more debts (severalty of debt)
2.
The debts must be of the same kind
3.
The debts are owed by the same debtor in favor of the same creditor (thus, there must be only one debtor and only one
creditor)
4.
All the debts must be due
‣
5.
EXCEPT —
a.
If the parties so stipulate
b.
When the application of payment is made by the party for whose benefit the term has been constituted.
The payment is not enough to extinguish all the debts
PREFERENTIAL RIGHT OF DEBTOR
‣
RULE — It is the debtor who is given by the law the right to select which of his debts he is paying
‣
This is subject to the following restrictions —
1. If there was a valid prior but contrary agreement, the debtor cannot choose
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
2.
The debtor cannot choose to pay part of the principal ahead of the interest (Art. 1253; Sunico vs Ramirez), unless
the creditor consents.
‣
If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.
‣
The debtor cannot insist that his payment be credited to the principal instead of the interest. However, if the
creditor agrees, this is all right.
‣
Under the law, payment that is made to a creditor must be credited to interest (that is already due) ahead of the
principal. The interest can refer not only to interest on amounts already due but also to interest on future
installments, if said installments are eventually not paid on time. (Rosete, et al. v. Perober Dev. Corp. 1981)
‣
Effect if Payment Is Credited to the Principal — Reduction of the principal would, of course, result in the
decrease of the total interest collectible.
‣
‣
NOTE — If the debtor makes a proper application and the creditor refuses, the creditor will be in mora accipiendi.
What if it is the creditor who makes the application without the knowledge and consent of the debtor?
‣
The application is not valid.
HOW A PPLICATION OF PAYMENT IS M ADE
1.
The debtor makes the designation (Art. 1252, par. 1)
2.
If not, the creditor makes it, by so stating in the receipt that he issues, “unless there is cause for invalidating the
contract” (Art. 1251, par. 2)
‣
3.
NOTE — If the obligation itself is void, the application and the payment are also void. But if the debtor’s consent in
accepting the receipt was vitiated — as by fraud, error, or violence — the application is not valid, it is voidable.
If neither the debtor nor the creditor has made the application, or if the application is not valid, then application is
made by operation of law (Arts. 1253 and 1254)
‣
Rules in Case No Application of Payment Has Been Voluntarily Made —
a.
Apply it to the most onerous (in case the due and demandable debts are of different natures).
‣
b.
‣
‣
Sometimes it is easy, and sometimes it is hard to determine which obligation is the most onerous. The reason
is that the burden may be relative. It follows, therefore, that no hard and fast rules can be put up, because what
may be true in one case may not be true in another case.
If the debts are of the same nature and burden, application shall be made to all proportionately.
Example —
‣
If one debt is for P1 million, and another is for P2 million and only P1 million is paid, how will the payment be applied?
If the debtor makes the application, the payment should be credited to the first debt. The debtor cannot insist that the
creditor accept it for the second debt for insofar as the second debt is concerned, it is only a partial payment. And
under the law, a creditor cannot generally be compelled to receive partial payment. If no application has been made,
the law steps in, and application will be made, not equally but proportionately. (Art. 1248)
‣
If one debt is P1.2 million and the other is P600,000, and the debtor without making any application of payment gives
P300,000, how should said payment be applied, presuming that both are of the same nature and burden? The
payment will be applied proportionately. Hence, P200,000 will be deducted from the first, and P100,000 will be
deducted from the second. The first debt will now be P1 million and the second will be P500,000. The ratio here of the
first debt to the second debt is thus preserved, namely, 2 is to 1.
Examples of How a Creditor Makes the Application —
1.
When the debtor without protest accepts the receipt in which the creditor specified expressly and unmistakably the
obligation to which such payment was to be applied, said debtor renounced the right of choice. (Liggett & Myers
Tobacco Corp. v. Assn. Insurance, 1960)
2.
When monthly statements were made by the bank specifying the application and the debtor signed said statements
approving the status of her account as thus sent to her monthly by the bank. (Garcia v. Enriquez)
REVOCATION OF THE APPLICATION
‣
Once an application of payments is made, may it be revoked?
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
NO (Bachrach Garage & Taxicab Co. vs Golingco), unless both parties agree. Even if both parties agree, however, still
the revocation or change in the application (by crediting the payment to another debt) will not be allowed if third
persons would be prejudiced.
W HEN A PPLICATION M UST B E M ADE
‣
Application must be made at the time when payment by the debtor is made, not afterwards. (Powell v. Nat. Bank)
PAYMENT BY CESSION
Article 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be
governed by special laws. (1175a)
D EFINITION
OF
PAYMENT BY CESSION
‣
It is the process by which a debtor transfers all the properties not subject to execution in favor of his creditors so that the
latter may sell them, and thus apply the proceeds to their credits.
‣
It is also known as “Voluntary Assignment in Favor of Creditors”.
‣
Kinds or Classes of Assignment —
1.
Legal (This is governed by the Insolvency Law, the majority of creditors must agree)
2.
Voluntary (This is what is referred to in Art. 1255.) (All the creditors must agree.)
REQUISITES
1.
There must be more than one debt
2.
There must be more than one creditor
3.
The debtor is completely or partially insolvent
4.
The abandonment of all debtor’s property not exempt from execution (unless exemption is validly waived by debtor) in
favor of creditors
5.
Acceptance or consent on the part of the creditors (for it cannot be imposed on an unwilling creditor)
E FFECTS OF CESSION
1.
The creditors do not become the owners; they are merely assignees with authority to sell. (If ownership is
transferred, this becomes a dation in solutum.)
‣
2.
Thus, cession is really in the nature of “agency”.
The debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the
contrary. (Art. 1255, 2nd sentence).
‣
3.
‣
The balance remains collectible.
Creditors will collect credits in the order of preference agreed upon, or in default of agreement, in the order
ordinarily established by law.
PARAS — Some properties should not be assigned, such as —
1.
The family home, whether judicially or extrajudicially created, save in certain exceptions
2.
The amount needed by the debtor to support himself and those he is required by law to support (But if such amount
is not reserved, the cession is not void but merely reducible to the extent that the support is impaired. The party
prejudiced can ask the court for the reduction)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
DATION IN PAYMENT VS PAYMENT BY CESSION
DATION IN PAYMENT
CESSION
Does not affect all the properties of the debtor
In in general, affects all the properties of the debtor
Does not require plurality of creditors
Requires more than one creditor
Only the specific or concerned creditor’s consent is
required
Requires the consent of all the creditors
May take place during the solvency of the debtor
Requires full or partial insolvency
Transfers ownership upon delivery
Does not transfer ownership
This is really an act of novation
Not an act of novation
Akin to a sale
Akin to agency where the creditors are authorized to sell
the properties ceded.
TENDER OF PAYMENT AND CONSIGNATION
Article 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the
same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
Article 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment.
(1177)
Article 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom
the tender of payment shall be proved, in a proper case, and the announcement of t he consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof. (1178)
Article 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1179)
Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the
obligation.
Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been
properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180)
Article 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he
shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released.
(1181a)
TENDER OF PAYMENT
‣
It is the act of offering the creditor what is due him together with a demand that the creditor accept the same.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
‣
The objective of notice prior to consignation is to give the creditor a chance to reconsider his refusal to accept payment. In
this way, consignation and litigation may be avoided. On the other hand, the purpose of notice after consignation is to enable
the creditor to withdraw the money or goods deposited with the judicial authorities. (Soco v. Judge Militante 1983)
C ONSIGNATION
‣
It is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or
refuses to accept payment. It generally requires a prior tender of payment. (Limkako v. Teodoro)
‣
Distinguish tender of payment and consignation — The clear meaning of these words show their difference. Tender is
the antecedent of consignation, i.e., 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
RULES ON PAYMENT MUST BE COMPLIED WITH
‣
Tender of payment and consignation, to extinguish the debtor’s obligation must comply with the requisites provided in
Arts. 1256-1258 of the Civil Code. Thus, if the debtor made a tender of payment by telegraphic transfer sent to the clerk
of court, and the same was not received by the creditor, but instead returned to the debtor, it cannot be given effect.
(Alemars v. Cagayan Valley College)
EFFECT OF TENDER WITHOUT CONSIGNATION
‣
RULE — Tender of payment without consignation does not extinguish the debt; consignation must follow
‣
Examples —
‣
A owes B a sum of money. A gives B the money but B refuses without just reason to accept it. What should A now
do? A must deposit the money in court, since his tender of payment was refused without just reason. His deposit in
court is called consignation.
‣
When a debtor owes money lent him with interest, is it sufficient to just tender the principal without the interest?
No. The tender of the principal must be accompanied with the tender of the interest which has accrued. Otherwise,
said tender will not be valid.
‣
EXCEPT — Consignation is not required in certain instances —
‣
In some cases, however, consignation is not required, mere tender being needed. This is so where there really
exists no debt, no obligation, and where therefore payment is purely voluntary, that is, the person offering, at his
option, could have refused to offer. This may happen in the case of —
1. Options
2.
‣
Redemption
Where only a right, not a duty, exists. Thus, if one is granted an option to buy he may or he may not buy, at his
choice; if one is granted the right to redeem, he may or he may not redeem also at his own choice.
WHEN CREDITOR IS JUSTIFIED IN REFUSING TENDER OF PAYMENT
‣
The creditor is justified in refusing to accept the tender of payment if the tender of payment is not valid. To be valid, the
tender of payment must have the following requisites —
1. It must be made in legal tender (lawful currency).
2.
It must include whatever interest is due.
3.
Generally, it must be unconditional.
4.
The obligation must already be due.
VALIDITY OF CONSIGNATION; REQUISITES FOR CONSIGNATION
1. Existence of a valid debt
2. Valid prior tender, unless tender is excused
3. Prior notice of consignation (before deposit)
4. Actual consignation (deposit)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
A. PAYMENT OR PERFORMANCE
5. Subsequent notice of consignation
VALIDITY OF CONSIGNATION; REQUISITES FOR CONSIGNATION (EXPOUNDED)
1. EXISTENCE OF A VALID
‣
DEBT
In the following cases, there is NO valid debt —
a. In the case of an option, there is a privilege, not an obligation or a debt.
‣
Example — A was given an option to cancel a contract provided he paid P600,000. Mere tender is sufficient to
preserve the right to cancel. The same is true in the case of an option to buy given to a lessee.
b. In the case of legal redemption, there is as yet no debt (for this again is a right, not a debt or duty).
c. In the case of conventional redemption (this again is a right, not an obligation).
d. If the alleged debt has prescribed (for here, there is no more debt).
e. If the debt is founded on an illegal cause or consideration, or if for any other reason, null and void.
f.
If the obligation of the debtor is conditional, and the condition has not been fulfilled.
2. VALID PRIOR TENDER,
‣
‣
UNLESS TENDER IS EXCUSED
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. Generally, there must be prior tender of
payment prior to consignation
EXCEPT — Consignation alone shall produce the same effect in the following cases —
a. When the creditor is absent or unknown, or does not appear at the place of payment
b. When he is incapacitated to receive the payment at the time it is due (But this does not apply if the creditor has a
legal representative and this fact is known to the debtor.
c. When, without just cause, he refuses to give a receipt
d. When two or more persons claim the same right to collect
e. When the title (written document) of the obligation has been lost
3. PRIOR NOTICE OF CONSIGNATION (BEFORE
DEPOSIT)
‣
The law says the consignation “must first be announced to the persons interested in the fulfillment of the obligation”.
‣
Without such notice, the consignation as a payment is VOID.
‣
RATIONALE — The reason is because, had notice been made, the creditor would have had opportunity to withdraw
the money consigned and thus make use of it. To enable the creditor and other parties interested (such as the
mortgagees, pledgees, guarantors, solidary co-creditors, and solidary co-debtors) to reconsider the previous refusal,
and thus, avoid litigation by the simple expedient of accepting payment.
‣
EXCEPT — when any attempt to give such notice would be useless, as when the creditor was traveling from place to
place and could not be located.
‣
The notice of consignation may be made by merely giving notice of the debtor’s intention to take the case to court, in
the event that tender is rejected. This is to say that the first notice of consignation may be accomplished
simultaneously with the tender of payment.
4. ACTUAL CONSIGNATION (DEPOSIT)
‣
It is understood that before a deposit is made, a complaint against the creditor to compel him to accept has to be first
filed in court.
‣
The consignation must be made —
1. By depositing the very object that is due (and not another)
2. With the proper judicial authority which, in certain case, may include the sheriff
3. Accompanied by proof that tender had been duly made, unless tender is excused and that first notice of the
consignation had already been sent
5. S UBSEQUENT
‣
NOTICE OF CONSIGNATION
This is mandatory and, therefore, without such subsequent notice, the consignation is VOID
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
B. L OSS OF THE T HING D UE
EFFECTS IF CONSIGNATION HAS BEEN DULY MADE
1. The debtor may ask the judge to order the cancellation of the obligation.
2. The running of interest is suspended.
3. However, it should be observed that before the creditor ACCEPTS, or before the judge declares that consignation has
been PROPERLY MADE, the obligation REMAINS.
