MODES OF EXTINGUISHMENT OF OBLIGATIONS

Art. 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.

Aside from those mentioned in Art. 1031, death of one of the party may
also extinguished an obligation as viewed by some authors. But Professor
Tolentino is of the view that obligation is not extinguished by the death of
one of the parties. But CU believed that the statement of Prof. Tolentino
apply only to contracts, because as an example for obligations arising from
law, it is the law which would determine if the death of one of the parties
will extinguish the obligation.

As to contracts, as a rule death of a party does not extinguish the obligation
arising from contracts because under Art. 1311 obligations arising from
contracts, rights and obligation are transmissible to the heirs or to the estate,
and therefore they are not extinguished.

On the other hand, it was said that renunciation by a creditor is a mode of
extinguishment. This is considered as other causes. If it is considered as
other causes it is implied that it is not covered by those mention in Art.
1231. The civil code honors renunciation as a gratuitous or an onerous act.
If renunciation is a gratuitous act, clearly it would fall under condonation. If
renunciation is for a consideration, then this would rightfully fall under
novation. By then, he would waive his right, but he

will be demanding for another for the performance of another obligation.
Hence, there is novation when there is a change in the object of the
obligation. Hence from the foregoing, this would not be considered a
separate and distinct mode.

One other which is allegedly may be considered to be a mode of
extinguishment of obligation would be compromise. This would appear
to be another mode of extinguishment separate and distinct than that
mentioned in Art. 1031. It is another mode of extinguishment because the
effect of a compromise agreement. Ordinarily it would only decrease the
liability of the debtor. As in the case of Ronquillo vs. CA, the liability was
decreased from 170 to 110. Thus, a compromise agreement is only a partial
extinguishment. Is this not a separate and distinct mode? No because it
would fall under condonation or remission. However, can there be a
compromise where the object of the obligation can be changed? Yes, such
as when the obligation to deliver a horse was changed to a laptop. Would it
be considered a separate and distinct obligation other than those
mentioned? No, because it would fall under novation.

May the unilateral act of one of the parties extinguish the obligation?

Yes it may, however in contracts, as a rule it cannot. The unilateral
act of one of the parties will not extinguish the obligation arising from
contracts, because it would violate the fundamental principle in contracts
known as the mutuality of contracts, except on those contracts which are
based on trust and confidence such as when the law grant a party to a
contract the right to terminate the obligation arising therefrom. For
example, a contract of agency. Under the law the principal can terminate
the authority of the agent and thus extinguish the contract, and thereby the
obligations arising from it by revocation which is the act of the principal.
And the agent may also terminate the obligation by withdrawal.

Is a happening of a fortuitous event a mode of extinguishment?

No. The Supreme Court has consistently ruled that a happening of a
fortuitous event is not a mode of extinguishment. Rather it is the effect of
the happening of the fortuitous event which is the impossibility of
performance, if it would have such effect, or the loss of the thing due which
is a mode of extinguishment.

Likewise, if there is an obligation to deliver a generic thing or pay a
sum of money, the same would not likewise extinguish the obligation even
if the thing is lost because the genus does not perish. This is of course as a
rule.

If there is an obligation to deliver a determinate t h i n g w o u l d n o t n e
c e s s a r i l y r e s u l t t o t h e extinguishment of the obligation if the
same is lost through a fortuitous event. If the fortuitous event does not
affect the thing which is to be delivered.

However if the fortuitous even caused the impossibility of the performance,
then it will extinguished the obligation. It is the impossibility of
performance which is the mode of extinguishment and not the fortuitous
event. This impossibility of performance is considered by Prof. Tolentino
as nullity of contracts. But CU is of the view that it cannot be considered as
a mode of extinguishment because when a contract is null and void there is
nothing to extinguish.

If there is a change in civil status there may be an obligation which may be
extinguished which is the obligation to give support. If the marriage is
declared null and void or if there is legal separation, a spouse may no
longer have the obligation to give support. Note however, the court may
order the guilty spouse to continue with the support.

Payment or Performance

Payment is synonymous to performance that even an obligation to do may
be extinguished by payment. Although there is a view that when the code
was being drafted payment is only limited only to monetary obligations but
those who advocated t h i s v i e w d i d n o t s u c c e e d . T h i s m o d
e o f extinguishing an obligation is applicable to any kind of obligation,
even obligations not to do, as long he is not doing what he is supposed
to do he is actually fulfilling his obligation. Payment does not necessarily
pertain to a monetary obligation.

To determine whether an obligation is extinguished by payment, or to
determine whether payment is a valid payment or not, it would be good to
classify the rules of payment into 4,

1. There are rules which pertain to the person who pays.
2. There are rules which pertain to the person to whom payment is made.
3. There are rules which pertain to the prestation to be performed, or to the
thing to be delivered.
4. There are rules which pertain to the date, time, place and manner of
payment.

All these rules will have to be complied in order that payment may
extinguish the obligation.

To the person who pays need not be the debtor, such as third party
payment. Also the person to whom the payment is made need not be
the creditor. He is called the payee.

As to the person who pays, the requirements of the law to extinguish the
obligation

Payment by a minor may extinguish the obligation especially in obligation
arising from quasi delict.

However payment by a minor may likewise not extinguish the obligation
because there are payments which may only be made by the person who
has the capacity to alienate his properties. Payment may be made by the
minors guardian, or if there is none to court may appoint a guardian ad
litem.

If the minor wanted to pay or extinguish his obligation, who may question
his capacity to make payment? The other creditors.

Secondly, a person who who pays must also have the free disposal of his
property. Hence, a person suffering from civil interdiction cannot validly
fulfill or pay his debts because he has no free disposal of his property.

If A is indebted to B and X offered to pay B. May this extinguish the
obligation?

The obligation may be extinguished if B accepts. Though he may not be
compelled, he may want to accept. A creditor as a rule may not accept
performance from a third person, except:

a. by stipulation
b. if the third person has an interest in the fulfillment of the obligation.

Why cant a creditor be compelled to accept payment or performance?

In an obligation to do, a creditor may not want to accept performance from
a person with whom the creditor does not want to make the performance,
probably by taking into consideration the personal circumstances of the
debtor.

In an obligations to give, the creditor may not likewise be compelled to
accept payment from a person other than the original debtor, probably
because the money coming from another person may probably come from
drugs or the money is counterfeit.

Who are these persons who have an interest in the fulfillment of the
obligation other than the debtor?

Persons with Interest in the payment are those who are subsidiarily liable
like, guarantors, mortgagors, or pledgors. They have an interest because if
the obligaiton is not complied their property may be lost.

If there are 5 debtors in an obligation to pay
100,000 can any one of the debtors compel acceptance from the creditors
the payment of the entire of the obligation?

There should be no debate in solidary obligations because in a solidary
obligations, any one of the debtors can be compelled to perform the
fulfillment of the entire obligation.

As to co-joint debtors can also compel the creditor to accept payment of the
entire obligation, if the co- joint debtors has an interest in the fulfillment of
the obligation. Even he cannot be compelled to pay the entire, he has an
interest in the performance of the obligation.

What if a person who has no interest in the fulfillment of the obligation, yet
he paid the creditor voluntarily the payment of the entire obligation, can the
creditor be compelled to accept payment of the entire obligation? Can t h e
p e r s o n w h o p a i d , v a l i d l y d e m a n d reimbursement from one
of the principal debtors? Third if the one who paid cannot validly make the
demand from the debtors, can X go after the guarantors?

