Pryce Corp vs PAGCOR

Ligutan vs CA

RCBC vs CA

only the obligees action or suit filed before the court, which is not then acting
as a probate court.
In the present case, whatever monetary liabilities or obligations Santos had
under his contracts with respondent were not intransmissible by their nature, by
stipulation, or by provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which merely passed on to his
estate. Death is not a defense that he or his estate can set up to wipe out the
obligations under the performance bond. Consequently, petitioner as surety
cannot use his death to escape its monetary obligation under its performance
bond.

PNB vs Tan-Sanchez

Agner vs BPI Savings

A DEBT IS PAID BY COMPLETE DELIVERY OF THE THING OR

RENDITION OF SERVICE

Multi-Internatinal Bus vs Martines

Stronghold Ins vs Republic-Asahi

The death of the principal obligor does not, as a rule, extinguish

the obligation and the solidary nature of that liability.

ISSUE: Whether petitioners liability under the performance bond was

automatically extinguished by the death of Santos, the principal
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond principal, extinguished
his liability under the surety bond. Consequently, it says, it is automatically
released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation. Obligations are transmissible to the heirs,
except when the transmission is prevented by the law, the stipulations
of the parties, or the nature of the obligation. Only obligations that are
personal or are identified with the persons themselves are
extinguished by death.
Section 5 of Rule 86of the Rules of Court expressly allows the prosecution of
money claims arising from a contract against the estate of a deceased debtor.
Evidently, those claims are not actually extinguished. What is extinguished is

There is no question that no payment had ever been made to private

respondent as the check was never delivered to him. When the court ordered
petitioner to pay private respondent the amount of P32,480.00, it had the
obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a debt
shall not be understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered, as the case
may be.

PAYMENT OF OBLIGATION NEGATED BY FAILURE TO PRESENT

SPECIAL POWER OF ATTORNEY IN CASE AT BAR

Considering that the contents of the SPA are also in issue here, the best
evidence rule applies. Hence, only the original document (which has not been
presented at all) is the best evidence of the fact as to whether or not private
respondent indeed authorized Sonia Gonzaga to receive the check from
petitioner. In the absence of such document, petitioners arguments regarding
due payment must fail.

There is no question that no payment had ever been made to private

respondent as the check was never delivered to him. When the court ordered
petitioner to pay private respondent the amount of P3 2,480.00, it had the
obligation to deliver the same to him. Under Art. 1233 of the Civil Code, 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.

The burden of proof of such payment lies with the debtor. 3 In the instant
case, neither the SPA nor the check issued by petitioner was ever presented in
court.
The testimonies of petitioners own witnesses regarding the check were
conflicting. Tagamolila testified that the check was issued to the order of Sonia
Gonzaga as attorney-in-fact of Loreto Tan, 4while Elvira Tibon, assistant cashier of
PNB (Bacolod Branch), stated that the check was issued to the order of Loreto
Tan.5
Furthermore, contrary to petitioners contention that all that is needed to be
proved is the existence of the SPA, it is also necessary for evidence to be
presented regarding the nature and extent of the alleged powers and authority
granted to Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended for private
respondent. However, no such evidence was ever presented.

that he made the payment in good faith, to an agent who issued SMC receipts
which appeared to be genuine. Thus, according to the petitioners, they had duly
paid their obligation in accordance with Articles 1240 and 1242 of the New Civil
Code.
The private respondent, for its part, avers that the burden of proving
payment is with the debtor, in consonance with the express provision of Article
1233 of the New Civil Code. The petitioners miserably failed to prove the selfserving allegation that they already paid their liability to the private respondent.
Furthermore, under normal circumstances, an obligor would not just pay a
substantial amount to someone whom he saw for the first time, without even
asking for the latters name.