‣
NOTE — If the consignation is judicially approved OR if all the essential requisites are present OR if the creditor has
signified his acceptance, the creditor bears the loss; otherwise, it is the debtor who bears the burden.
E FFECTS OF IMPROPER C ONSIGNATION
1. If the consignation was improperly made, the obligation remains, because the consignation is NOT EFFECTIVE as a
payment.
2. If at the time of consignation the debt was already due, and the requisites for consignation are absent, the debtor is in
DEFAULT.
WITHDRAWAL OF THE THING CONSIGNED BY THE DEBTOR
1. As a matter of right —
a. Before the creditor has accepted the consignation
b. Before there is a judicial declaration that the consignation has been properly made. (Here, the obligation and the
accessory stipulations remain.)
2. As a matter of privilege — When after consignation had been properly made (the creditor having accepted or the court
having declared it proper), the creditor authorizes the debtor to withdraw the thing.
‣
EFFECT —
a. The obligation remains.
b. The creditor loses any preference (priority) over the thing.
c. The solidary co-debtors, guarantors, and sureties are released (unless they consented).
‣
‣
BUT — the solidary co-debtors are released only from the solidarity, not from their own individual shares, since
unlike guarantors or sureties, the solidary co-debtors are in themselves principal debtors.
How can the creditor prevent the debtor from exercising the RIGHT to withdraw the thing consigned?
‣
By immediately accepting the consignation with or without reservations. If he accepts without reserving his right to
further claims such as damages, this would be a case of WAIVER.
B. LOSS OF THE THING DUE
NATURE AND CONCEPT OF “LOSS”
Article 1189. XXXXX
(2) XXXXXX 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;
‣
‣
NOTE — Loss includes “impossibility of performance” in obligations to do.
When is there a “loss”?
1. When the object perishes (physically, it is destroyed)
2. When it goes out of commerce
3. When it disappears in such a way that —
a. Its existence is unknown
b. It cannot be recovered.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
B. L OSS OF THE T HING D UE
‣
When is there a “loss" or "impossibility of performance”?
1. Physical impossibility —
a.
Total loss —
i.
When the object perishes (physically, it is destroyed)
ii.
When the thing disappears in such a way that —
(1) Its existence is unknown
(2) It cannot be recovered
iii. When performance has become physically impossible (Art. 1266)
b.
2.
Partial loss (deemed total loss by the courts) (Art. 1264)
Legal impossibility
a.
When it goes out of commerce
b.
When performance is prohibited by law (Art. 1266)
3. Moral impossibility
a.
Rebus sic stantibus (Art. 1267)
LOSS IN OBLIGATIONS TO GIVE
Article 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost
or destroyed without the fault of the debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the
obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the
assumption of risk. (1182a)
Article 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation. (n)
Article 1460. A thing is determinate when it is particularly designated or physical segregated from all others of the same
class. The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable
of being made determinate without the necessity of a new or further agreement between the parties. (n)
OBLIGATIONS TO GIVE A SPECIFIC THING —
1.
‣
THE OBLIGATION IS EXTINGUISHED
EXCEPT — In these cases, the obligation is not extinguished but converted into a monetary obligation (payment of
damages) —
a. If the debtor is at fault
b.
When the debtor is made liable for a fortuitous event because of—
i.
A provision of law — such as in the following cases —
(1) When the debtor is in default (mora) (Art. 1165)
(2) When the debtor has promised to deliver the same thing to two or more persons (parties) who do not have
the same interest (Art. 1165)
(3) When the obligation arises from a crime. (Art. 1268)
(4) When a borrower (of an object) has lent the thing to another who is not a member of his own household
(Art. 1942[4])
(5) When the thing loaned has been delivered with appraisal of the value, unless there is a stipulation
exempting the borrower from responsibility in case of a fortuitous event (Art. 1942[3])
(6) When the payee in solutio indebiti is in bad faith. (Art. 2159)
ii.
A contractual stipulation
iii.
The nature of the obligation requires the assumption of risk on the part of the debtor
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
B. L OSS OF THE T HING D UE
OBLIGATIONS TO GIVE A GENERIC THING —
2.
‣
THE OBLIGATION IS
NOT
EXTINGUISHED
The obligation continues to exist because a generic thing does not really perish (genus nunquam perit — “genus never
perishes”).
‣
EXCEPT —
a.
If the generic thing is delimited (like “50 kilos of sugar from my 1999 harvest” when such harvest is completely
destroyed) (“delimited generic thing”).
b.
If the generic thing has already been segregated or set aside, in which case, it has become specific.
PARTIAL LOSS
Article 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation
is so important as to extinguish the obligation. (n)
‣
PARAS — In certain cases, partial loss may indeed be equivalent to a complete loss, such as the loss of a specific
fountain pen minus the cover. In other cases, the loss may be insignificant. Hence, judicial determination of the effect is
needed.
‣
NOTE — This also applies to partial impossibility of performance
PRESUMPTION OF FAULT
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his
fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does
not apply in case of earthquake, flood, storm, or other natural calamity. (1183a)
IMPOSSIBILITY OF PERFORMANCE IN OBLIGATIONS TO DO
Article 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor. (1184a)
‣
PARAS — The impossibility must be AFTER the constitution of the obligation. If it was before, there is nothing to
extinguish.(Note the word “becomes”). Hence, if the performance was impossible right at the start, the obligation must be
regarded as VOID.
‣
‣
Examples —
‣
Legal impossibility — The furnishing of work on Sundays when the same is prohibited by law
‣
Physical impossibility — To install a motor in a ship that was lost after the perfection of the contract but prior to
such installation.
If the act is subjectively impossible (for the debtor himself) but otherwise objectively possible (for all others), is the
obligation extinguished?
‣
PARAS — It depends. Usually the obligation subsists unless personal considerations are involved such as when only
a particular company is prohibited by law to furnish work on a certain day.
REBUS SIC STANTIBUS
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
B. L OSS OF THE T HING D UE
Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part. (n)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
B. L OSS OF THE T HING D UE
‣
PARAS — This Article refers to moral impossibility or impracticability due to change of certain conditions (rebus sic
stantibus — a treaty or agreement remains valid only if the same conditions prevailing at the time of contracting continue
to exist at the time of performance). This is also referred to as the doctrine of “the frustration of the commercial object”
‣
‣
Example — The duty to construct a railroad when such construction was possible but very dangerous to life and
property, is excused by the law; therefore, failure to grind sugar cane in view of the non-construction of the railroad
does NOT give rise to damages. However, if instead of extreme danger there is only proved the existence of mere
inconvenience, unexpected impediments, or increased expenses, the same would not be enough to relieve a debtor
from his “bad bargain.”
REQUISITES —
1. The obligation is to do
‣
Art. 1267 speaks of a “service” — a personal obligation. Thus, real obligations (“to give”) are not included within its
scope.
2. The service must become so difficult that it was manifestly beyond the contemplation of BOTH parties.
‣
Thus, it is not enough that neither party actually anticipated or foresaw the difficulty; the difficulty could not
possibly have been anticipated or foreseen.
‣
The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the
service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears
that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence
to that intention to hold the obligor still responsible.
3. The object must be a future service with future unusual change in conditions
‣
Naturally, an aleatory contract or one dependent on chance, in view of the risks being foreseen, does not come
under the scope of Art. 1267
LOSS IN CRIMINAL OFFENSES
Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be
exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by
him to the person who should receive it, the latter refused without justification to accept it. (1185)
‣
Example — A commits the crime of theft, and is asked to return the car stolen to its owner B. If, before the car is delivered
to B, it is destroyed by fortuitous event, is A’s liability extinguished? No, A’s liability is not extinguished. A’s obligation to
deliver the car arose from a criminal offense, and in such a case, the rule is, he is liable even if the loss occurs because of
a fortuitous event.
‣
What if A had previously asked the owner to accept the car, but the owner without any justifiable reason refuses to
accept the car, do you believe A to still be responsible if, let us say, the car is lost later by a fortuitous event? In this
case, the criminal could no longer be liable because here the creditor is in mora accipiendi. This is the exception to the
rule.
‣
If the creditor refuses to accept the thing due from the criminal, what should the latter do? The criminal may either
consign the thing or else keep the thing in his possession. If he does the latter thing, he is still obliged to care for it with
due diligence, but this time he will not be liable if the thing is lost through a fortuitous event
TRANSFER OF RIGHTS FROM THE DEBTOR TO THE CREDITOR IN CASE OF LOSS
Article 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of
action which the debtor may have against third persons by reason of the loss. (1186)
‣
Example — S is obliged to deliver his car to B. But X destroys the car. B has a right to sue X. The right is given to B
instead of S because otherwise S would unduly profit in that he will gain two things: first, his obligation to give the car or
its value is already extinguished; second, he would be allowed to recover from X. It is obvious that S must not unduly profit
at the expense of B.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
C. CONDONATION OR REMISSION
C. CONDONATION OR REMISSION
DEFINITION OF CONDONATION
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be
made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (1187)
‣
Remission or Condonation is the gratuitous abandonment by the creditor of his right.
‣
‣
It is basically a donation.
Example — A owes B P5.00. When the debt matured B told A that she need not pay the debt since he was condoning it.
A, in turn, expressed her gratitude. Here, the debt has been extinguished by remission.
REQUISITES FOR CONDONATION
1.
There must be an agreement (since acceptance of the offer is required)
2.
The parties must be capacitated and must consent
3.
There must be subject matter (object of the remission — otherwise, there would be nothing to condone).
4.
The cause or consideration must be liberality (for remission is essentially gratuitous). (Otherwise, the act may be a dation
in payment, or a novation, or a compromise)
5.
The obligation remitted must have been demandable at the time of remission (otherwise, the remission is useless).
6.
The remission must not be inofficious (It should not impair the legitimes, otherwise, it would be reducible, so that the
legitimes of the compulsory heirs would not be impaired).
7.
Formalities of a donation are required in the case of an express (but not implied) remission
‣
Example — A remission of an obligation to give land must be in a public instrument in order to be valid. (Art. 749)
‣
May an express remission defective in form be considered an implied remission?
‣
K INDS
1.
2.
3.
PARAS — NO, otherwise, the requirement of the law on express remission would be rendered useless. Thus, an
express remission, not made in due form, cannot affect the creditor if it is withdrawn in due time. It would affect
him only when new acts of waiver confirm the express purpose of the former, as one of the bases on which tacit or
implied remission may rest.
OF
C ONDONATION
As regards its effect or extent
a.
Total
b.
Partial (only a portion is remitted or the remission may refer only to the accessory obligations)
As regards its date of effectivity
a.
Inter vivos (during life)
b.
Mortis causa (after death)
As regards its form
a.
Implied or tacit (this requires no formality) (conduct is sufficient)
b.
Express or formal (this requires the formalities of a donation if inter vivos; of a will or codicil if mortis causa)
DELIVERY OF PRIVATE DOCUMENT EVIDENCING THE CREDIT
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
Article 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had against the latter.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
C. C ONDONATION OR R EMISSION
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)
‣
PARAS — The Article speaks of a “private document,” not a public one because in the case of the latter, a copy is easily
obtainable, being a public record. Note that with the delivery of the private instrument, a remission or renunciation is
presumed.
‣
Example — Steffi made a promissory note in favor of Agassi in the amount of P100 million. After some time, Agassi
voluntarily delivered the promissory note to Steffi without collecting the P100 million. Steffi is now in possession of said
note. There is a disputable presumption that there has been a remission. The presumption is merely disputable and not
conclusive because it may be that the instrument was delivered only for examination by Steffi or for collection.
‣
It should be noted that Art. 1271 gives us an example of an implied remission.
‣
The voluntary destruction by the creditor of the instrument is likewise another form of implied remission
‣
It should be noted likewise that as between the presumption of remission and the presumption of payment, the first
(remission) ordinarily prevails.
PRESUMPTION OF VOLUNTARY DELIVERY
Article 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall
be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189)
‣
PARAS — While Art. 1271 gives a presumption of remission, Art. 1272 gives a presumption of voluntary delivery.
‣
Note again here that the law speaks of a private document.
‣
The presumption is disputable or prima facie, for the law itself says “until the contrary is proved.”
‣
Rule if the Instrument of Credit Is Still in Creditor’s Hands — If the instrument of credit is still in the hands of the credi- tor,
this is evidence that the debt has not yet been paid, unless the contrary be fully proved. To rebut the presumption,
ordinarily, a receipt of payment must be presented.
‣
What is the effect if the obligation is joint, or if it is solidary?
‣
PARAS — Example — A and B owe C P100,000, evidenced by a private document.
1.
If the private document is found in the possession of A, who is a joint debtor, what is the presumption? The
presumption is that only A’s debt has been remitted. Reason: A’s debt is not P100,000 but only P50,000; in other
words, his debt is really distinct from B’s debt.
2.
If the private document is found in the possession of A who is a solidary debtor, what is the presumption? Since this is
a solidary obligation, the presumption is that the whole obligation (not merely A’s share) has been remitted.