The creditor cannot be compelled because the one paying does not have an
interest, but he may accept. Assuming he accepts, the one who paid claims
reimbursement the following observations are seen:

As to the demand for reimbursement, the answer would depend on whether
the payment was made with or without the knowledge or against the
will(therefore without consent) of the principal debtors, then in such
instance when there is no knowledge, the one who paid may or may not
validly demand reimbursement. If there is knowledge or consent, the person
who paid may validly demand without issue. With respect with the instance
where there is no knowledge, under the law, the one who paid may only
demand reimbursement from one of the principal debtors only to the extent
that he may be benefited. Here, one of the principal debtor may have
previously paid a part of the debt, hence to be asked for reimbursement of
the amount paid by such third person may work to the prejudice of one of
the principal debtors demanded of reimbursement, as

he can only reimburse the amount from which he was benefited.

X demanded for reimbursement under the same scenario (has no interest),
and he cannot demand reimbursement, may X foreclose the mortgage?

No. When X paid the creditor, the obligation is extinguished. It does not
matter whether the debtor consented payment or not. The fact that the
creditor accepted payment, the obligation is extinguished. If the
obligation is extinguished, which is the principal contract, and the
mortgage was only an accessory contract, therefore the mortgage follows
the principal, therefore the mortgage may likewise be extinguished. It is
also argued that X cannot foreclose the mortgage because X is not a party
to the mortgage. The parties to the mortgage is the mortgagor and the
creditor. It was constituted to secure the debtors obligation and not Xs
obligation. (WRONG)

Assuming that this payment was with the consent of the debtor, and X
cannot claim reimbursement from the former. X can foreclose the mortgage
even when the obligation was already extinguished. This is because in this
payment with the creditor, X will be subrogated to the rights of the
principal debtor. Even when this obligation was extinguished which
apparently result with the extinguishment of the mortgage, that will not
prejudice X right to go over the principal debtors or guarantors under the
principle of subrogation.

However, when this payment is without the knowledge of the debtor or
against the will, there will be no right of subrogation, hence he cannot go to
the mortgagors and guarantors.

If X and B (creditor) entered into an agreement without the knowledge of A
(principal debtor) that if X pays B as to his obligation, X will be subrogated
in the rights of B. X paid B. Can X now foreclose the mortgage if A fails to
reimburse?


No X cannot foreclose the mortgage even when there is an agreement.
Although the answered would be yes as implied by the provision. The
provision says that if payment was without the knowledge or against the
will of the debtor,l X cannot compel B for him to be reimbursed, but they
can come to an agreement. But such is not the intention of the law. The
intention of the law is that when there is no knowledge or it is against the
will, X cannot be subrogated. Such is for the protection of the debtor.

If X paid B, without the intention of being reimbursed by A, after two
weeks he demanded what he paid to B claiming that A did not give consent
to this payment. Since it is a form of an indirect donation, A did not give
consent, which is a requirement in donations where the donee must accept.
Here, there is no acceptance, hence the payment is void. Is the contention
correct?

No. Even if the payment was without the knowledge of A and did not
intend to be reimbursed, as far as the creditor is concerned, he would no
have the right to reclaim what was paid.
To whom payment should be made in order for the obligation is to be
extinguished?

Payment should me made to:

a. To the person in whose favor the obligation is constituted.

Note: The person in whose favor the obligation is constituted need not
necessarily be the person who entered into a contract, it may be another
person.

For example if A and B entered into a contract and A paid B, does it
necessarily extinguished the obligation? No. Maybe it is not B who is the
person in whose favor the obligation is
constituted.

b. Succesors in interests, or assigns.

c. To the person who has the authority to receive payment.

Note: To the person who has the authority from the creditor to receive
payment is not accurate because a person may have the authority to
receive payment when the same is authorized or granted by law (sheriff,
guardian, liquidators,
receivers, conservators, etc. ).

When the debtor paid the sheriff, does it extinguish the obligation when the
sheriff pocketed the money? Yes. because he has the authority of the law to
receive payment.

If payment was made to a person who is not one of those persons
mentioned in Art. 1240, what will be the effect of such payment? It will not
extinguish the obligation. As a rule, payment to a wrong party is not a
proper payment and therefore does not extinguish an obligation.

Art. 1240. Payment shall be made to the person in whose favor the
obligation has been
constituted, or his successor in interest, or any person authorized to receive
it. (1162a).


What is the remedy of a person to whom he wrongfully paid? To recover
from the person with whom he pays under solution indebiti because that
person will not have the right to demand for payment. By way of exception,
payment to a wrong party may also extinguish the obligation, when: When
the payment
redounded to the benefit of the creditor, but only up to the extent that the
creditor was benefited.

Payment to the child of the creditor, would that extinguish the obligation?
As a rule no, because
the child is not the creditor. It is a payment to a wrong party. Who will have
the burden in proving that the payment redounded to the benefit of the
creditor? Obviously, the payer or debtor will have this burden. As an
exception where the payer or debtor would not have the burden of proving
that the payment redounded to the benefit of the creditor when: 1. When
there is ratification of the creditor, as such it is deemed redounded to the
creditors benefit. Why would he ratify if it did not redound to his benefit; 2.
through the acts of the creditor, the debtor was lead to believe that the
person or payee has authority to receive payment, this is under the principle
of the estoppel; 3. when the payee acquired the rights of the creditor after
the payment. Note: The payee should acquire the right of the creditor after
the payment and not before the payment, this is because when the payee
acquired the rights of the creditor before the payment, this would not be a
payment to a wrong
party, as this would be a payment to a successor in interest or an assignee,
and such would be a valid payment.

A executed a promissory note and delivered the same to B the creditor. But
few weeks thereafter, the promissory note was already in the possession of
C. In the hands of C the promissory note matured and C demanded payment
from A. A paid C. Would payment to C by A extinguished the obligation to
B?

Yes.

Not just because C was in possession of the promissory note does not make
him a proper party to receive payment. There are two requirements which
are required in order for it to be considered a valid payment: 1. This person
(C) must be in possession of the credit. Note that possession of a
promissory note does not necessarily mean that he was in possession of the
credit. The latter is merely an evidence of credit. To be in possession of a
credit is that such person must appear to have possession of the credit. For
example, the promissory note provides that payment to Jose Reyes It
could not be considered as a person

appearing to have possession of the credit, the same not being a negotiable
instrument. It would be different if the promissory note is a negotiable
and a bearer promissory note and in possession of C. Therefore under this
circumstance it can be inferred that C negotatiated the note by mere
delivery. He therefore is in possession of the credit. But note that payment
to him does not necessarily extinguish the obligation because the other
requirement is, 2: payment must be in good faith. meaning that when A
paid C he must have no knowledge of the defect of title C.

These two requirement must concur in order that the payment to a wrong
party to extinguish the obligation of A to B.

Since under the foregoing circumstance, the obligation of A is
extinguished, B therefore has the remedy against C.

A is the debtor of B, thereafter B assigned his credit to C. It was after the
assignment that A paid B. That is a payment to a wrong party because C is
not supposed to be the new creditor through assignment. May the payment
of A to B, extinguish his obligation to C?

Yes, when A paid B without knowledge of the assignment.

May a creditor be compelled to partial performance?

As a rule, no, unless there is a stipulation to the contrary or if the obligation
is partly liquidated or partly unliquidated to the extent of the portion which
is liquidated, the creditor may compel the debtor to perform, likewise the
debtor may compel the
creditor to accept.

If the obligation is to deliver a determinate thing, the creditor may not be
compelled to accept the delivery of another thing even if
such other thing is more valuable than the thing supposed to be delivered.