ISSUE: Whether the payment of the petitioners obligation to the private

respondent was properly made, thus, extinguishing the same

Culaba vs CA
According to the petitioners, receiving receipts from the private
respondents agents instead of its salesmen was a usual occurrence, as they had
been operating the store since 1979. Thus, on four occasions in April 1983,
when an agent of the respondent came to the store wearing an SMC uniform
and driving an SMC van, petitioner Francisco Culaba, without question, paid his
accounts. He received the receipts without fear, as they were similar to what he
used to receive before. Furthermore, the petitioners assert that, common
experience will attest that unless the attention of the customers is called for,
they would not take note of the serial number of the receipts.
The petitioners contend that the private respondent advertised its warning
to the public only after the damage was done, or on July 9, 1993. Its belated
notice showed its glaring lack of interest or concern for its customers welfare,
and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to
whom the accounts were paid had all the physical and material attributes or
indications of a representative of the private respondent, leaving no doubt that
he was duly authorized by the latter. Petitioner Francisco Culabas testimony that
he does not necessarily check the contents of the receipts issued to him except
for the amount indicated if [the] same accurately reflects his actual payment is
a common attitude of customers. He could, thus, not be faulted for paying the
private respondents agent on four occasions. Petitioner Francisco Culaba asserts

A careful study of the records of the case reveal that the appellate court
affirmed the trial courts factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the
private respondents lost booklet, which loss was duly advertised in a newspaper
of general circulation; thus, the private respondent could not have officially
issued them to the petitioners to cover the alleged payments on the dates
appearing thereon.
Second. There was something amiss in the way the receipts were issued to
the petitioners, as one receipt bearing a higher serial number was issued ahead
of another receipt bearing a lower serial number, supposedly covering a later
payment. The petitioners failed to explain the apparent mix-up in these receipts,
and no attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the
four receipts and that the petitioners could not even remember the name of the
supposed impostor who received the said payments strongly argue against the
veracity of the petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the
merits of the case.

Payment is a mode of extinguishing an obligation. Article 1240 of the Civil

Code provides that payment shall be made to the person in whose favor the
obligation has been constituted, or his successor-in-interest, or any person
authorized to receive it.[21] In this case, the payments were purportedly made to
a supervisor of the private respondent, who was clad in an SMC uniform and
drove an SMC van. He appeared to be authorized to accept payments as he
showed a list of customers accountabilities and even issued SMC liquidation
receipts which looked genuine. Unfortunately for petitioner Francisco Culaba, he
did not ascertain the identity and authority of the said supervisor, nor did he ask
to be shown any identification to prove that the latter was, indeed, an SMC
supervisor. The petitioners relied solely on the mans representation that he was
collecting payments for SMC. Thus, the payments the petitioners claimed they
made were not the payments that discharged their obligation to the private
respondent.
The basis of agency is representation. A person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent.
[23]
In the instant case, the petitioners loss could have been avoided if they had
simply exercised due diligence in ascertaining the identity of the person to
whom they allegedly made the payments. The fact that they were parting with
valuable consideration should have made them more circumspect in handling
their business transactions. Persons dealing with an assumed agent are bound
at their peril to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is
upon them to establish it. The petitioners in this case failed to discharge this
burden, considering that the private respondent vehemently denied that the
payments were accepted by it and were made to its authorized representative.
Negligence is the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs,
would do, or the doing of something, which a prudent and reasonable man
would not do. In the case at bar, the most prudent thing the petitioners should
have done was to ascertain the identity and authority of the person who
collected their payments. Failing this, the petitioners cannot claim that they
acted in good faith when they made such payments. Their claim therefor is
negated by their negligence, and they are bound by its consequences. Being
negligent in this regard, the petitioners cannot seek relief on the basis of a
supposed agency.