3.
In both cases, may the presumption be rebutted? Yes, the presumption in both cases can be overcome by superior
contrary evidence.
EFFECT OF CONDONATION OF THE PRINCIPAL ON THE ACCESSORY
Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force. (1190)
‣
This follows the rule of “accessory follows the principal
REMISSION OF PLEDGE
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
D. C ONFUSION OR M ERGER
Article 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its
delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a)
‣
PARAS — Note here that only the accessory obligation of pledge is presumed remitted. The principal obligation (the loan)
remains in force. The presumption is only disputable, for the debtor or the third person may be in possession of the
property by theft or because it had been sent for repairs, or for similar causes.
‣
RATIONALE — It is essential in pledge that the thing be delivered to the creditor, or to a third person by common
agreement.
‣
The law says “or of a third person who owns the thing.” Therefore, if the third person does not own the thing, the presumption does not arise. As a matter of fact, the stranger may just have found it or it may have been delivered to him
only for safekeeping.
D. CONFUSION OR MERGER
NATURE OF CONFUSION OR MERGER
Article 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same
person. (1192a)
N ATURE OF C ONFUSION OR M ERGER
‣
What is confusion or merger?
‣
Merger or confusion is the meeting in one person of the qualities of creditor and debtor with respect to the same
obligation. It erases the plurality of subjects of the obligation, and extinguishes the obligation because it is absurd that
a person should enforce an obligation against himself.
‣
‣
‣
Furthermore, the purposes for which the obligation may have been created are considered as fully realized by the
merger of the qualities of the debtor and creditor in the same person.
Example — A makes a check payable to bearer, and hands the check to C, who hands it to D who finally hands it to A.
Here A owes himself. This is a clear case of merger, and hence the obligation of A is extinguished.
What are the causes of confusion or merger?
‣
It arises from any act which brings about a succession to the credit, whether it be universal or particular, intervivos or
mortis causa.
‣
Example — in testate or intestate succession in which the debtor inherits the credit from the creditor. (But the reverse it
not true, where the creditor inherits from the debtor, there can be no confusion if the debt is for a sum of money,
because the debt is not transmitted to the heirs.)
‣
What is the effect of confusion or merger?
‣
It extinguishes the obligation.
‣
Thus, it has been held that where a mortgagee of a piece of land acquires the mortgagor’s equity or right to redeem,
there is an extinguishment of the mortgage obligation by merger, as the mortgagee becomes the owner of the land.
(Enriquez vs Ranola)
R EQUISITES
1.
OF
C ONFUSION
OR M ERGER
It must take place between the creditor and the principal debtor
‣
‣
Therefore, confusion of the creditor with the person of the guarantor does not extinguish the principal obligation.
2.
There can be no confusion or merger if the debtor and creditor represent (different) juridical entities even if the officers
of both are the same. (Kapisanan ng mga Manggagawa sa MRR v. Credit Union 1960)
The merger must be clear and definite. (Testate Estate of Mota v. Serra)
3.
The very same obligation must be involved
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
D. C ONFUSION OR M ERGER
‣
Because if the debtor acquires certain rights from the creditor with respect to other things, there is no merger. (Testate
Estate of Mota v. Serra)
‣
Mere transfer to a third person of rights belonging to both the debtor and the creditor BUT not the credit as against
the debt does not result in merger.
‣
4.
Example — A and B were co-owners of a piece of property worth P1,000,000. For some repairs thereon, B paid
P200,000. Because they were co-owners, A had to share in said expenses, and so A owed B P100,000. A sold his
share in the property to C and B also sold his share in the property to C. Later B brought this action to recover
P100,000 from A. A claimed that since C is now the owner of the property, C owes himself, and therefore said
merger had extinguished his debt to B. Should A pay B? Yes, A should pay B, since there was really no merger
here. What had been sold to C were the half shares of each of the co-owners, or P500,000 worth of property from
each. C did not acquire the indebtedness of P100,000 for the repairs, hence there can be no merger with reference
to that debt.
The confusion must be total or as regards the entire obligation
C ONFUSION DISTINGUISHED FROM C ONSOLIDATION
‣
OF
O WNERSHIP
Real rights, such as usufruct over property, may be extinguished by merger of the real right with the right of ownership.
‣
Such as —
‣
Usufructuary may transmit his right to the owner of the thing in usufruct (naked owner)
‣
The dominant and servant tenements may pass to the ownership of the same person
‣
TOLENTINO — This is NOT “merger” in the concept used in the law of obligation. This is in reality, a consolidation of
ownership.
‣
Example — A had two brothers B and C. A gave a parcel of land to B in usufruct (right to the use and right to the
fruits), and the same parcel to C in naked ownership. If later C donates the naked ownership of the land to B, B will
now have the full ownership (his ownership is consolidated), and it is as if merger had resulted.
REVOCATION OF THE CONFUSION OR MERGER
‣
When the act which occasions the merger is susceptible of termination or revocation, the merger that has taken place is
also terminated or revoked, the merger that has taken place is also terminated or revoked, and the obligation is recreated
in the same condition that it had when the merger took place.
‣
Thus, when the merger takes place by a particular title, this may be set aside for causes of nullity or rescission of
contract, or by redemption, etc.
‣
BUT — the time intervening between the merger and its revocation, is NOT to be computed in the determination of
prescription of the obligation.
EFFECT IF MORTGAGEE BECOMES THE OWNER OF THE MORTGAGED PROPERTY
‣
If the mortgagee becomes the owner of the property that had been mortgaged to him, the mortgage is naturally
extinguished, but the principal obligation may remain. (Yek Ton Lin Fire v. Yusingco)
‣
Example — I borrowed P1,000,000 from my brother, and as security, I mortgaged my land in his favor. Later I sold the
land to him. The mortgage is extinguished but I still owe him P1,000,000. (NOTE: Had he assigned his credit of
P1,000,000 to a friend and the friend assigned the credit to me, both the principal obligation and the mortgage are
extinguished.)
EFFECT OF MERGER ON THE GUARANTORS
Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193)
‣
RULE — THE EXTINGUISHMENT OF THE PRINCIPAL OBLIGATION THROUGH CONFUSION RELEASES THE GUARANTORS
‣
This is because the obligation of the guarantors is merely accessory.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
‣
‣
Example — A owes B P700,000, guaranteed by C. B assigns his credit to X. X assigns the credit to Y. Y assigns the
credit to A. A’s obligation is extinguished and C is released from his obligation as guarantor.
BUT — Confusion which takes place between the creditor and the guarantor does NOT extinguish the principal
obligation, but it extinguishes the accessory obligation of the guarantor
‣
Example — A owes B P700,000, guaranteed by C. B assigns his credit to X. X assigns his credit to Y. Y assigns his
credit to C, the guarantor. Does A still have to pay C? Yes. However, the contract of guaranty is extinguished, but not
A’s obligation to pay the P700,000.
CONFUSION AND GUARANTY INVOLVING MORTGAGED PROPERTY
‣
When the mortgaged property belongs to a third person, and the mortgage acquires a part of such property subject to
mortgage, that part is released from the encumbrance, which continues to burden the rest of the property, but the credit
is NOT extinguished even in part because there is no confusion as to it.
‣
‣
Example — A owes B with C’s land given as security by way of mort- gage. Later B becomes the owner of onethird of C’s land (said one-third share having been sold or donated to him by C). Is the mortgage extinguished? The
mortgage is extinguished regarding B’s one-third share of the land because of merger. This is evident because
otherwise, if the debt is not paid, B would hold his own property as security and this would be absurd. However,
the mortgage continues to subsist on the two- thirds of the land still belonging to C.
BUT — Where the mortgage acquires ownership of the entire mortgaged property, the mortgage is extinguished, but
this does not necessarily mean the extinguishment of the obligation secured thereby, which may become an
unsecured obligation.
‣
Thus, for the same reason hereinabove given, in reference to the previous example, the mortgage is completely
extinguished. However, does A’s debt in favor of B still exist? The answer is evidently YES, for extinguishment of
the accessory obligation does not by itself extinguish the principal obligation which is the loan. This time, however,
it would be a case of a loan without security.
MERGER IN JOINT OBLIGATIONS
Article 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or
debtor in whom the two characters concur. (1194)
‣
Example — A and B jointly owe C P1,000,000. If C assigns the entire credit to A, A’s share is extinguished, but B’s share
remains. In other words, B would still owe A the sum of P500,000. In a joint obligation, the debts are distinct and separate
from each other.
E. COMPENSATION
NATURE AND KINDS OF COMPENSATION
Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. (1195)
Article 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total
compensation. (n)
NATURE OF COMPENSATION
‣
It is a mode of extinguishment to the concurrent amount, the obligations of those persons who in their own right are
reciprocally debtors and creditors of each other. It is the offsetting of two obligations which are reciprocally extinguished if
they are of equal value, or extinguished to the concurrent amount if of different values.
‣
Compensation is a sort of balancing between two obligations, it involves a figurative operation of weighting two
obligations simultaneously in order to extinguish them to the extent in which the amount of one is covered by the other.
By this means, payment is simplified and assured between persons who are indebted to each other.
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
‣
It is a sort of balancing (cum ponder — ‘to weigh together’) between two obligations; it involves a figurative operation of
weighing two obligations simultaneously in order to extinguish them to the extent in which the amount of one is covered by
the other.
‣
It is the extinguishment in the concurrent amount of the obligations of those persons who are reciprocally debtors and
creditors of each other.
‣
In effect, it is a specie of abbreviated payment which gives to each of the parties a double advantage —
1.
“Facility of payment
2.
Guaranty for the effectiveness of the credit because if one of the parties pays even without waiting to be paid by the
other, he could easily be made a victim of fraud or insolvency.’’
‣
Indeed, it is simplified or abbreviated payment, because the two debts are extinguished without requiring the transfer
of money or property from one party to the other.
‣
NOTE — In banking operations, a “clearing house” takes care of compensation in banking accounts.
K INDS
1.
2.
OF
C OMPENSATION
AS TO THEIR
EFFECTS
a.
Total compensation — When two obligations are of the same amount
b.
Partial compensation — When the amounts are not equal
AS TO
ORIGIN
a.
Legal compensation — takes place by operation of law because all the requisites in Art. 1279 are present.
b.
Conventional or voluntary compensation — when the parties agree to compensate their mutual obligations even is
some requisite is lacking, such as that provided in Art. 1282.
c.
Facultative compensation — when compensation can be claimed by one of the parties who, however, has the right
to object to it, such as when one of the obligations has a period for the benefit of one party alone and who renounces
that period so as to make the obligation due.
d.
Judicial compensation — when compensation is decreed by the court in a case where there is a counterclaim, such
as that provided in Art. 1283.
LEGAL COMPENSATION
Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the
compensation. (1202a)
Article 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)
Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. (1195)
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor. (1196)
Article 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)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
HOW LEGAL COMPENSATION TAKES PLACE
‣
RULE — WHEN ALL THE REQUISITES UNDER ART. 1279
(ART. 1290)
ARE PRESENT,
L EGAL COMPENSATION TAKES EFFECT BY OPERATION
OF LAW
‣
This extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the
compensation. “To the concurrent amount” means that if one debt is larger than the other, the balance subsists as
debt.
‣
Legal compensation takes place automatically unless there has been valid waiver thereof.
‣
Compensation which extinguishes principal obligations also extinguishes accessory obligations.
‣
It takes place by operation of law despite the fact that the debts may be payable at different places (Art. 1286)
‣
BUT — there shall be an indemnity for expenses of exchange or transportation to the place of payment. (Art. 1286)
‣
‣
Example — A owes B P1M payable in Manila and B owes A P1M payable in England. Whoever claims
compensation must pay for the exchange rate of currency.
EXCEPT — when the assignment (after compensation has already taken place) was made with the consent of the
debtor. Such consent operates as a waiver of the rights to compensation. (Art. 1285)
‣
EXCEPTION TO EXCEPTION — when at the time he gave his consent, he reserved his right to the compensation
REQUISITES OF LEGAL COMPENSATION
1.
Each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other
2.
Both debts must either consist of —
a.
A sum of money
b.
Fungible (generic) things of the same kind, and also of the same quality if such is stated
3.
The two debts be valid, due, liquidated and demandable
4.
Neither of the debts must be subject of any retention or controversy, commenced by third persons and communicated in
due time to the debtor
5.
The compensation must not be prohibited by law
6.
Any of the parties must not have waived the benefits of compensation
REQUISITES OF LEGAL COMPENSATION (EXPOUNDED)
1.
EACH ONE OF THE OBLIGORS BE BOUND PRINCIPALLY,
AND THAT HE BE AT THE SAME TIME A PRINCIPAL CREDITOR OF THE
OTHER
‣
The parties must be mutually debtors and creditors —
a.
There must be a relationship of debtor and creditor between the parties in their own right, and not in a
representative capacity
‣
b.
Examples —
‣
G, as guardian for W,is a creditor of D. D in turn is a creditor of G who owes him a personal debt. There can
be NO compensation because it is W who is the real creditor, not G.