In Art. 1234 what is the effect of substantial performance?

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

The premise of substantial performance is that the creditor accepted.
Whether or not he can be compelled to accept does not matter, what matters
is he accepted the partial performance.

For example when the debtor is indebted to a sum of money payable in 10
years in monthly installments. When the debtor has already paid for
8 years, the creditor can no longer rescind the contract because there is
payment which is considered partial performance.

If there is substantial performance in relation to Art.
1181 there is no more substantial breach.

What would constitute substantial performance?

8 out of 10 installments is substantial performance.

95 installments out of 120 is also substantial performance.

6 5 % o f t h e o b l i g a t i o n i s n o t s u b s t a n t i a l performance.

74% is not a substantial performance.

What are the rights of the parties when there is an obligation to pay or
deliver 100 sacks of rice.
85 sacks has been delivered, the other 15 can no longer be delivered despite
good faith. How much can the seller recover from the buyer?

Under the law the seller may recover only the value of the 85 sacks less
damage that may be suffered by the creditor. The buyer not having been
able to receive 100 sacks of rice, he may have suffered because if the 100
sacks of rice has been all delivered, he may have sold it for a higher prize.
This is called unrealized profit where the the value of the 85 sacks of rice
shall be lessened because of the unrealized profits which the buyer may
have received were it not for the incomplete delivery

When there is an irregular or incomplete fulfillment, there is an instance
under the law that the obligation is fully complied with. However the
following requisites must be complied with, namely:

1. There must be acceptance by the creditor

2. The acceptance must be with full knowledge of the incompleteness or
irregularity.

3. He must not have made an objection.

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

In the case of Azcona vs. Amandre where the Supreme Court ruled that the
payment extinguished the obligation where the actual

amount due was 7,200 but only paid 7,000 when
the seller issued a receipt 7000 as per contract, it is as if there was faithful
compliance.

In monetary obligations, can there be a valid obligation in money which is
not in Philippine currency?

Yes. with or without RA 529, as amended it will be a valid obligation.

REPUBLIC ACT NO. 8183
.
.
AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED
TWENTY-NINE AS AMENDED, ENTITLED "AN ACT TO ASSURE
THE UNIFORM VALUE OF PHILIPPINE COIN AND CURRENCY."

Section 1. All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the parties may
agree that the obligation or transaction shall be settled in any other currency
at the time of payment.

Sec. 2. Republic Act Numbered Five Hundred Twenty- Nine (R.A. No.
529), as amended entitled "An Act to Assume the Uniform Value of
Philippine Coin and Currency," is hereby repealed.

Sec. 3. This Act shall take effect fifteen (15) days after
its publication in the Official Gazette or in two (2) national newspapers of
general circulation. The Bangko Sentral
ng Pilipinas and the Department of Finance shall conduct an intensive
information campaign on the effect of this Act.

If the currency agreed upon is not in Philippine pesos, can the creditor
demand fulfillment in the currency agreed upon and not in Philippine
currency?

Under R.A. 529 it is not allowed. Even if the parties agree to a currency
expressly stipulated, under RA 529, such is a void stipulation.

The obligation is not void, it is the stipulation of payment in the currency
offered which is void.

However in RA 8183 amending RA 529 a creditor can demand fulfillment
other than Philippine currency if such was the stipulation is valid.

Can the creditor be compelled to accept payment by checks?

No. whatever kind of check is not allowed, they are not legal tenders.

When creditor accepted the check and the same became stale, is the
obligation extinguished?

No. It is only that it cannot be be encashed.



When creditor accepted the check and the same became stale, can the
creditor demand for the issuance of another check?

No.

When the creditor was in possession of a check, there is a disputable
presumption that the debt has not yet been paid. It may be rebutted when
the debtor had already paid, and the creditor was still in possession of the
check.
What are those which are considered legal tenders?

a. notes (cash)
b. coins

Note: Even when the money is considered legal tenders the same has been
withdrawn from circulation or has been demonitized.

An action was filed under quasi delict and thereafter a judgment was
rendered in favor of the plaintiff on a contract entered into 10 years ago,
today A filed a motion to have his judgment adjusted claiming that there is
an
extraordinary inflation. May the judge award As motion?

Under Art. 1250 In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at the time
of the establishment of the obligation shall be the basis of payment, unless
there is an agreement to the contrary.

Under the facts, for Art 1250 to apply, the same must be based on a
contract and not quasi delict because the law as worded currency
stipulated. Hence, Art 1250 will not apply and therefore adjustment cannot
be allowed.

If the action was filed based on contract, the judge should not grant the
motion for adjustment if the same is not an extraordinary inflation. Because
the adjustment should be granted if there is only an extraordinary inflation
that occur, otherwise not granted.

Note: Art. 1250 means that there must be an adjustment at the time of the
constitution of the obligation if there is an extraordinary inflation or
deflation based on a contract.

If the due date for the performance of the obligation is a sunday and
demand was made on that day however the debtor only performed it the
next day, may he be considered in delay?

Yes. Even if sunday or holiday, if the debtor promised to perform the
obligation on such day and he did not perform, he is considered in delay.
As an exception, even if the date agreed upon is a
sunday the debtor may not be considered in delay when there is an
impossibility of performance of the obligation, or when the debtor gave the
creditor a check and the checks due date is a holiday or a
non banking day, in the latter case it is allowed for as long as it is the next
banking day.

In an obligation to give or deliver a determinate thing and the thing was
delivered at the place of business of the creditor, and the creditor refused to
accept. Is the creditor already in delay?

Not necessarily, because there may be a stipulation that delivery be made in
another place.

If there is no stipulation as to the place where the thing is to be delivered,
where should such thing be delivered?

It depends on whether the thing is determinate or generic.

If it is a determinate thing, then payment shall be made at the placer
wherever the thing might be at the moment the obligation was constituted.

In any other case (such as when the thing is indeterminate) then the debtors
domicile shall be the place of payment.

What are the special forms of payment?

1. Dation in payment
2. Application of payment
3. payment by cession or assignment
4. tender of payment and consignation

Is payment by a third party a special form of payment?

No. It is a payment by a person not a party to a contract.

In these special forms of payment, do they require the consent of the parties
in order that the obligation be extinguished?

As to debtors, their consent is required because he is the one offering to
pay.

As to the creditor, as a rule the creditors consent is not required because
the debtor under the law has the right to designate to which the payment is
to be applied.

Is the consent of the creditor required in order that obligation be
extinguished by way of consignation?

No. Consignation does no require the creditors consent if the creditor
refuses to accept, then the court shall determine whether the consignation is
valid or not. The creditor cannot do anything if the consignation is a valid
consignation. Hence, the obligation is to be extinguished. It may either by
acceptance or by declaration of the court.
In these special forms of payment, when the debtor delivers a thing to the
creditor, there is transfer of ownership?

Not necessarily. In case of cession. This is because when the thing is
delivered to the creditor in order for him to sell. The creditor does not
acquire ownership because this thing is to be sold to third persons who will
be the one to acquire ownership.

When can consignation to the court pass ownership to the creditor?

In case of valid consignation, ownership is transferred to the creditor at the
time of delivery.

In case of invalid consignation, and the creditor did not accept, ownership
is not transferred to the creditor.

If there is dation in payment, the obligation of the debtor is totally
extinguished?

Not necessarily. This is because when the thing alienated is less than the
value the indebtedness, the obligation is not extinguished totally. It is
merely a partial performance.