As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship between a
bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:
Art. 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.
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the

nature of a simple loan or mutuum.[42] More succinctly, in Citibank,
N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a
money market placement is a simple loan or mutuum. [43] Further, we defined a
money market in Cebu International Finance Corporation v. Court of Appeals, as
follows:
[A] money market is a market dealing in standardized shortterm credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a
middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.
In the case at bar, the money market transaction
between the petitioner and the private respondent is in the
nature of a loan.[44]
Lim Sio Wan, as creditor of the bank for her money market placement, is
entitled to payment upon her request, or upon maturity of the placement, or
until the bank is released from its obligation as debtor. Until any such event, the
obligation of Allied to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when obligations
are considered extinguished, thus:

Allied Banking vs Lim Sio Wan-Ebol

The Liability of the Parties

Art. 1231. Obligations are extinguished:

(1)
(2)

By payment or performance;
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.

x x x contributory to the injury caused in the present case,

which thereby leads to the conclusion that it is the collecting
bank, Metrobank that is the proximate cause of the alleged loss
of the plaintiff in the instant case.[46]

Other causes of extinguishment of obligations, such as

annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code. (Emphasis
supplied.)

We are not persuaded.

Dela Cruz vs Concepcion-Balindong

From the factual findings of the trial and appellate courts that Lim Sio
Wan did not authorize the release of her money market placement to Santos
and the bank had been negligent in so doing, there is no question that the
obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of
the Code states that payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. As commented by Arturo Tolentino:
Payment made by the debtor to a wrong party
does not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed to
the latter. Even when the debtor acted in utmost good
faith and by mistake as to the person of his creditor, or
through error induced by the fraud of a third person, the
payment to one who is not in fact his creditor, or
authorized to receive such payment, is void, except as
provided in Article 1241. Such payment does not
prejudice the creditor, and accrual of interest is not
suspended by it. (Emphasis supplied.)

National Power Corp vs Ibrahim-Nosdo

Estanislao vs Eastwest Banking

ISSUE: Did the deed of assignment which expressly provides that the transfer
and conveyance to respondent of the three units of heavy equipment, and its
acceptance

thereof,

shall

be in

full

payment of

the

petitioners

total

outstanding obligation to the latter operate to extinguish petitioners debt to

respondent, such that the replevin suit could no longer prosper?
The appellate court erroneously denominated the replevin suit as a
collection case. A reading of the original and amended complaints show that

Since there was no effective payment of Lim Sio Wans money market
placement, the bank still has an obligation to pay her at six percent (6%)
interest from March 16, 1984 until the payment thereof.

what the respondent initiated was a pure replevin suit, and not a collection
case. Recovery of the heavy equipment was the principal aim of the suit;
payment of the total obligation was merely an alternative prayer which
respondent sought in the event manual delivery of the heavy equipment could

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans
money. It points out that Metrobank guaranteed all prior indorsements inscribed
on the managers check, and without Metrobanks guarantee, the present
controversy would never have occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the
proceeds of the check is paid to the proper party is, aside from
being an efficient intervening cause, also the last negligent act,

no longer be made.
Replevin, broadly understood, is both a form of principal remedy and a
provisional relief. It may refer either to the action itself, i.e., to regain the
possession of personal chattels being wrongfully detained from the plaintiff by
another, or to the provisional remedy that would allow the plaintiff to retain the
thing during the pendency of the action and hold it pendente lite.[5]

The deed of assignment was a perfected agreement which extinguished

that was created.[10] Respondent is presumed to have maintained a high level of

petitioners total outstanding obligation to the respondent. The deed explicitly

meticulousness in its dealings with petitioners. The business of a bank is

provides that the assignor (petitioners), in full payment of its obligation in the

affected with public interest; thus, it makes a sworn profession of diligence and

amount of P7,305,459.52, shall deliver the three units of heavy equipment to

meticulousness in giving irreproachable service.[11]

the assignee (respondent), which accepts the assignmentin full payment of

the above-mentioned debt. This could only mean that should petitioners

Besides, respondents protestations of mistake and plain oversight are

complete the delivery of the three units of heavy equipment covered by the

self-serving. The evidence show that from August 16, 2000 (date of the deed of

deed, respondents credit would have been satisfied in full, and petitioners

assignment) up to March 8, 2001 (the date of delivery of the last unit of heavy

aggregate indebtedness of P7,305,459.52 would then be considered to have

equipment covered under the deed), respondent did not raise any objections

been paid in full as well.

nor make any move to question, invalidate or rescind the deed of assignment. It
was not until June 20, 2001 that respondent raised the issue of its alleged

The nature of the assignment was a dation in payment, whereby

property is alienated to the creditor in satisfaction of a debt in money. Such
transaction is governed by the law on sales.