‣
A, debtor of two partners, cannot compensate the debt with what the partnership itself owes her.
The parties must generally be bound as principals
‣
No compensation can be had when one party is a principal creditor in one obligation but is only a surety or
guarantor in the other.
‣
Example — A debtor owes a creditor P1 million but the creditor owes the debtor’s guarantor P1 million. The
debtor cannot claim compensation.
‣
c.
‣
BUT — a guarantor may set up compensation as regards what the creditor may owe the principal debtor.
The reason is simple: If the principal obligation is extinguished, the accessory obligation of guaranty is also
extinguished. (See Art. 1280)
There must be two debts and two credits
These cannot be subject of compensation, as these are not “debts”, thus no debtor-creditor relation —
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
1.
Corporation cannot set-off debts owed by a shareholder to it with his share of stock in the corporation —
Under the law, the two persons concerned are creditors and debtors of each other; therefore, a debtor of a
corporation cannot compensate his debt with his share of stock in the corporation, since the corporation is not
considered his debtor. Shares of stock in a corporation is considered “equity” and not debt. “According to the
weight of authority, a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of
indebtedness, and, therefore, it is not a credit. (Garcia v. Lim Chu Sing)
2.
Internal revenue taxes cannot be the subject of compensation —The government and taxpayer “are not
mutually creditors of each other” under Art. 1278 of the Civil Code and a “claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off.’’ There can be no offsetting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot
await the result of a lawsuit against the government. (Francia v. IAC 1988)
‣
BUT — The government can set-off taxes owed by a taxpayer with his outstanding receivables due to a refund.
‣
SEE — CIR v. Cebu Portland Cement Co., 156 SCRA 535, 541 (1987)
‣
In this case, the taxpayer won a case for refund. The BIR was accordingly order to refund a certain sum.
However, the BIR refused to do so because of an outstanding tax liability based on sales taxes of the
taxpayer. It said that it credited the refund with this liability. Note that an assessment was already issued
for the sales tax liability in this case. The taxpayer argues that set-off cannot yet take place because it
was still connecting the assessment.
‣
The issue was whether or not the BIR can set-off the refund with the sales tax liability
‣
The court in this case allowed the set-off NOT because of the civil law principle on legal compensation
but because of the power of the BIR to enforce collection though administrative remedies (of distraint
and levy). It would be absurd for the BIR to pay the refund and later distraint it. But if the BIR hasn’t
issued an assessment yet, then it can't set-off the refund. Remember that the power of distraint and
levy arises only from the the time the taxpayer fails to pay on the date stipulated in the assessment.
BOTH DEBTS MUST EITHER CONSIST OF —
2.
a.
A sum of money
b.
Fungible (generic) things of the same kind, and also of the same quality if such is stated
‣
TOLENTINO — the use of the word “consumable” is a mistake of the old Civil Code which has been copied into
the present code. The proper word should be “fungible” pertaining to generic things which may be substituted for
each other.
‣
When the debt consists of determinate things, there can be no compensation.
‣
Example — A owes B a fountain pen (generic). B owes A also a fountain pen (generic). There can be compensation
here because the objects are fungible (although not consumable). Had specific fountain pens been agreed upon,
there can be no compensation (legal compensation).
T HE TWO DEBTS BE VALID, DUE , LIQUIDATED AND DEMANDABLE
3.
‣
‣
Both debts must be valid or at least voidable — the obligations must NOT be void. But when one or both debts are
merely rescissible or voidable, they may be compensated against each other before they are judicially rescinded or
avoided. (Art. 1284)
‣
BUT — Although a rescissible or voidable debt can be compensated before it is rescinded or annulled, the
moment it is judicially rescinded or annulled, the decree of rescission or annulment is retroactive, and the
compensation must be considered as cancelled. Rescission or annulment requires mutual restitution, the party
whose obligation is annulled or rescinded can thus recover to the extent that his credit was extinguished by the
compensation, because to that extent he is deemed to have made a payment.
‣
To avoid unfairness if rescission or annulment is later on decreed by the court, it is as if NO compensation ever
took place. The decree thus acts retroactively.
‣
Example — A owes B P1 million. Later, A forced B to sign a promissory note for P1 million in A’s favor. The first
debt is valid; the second is voidable. But if all the requisites for legal compensation are present, both debts are
extinguished since B’s debt is not yet annulled. This is obviously unfair if, later on, B’s debt is annulled by the court.
Thus here, the compensation that has taken place will be cancelled.
Both debts must be due — The fact that there is an existing debt not yet matured will not prevent the enforcement
by action of that which already due. However, if before payment of that which matured first, the second debt also
matures, there will be compensation. “Due” means that the period has arrived, or the condition has been fulfilled
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E. COMPENSATION
‣
‣
Example— Solita owes Edmundo P1 million payable Apr. 1, 2005. Edmundo owes Solita P1 million payable Jun. 8,
2005. Can there be legal compensation on Apr. 1, 2005? No, for one of the debts is not yet due. However, there
can be voluntary compensation upon agreement. (See Art. 1282)
Both debts must be demandable — this means that the debts are also enforceable in court, there being no apparent
defenses inherent in them. “Demandable” may refer to the fact that neither of the debts has prescribed, or that the
obligation is not invalid or illegal.
‣
‣
Thus, there can be NO compensation if —
a.
When the obligation cannot be sued upon — such as when the obligation has already been converted into a
natural obligation because it has prescribed.
b.
When the suspensive condition has not yet happened — Obligations which are subject to suspensive
conditions cannot be set up by way of compensation before the fulfilment of the condition, although once
fulfilled, Art. 1187 should be observed as to the retroactive effect of the happening of the condition.
c.
When one of the parties is in a state of suspension of payments
d.
When there is a period which has not yet arrived
Both debts must be liquidated — a debt is liquidated when its existence and amount are determined. It is not
necessary that it be admitted by the debtor. Nor is it necessary that the credit appear in a final judgment in order that
it can be considered as liquidated, it is enough that its exact amount is known. And a debt is considered liquidated,
not only when it is expressed already in definite figures which do not require verification, but also when the
determination of the exact amount depends only on a simple arithmetical operation.
‣
Compensation takes place only if both obligations are liquidated. Therefore, it cannot take place if one’s claim
against the other is still the subject of court litigation. In no event can it include the unliquidated claims of one of
the parties for alleged damages or for untaxed court costs.
‣
4.
BUT — when the defendant who has an unliquidated claim sets it up by way of counterclaim, and a judgment
is rendered liquidating such claim, it can be compensated against the plaintiff’s claim from the moment it is
liquidated by judgment.
NEITHER OF THE DEBTS MUST BE SUBJECT OF ANY RETENTION OR CONTROVERSY,
COMMENCED BY THIRD PERSONS AND
COMMUNICATED IN DUE TIME TO THE DEBTOR
‣
When one of the obligations sought to be compensated is subject to a suit between a third party and the party
interested in the compensation, each claiming to be the creditor in said obligation, there is a provisional suspension
off the possible compensation. If the third party is adjudged the creditor, there will be no compensation, otherwise,
compensation will take place.
‣
Thus, there can be no legal compensation when one’s claim against another is still the subject of court litigation.
(Miailhe v. Halili 1962)
‣
Example — A owes B P100,000, and B owes A P100,000, but A’s credit of P100,000 has been garnished by C who
claims to be an unpaid creditor of A. B has been duly notified of the controversy. There can be NO compensation here.
(See Rule 57, Sec. 8, Revised Rules of Court on Garnishment). Any possible compensation is in the meantime
suspended. If C wins his claim, there can be no compensation; if he loses, the controversy is resolved, and
compensation can take place.
5.
T HE COMPENSATION MUST NOT BE
‣
PROHIBITED BY LAW
The compensation of the following are prohibited —
a.
Debts arising from a depositum (except bank deposits, which are by law considered as loans to the bank) (Art.
1287, 1980)
b.
Debts arising from the obligations of a depository (Art. 1287)
c.
Debts arising from the obligations of a bailee in commodatum (like the borrower of a bicycle) (Art. 1287)
d.
Debts arising from a claim for future support due by gratuitous title (Art. 1287)
e.
Debts consisting in civil liability arising from a penal offense (Art. 1288)
f.
Damages suffered by a partnership thru the fault of a partner cannot be compensated with profits and benefits
which he may have earned for the partnership by his industry. (Art. 1794)
‣
RATIONALE — Since the partner has the duty to obtain benefits for the firm, and a duty not to be at fault, there
can be no compensation because both are duties, and the partner is the debtor in both instances
‣
BUT — The courts may, however, equitably lessen this responsibility of the partner, if, thru the partner’s
extraordinary efforts in other activities of the partnership, unusual profits have been realized. (Art. 1794)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
6.
ANY OF
THE PARTIES MUST NOT HAVE WAIVED THE BENEFITS OF COMPENSATION
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
‣
The effects of compensation may be waived or renounced by a party, either at the time an obligation is contracted or
afterwards.
DISTINGUISHING COMPENSATION WITH THE OTHER MODES OF EXTINGUISHMENT
‣
What is the difference of legal compensation and payment?
‣
In payment, capacity to dispose the thing paid and the capacity to receive payment are required for the debtor and
creditor, respectively, in compensation, such capacity is not necessary, because compensation operates by law, and
not by the act of the parties.
‣
In payment, the performance must be complete, while in compensation, there may be partial extinguishment of an
obligation.
‣
What is the difference of legal compensation and merger?
‣
As to the number of obligations — Merger involves only one obligation, whereas in compensation, there must always
be two obligations.
‣
As to the number of persons — In merger there is only one person in whom the character of the creditor and debtor
meet, in compensation, there are two persons who are mutually debtors and creditors of each other in two separate
obligations, each arising from a different cause.
EFFECT OF COMPENSATION ON A GUARANTORS
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards
what the creditor may owe the principal debtor. (1197)
‣
RULE — THE GUARANTOR MAY SET UP COMPENSATION WITH RESPECT TO PRINCIPAL DEBT, OR THAT DEBT WHICH THE
CREDITOR MAY OWE THE PRINCIPAL DEBTOR
‣
The liability of the guarantor is only subsidiary, it is accessory to the principal obligation of the debtor. If the principal
debtor has a credit against the creditor, which can be compensated, it would mean the extinguishment of the
guaranteed debt, either totally or partially. This extinguishment benefits the guarantor, for he can be held liable only to
the same extent as the debtor.
‣
This is an exception to Art. 1279, par. 1, because a guarantor is subsidiarily, not principally, bound.
‣
RATIONALE — Extinguishment (partial or total) of principal obligation extinguishes (partially or totally) the guaranty
(which is merely an accessory obligation).
‣
Examples —
‣
A owes B P500,000. C is the guarantor of A. B owes A P100,000. When B sues A and A cannot pay, for how much
will C be liable? C will be liable for only P400,000, because he can set up the P100,000 credit of A as the basis for
partial compensation.
‣
A owes B P500,000. C is the guarantor of A. B owes C P500,000. When B sues A for the P500,000, may A
successfully put up the defense of compensation in that, after all, his creditor (B) owes C the same amount? There
can be no compensation here because in the obligation which C guaranteed for A, he (C) is not bound in his own
right. Neither is A the creditor of B (.NOTE: If A cannot pay and B sues the guaranty, C will not be liable anymore
because the obligation of guaranty has been extinguished by compensation.)
COMPENSATION WHEN THERE IS AN ASSIGNMENT OF CREDIT
Article 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the
same and also later ones until he had knowledge of the assignment. (1198a)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
‣
PARAS CITING MANRESA — Art. 1285 has for its purpose the prevention of fraudulent deprivation of the benefits of total
and partial compensation.
E FFECT OF A SSIGNMENT ON C OMPENSATION OF DEBTS
‣
PARAS CITING MANRESA— Under Art. 1290, “when all the requisites mentioned in Art. 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.” Thus, compensation takes place automatically or ipso jure. Now then, if
AFTER compensation has taken place one of the extinguished debts is ASSIGNED to a stranger, ordinarily this would be
a useless act since there is nothing more to assign. The defense of compensation could then be set up. There is ONE
exception to said rule, and this takes place when the assignment (after compensation has already taken place) was made
WITH THE CONSENT of the debtor. Such consent operates as a WAIVER of the rights to compensation. The exception to
the exception occurs when “at the time he gave his consent, he RESERVED his right to the compensation.”
CASES COVERED BY THE ART. 1285
A SSIGNMENT MADE WITH THE CONSENT OF THE DEBTOR — C OMPENSATION CANNOT BE SET UP ( BECAUSE THERE HAS BEEN
CONSENT AND , THEREFORE , A WAIVER ).
1.
‣
EXCEPT — If the right to the compensation (that has already taken place) is reserved.
‣
Example — A owes B P1,000,000. B in turn owes A P200,000. Because both debts are already due, and because all
other requisites for legal compensation are present, both debts are extinguished automatically up to the amount of
P200,000. Later however, B, with the consent of A, assigned his (B’s) P1,000,000 credit to C. How much can C collect
successfully from A? C can collect from A the whole P1,000,000. A cannot set up the defense of compensation as of
the P200,000 in view of his consent to the assignment. Had A reserved his right to the compensation, A would be
forced to give only P800,000.)