Note: Different view under 1235

In dation in payment if the thing is alienated by the debtor in satisfaction of
his debt and the value of such thing is less than the indebtedness, is the
obligation extinguished to the extent of the value unless otherwise
stipulated? Or in dation in payment, it totally extinguishes the obligation,
unless there is a stipulation to the contrary?

It only extinguishes to the extent of the value of the thing unless agreed
upon by the parties. It is a proper position because no creditor would accept
less than than what is the value of the thing. This position would appear to
be just.

However, there is a view to the effect that it may totally extinguish the
obligation under 1235, as 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.

Dation in payment shall be governed in the law on sales?

Not necessarily. It will be governed in the law on sales when property is
alienated to the creditor in satisfaction of a debt in money, otherwise it will
be governed by the law of novation because there is a change in the object.

Is it correct to say that when a property is alienated to the creditor in
satisfaction of a debt in money, it can be governed by the law on novation,
since there is a change in the object?

It may be said that since there is a change in the object, the law on novation
is proper. However, there is a law on the matter which is Art. 1245 which
provides that when property is alienated to the creditor in satisfaction of a
debt in money, shall be governed in the law on sales.

There is wisdom in the latter view (Art. 1245) because If a person is
indebted to another person, and in this pre-existing debt the debtor paid the
creditor a watch, in a way it will have to be governed by the law on sales
because it may be said that the debtor paid in cash and the creditor used this
cash to buy the watch of the debtor.

For the rules of application of payment to be invoked, there should only be
one creditor?

Not necessarily. There may be 2 or more creditors since the law does not
specify that the debtor should only have 1 creditor.

In application of payments therefore, is there a scenario where there will be
total extinguishment of obligation?

No. For application of payments to be applied, the debtor paid partially. If
the debtor paid in a sum which is sufficient to cover all the debts, there will
no longer a question to which debt is payment is to
be applied. This happens when the debtor paid less than the amount of the
debt.

A has an obligation of 30,000, 50,000, and 500000 to X. A paid the 30,000
to satisfy the 500,000 debt? Is that allowed? Why would A apply the
payment to the 500,000?

It is allowed to apply the payment to 500,0000. A would apply the payment
to the 500,000 because it would be more burdensome to the 500,000
because the latter is interest bearing.



To which the debt the payment is to be applied?

It is a debtor as a rule, has the choice to which the payment is to be applied.
Under the above scenario, if 2 of the debts is not yet due and the first one is
due the debtor may apply the payment to the first debt if the debtor is the
person to whom
the period is fixed, otherwise, even if one is due but the period was fixed in
the creditors favor, then the debtor may not apply the payment in the first
debt.

If all the debts is already due, the debtor cannot compel the creditor to
apply the payment to the first debt by choice, under the principle that the
creditor cannot be compelled to accept partial performance or by stipulation
of the parties the first debt is the last to be paid or 2nd.

What are the limitations to the right of the debtor for which the payment is
to be applied?

1. Partial payment
2. due and demandability
3. If there is an agreement that the debtor cannot make the choice of
application without the consent of the creditor.
4. When the debt produces interests

All the debts are due and demandable, and one of the debt produces
interests, may the debtor apply the payment to the debt which does not
incur interests?

If one of the demandable debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been
covered.

What if the debtor failed to designate to which the payment is to be applied,
to which the payment is to be applied?

The debt designated by the creditor and such designation is to be accepted
by the debtor.

If the debtor and the creditor failed to designate to which the payment is to
be applied, to which the payment is to be applied?

It depends if the debts are of the same nature and burden, payment shall be
applied to all of them proportionately under Art. 1254.

However, if the debts are not of the same nature or burden, meaning one of
them is more onerous, apply the payment to the most onerous obligation.

If the amount of the debt is bigger does it mean that it is the most onerous?



Not necessarily. The smaller amount may incur bigger interests. There is no
hard and fast rule to determine which of the debt is more onerous. A 6%
interest in fact may be more onerous than a 12% interest when the amounts
involved are different.

If in one of the debt, A is a principal debtor, and in another debt, he is
merely a guarantor, which is more onerous?

The more onerous is the debt in which the debtor is principally bound
because the guarantor can demand from reimbursement from the creditor.

Payment by Cession

If the client is the debtor, and he is willing to abandon his properties to his
creditor, what if the creditors refused to adhere to this offer, what advice
would you give to your client?

Under Art. 1255. The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless there is stipulation to
the contrary, shall only release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors shall be governed by
special laws.
(1175a)

So it means that when the value of the thing to be ceded to the creditor is
less than the debt, such will be a partial payment and shall release the
debtor only to the extent of the net proceeds of the thing assigned or ceded.

Is insolvency a requirement that the debtor is insolvent in order for him to
assign or cede his property?

Not payment by cession is by agreement of the parties and therefore as long
as the debtor cedes and the creditor accepts for the latter to sell, insolvency
is not required.

Tender of payment and consignation

Is tender of payment a mode of extinguishment?

Tender of payment is not a mode of extinguishment. No obligation is
extinguished by mere tender of payment.

Tender of payment, as a rule, required in order to extinguish an obligation
by way of consignation?

As a rule, it is not required that tender of payment be made to extinguish an
obligation by way of consignation, except when 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 thin
or sum due (Art. 1256).
Under the law, tender of payment is not required as provided by law, which
are:

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 at the time it
is due;
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 of the obligation has been lost
(Art. 1256).

Tender of payment may be extrajudicial?

No, it is always extrajudicial and can never be judicial. It is not required to
involve the court to make a tender of payment. By its nature it is
extrajudicial.

However, in a case where the SC held that tender of payment may be
judicial when the tender of payment was made during the pendency of the
action. But note by its nature tender of payment is extrajudicial.

A has a right to redeem within the period within which A has a right to
redeem, he offered the money to the other party for the redemption of
a property. However, the other party refused to accept without just cause,
after the lapse of the period to redeem, the redemptioner filed an action to
sell the property and deliver the same to him. One of the defenses raised by
the other party was the tender was not in good faith because the
redemptioner did not deliver the money to the court by way of
consignation, when he refused to accept the money? IS it a valid defense?

In the case of Immaculata vs. Navarro, the defense is not tenable. It is not
required that when the other party refused to accept by way of
consignation, the redemptioner should deliver the money to the court by
way of consignation before the lapse of the redemption period. The reason
is that consignation is only required when there is an obligation to be
extinguished. Here there was no obligation to be extinguished but only a
right to be exercised.

One of the requisite in order to have a valid consignation is that there must
be a debt which is due.

If the creditor refuses to issue a receipt, is it a ground to make a delivery to
the court by way of consignation?

Yes because a receipt is an evidence of payment, non issuance of a receipt
the creditor may again demand for the payment.

A law which provides that a payment is only considered as such upon
issuance of the receipt, is it advantageous?

Yes. It is advantageous because it would involve less litigations, secondly
the debtor can compel the creditor to issue a receipt.

But of course, payment is the one which extinguishes the obligation and not
a receipt.

In an obligation to deliver a horse, 3 persons are claiming to have a right
over this horse, therefore the creditor has the right to deliver the horse to
the court by way of consignation?

Not necessarily because one person may have a better right than the others
such as when one has a certificate of title over the horse

Is the two notice requirement under consignation mandatory? Would these
two notices both come from the creditor?

Yes it is required as held in the case Soco vs. Militante. In order that
consignation may be effective, the debtor must first comply with certain
requirements prescribed by law. The debtor must show (1) that there was a
debt due; (2) that the consignation of the obligation had been made because
the creditor to whom tender payment was made refused to accept it, or
because he was absent or incapacitated, or because several persons claimed
to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that
previous notice of the consignation had been given to the person interested
in the performance of the obligation (Art. 1177, Civil Code); (4) that the
amount due was placed at the disposal of the court (Art. 1178, Civil Code);
and (5) that after the consignation had been made the person interested was
notified thereof (Art. 1178, Civil Code). Failure in any of these
requirements is enough ground to render a consignation ineffective.