‣
2.
NOTE — Par. 1 of Art. 1285 applies whether the consent to the cession was BEFORE or AFTER the debts became
compensable.
A SSIGNMENT MADE WITH THE KNOWLEDGE BUT WITHOUT THE CONSENT ( OR AGAINST THE WILL) OF THE DEBTOR —
C OMPENSATION CAN BE SET UP REGARDING DEBTS PREVIOUS TO THE CESSION OR ASSIGNMENT.
‣
This refers to debts maturing before the assignment (that is, before the NOTICE); hence here, legal compensation has
already taken place.
‣
Examples —
3.
‣
A owes B P1,000,000. B owes A P200,000. Both debts are already due. Later B, with the knowledge but without
the consent (or against the will) of A, assigned the P1,000,000 credit to C. How much can C successfully collect
from A? If A sets up the defense of partial compensation as to previously maturing debts, C can collect only
P800,000. There had already been compensation with respect to the P200,000.
‣
A owes B P1,000,000 due on Apr. 2; B owes A P200,000 due also on Apr. 2. On Feb. 4 (when there was no legal
compensation yet), B assigned his P1,000,000 credit to C, with the knowledge but without the consent of A. On
Apr. 2, how much can C successfully collect from A? P1,000,000, because if at all there would be compensation
here, it took place after the assignment, not before. It does not matter that the P200,000 had been incurred prior to
the cession, for when the law speaks of “debts previous to the cession,” it refers to debts maturing before the
cession (not to debts incurred prior to such ces- sion which have not yet matured before said cession).
A SSIGNMENT
— DEBTOR CAN SET UP COMPENSATION AS A
PRIOR TO HIS KNOWLEDGE OF THE ASSIGNMENT ( WHETHER THE DEBTS MATURED
ASSIGNMENT ).
MAY BE MADE WITHOUT THE KNOWLEDGE OF THE DEBTOR
DEFENSE FOR ALL DEBTS MATURING
BEFORE OR AFTER THE
‣
PARAS — The crucial time here is the time of knowledge of the assignment, not the time of assignment itself.
‣
Example — A owes B P1,000,000. B owes A in turn P200,000. Both debts are already due. Later, B assigns the
P1,000,000 credit to C, without the knowledge of A. This assignment was made on July 1. On Jul. 15, a P250,000 debt
of B in favor of A matured. A learned of the assignment on Aug. 1. On Aug. 23, a P150,000 debt of B in favor of A
matured. Later C asks A to pay his debt. How much can C successfully collect from A? C can collect P550,000
because A can set up the defense of partial compensation regarding the P200,000 and the P250,000 debts, debts
which had matured and were therefore already compensable PRIOR to his knowledge of the assignment. But A cannot
set up the last debt of P150,000 for partial compensation because this matured only after he knew of the assignment.
CONVENTIONAL OR VOLUNTARY COMPENSATION
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
E. COMPENSATION
Article 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
‣
Conventional compensation — this is compensation by agreement of the parties, even if some requisite provided by law
should be wanting. It is intended to eliminate or overcome obstacles which prevent ipso jura extinguishment of their
obligations.
‣
NOTE — It is not limited to obligations which are not yet due. The parties may compensate by agreement any
obligations, in which the objective requisites provided for legal compensation are not present. It is necessary,
however, that the parties should have the capacity to dispose of the credits which they compensate, because the
extinguishment of the obligations in this case arises from their will and not from law.
‣
The requisites mentioned in Art. 1279 do not apply.
‣
It is sufficient in conventional compensation that the agreement or contract which declares the compensation should
itself be valid; thus among other things, the parties must have legal capacity and must freely give their consent.
‣
REQUISITES —
1.
Each of the parties has the capacity to dispose of the credit he seeks to compensate
2.
The parties agree to the mutual extinguishment of their credits
FACULTATIVE COMPENSATION
Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of
a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301. (1200a)
Article 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.
(n) Article 1289. If a person should have against him several debts which are susceptible of compensation, the rules on
the application of payments shall apply to the order of the compensation. (1201)
‣
Facultative compensation — this is compensation which can be set up only at the option of a creditor, when legal
compensation cannot take place because of the want of some legal requisites for the benefit of the creditor. The latter
can renounce his right to oppose the compensation and he himself can set it up.
‣
‣
Example — A owes B P1 million demandable and due on Jan. 12, 2004. B owes A P1 million demandable and due on
or before Jan. 31, 2004. On Jan. 12, 2004 B, who was given the benefit of the term, may claim compensation because
he could then choose to pay his debt on said date, which is “on or before Jan. 31, 2004.” If, upon the other hand A
claims compensation, B can properly oppose it because B could not be made to pay until Jan. 31, 2004.
What is the difference of facultative and conventional compensation?
‣
Facultative compensation is unilateral, it depends only on the will of one of the parties who has the right to oppose the
compensation. Conventional compensation is mutual, it depends on the agreement of both parties.
C ASES WHERE F ACULTATIVE C OMPENSATION A PPLIES
‣
NOTE — These are all cases where Legal Compensation is prohibited
When one debt arises from a depositum — Only the depositor may set up compensation
1.
‣
The purpose is to prevent breach of trust and confidence.
‣
It is the depositary who cannot claim compensation. The depositor is allowed to so claim
‣
Example — A asked B to keep P1,000,000 for him. Now, A is indebted to B for the amount of P400,000. When A asks
for the return of his money, B gives him only P600,000, alleging partial compensation. Is B correct? No, B is not
correct because the P1,000,000 deposit with him is not subject to compensation. (Art. 1287, 1st par.)
‣
NOTE — this does NOT apply to bank deposits, for these are really simple loans or mutual (Art. 1980)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
‣
Example — A has a P1,000,000 savings deposit with the Phil. National Bank. One day A borrowed P200,000 from
the Bank. Without asking permission from A, the Bank subtracted the P200,000 from A’s account, leaving a balance
of P800,000 in A’s favor. Is the bank’s action proper? Yes. Compensation is allowed here because in this case, the
relationship between the bank and the depositor is that of debtor and creditor.
When one debt arises from the obligations of a depositary — Only the depositor may set up compensation
2.
‣
Again, the depositor is given the right to claim compensation.
When one debt arises from the obligations of a bailee in commodatum — Only the lender (bailor) may set up
compensation
3.
‣
The lender may claim compensation; the borrower is NOT allowed to do so.
When one debt arises because of a claim for support due to gratuitous title — Only the person entitled to receive
support may set up compensation
4.
‣
5.
BUT — Support in arrears may be compensated, but not future support, for this is “vital to the life of the recipient”.
When one debt consists in civil liability arising from a penal offense — Only the victim may set up compensation
‣
RATIONALE — If one of the debts consist in civil liability arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of such obligation is imperative
‣
JBL REYES — This should be specifically limited to the accused to prevent his escaping liability by pleading prior
credits against the offended party. But not to the victim of a crime who happens to be indebted to the accused
JUDICIAL COMPENSATION
Article 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may
set it off by proving his right to said damages and the amount thereof. (n)
‣
Judicial compensation — this is compensation which takes place when the defendant, who is creditor of the plaintiff for
an unliquidated amount, sets up his creditor of the plaintiff for an unliquidated amount, sets up his credit as a
counterclaim against the plaintiff, and his credit is liquidated by the judgment, thereby compensating it with the credit of
the plaintiff. Two of debts arising from final and executory judgments may be extinguished due to compensation.
‣
Pleading and proof of the counterclaim must be made. Unless pleading and proof are made, the court cannot of its own
accord declare the compensation. This is because of “the supplicatory character of our civil procedure.”
‣
All the requisites mentioned in Art. 1279 must be present, except that at the time of pleading, the claim need not yet
be liquidated. The liquidation (or fixing of the proper sum) must be made in the proceedings.
F. NOVATION
NATURE AND KINDS OF NOVATION
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
NATURE OF NOVATION
‣
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting the person of
the debtor, or by subrogating a third person in the rights of the creditor.
‣
Unlike the other modes of extinction of obligations, novation is a juridical act of dual function in that at the time it
extinguishes an obligation it creates a new one in lieu of the old. The substitution is not merely of a new paper or
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
instrument, but of a new obligation in lieu of an old one, the effect of which is to extinguish the old. It does not operate as
an absolute but only as a relative extinction.
‣
While a true or proper novation extinguishes an obligation, a partial, modificatory or imperfect novation merely modifies
the old obligation. Thus, Art. 1291 says “Obligations may be modified by”. Moreover, since a new or modified obligation
arises, novation “does not operate as an absolute but only as a relative extinction.”
K INDS
1.
OF
N OVATION
AS TO ITS
Subjective or personal novation — it is the modification of the obligation by the change of subject
a.
i.
Active — when there is a substitution of the debtor
ii.
Passive — when a third person is subrogated in the rights of the creditor
Objective or real novation — it is the change of the obligation by either —
b.
c.
2.
NATURE
i.
Substituting the object with another, or
ii.
Changing the principal conditions.
Mixed novation — when there is a combination of the subjective and objective novation
AS TO ITS
FORM
a.
Express novation — when the parties declare that the obligation is extinguished and substituted by the new
obligation
b.
Implied novation — when there is such an incompatibility between the old and the new obligation that they cannot
stand together
3.
AS TO
EFFECT
a.
Total or extinction novation — when the old obligation is completely extinguished
b.
Partial or modificatory novation — when there is only a modification or change in some principal conditions of the
obligation. Here the old obligation is merely modified; thus, it still remains in force except insofar as it has been
modified.
‣
NOTE — Should there be any doubt as to whether the novation is total or partial, it shall be presumed to be merely
modificatory.
MEANING OF “CHANGE IN THE PRINCIPAL CONDITIONS”
‣
The term “principal conditions” in Art. 1291 of the New Civil Code should be construed to include a change in the period to
comply with the obligation, which change in the period would only be partial novation, since the period merely affects the
performance, not the creation of the obligation. (Ong v. Bogñalbal)
REQUISITES OF NOVATION IN GENERAL
1.
The existence of a valid and existing original obligation
2.
The intent to extinguish or to modify the old obligation by a substantial difference
3.
The capacity and consent of all the parties
4.
The validity of the new obligation
EFFECTS OF NOVATION
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
Article 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who did not give their consent. (1207)
Article 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either
against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation. (1212a)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be
under the same condition, unless it is otherwise stipulated. (n)
1.
NOVATION
2.
WHEN THE PRINCIPAL OBLIGATION IS EXTINGUISHED BY NOVATION,
1296)
CAN EITHER EXTINGUISH OR MERELY MODIFY AN ORIGINAL AND EXISTING OBLIGATION
‣
Such as — pledges, mortgages, guaranties
‣
EXCEPT —
a.
b.
‣
(ART. 1291)
ACCESSORY OBLIGATIONS ARE ALSO EXTINGUISHED
(ART.
The accessory obligations may subsist only insofar as they may benefit third persons who did NOT give
their consent. (Art. 1296)
‣
Accessory obligations or stipulations made in favor of third persons (stipulations pour autrui) remain unless
said third persons have their consent to the novation.
‣
RATIONALE — Their rights to the accessory obligations (which for them is really a distinct one) should not be
prejudiced without their consent.
Art. 1296 does NOT apply in cases of novation by subrogation of the creditor. (Art. 1303)
What if the novation is merely modificatory, are guarantors and sureties released, if the novation is made
WITHOUT their consent?
a. If the modified obligation is now MORE ONEROUS — they are liable only for the original obligation. (Art. 2054)
b.
‣
If the modified obligation is now LESS ONEROUS — the guarantors and sureties are still responsible.
May it be agreed that despite the extinguishment of the old obligation, the accessory obligations would still
remain as accessory to the new obligation?
‣
PARAS — YES, provided that the debtors of said accessory obligations give their consent.
WHEN NOVATION TAKES PLACE AND THE ORIGINAL OBLIGATION WAS SUBJECT TO A CONDITION ( SUSPENSIVE OR
RESOLUTORY), THE NEW OBLIGATION SHALL BE UNDER THE SAME CONDITION
3.
‣
EXCEPT — when it is otherwise stipulated
‣
RATIONALE —If, for example, the suspensive condition attached to the obligation is NOT fulfilled, the old obligation
never arose. Therefore, there would be nothing to novate, since novation requires the existence of a previous valid and
effective obligation.
‣
Examples —
‣
A promised to give B a car if B should pass the bar exams. Later, both agreed that what should be given would be a
diamond ring. Nothing was mentioned in the second contract regarding the condition. Is the new obligation also
subject to a suspensive condition? YES unless it was otherwise stipulated in the new contract. The delivery of the
diamond ring would, therefore, be due only after B has passed the bar exams.
‣
A promised to give B a car unless X married Y. Later A and B agreed to change the object to a precious stone. No
mention was made regarding any condition. Is the second obligation subject to a resolutory condition? YES unless
the contrary has been provided for in the contract. Supposing under the same facts, X had already married Y
before A and B novated their contract, what happens to the new obligation? It is as if the new obligation never
arose, for a contract that has already been extinguished cannot be novated.