Do these notice both come from the debtor?

No. The first notice (prior consignation) must come from the debtor but the
second one (after consignation) may come from the creditor.

A sum of money was delivered to the court by way of consignation,
however he was able to withdraw the sum of money, thereafter he paid the
debt. If the obligation of the debtor is secured by a mortgage because of
failure of the debtor to pay the debt, may the creditor foreclose the
mortgage even if the debtor withdraw the payment by way of consignation?

It depends whether the withdrawal was a matter of right, the creditor may
foreclose the mortgage. It would be a matter of right where the consent of
the creditor is irrelevant when it is done before acceptance and there or no
declaration by the court that there is a valid consignation (Art 1260).

The authority of the creditor is required when the withdrawal is a matter of
right, since the consent of the creditor is required, there can no longer be a
foreclosure because the creditor gave his/her consent and the obligation is
already extinguished.

The due date was 1-1-01, tender of payment was made 1-1-02 and
consignation was made
1-1-05, on 1-22-10 the court rendered judgment in relation to this
consignation, would the
debtor be held liable for interest from the tender of payment on 1-1-01?

If there was demand made, he is liable for interest because with such he is
considered in delay, without demand no liability to pay interest.

The debtor may be held liable to pay interest
(assuming debtor is in delay) from 1-1-01 to
1-22-01 if the court considered to consignation to be void.

Assuming the court declared the consignation to be valid (there is also
delay), the interest shall be counted only upto the time the debtor delivered
the payment in court. But justice and equity serves that payment of interest
should only be counted up to the time tender of payment is made or the
principle where both the debtor and creditor is in delay, such when the
debtor refuses to accept, as such the debtor can no longer be held liable for
interest.

when property is alienated to the creditor in satisfaction of a debt in money,
it will be governed on the law on sales pursuant to Art. 1245, unless there is
a stipulation to the contrary, further

Loss of the Thing Due or impossibility of performance

Can loss of the thing be invoked in all kinds of obligations?

No. because there are obligations to do or not to do which does not include
a thing.In the former cases
it would be proper to call it impossibility of performance.

In an obligation to deliver a generic thing, is loss of the thing extinguish an
obligation?

Impossibility pertains to physical and legal. A law which prohibits the
performance of an obligation to give even if it pertains to a generic thing, in
which the law became effective during the pendency of the obligation, by
law it is considered legally impossible to perform. If prior the
constitution of the obligation it is considered as void being contrary to law,
hence there is nothing to be extinguished.

Loss of the thing may be extinguished even if the thing is a generic thing,
by mutual agreement of the parties, it is not because of the loss of thing.

Another scenario is when the generic thing is the last of its kind, as when it
goes out of commerce.

In an obligation to deliver a determinate thing, when would this obligation
be extinguished under the Code?

If the loss of the thing is due to the fault of the debtor, it is not
extinguished, but if the debtor was not at fault the obligation is
extinguished.

If the obligation was not extinguished and the thing was lost (a determinate
thing), what is the effect?

The thing itself can no longer be delivered extinguishes his obligation to
deliver the thing, but would entitle the creditor to damages.

Any person who in the performance of their obligations are guilty of fraud,
negligence or delay and those who in any manner contravene the tenor
thereof shall be liable for damages (Art 1170).

If there was a lost of the thing due to the fault of the debtor, which makes
him liable, who has the burden of proving that the loss was due to the fault
of the debtor?

The creditor absolutely has the burden of proving that it was lost if the
same was lost due to the fault of the debtor.

However, there when the thing lost was in the possession of the debtor, a
presumption will arise

that is was due to his fault, unless there is proof to the contrary. This
presumption take place only when there is no allegation that the thing was
lost
was not due to the fault of the debtor. However, this presumption will not
apply in case of earthquake, flood, storm, or other natural calamity.

When the lost of the thing was due to a fortuitous event, may the debtor
shall be held liable due to the loss of the thing?

Not necessarily. He may be liable when he was in delay. If he was not in
delay, he will likewise be liable if there is a stipulation to the contrary.
Aside from stipulation, if the law so provides.

Note: When the nature of the obligation requires the assumption of risks as
a defense cannot apply to determinate things.

If the performance of the obligations becomes so difficult, the obligation is
extinguished?

Not necessarily. It may be extinguished when it became so difficult, so
difficult that it is beyond the contemplation of the parties. The court may
release the debtor partially or wholly from this obligation.

An action was filed for the court to adjust the agreement of the parties as to
their share in the profits in relation to the sale of a house and lot. Defendant
was the owner of the land and the plaintiff was the owner of the materials
used in the construction, the proceeds to be divided between them 60/40.
The plaintiff went to court to adjust the shares due to difficulty of
performance as the prices of the materials increased. The court did adjust
the terms and conditions of the agreement. A motion to dismiss was filed
on the adjustment. Is the motion granted? adjustment proper?

The. The court has no power to change the terms and conditions of the
agreement. The only power given by law to the court is to release the
debtor in whole or in part . Even if the reason for the difficulty is because
of an unforeseen event still the court has not power to change the terms and
conditions of the contract. The court may however, release the debtor in
whole or in part. That is the only power
granted to the court under this provision provided in Art. 1267 which
provides that when the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.

A has a cellphone, and it had a casing, and if someone would forcibly take
his cellphone he would request that the cellphone alone should be taken. If
there is an obligation to deliver a

cellphone with its case, and the cellphone was lost or destroyed due to a
fortuitous event, the obligation therefore is extinguished?

It depends on the intention of the parties as to the importance of the thing
which was lost in relation to the entire obligation. In other words, when the
creditor would not have entered into the contract without the other thing
which was lost, the
obligation would therefore be extinguished. The casing would be
considered be more important when the casing was jewel encrusted.

Condonation or Remission of the debt

Condonation is also known as?

Donation of credit or remission of the debt.

Is renunciation also a good name for condonation?

No because renunciation may not be a gratuitous act. The civil code would
recognize an onerous renunciation. If the renunciation is a gratuitous act it
will amount to condonation.

Son A is indebted to his father B in the amount of 500,000. Through a
check A paid his father B
300,000. B, his father died. The executor of the father of the decedent
demanded payment from A 200,000. However the son raised that his
obligation was totally extinguished because as shown in the annotation at
the back of the check, it provides that it was in full payment of the
obligation. Is it condoned?

It will depend on who wrote the annotation. If the father who made the
annotation, it depends on whether it is express or implied. If the obligation
is express there must be an acceptance by the son because it is a form of
donation, which requires acceptance. Hence the son is still compelled to
pay.

A borrowed money from B, 100,000. A executed a promissory note which
he delivers to B was already in the possession of A. Was the obligation of
A was extinguished by condonation?

Not necessarily. There is a presumption that the obligation is extinguished
when the promissory note is a private instrument. If the promissory note
is contained in a public instrument the presumption will not arise.

When the promissory note was a private instrument and it was already in
the possession of the debtor, does it raise the presumption that

the obligation was extinguished by condonation?

What the law provides under Art 1272, when the private document was in
the possession of the debtor, there is a presumption that the creditor
delivered it voluntarily, then it presupposes that there is payment when
there is a receipt (evidence of payment) given. If there is none, a disputable
presumption is given that there is condonation.

A borrowed 100,000 from B. To secure fulfillment of his obligation a
watch was delivered to B. Thereafter, the watch was already in the
possession of X. Therefore, the obligation of A to B was extinguished?

The thing that was delivered to secure was obviously a form of pledge.
When the thing was found no longer in the possession of the creditor,
pledgee. There is no presumption that the
obligation is extinguished. What is presumed is that the pledge is
extinguished.

Under the facts, there would be a presumption that the obligation is
extinguished if X was the owner. If X was the pledgor, then there is no
presumption that such will arise.

Confusion or merger of rights Confusion is also known as? Merger of
rights.
Can there be confusion by operation of law?

Yes. If a person inherits the credit, then there will be confusion as when the
son who has a debt to his father, the son may inherit from his father the
credit thereby extinguishing the obligation by merger of rights, assuming he
is the only heir.

If it was the debtor child who died in the above scenario, will there be
confusion?

Not necessarily. Ordinarily there will be no confusion because the father
will not accept. For transmission of successional rights the heir must
accept. If he accepts then there will confusion. Normally, as to obligations
or debts, no one would accept.

By agreement of the parties the most common agreement which would
result in confusion is known as?

Merger agreement or contracts.

Can there be a partial extinguishment of an obligation by confusion?

Yes. If there are two debtors.

Can there be partial confusion?

No. There is no partial confusion.
A debt of A to B became due in 1995, a merger agreement was entered into
in 2002, just like any agreement there can be a rescission, as in this case
were rescission was made in 2008, today 2010 an action was filed by B
against A on the debt, may the action still prosper?

Observation: In the exam when CU uses the word STILL prosper, it talks of
prescription. When CU uses May the action prosper, it doesnt talk about
prescription but on some other grounds.

The action may still prosper. The obligation is extinguished in 2002 by
merger. The merger up to the time of rescission should not be included in
the computation of the prescriptive period of 10 years. During the merger
period, B cannot sue A, their personality being one and the same. The effect
of rescission revives the status of the parties prior to the merger, it is if A
again has an obligation to B again. Therefore from 1995 to 2002 and from
2008 to 2010 the time lapsed is only 9 years, hence well within the
prescriptive period.

Compensation

Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. (1195)

Art. 1279. In order that compensation may be proper, it is necessary:


(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(1196)

Art. 1280. Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the creditor may
owe the principal debtor. (1197)

Art. 1281. Compensation may be total or partial. When the two debts are of
the same amount, there is a total compensation. (n)


Art. 1282. The parties may agree upon the compensation of debts which are
not yet due. (n)


Art. 1283. If one of the parties to a suit over an obligation has a claim for
damages against the other, the former may set it off by proving his right to
said damages and the amount thereof. (n)


Art. 1284. When one or both debts are rescissible or voidable, they may
be compensated against each other before they are judicially rescinded or
avoided. (n)


Art. 1285. The debtor who has consented to the assignment of rights made
by a creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he gave his consent, that
he reserved his right to the compensation.


If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.


If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones until
he had knowledge of the assignment. (1198a)


Art. 1286. Compensation takes place by operation of law, even though the
debts may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment. (1199a)


Art. 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)


Art. 1288. Neither shall there be compensation if one of the debts consists
in civil liability arising from a penal offense. (n)

Art. 1289. If a person should have against him s e v e r a l d e b t s
w h i c h a r e s u s c e p t i b l e o f compensation, the rules on the
application of payments shall apply to the order of the compensation.
(1201)


Art. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not
aware of the compensation. (1202a)


Art. 1243. Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid. (1165)

Art. 1215. Novation, compensation, confusion or remission of the debt,
made by any of the solidary creditors or with any of the solidary debtors,
shall extinguish the obligation, without prejudice to the provisions of
Article 1219.


The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them. (1143)


What is compensation?


It is a mode of extinguishing to the concurrent amount, the obligations of
those person who in their own right are reciprocally debtors and creditors
of each other.


What are the kinds of compensation?


1. Facultative - Deposit, Commodatum, Gratuitous support and civil
liability from crime


Requires consent of one of the parties


2. Legal - By operation of law


3. Conventional/Voluntary - by agreement of the parties.


In compensation is required that the parties have capacity to receive and
capacity to dispose of their properties?


Not necessary. Compensation operates by operation of law.


Can there be partial compensation?

Yes. There may be partial extinguishment of an obligation. As long as the
debts of one are not equal to the debts of the other, the compensation will
only be to the concurrent amount and there will be no total extinguishment.


When can total extinguishment take place?


When the debts of one are totally equal with the other.


A owes B 100,000, but B has several debts to A 1k,
2k, 5k and 20k, 80k in total, with compensation, all the debts will be totally
extinguished, because the extinguishment is for the concurrent amount, but
A will still owe B 20k.


A has an obligation to B, and B has an obligation to A. As obligation is
interest bearing, after compensation can B still collect interest from A?


It depends on whether the debt of B is larger than the debt of A. If the debt
of B is larger than A, then A will not be liable for interest as there will be
total extinguishment of the debt of A.


What if the debt of A is secured by a mortgage, and compensation took
place, may B foreclose the mortgage?


Yes. because there will still be a balance of 50k. A mortgage is an
indivisible contract, until the obligation is extinguished the mortgage will
remain in force. If A failed to pay the 50k then B can foreclose on the
mortgage.


A opened a savings account with Y Bank in the amount of 1 M, thereafter
A borrowed money from the same bank 800k, thereafter A wanted to
withdraw the 1M, the bank refused to allow A to withdraw the 1M as A can
only withdraw up t o t h e e x t e n t o f 2 0 0 k a n d i n v o k i n g
compensation. Can the bank deposits be a subject of compensation with the
debt?


No. Under Art. 1287 it was provided that there can be no compensation
when one of the debts arises from a deposit. But a bank deposit is not a
contract of deposit which is prohibited. The opening of a savings account is
a contract of loan. Since both are simple loan there can be compensation.


What if A delivered a thing to the bank as a depositary for safekeeping, can
this be a subject of compensation?

Yes it can be a subject of compensation, but only the depositor can invoke
compensation.


What is A promised to give B a specific kind of bike, in the meantime A
already had a bike. B borrowed the bike. Can the borrowed bike be a
subject of compensation?


Yes. But only the bailor A can invoke compensation and not the bailee B.
This is commodatum.


Can support be a subject of compensation?


It depends, if it is legal support it cannot because it is needed for a persons
survival. It should be gratuitous support and not contractual support. If
gratuitous compensation can take place.


A is indebted to B 100k, when B tried to collect the debt from A, A refused
to pay, so B stabbed A and hold B criminally liable. Can there be
compensation?


Yes, but only the aggrieved party A (offended party)can invoke
compensation and not B (convict)


If A and B are indebted to each other and the debts are not yet due, can
compensation take place?


Yes, by voluntary compensation.


If A is indebted to B of a carabao while B is indebted to A of a car, can
compensation take place?


Yes, by voluntary compensation.


A owes B a sum of money due in 1992, B owes A a sum of money due
1999, both debts valued at 1 million. A filed an action against B and invoke
compensation, A however said that B cannot invoke compensation because
Bs credit had already prescribed. Is A correct?


No. In 1999 even without the parties knowledge, when the debts become
due and demandable, compensation took place by operation of law.


W h a t a r e t h e r e q u i r e m e n t s o f l e g a l compensation?


1. They must be mutual creditors and debtors

2. Both debts must be in sums of money or if they pertain to goods, they
must be of the same kind and quality.


3. Both parties must be principally bound.


4. They must be creditors and debtors of each other in their own right.


Is it correct to say reciprocal creditors?