TOTAL OR EXTINCTIVE NOVATION — EXPRESS OR IMPLIED
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
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 inc ompatible with each
other. (1204)
Article 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the
debtor or when ratification validates acts which are voidable. (1208a)
Article 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)
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IV. M ODES OF E XTINGUISHMENT OF OBLIGATIONS
F. N OVATION
DETERMINING THE EXISTENCE OF EXTINCTIVE NOVATION
‣
Novation of a contract may either be extinctive or modificatory, much being dependent on the nature of the change and
the intention of the parties.
‣
An extinctive novation would, thus, have the twin effects —
1. Extinguishing an existing obligation and
2.
‣
Creating a new one in its stead
REQUISITES — For extinctive novation to arise, the following elements must be present —
1.
A previous valid and existing obligation — there must be an original existing obligation at the time of novation.
This means that the obligation must not only be valid, but also that it has not been extinguished by any cause.
2.
The agreement of all the parties to the new contract — novation requires the creation of a new contractual
relation, as well as the extinguishment of the old. There must be consent of all the parties to the substitution, resulting
in the extinction of the old obligation and the creation of a new one.
3.
The extinguishment of the old contract — this may take place by express stipulation in the new agreement
(express novation) or by implication from the incompatibility between the old the new contracts.
4.
The validity of the new contract — in order that a contract may be considered novated, it is indispensable that the
new contract which purports to annul the previous one be valid and effective.
REQUISITES OF EXTINCTIVE NOVATION (EXPOUNDED)
1.
THE EXISTENCE OF A VALID AND EXISTING ORIGINAL
‣
There must be an original existing obligation at the time of novation. This means that the obligation must not only be
valid, but also that it has not been extinguished by any cause.
‣
‣
This requisite is absent if either —
a.
The original obligation was void (Art. 1298)
b.
The original obligation has already been judicially annulled.
c.
The original obligation has already been legally extinguished
BUT — when the original obligation was merely voidable, in the following instances, the novation is still valid —
1. When the original obligation has already been ratified before the novation (Art. 1298)
2.
‣
When annulment may be claimed only by the debtor (Art. 1298) — in this case, the consent of the debtor to the
novation will render the novation effective because such consent is a waiver of the action for annulment.
What if the original obligation had already prescribed, may novation still take place?
‣
TOLENTINO — YES. If the debtor consents. A new contract, recognising and assuming the prescribed debt,
would be valid and enforceable. The prescription, being available only to the debtor, can be waived by him, and he
does so by voluntarily promising to pay the prescribed debt.
‣
NOTE — A prescribed debt, constituting as it does a moral or natural obligation, may be the cause or
consideration of a new obligation to pay therefor. (Villareal v. Estrada)
‣
What if the original obligation has been extinguished by loss or impossibility of performance, may novation still
take place?
‣
2.
OBLIGATION
PARAS — It depends —
a.
If the loss was purely because of a fortuitous event without liability on the part of the debtor — the novation is
VOID for there would be NO obligation to novate.
b.
If the loss made the debtor liable — there is still an existing monetary obligation that may be the subject of
novation.
THE AGREEMENT
OF ALL THE PARTIES TO A NEW CONTRACT
‣
Novation requires the creation of a new contractual relation, as well as the extinguishment of the old. There must be
consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a new
one.
‣
EXCEPT — in the case of expromision, where the old debtor does not participate
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‣
3.
BUT — The consent of the creditor to the change of debtors, whether in expromision or delegacion, is an
indispensable requirement. Substitution of one debtor for another may delay or prevent the fulfillment of the obligation
by reason of the inability or insolvency of the new debtor. Hence, the creditor should agree to accept the substitution
in order that it may be binding on him.
THE VALIDITY AND EFFECTIVITY OF THE NEW CONTRACT
‣
If the new obligation is void, the original one shall subsist (Art. 1297) — In order that a contract may be considered
novated, it is indispensable that the new contract which purports to annul the previous one be valid and effective.
‣
EXCEPT — the parties intended that the former relation should be extinguished in any event. (Art. 1297)
‣
A mere draft of a contract which is not perfected because of the lack of consent of the parties, cannot extinguish a
prior and effective contract.
‣
If the new contract is merely voidable — novation still becomes effective, as a voidable contract is considered valid
until judicially annulled.
‣
BUT — If the action to annul is brought, and the obligation is set aside, it will be deemed as if there had been no
novation, and the original obligation subsists
‣
‣
4.
‣
EXCEPT — when the parties intended to definitely extinguish it at all events. (Art. 1297)
If the new obligation is subject to a suspensive condition — such as the obtaining of some signatures, and the
condition does not materialize, such new obligation never became valid or effective, so no novation has resulted.
Pending the happening of the condition, the old obligation cannot be considered as extinguished, nor can its
performance be enforced, it is as much in a state of suspense as the new one. If the condition is not fulfilled before
one of the parties withdraws from the proposed conditional contract, there is no novation at all.
THE EXTINGUISHMENT OF THE OLD CONTRACT, EXPRESSLY OR IMPLIEDLY
Extinguishment may take place by express stipulation in the new agreement (express novation) or by implication from
the incompatibility between the old the new contracts (implied novation).
a.
Express Novation — when the novation is so declared in unequivocal terms
b.
Implied Novation — when the old and the new obligations be on every point incompatible with each other
‣
Extinctive novation is never presumed — there must be an express intention to novate. In cases where it is implied,
the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration
for the emergence of the new one. Implied novation necessitates that the old obligation is completely superseded by
the new one.
‣
TEST — The test of incompatibility is whether they can stand together, each one having an independent existence, if
they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. There must be complete
or substantial incompatibility.
‣
Implied novation is done by making substantial changes in either —
a.
The object or subject matter of the contract
‣
b.
Example — delivery of a car instead of a diamond ring
The cause or consideration of the contract
‣
c.
Example — an upward change in the price
The principal terms or conditions of the contract
‣
Examples —
‣
If a debt subject to a condition is made an absolute one without a condition. (Macondray v. Ruiz)
‣
Reduction of the term or period originally stipulated. (Kabankalan Sugar Co. v. Pacheco)
‣
When, without the consent of some subscribers, the capital stock of a corporation is increased. Here the
subscribers who did not consent to the increase are released or freed from their subscription. ((National
Exchange Co. v. Ramos)
‣
Mere accidental modifications or changes in an existing obligation do NOT extinguish it by novation — Mere
modifications of the debt do not constitute novation. When the changes refer to secondary agreements, and not to the
object or principal conditions of the contract, there is no novation, such changes will produce modifications of
incidental facts, but will not extinguish the original obligation.
‣
TOLENTINO — Ultimately, the determination of whether the changes in any given contract or obligation are sufficient
to bring about novation must depend upon the facts and circumstances of each case. The distinction between a
principal and an accidental condition inn the contract or obligation is relative. The legal effect of any change made by
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the parties will depend upon a sound appreciation of their importance. The courts should consider, in each particular
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case, not only the nature of the clause that is modified, but also the intention of the parties and the economic
significance of the modification.
INSTANCES WHEN THE COURT HELD THAT THERE WAS NO EXTINCTIVE NOVATION (ONLY A MODIFICATORY NOVATION)
1.
When there are only slight alterations or modifications in the construction plans of a building. (Tiu Suico v. Habana)
2.
When the new contract merely contains supplementary agreement. (Asiatic Petroleum Co. v. Quary Sim Pao)
3.
When additional interest is agreed upon. (Bank of the P.I. v. Gooch)
4.
When additional security is given. (Bank of the P.I. v. Herridge).
5.
When, after a final judgment, a contract was entered into precisely to provide a method of payment other than that
stated in the judgment. (Zapanta v. Rotaeche)
‣
BUT — if the object of the new contract is to settle the judgment, by reducing the amount stated in the judgment, and
by stipulating an attorney’s fees in case of non-payment, and by inserting a penalty clause, the judgment may be
considered to have been novated. (Fua Cam Lu v. Yap Fauco)
6.
When a guarantor enters into an agreement with the creditor that he (the guarantor) will also be a principal debtor. (Here
the original principal debtor is not released from his obligation). (Santos v. Reyes)
7.
When the creditor in the meantime refrains from (or forbears from) suing the debtor (Teal Motors v. Continental Ins), or
even when the creditor merely extends the term of payment, for here the period merely affects the performance, not the
creation of the obligation. (Inchausti v. Yulo)
‣
8.
BUT — guarantors who do not consent to the extension of term are released from their obligation of guaranty by
express provision of the law, and not because of any extinctive modification. (See Art. 2079)
When the place of payment is changed or when there is a variation in the amount of partial payments. (Manresa).
9.
When a public instrument is executed to confirm a valid contract, whether oral or in a private instrument. (Manresa).
10.
When payment of the purchase price for certain trucks is made by the execution of a promissory note for said price.
Here, there is no novation of the contract of sale. (Luneta Motor Co. v. Baguio Bus Co)
JURISPRUDENCE ON THE DETERMINATION OF THE EXISTENCE OF NOVATION
‣
NOTE — The determination of whether implied novation is extinctive or merely modificatory is a fact-driven exercise
‣
T IU S UICO V. HABANA 45 PHIL. 707
‣
FACTS — A engaged B to construct a building for him (A). In the process of the construction, many written alterations
were agreed upon and really made, but it was proved that essentially, the plans followed were the original plans. It
must be stated that in the contract, a specific amount for the construction was agreed upon. Later, when the building
was finished, the con- tractor wanted to abandon the original price on the ground that the alterations in the building
had caused an abandonment or a novation of the old contract. The contractor therefor wanted to be paid, not on the
basis of the contract, but on the basis of quantum meruit. The owner did not consent to this. Issue: Was there
novation here?
‣
HELD — There was no novation here. The old contract was not abandoned since, after all, the original plans were
followed. Therefore, without the consent of the owner, the contractor can- not treat the old contract as abandoned.
The contractor, without the consent of the owner, cannot recover on the basis of quantum meruit (on the work done).
Rather, the contract price will form the basis for payment, plus the cost of the alterations.
‣
NOTE — NOTE: Under Art. 1724 of the New Civil Code, the contractor cannot demand an increase in the price unless
the change in the plans and specifications was authorized in writing and the additional price to be paid was also
determined in writing by both parties. Under the old Civil Code, no such requisite in writing was essential.
A SIATIC PETROLEUM C O. V. Q UAY SIM PAO (C.A.) 40 O.G. S UPP. N OV . 1, 1941
‣
FACTS — A, in a contract of agency with B, agreed to be the agent of the latter. In the course of the agency, the agent
was given certain privileges and facilities, which, however, were not incompatible with the old agreement.
‣
‣
HELD — There was no novation here because there is real incompatibility between the old and the new agreements.
Besides, the new agreement was merely of a supplemental nature.
ZAPANTA V. ROTAECHE 21 PHIL. 154
‣
FACTS — In a final judgment, Zapanta was declared the debtor of Ortiz. Later, Zapanta and Ortiz agreed that the
judgment was to be extinguished by payment in monthly installments, with the stipulation that in case of default, Ortiz
could sue Zapanta. Zapanta later defaulted. Ortiz, to protect his rights, obtained an execution of the final judgment
‣
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referred to, and so the property of Zapanta was levied upon. Zapanta now instituted this action for damages on the
ground that the execution was improper, the judgment having been extinguished by novation.
‣
‣
HELD — The contract did not expressly extinguish the obligations existing in said judgment. On the contrary, it
expressly recognizes the obligations existing between the parties in said judgment, and expressly provides a method
by which the same shall be extinguished. The contract, instead of containing provi- sions absolutely incompatible with
the obligations of the judg- ment, expressly ratifies such obligations and contains provisions for satisfying them. The
said agreement simply gave Zapanta a method and more time for the satisfaction of the judgment. It did not
extinguish the obligations contained in the judgment until the terms of said contract had been fully complied with. Had
Zapanta continued to comply with the conditions of the contract, he might have successfully invoked its provisions
against the is- suance of an execution upon the said judgment. The contract and the punctual compliance with its
terms only delayed the right of the defendant to an execution upon the judgment. There was therefore no novation,
and execution was proper.
FUA CAM LU V. YAP FAUCO 74 PHIL. 287
‣
‣
‣
FACTS — A debtor was, by final judgment, ordered to pay P1,500, with legal interest and costs. Later, the debtor
executed a mortgage in favor of the judgment creditor containing the following terms —
1. The debt was reduced to P1,200, payable in four monthly installments of P300 each.
2.
The debtor’s camarin was mortgaged to the creditor.
3.
In case of failure to pay any of the installments, the debtor would pay for attorney’s fees and judicial costs — in
the action to be brought by the creditor.
4.
The difference of P300 would have to be given to the creditor.
5.
The agreement was entered into as a settlement of the judgment.