No, this is because this would pertain to reciprocal obligations, which
would necessarily require that the same arose from the same transaction.
Therefore in reciprocal obligations, there can no no legal compensation
even if they are said to be mutual creditors and debtors of each other.


Francia's property was expropriated by the
Republic of the Philippines. Since 1963 up to
1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City
Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No.
464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. May compensation take place?

No. There can be no off-setting 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 results
of a lawsuit against the government.

A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action
or any indebtedness of the
state or municipality to one who is liable to the state or municipality for
taxes.

Government and taxpayer are not mutually creditors and debtors of each
other under Article
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.

By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279,
to wit: (1) that each one of the obligors be bound principally and that he be
at the same time a

principal creditor of the other; xxx (3) that the two debts be due.


PNB's main thesis is that when it opened a savings account for ISABELA
on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to
ISABELA in that amount. 11 So that when ISABELA itself subsequently
came to be indebted to it on account of ISABELA's breach of the terms of
the Credit Agreement of October
13, 1977, and therefore ISABELA and PNB became at the same time
creditors and debtors of each other, compensation automatically took place
between them, in accordance with Article
1278 of the Civil Code. The amounts due from each other were, in its view,
applied by operation of law to satisfy and extinguish their respective
credits. More specifically, the P2M owed by PNB to ISABELA was
automatically applied in payment and extinguishment of PNB's own credit
against ISABELA. This having taken place, that amount of P2M could
no longer be levied on by any other creditor of ISABELA, as the ACEROS
attempted to do in the case at bar, in order to satisfy their j u d g m e n
t a g a i n s t I S A B E L A . I s t h e r e compensation by operation of
law between PNB and ISABELA?

No. The court ruled in PNB vs. Acero, that even though that PNB was a
debtor of ISABELA under the latters savings deposit in the bank, which is
considered a simple loan, there was no proof shown by PNB in the case
that ISABELA was also indebted to PNB, the only evidence present by
PNB towards this end consists of two (2) documents marked in its behalf as
Exhibits 1 and 2, But as the IAC has cogently observed, these documents
do not prove any indebtedness of ISABELA to PNB. All they do prove is
that a letter of credit might have been opened for ISABELA by PNB, but
not that the credit was ever availed of.

May there be obligations both in sums of money in reciprocal
obligations?

It cannot happen. In reciprocal obligation there are different prestations,
one is delivery of a thing and the other is monetary.

Will there be legal compensation only if the debt in money arose from
contract?

No, there are cases where compensation by operation of law took place
when there was award of attorneys fees and the court ruled that legal
compensation may take place.

May all monetary obligation be the subject of legal compensation?

No. Legal compensation cannot take place in certain monetary obligations
such as taxes, customs duties, tariff etc.


Where A is indebted to B and this obligation is secured by a guarantor G,
on the other hand B is also a debtor of G, if G demands payment from B,
can B claim that since G is a guarantor on As debt to be, compensation
may take place on As debt and Bs debt to G?


No because the guarantor is not principally bound, but the moment A
defaults and his properties are already exhausted, the guarantor will not
be p r i m a r i l y l i a b l e t o B , a n d f r o m t h e n o n compensation
may take place.


The owner of a share of stock authorized L to sell the same, L on the other
hand authorized S to sell it, the latter was able to sell the share of stock,
however, despite demand of A from S to remit the proceeds of the sale he
refused to do so. S was charged for estafa and was convicted, on appeal S
claimed that L owed him also, so compensation took place, therefore he
cannot be liable for estafa. Is Ss contention correct?


No, even assuming that L is indebted to S, the latter is really not indebted to
L in his own right. The real creditor of L is the buyer of the shares. L and S
should be debtors and creditors of each other.


Is it required that when both debts are due and demandable means that they
are due at the same time?


No. What is required is that both debts are due. So if one of the debts
became due 3 years ago, and the debt became due today, compensation will
only take place today because it is only today that both debts became due.


A borrowed from B, B bought a car from A on credit, can there be legal
compensation?


There can be legal compensation because when B bought the car from A on
credit, the buyer B is also going to pay the price in money, so there can be
legal compensation.


Fajardo borrowed money from ICB in the sum of 50M, the bank released
20M, to secure this obligation Fajardo mortgaged properties amounting
110M, thereafter she also delivered
1M to the bank for money market investment, so like just other investments
it matured, so Fajardo demanded for the return of the 1M, the

bank claimed that Fajardo has nothing to recover from the bank because as
to her loan which Fajardo failed to pay, upon foreclosure of the mortgage
Fajardo still has a deficiency of 6 million, so compensation took place.
Fajardo questioned the mortgage. Can there be legal compensation?


No. There can be no legal compensation while the claim of Fajardo
questioning the mortgage is being litigated. As one of the requirement of
legal compensation, the debts must be liquidated and demandable. Here, the
amounts of the debt is not yet identified or liquidated, the foreclosure being
subjected to litigation.


M a y l e g a l c o m p e n s a t i o n t a k e p l a c e i n depositum or
commodatum?


No. As expressed in Art. 1287. In such cases legal compensation will not
take place since in depositum the depositor or the bailor must invoke legal
compensation?


May legal compensation take place in debts which consists of civil liability
arising from a criminal offense?


No as expressed in Art. 1288. Only the the aggrieved party may invoke
compensation.


Assignment of Credit as a right to invoke compensation


A was indebted to B for 50k, 30k, and 20k, B on the other hand is indebted
to A for 100k, A assigned his credit to X, X demanded payment from B,
how much can X demand from B?


It depends on when did this assignment occur, before or after the debt
became due.


If the 50k was made on June 15, 2002, the 30k was made on Oct. 15, 2002,
and the 20k was on Dec. 15, 2002, the deed of assignment was made
on Jan. 15, 2003, and the 100k debt of B to A was due on Nov. 15, 2002.
How much can X recover from B?


Since the debt became due on Nov. 15, 2002 which is prior to the debt
incurred on Dec. 15, 2002 and the assignment was made long before the
debt of
100k became due, compensation took place only to the extent of 80k.
Hence, X can recover as much as 20k only, for the latter was made after the
debt of 100k became due.

Assuming the 100k debt of B to A is due on Nov. 15, 2002 and A assigned
his credit X on March 2002, how much can X recover from B?


Since the assignment was made before the debt became due, X can recover
nothing. The obligation is not yet due until Nov. 15, 2002.


Assuming the due date of the 100k debt is on
Nov. 15, 2002, and the assignment is in July
2002, how much can X (assignee) recover from
B?


The only debt subject to compensation is the 50k and the 30k and 20k is not
covered. Hence, only
50k is subject to compensation. The Oct and Dec.
2002 debts may be recovered by X subject to certain requirements required
by law.


What are these requirements?


Determine if B had knowledge or without knowledge of the assignment. If
B is with knowledge of the assignment, determine whether there is consent
or none. If consent is given, determine whether he has made a reservation
as to Bs right to the compensation at the time his consent is given.


What are the effects of reservation at the time of consent?


If the debtor reserves there is compensation. If there is no reservation,
the debtor waived his right to compensation.


If B did not reserve his right to compensation, what is his remedy?


Demand the debts on the 50, 30 and 20k.


If B is without knowledge of the assignment, what is the effect?


There is compensation. Novation
Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions; (2) Substituting the
person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

- Novation 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 condition, or by
substituting the person of the debtor, or by subrogating a third person in the
rights of the creditor.

The effect of which is to extinguish the old.

What are the classifications of novation?


Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, or by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of the
creditor. 4 Novation through a change of the object or principal conditions
of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor
is described as subjective (or personal) novation. Novation may also be
both objective and subjective (mixed) at the same time. In both objective
and subjective novation, a dual purpose is achieved-an obligation is
extinguished and a new one is created in lieu thereof. 5

If objective novation is to take place, it is imperative that the new
obligation expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with the old one.
6 Novation is never presumed: it must be established either by the
discharge of the old debt by the express terms of the new agreement, or by
the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible.
7

Again, if subjective novation by a change in the person of the debtor is to
occur, it is not enough that the juridical relation between the parties to the
original contract is extended to a third person. It is essential that the old
debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. If the old debtor is not released, no
novation occurs and the third person who has assumed the obligation of the
debtor becomes merely a co-debtor or surety or a co- surety.

It may be express (by agreement) or implied
(incompatible).

It may be partial or total.

What are the requisites of novation?



1. A previous valid obligation
2. agreement f all the parties to the new contract
3. extinguishment of the old contract
4. validity of the new one

Art. 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other. (1204)

Can novation be presumed?

It is never presumed.

What is the test of incompatibility between the old and the new obligation
in order to effect novation?

The change must refer to the object, the cause, or the principal conditions
of the obligation. In other words there must be an essential change.

Accidental modifications in an existing obligation do not extinguish it by
novation. Mere modifications of the debt, agreed upon between the parties
do not constitute novation. When the changes refer to secondary
agreements, and not the 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.

E.g. A mere extension of the term of payment does not result in novation,
for the period affects only the performance, and NOT THE CREATION OF
THE OBLIGATION.

Ultimately, the determination of whether the changes in any given contract
or obligation are sufficient to bring about a novation, must depend upon the
facts and circumstances of each case. The distinction between a principal
and an accidental condition in the contract or obligation is relative. The
legal effect of any change made by the parties will depend upon a sound
appreciation of their importance. The courts should consider, in each
particular 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.

Art. 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)

What are the two forms of substitution of debtor?

1. Expromission which the initiative for the 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.

2. Delegacion is by the debtor who offers and the creditor accepts a third
person who consents to the substitution, so that the consent of these
three are necessary.

Is the release of the old debtor required in order that a new debtor may be
substituted?

It is required.

Is the consent of creditor required?

Whether expromission or delegacion, the consent of the creditor is required.
This is so because substitution of one 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.

It may be express or implied, simultaneous or not, nor is it required to be in
any particular form.

Is the consent of the old debtor required?

In expromission the consent of the old debtor is not necessary, while in
delegacion the old debtors consent is required for it shall be initiated in his
instance.
Is the consent of the new debtor necessary? Ofcourse, because he is to
assume an obligation. To w h o m c a n t h e n e w d e b t o r d e m a n d
reimbursement?

If the novation is by delegacion, and the new debtor pays the obligation, he
could demand from the old debtor what he has paid.

If the novation is by expromission, and the new debtor pays the debt
without the knowledge of the old debtor, the former can recover only
insofar as the payment has been beneficial to the old debtor.

Art. 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)

In case the new debtor became insolvent, can the new debtors liability be
enforced against the old debtor who has no knowledge of the novation?

If novation is by expromission, no liability for the new debtors insolvency
can be enforced against the old debtor, because the latter did not have the
initiative in making the change, which might have been made without his
knowledge.

In case the new debtor became insolvent, can the new debtors liability be
enforced against the old debtor who has knowledge of the novation?

It depends. In case of expromission he is also r e l e a s e d f r o m l i
a b i l i t y n o t w i t h s t a n d i n g h i s knowledge because obvious
intent of the code is the release the old debtor. To make the old debtor
liable in expromission simply because he has knowledge of the
assumption of his debt by another, or that he assented to it, would make
his liability even greater that that of a debtor who took the initiative and
offered a new debtor in his place; in the latter case, the liability of the
old debtor would be limited to the two exceptions provided in art. 1295,
while in the former, his liability in all cases on non fulfillment would
be without limitation.

Art. 1295. The insolvency of the new debtor, who has been proposed by the
original debtor and accepted by the creditor, shall not revive the action of
the latter against the original obligor, except when said insolvency was
already existing and of public knowledge, or known to the debtor, when the
delegated his debt. (1206a) (DELEGACION)

Other modes which does not exempt the old debtor from liability due to the
new debtors insolvency?

a. if the new debtor is only secondarily liable

b. if the third person is only an agent of the debtor

c. where the new debtor is bound solidarily with the old debtor.

Art. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent. (1207)

Accessory obligation such as pledges, mortgages as well as guarantors and
sureties, unless the latter agree to be bound under the new obligation.

The exception provided has reference to a stipulation in favor of the
third person, which is

subordinated by the principal obligation. Although technically it is an
accessory obligation, it in ins reality a distinct obligation in favor of a third
person, and cannot be extinguished by novation without the consent of the
latter.

Art. 1297. If the new obligation is void, the original one shall subsist,
unless the parties intended that the former relation should be extinguished
in any event. (n)

What if the new obligation is voidable, or not entirely void, will the old
obligation subsist?

The novation becomes effective, it is valid until annulled.

What if there is a conditional new obligation, is there novation?

It depends, if the condition is attached to the old obligation or not. Because
if it is attached to the old obligation, there is no novation at all.

If the condition on the new obligation is intended to substitute the original
pure obligation, the novation itself, and the consequent extinguishment of
the original obligation, is subject to the condition, the novation itself did not
take place, until the happening of the condition. Pending the happening of
the condition, novation did not yet take place, the original obligation not
extinguished.

Can the creditor demand from the object of the old obligation if the novated
object is loss?

The creditor cannot demand from the original object, the latter is
already extinguished by the new obligation.

Art. 1298. The novation is void if the original obligation was void, except
when annulment may be claimed only by the debtor or when ratification
validates acts which are voidable. (1208a)

May a void original obligation be validated?

No. It is void and cannot be ratified. What can be ratified is a voidable
obligation. A void obligation cannot be a source or rights, or waivable by
the parties.

Art. 1299. If the original obligation was subject to a suspensive or
resolutory condition, the new obligation shall be under the same
condition, unless it is otherwise stipulated. (n)

What if both obligations are conditional, old and new?

They must all be fulfilled in order that novation may become effective and
the new obligation be enforceable. If only the conditions affecting the old
obligation are fulfilled, and those affecting the new obligation are not, then,
there is no novation, and the old obligation subsists, because the requisite of
a new valid obligation would be lacking.

Art. 1300. Subrogation of a third person in the rights of the creditor is
either legal or conventional. The former is not presumed, except in cases
expressly mentioned in this Code; the latter must be clearly established in
order that it may take effect. (1209a)

Art. 1301. Conventional subrogation of a third person requires the consent
of the original parties and of the third person. (n)

Art. 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 or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice to the
effects of confusion as to the latter's share. (1210a)

Art. 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)
Art. 1304. A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of the partial payment of the
same credit. (1213)

What obligation may be novated? Is it required that an obligation must arise
from a contract?

No, any obligation may be the subject of novation.

Is it required that there be agreement between the parties in order that
novation will take place?

Yes. Agreement is required. There may only be a novation as a result of the
agreement of the parties.

What is the effect of novation?

There will be extinguishment of the old obligation and a new one exist,
except prescription. In prescription there is no existence of a new
obligation. ??????

If there are changes in the original obligation does it mean that there is
novation?

No. If the changes does not result in novation, there is no novation.
Aside from the classification, it goes into the nature of the extinguishment.