HELD — There was extinctive novation, in view of the incompatibility between the judgment and the contract,
considering the fact that the judgment was payable at once, was unsecured, and contained a stipulation for attorney’s
fees. The contract was NOT a mere extension of the period within which to pay the judgment because the contract
itself stated that the promise to pay the P1,200 was precisely made as a settlement of said judgment. There would
have been no settlement had it not been implicitly agreed that the obligation in the judgment was considered by both
parties as already extinguished.
INCHAUSTI AND CO. V. YULO 34 PHIL. 978
‣
FACTS — Four people were solidarily bound in a contract made on Aug. 12, 1909. On May 12, 1911, three of them
made a contract with the creditor giving the three debtors different terms and conditions for the payment of the
obligation. Said new contract reaffirmed the liability of the debtor not present. When the absent debtor, Gregorio Yulo,
was asked to pay, he presented the defense of novation to the effect that the second contract is incompatible with the
first, and that, therefore, he should not be made to pay.
‣
HELD — Gregorio Yulo is wrong. Far from providing that the obligation of four was being substituted by the obligation
of three, the new contract ratified or reaffirmed the obligation of the absent debtor, and therefore the absent debtor,
Gregorio Yulo, must pay. With respect to the third, there can also be no doubt that the contract of May 12, 1911, does
not constitute a novation of the former one of Aug. 12, 1909, with respect to the other debtors who execute this
contract, or more concretely, with respect to the defendant Gregorio Yulo: First, because in order that an obligation
may be extinguished by another which substitutes it, it is necessary that it should be so expressly declared or that the
old and the new be incompatible in all points,’’ and the instrument of May 12, 1911, far from expressly declaring that
the obligation of the three who executed it substitutes the former signed by Gregorio Yulo and the other debtors,
expressly and clearly stated that the obligation of Gregorio Yulo to pay the two hundred and fifty-three thousand and
odd pesos sued for exists, stipulating that the suit must continue its course, and if necessary, these three parties who
executed the contract on May 12, 1911, would cooperate in order that the action against Gregorio Yulo might prosper
(7th point in the statement of facts), with other undertakings concerning the execution of the judgment which might be
rendered against Gregorio Yulo in this same suit. “It is always necessary to state that it is the intention of the
contracting parties to extinguish the former obligation by the new one. There exists no incompatibility between the old
and the new obligation as will be demonstrated in the resolution of the last point, and for the present we will merely
reiterate the legal doctrine that an obligation to pay a sum of money is not novated in a new instrument wherein the
old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one.’
‣
PEOPLE V. N ERY L-19567, F EB. 5, 1964
‣
FACTS — Soledad Nery was given by Federia Mantillaro two diamond rings to be sold by her. If successful, Nery was
supposed to receive a commission. She failed to return the rings or their cash value, so the owner sued her for estafa.
While the case was pending, she executed a deed of compromise, promising to pay for the money in installments.
After making one payment, she did not continue paying for the balance. She now contends that she ought to be
acquitted because the acceptance by the owner of the partial payment NOVATED the original relation between the
parties.
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‣
HELD — She is still guilty of estafa, firstly, because the exaction of criminal responsibility is something that can be
renounced only by the State, not by the offended party; and secondly, because there was no intent to extinguish the
original relationship. The novation theory may perhaps apply PRIOR to the filing of the criminal information in court
because up to that time, the original trust relation may be converted by the parties into an ordinary creditor-debtor
situation, thereby placing the victim in estoppel should he insist on the original trust. But AFTER the filing of the case
in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability as
distinguished from the civil. The crime being an offense against the State, only the latter may renounce the criminal
consequences. The acceptance of partial satisfaction cannot indeed effect the nullification of a criminal liability that is
already fully mature and in the process of judgment.
C ARLOS B. G ONZALES V. E ULOGIO S ERRANO L-25791, S EPT. 23, 1968
‣
FACTS — By virtue of an agreement which was on the sur- face one of C.O.D. (Cash on Delivery), but which was really
an agency to sell, Carlos B. Gonzales delivered to one Librada S. Asis certain flowers worth approximately P10,000.
When the woman took delivery of the flowers, she paid P2,000 cash and issued a check for P8,000. The next day, she
requested Gonzales not to deposit the check for she did not have sufficient funds in the bank as she had not yet been
able to dispose of the flowers. Gonzales agreed by not depositing the check. Nearly a month later she made a partial
payment of P5,500 on the balance. Regarding the remaining debt, she offered to return the unsold flowers
corresponding to the amount of the deficiency. Gonzales then sued her for estafa. Issue: Is she guilty of estafa?
‣
HELD — She is not guilty of estafa, in view of the following reasons —
‣
1.
The agreement, although apparently one of C.O.D., was actually an agency to sell; she could return the unsold
goods instead of the price therefor. Here, she is willing to return; and even if she does not, there would only be a
civil obligation, not a criminal offense.
2.
Even granting that a trust relation had been created because of the C.O.D. and the issuance of the check, still
there would be no liability for a crime because the parties, a short time after the delivery of the check, changed
the original trust relation into an ordinary creditor-debtor situation. Hence, the novation of the contract took place
long before the filing of the criminal complaint.
LA CAMPANA F OOD PRODUCTS , I NC. V . PCIB, ET AL. GR 46405, JUN . 30, 1986
‣
Where the mortgagee-bank agreed to guarantee the mortgagor’s foreign loan subject to the condition that the latter
should deposit with the former the proceeds of the loan which should be made available for payment to the
mortgagor’s obligation to a local financial institution and to serve as working capital, the mortgagee-bank did not
substitute the mortgagor as debtor to the financial institution.
‣
The mortgagee-bank’s guarantee has to be secured by the first mortgage on the assets then mortgaged to the said
bank and the assets offered as additional securities, which included the parcels of land mortgaged to the financial
institution. Hence, the mortgagee-bank requires the financial institution to lend the transfer certificates of title covering
the parcels of land mortgaged by the mortgagor to the financial institution for the mortgagee-bank to be able to
register its mortgage therein.
BISAYA LAND TRANSPORTATION CO., INC. V. SANCHEZ GR 74623, AUG. 31, 1987
‣
FACTS — A, the receiver of BISTRANCO, and S entered into a shipping agency contract whereby S was constituted
as shipping agent and was to receive 10% commission on all freight and passenger revenues coming from Butuan
City and 5% for all freight going to Butuan. Thereafter, a memorandum of agreement was entered into whereby the
rate of commission for freight and passage was reduced from 10% to 7-1/2% and the term of the contract reduced
from 5 years to a term of one year renewable yearly upon mutual consent. Later, BISTRANCO contacted the shippers
advising them to transact their business directly with its new branch office. S sued BISTRANCO for specific
performance. BIS- TRANCO answered that the working agreements executed by S and BISTRANCO novated the
agency contract.
‣
‣
HELD — The memorandum of agreement was not meant to novate the contract. The intent of the parties was to
suspend some of the provisions of the contracts for a period of one (1) year, during which the provisions of the
Agreement will prevail. Thus, the agreement that: “It is in this spirit of cooperation with A to enable him to pay huge
obligations of the company that agent S has acceded to the request of BISTRANCO to accept the reduction of his
commissions.” It would not be equitable for S to say that the contracts were extinguished and substituted by the
Agreement. It would punish S for concessions he extended to BISTRANCO. The changes were not really substantial
to bring about novation. The changes between the contract and the agreement did not go into the essence of the
cause or object of the agreement. Under the agreement, S remains the agent of BISTRANCO. There is no clear
incompatibility. The contract and the agreement can be reconciled. The provisions of the agreement which were more
of changes on how to enforce the agency prevailed during the period provided in them, but after their expiration, the
conditions under the contracts were implemented again.
REYES V. CA 76 SCAD 29 (1996)
‣
The mere circumstance of the creditor receiving payments from a third party who acquiesced to assume the obligation
of the debtor when there is clearly no agreement to release the debtor from the responsibility does not constitute
‣
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novation. At most, it only creates a juridical relation of co-debt- orship or suretyship on the part of the third party to
the contractual obligation of the debtor, and the creditor can still enforce the obligation against the debtor.
PASSIVE SUBJECTIVE NOVATION — SUBSTITUTION OF THE DEBTOR
Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in articles 1236 and 1237. (1205a)
Article 1236. XXXX Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor. (1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)
Article 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or
non- fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n)
Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a)
K INDS
OF
PASSIVE S UBJECTIVE N OVATON
1.
Expromision — substitution of the debtor without his consent
2.
Delegacion — substitution of the debtor with his consent
K INDS
OF
PASSIVE S UBJECTIVE N OVATON (E XPOUNDED)
EXPROMISION —
1.
‣
SUBSTITUTION OF THE DEBTOR WITHOUT HIS CONSENT
REQUISITES —
a.
The initiative must come from a third person (who will be the new debtor) — The initiative for change does
not emanate from the debtor and may be made even without his knowledge, since it consists in a third person
assuming the obligation. The initiative comes from a third person and not the debtor.
b.
The new debtor and the creditor must consent — expromision merely involves the consent of a third person
(substituting the debtor) and the creditor.
‣
c.
NOTE — A substitution of debtor without the consent of the creditor is binding upon the parties to the
substitution but not on the creditor. (De Cortes v. Venturanza)
The old debtor must be excused or released from his obligation — It is essential that the old debtor be
released from his obligation, otherwise there will be no expromision, no novation.
‣
Examples —
‣
D owes C P1,000,000. F, a friend of D, approaches C and tells him: “I will pay you what D owes you.” C
agrees. Is there expromision here? NO. Under the facts given, there is no expromision because they did not
agree that D would be released from his obligation. If F therefore does not pay C, C will still be allowed to
collect from D. It is evident here that no nova- tion exists because it may be that C understood F to be
acting merely as the agent of D, although F may not have done so as such agent. Thus, it has been ruled
that if a creditor accepts partial payments from a third person who has decided to assume the obligation,
BUT there is no agreement that the first debtor shall be released from responsibility, no novation has yet
taken place, and the creditor can still enforce the obligation against the original debtor. (Magdalena Estates,
Inc. v. Rodriguez 1966)
‣
D owes C P1,000,000. F, friend of D, approaches C and tells him: “I will pay you what D owes you. From
now on, consider me your debtor, not D. D is to be excused. Do you agree?” C agrees. Is there expromision
here? YES, and even if F does not pay C, D cannot be held liable anymore because his obligation has
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already been extinguished. (Art. 1294 provides that: “If the substitution is without the knowledge or against
the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to
any liability on the part of the original debtor.”)
DELEGACION —
2.
‣
SUBSTITUTION OF THE DEBTOR WITH HIS CONSENT
This is defined as a method of novation caused by the replacement of the old debtor by a new debtor, who (the old
debtor) has proposed him to the creditor, and which replacement has been agreed to by said creditor and by said new
debtor.
‣
REQUISITES —
a.
The initiative comes from the old debtor — The debtor offers and the creditors accepts a third person who
consents to the substitution. The initiative comes from the debtor, for it is he who delegates another to pay the
debt, and thus, he excuses himself.
b.
All the parties concerned must consent or agree — This involves the consent of the debtor, creditor and the
third (substituting the debtor)
‣
Parties to delegacion —
i.
The delegante — the original debtor
‣
ii.
The delegatario — the creditor
iii.
The delegado — the new debtor
The consent of the creditor may either be —
i.
Given in any form, it may be express, or may be implied from his acts
‣
c.
BUT — not from his mere acceptance of payment by a third party, for there is no true transfer of the
debt here (Pac. Com. Co. v. Sotto)
ii.
Before or after the new debtor has given his consent
iii.
May be conditional, but the condition has to be fulfilled; otherwise, there is no valid delegacion.
The old debtor must be released from the obligation — same with expromision, the debtor must be
discharged.
RIGHTS OF THE NEW DEBTOR (ART. 1236, 1237)
EXPROMISION — THIRD PERSON PAYS WITHOUT THE CONSENT ( KNOWLEDGE OR
1.
AGAINST THE WILL) OF THE DEBTOR
a.
Beneficial reimbursement — Third person may can recover only insofar as the payment has been beneficial to the
debtor
b.
No subrogation — Third person cannot compel the creditor to subrogate him in his rights (such as those arising from
a mortgage, guaranty, or penalty)
DELEGACION — T HIRD
2.
PERSON PAYS WITH THE CONSENT OF THE DEBTOR
a.
Full reimbursement — Third person may recover from the debtor what he has paid
b.
Subrogation — Third person can compel the creditor to subrogate him in his rights (such as those arising from a
mortgage, guaranty, or penalty)
IN CASE OF NON-FULFILMENT BY THE NEW DEBTOR (ART. 1294, 1295)
1.
EXPROMISION (ART. 1294)
‣
‣
2.
Creditor cannot recover against the original debtor
The new debtor's insolvency or non-fulfillment of the obligations shall NOT give rise to any liability on the part of the
original debtor.
DELEGACION (ART. 1295)
‣
Generally, the creditor also cannot recover against the original debtor
‣
EXCEPT — the creditor can only recover in case the third person is —
a. Insolvent at the time of the substitution
a.
‣
Such fact of insolvency was of public knowledge, or known to the debtor at the time of substitution
NOTE — if the insolvency occurred only AFTER the delegation, the old debtor is not liable.
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‣
Example — A owes B P1,000,000. A proposed to B that C will pay A’s debt, and that A will be released from all
liabilities. B and C agree to the proposal. Later, when B tries to collect from A, he finds out that C is insolvent. It
was proved that at the time of delegation, C was already insolvent but this was not known to A. Neither was the
insolvency of public knowledge. Nevertheless, B still sues A on the ground that it was A who made the proposal,
and that therefore A really guaranteed C’s insolvency. A is NOT liable, for the insolvency was neither of public
knowledge nor known to A at the time he delegated his debt. The law does not require A to give a blanket guaranty.
(Art. 1295).
This rule in Art 1295 does NOT apply if there really was no extinctive novation, such as —
a.
When the third person was only an agent, messenger, or employee of the debtor.
b.
When the third person acted only as guarantor or surety.
c.
When the new debtor merely agreed to make himself solidarily liable for the obligation.
d.
When the new debtor merely agreed to make himself jointly or partly responsible for the obligation. (Here the
delegacion is merely with reference to the joint or proportionate share.)
ACTIVE SUBJECTIVE NOVATION — SUBROGATION OF A THIRD PERSON IN THE RIGHTS OF THE
CREDITOR
Article 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)
Article 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third
person. (n)
Article 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express o r tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter's share. (1210a)
Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Article 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either
against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation. (1212a)
Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall
be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (1213)
NATURE AND KINDS OF SUBROGATION
‣
Subrogation (extinctive subjective novation by change of the creditor) is the transfer to a third person of all the rights
appertaining to the creditor, including the right to proceed against guarantors, or possessors of mortgages, subject to
any legal provision or any modification that may be agreed upon.
‣
Kinds of of Subrogation —
1. As to the cause or origin
a.
Conventional or voluntary subrogation — requires an agreement and the consent of the original parties and of
the creditor. It requires the intervention and consent of three persons — (a) original creditor, (b) new creditor, (c)
debtor. It must be clearly established, otherwise, it is as if no subrogation has taken place.
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Legal subrogation — takes place by operation of law. It is not presumed, except in the case expressly mentioned
in the law (such as in Art. 1302)
b.
2.
K INDS
1.
As to the extent
a.
Total subrogation
b.
Partial subrogation (here, there would now be two or more creditors)
OF
SUBROGATION (E XPOUNDED )
CONVENTIONAL OR VOLUNTARY
‣
The consent of ALL the parties is essential —
a.
Original creditor — because his right is extinguished
b.
New creditor — because he becomes a party to a new relation
c.
Debtor — because the old obligation is extinguished, and he becomes liable under a new obligation
‣
2.
SUBROGATION
NOTE — Generally, the debtor loses the right to present against the new creditor any defense which he, the
debtor, could have set up against the old creditor.
LEGAL SUBROGATION
‣
Generally, legal subrogation is NOT presumed (Art. 1300)
‣
EXCEPT — in the following cases, it is presumed that there is legal subrogation —
a. W HEN A CREDITOR PAYS ANOTHER CREDITOR WHO IS PREFERRED , EVEN WITHOUT
THE DEBTOR ' S KNOWLEDGE
‣
BUT — the debtor can still set up against the new creditor, the defences which he could have used against the
new creditor, such as compensation, payments already made, or vice or defect of the original obligation
‣
Examples —
‣
Ligaya has two creditors: Gloria, who is a mortgage creditor for P1,500,000, and Solita, who is an ordinary
creditor for P600,000. Solita, without Ligaya’s knowledge, paid Ligaya’s debt of P150,000 to Gloria. Here
Solita will be subrogated in the rights of Gloria. This means that Solita will herself now be a mortgage
creditor for P1,500,000, and an ordinary creditor for P600,000. If Ligaya fails to pay the P1,500,000 debt,
Solita can have the mortgage foreclosed (that is, the property can be sold at public auction, with Solita
being paid from the proceeds thereof). (NOTE: The answer will be the SAME if Solita paid with Ligaya’s
knowledge.)
‣
Suppose in the above-cited example, Solita paid Gloria only P1,300,000 for Ligaya’s total indebtedness
(Gloria agreed because of friendship), how much, concerning this debt, may Solita successfully recover from
Ligaya? The whole P1,500,000 because concerning this debt, Solita steps completely into the shoes of
Gloria.
‣
Suppose in problem above, Solita paid the P1,300,000 to Gloria without Ligaya’s knowledge, but it turns out
that at said time of payment, Ligaya’s debt had already been reduced to P300,000 (because of a prior partial
payment), how much can Solita successfully recover from Ligaya concerning this debt? Only said P300,000
because this is only the extent to which Ligaya had been benefited. It is Solita’s fault that she did not first
inform Ligaya of her intention to pay. Solita’s remedy now would be to recover the excess amount from
Gloria.
‣
In legal subrogation caused by payment to a preferred creditor, may the debtor set up against the new
creditor defenses which he, the debtor, could have set up against the old creditor?
‣
PARAS — YES, for after all, the subrogation took place by operation of law. This effect differs from the
effect of conventional subrogation where the debtor gave his consent. Examples of such defenses are the
following: causes of vitiated consent like force, intimidation, minority, undue influence, error; other causes
like prior payment whether total or partial; remission; compensation, etc.
b. WHEN A THIRD PERSON, NOT INTERESTED IN THE OBLIGATION, PAYS WITH THE EXPRESS OR TACIT APPROVAL OF THE
DEBTOR
‣
Subrogation only applies in favour of the third person, not interested in the obligation, who pays, when there is
consent from the debtor, express or tacit.
‣
If the third person pays without the debtor's consent, there is NO subrogation — If the third person pays
the creditor without the consent of the debtor, he is only entitled to reimbursement from the debtor for the
amount paid by him to the extent that the debtor was benefited (beneficial reimbursement). Also if the amount
he paid is less than the credit, even if the creditor has accepted it has full payment, the third person is entitled
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to reimbursement only for what he actually paid. He cannot proceed against sureties, guarantors, or mortgages
and pledges.
‣
Examples —
‣
Eubolo owes Luna P1,000,000 secured by a mortgage. Blesilda, a classmate of Eubolo, and having no
connection with the contract at all, paid Luna the P1,000,000 with Eubolo’s approval. Is Blesilda subrogated
in Luna’s place? Yes, because although not interested in the obligation, she nevertheless paid off Luna with
the approval of the debtor.
‣
If in the above example, Blesilda, who is Luna’s friend, paid her only P700,000 for the extinguishment of
Eubolo’s debt, but the payment was made without the express or tacit approval of Eubolo, what would be
Blesilda’s rights, if any? There is no legal subrogation here because there was no express or implied
approval of Eubolo. Therefore, all that Blesilda can recover is P700,000 for this is the amount with which she
is supposed to be REIMBURSED (a giving back to her of what she had DISBURSED). If Eubolo does NOT
pay, Blesilda cannot have the mortgage foreclosed. For, as has been said, there has been no subrogation
here.
WHEN, EVEN WITHOUT THE KNOWLEDGE OF THE DEBTOR, A PERSON INTERESTED IN THE FULFILLMENT OF THE
OBLIGATION PAYS, WITHOUT PREJUDICE TO THE EFFECTS OF CONFUSION AS TO THE LATTER'S SHARE
c.
‣
The persons who have an interest in the fulfilment of the obligation are those who would be benefited by the
extinguishment of the obligation
‣
Such as — joint co-debtors, sureties, guarantors the owner of the property mortgaged or pledged as
security for the debtor’s debt
‣
Payment under this provision does NOT require the consent nor knowledge of the debtor,
‣
Example — D owes C P1,000,000 secured by a mortgage and by a guaranty of G. If G, even without D’s
knowledge, pays C the P1,000,000, G will be subrogated in C’s place. But of course the guaranty is
extinguished. This is what the law means when it says that there is legal subrogation “with- out prejudice to the
effects of confusion as to the latter’s (payor’s) share in the obligation.”
‣
Is a solidary debtor included in the scope of “a person interested?”
‣
PARAS — Strictly speaking, NO, because when the solidary debtor pays the whole obligation to the
creditor, solidary obligation itself is extinguished. Therefore, it cannot be truly said that said solidary debtor
steps completely into the shoes of the creditor. Moreover, although the other solidary debtors must
reimburse him, this obligation to reimburse is not solidary, but merely joint, except of course that they are all
proportionately liable in the meantime for the insolvency of one of them.
‣
BUT — In another (“loose”) sense, the solidary debtor may be said to fall under the category of an
“interested person” in that he steps in a way into the shoes of the old creditor, since he would be
entitled to collect reimbursement, but of course he cannot collect the whole amount anymore in view of
the “effect of confusion (or merger) as to his share.” (See Art. 1217)
‣
TOLENTINO — When a solitary debtor pays the obligation, he is subrogated in the rights of the creditor,
the scope of his subrogation, however, should not be misunderstood. The payor cannot take advantage of
solidarity and recover the amount in excess of his share of the obligation from any of his co-debtors, the
solidarity terminates by his payment, and the obligation among the co-debtors becomes joint, each being
liable to the payor for his respective share. (See Art. 1217)
d. IN INSURANCE, UPON THE PAYMENT OF THE LOSS, THE INSURER IS ENTITLED TO BE SUBROGATED TO ANY RIGHT OF
ACTION WHICH THE INSURED MAY HAVE AGAINST THE THIRD PERSON WHO CAUSED THE LOSS (ART. 2207)
‣
If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract.
‣
If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall
be entitled to recover the deficiency from the person causing the loss or injury.
CONVENTIONAL SUBROGATION DISTINGUISHED FROM ASSIGNMENT OF CREDIT
‣
NOTE — assignment of credit is taken up under the law on sales. (See Art. 1624-1635)
‣
Is “conventional subrogation” the same as “assignment of credit”?
‣
TOLENTINO — NO. They are different. In the Argentine Civil Code, there is essentially no difference between
conventional subrogation and assignment of credit. The subrogation is merely the effect of the assignment. However,
under our Civil Code, conventional subrogation is NOT identical to assignment of credit. In the former, the debtor’s
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consent is necessary, in the latter, it is not required. Subrogation extinguishes an obligation and gives rise to a new
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one, 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 not
remedied by the assignment of the creditor’s right to another.
CONVENTIONAL SUBROGATION
ASSIGNMENT OF CREDIT
Effect on the
Original Obligation
This extinguishes the original obligation, and creates
a new one
There is mere transfer of the same right or credit (the transfer
did not extinguish the credit)
Requirement of the
Debtor’s Consent
This requires the debtor’s consent
This does NOT require the debtor’s consent (mere
notification to him is sufficient)
Effect on Defects
in the Original
Obligation
The defect of the old obligation may be cured in such
a way that the new obligation becomes entirely valid.
The defect in the credit or right is NOT cured simply by
assigning the same (
(Here, there is no right to present against the new
creditor any defense which he, the debtor, could have
set up against the old creditor.)
Here, the debtor generally still has the right to present
against the new creditor any defense available as against old
creditor.)
E FFECTS OF S UBROGATION
1. FULL SUBROGATION — It transfers to the new creditors (persons subrogated the credit) with all the rights of the
old creditor, either against the debtor or against third person, be they guarantors or possessors of mortgages.
(Art. 1303)
‣
BUT — this is subject to stipulation in a conventional subrogation. (Art. 1303)
‣
The credit and all the appurtenant rights, either against the debtor, or against third persons, are transferred (thus, in a
sense the obligation subsists, that is, it has not yet been extinguished or paid).
‣
Example — D owes C P1,000,000. G is the guarantor. A stranger S paid C the P1,000,000 with the consent of D and
C. S is now subrogated in the place of C. If D cannot pay the P1,000,000, S can proceed against the guarantor, G.
‣
Effect of Presence of a Suspensive Condition — It is understood that if the transferred credit is subject to a
suspensive condition, the new creditor cannot collect until after said condition is fulfilled.
2. PARTIAL SUBROGATION — The old creditor to whom partial payment has been made, may exercise his right for
the remainder, and he shall be preferred to the new creditor in virtue of the partial payment of the same credit. (Art.
1304)
‣
Here, there are two creditors —
a. The old creditor, who still remains a creditor as to balance (because only a partial payment has been made to him);
b. The new creditor who is a creditor to the extent of what he had paid the creditor.
‣
Example — A owes B P500,000. With the consent of both, C pays B P250,000. Now B and C are the creditors of A to
the amount of P250,000. Suppose A has only P250,000 who should be preferred? B, the original creditor, should be
preferred inasmuch as he is granted by the law (Art. 1304, Civil Code) preferential right to recover the remainder, over
the person subrogated in his place by virtue of the partial payment of the same credit.
‣
NOTE — The preference is only in the assets remaining with the debtor (not those already transferred to others).
Therefore, the old creditor must assert his claim or preference over the assets only while they are still in the hands of
the sheriff who has levied on the properties. If done later, the preference given by this article ceases. (Molina v. Somes)
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