[6]

mistake by filing an amended complaint for replevin involving different chattels,

although founded on the same principal obligation.

Even if we were to consider the

agreement as a compromise agreement, there was no need for respondents

The legal presumption is always on the validity of contracts. [12] In order

signature on the same, because with the delivery of the heavy equipment which

to judge the intention of the contracting parties, their contemporaneous and

the latter accepted, the agreement was consummated. Respondents approval

subsequent acts shall be principally considered. [13] When respondent accepted

may be inferred from its unqualified acceptance of the heavy equipment.

delivery of all three units of heavy equipment under the deed of assignment,
there could be no doubt that it intended to be bound under the agreement.

Consent to contracts is manifested by the meeting of the offer and the

acceptance of the thing and the cause which are to constitute the contract; the
offer must be certain and the acceptance absolute.

[7]

The acceptance of an offer

must be made known to the offeror, and unless the offeror knows of the

Since the agreement was consummated by the delivery on March 8,

2001 of the last unit of heavy equipment under the deed, petitioners are
deemed to have been released from all their obligations to respondent.

acceptance, there is no meeting of the minds of the parties, no real concurrence

of offer and acceptance.[8] Upon due acceptance, the contract is perfected, and

Since there is no more credit to collect, no principal obligation to speak

from that moment the parties are bound not only to the fulfillment of what has

of, then there is no more second deed of chattel mortgage that may subsist. A

been expressly stipulated but also to all the consequences which, according to

chattel

their nature, may be in keeping with good faith, usage and law.

consideration is the same as that of the principal contract. Being a mere

[9]

mortgage

cannot

exist

as

an

independent

contract

since

its

accessory contract, its validity would depend on the validity of the loan secured
With its years of banking experience, resources and manpower,

by it.[14] This being so, the amended complaint for replevin should be dismissed,

respondent bank is presumed to be familiar with the implications of entering

because the chattel mortgage agreement upon which it is based had been

into the deed of assignment, whose terms are categorical and left nothing for

rendered ineffectual.

interpretation. The alleged non-inclusion in the deed of certain units of heavy

equipment due to inadvertence, plain oversight or mistake, is tantamount to
inexcusable manifest negligence, which should not invalidate the juridical tie

Ong vs Roban Lending-Barrios

Both parties admit the execution and contents of the Memorandum of

Agreement and Dacion in Payment. They differ, however, on whether both

had to execute a promissory note for P5,916,117.50 which they were to pay
within one year.[35]

contracts constitute pactum commissorium or dacion en pago.

Respondent cites Solid Homes, Inc. v. Court of Appeals [36] where this
Court upheld a Memorandum of Agreement/Dacion en Pago.[37] That case did not

This Court finds that the Memorandum of Agreement and Dacion in

involve the issue of pactum commissorium.

Payment constitute pactum commissorium, which is prohibited under Article

That the questioned contracts were freely and voluntarily executed by
petitioners and respondent is of no moment, pactum commissorium being void
for being prohibited by law.

2088 of the Civil Code which provides:

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.

Tan Shuy vs Maulawin

The elements of pactum commissorium, which enables the mortgagee

to acquire ownership of the mortgaged property without the need of any
foreclosure proceedings, are: (1) there should be a property mortgaged by way
of security for the payment of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period. [31]
In the case at bar, the Memorandum of Agreement and the Dacion in
Payment

contain

redemption. Under

no
the

provisions

for

Memorandum

of

foreclosure
Agreement,

proceedings
the

failure

by

nor
the

petitioners to pay their debt within the one-year period gives respondent the
right to enforce the Dacion in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent, in effect, automatically
acquires ownership of the properties upon petitioners failure to pay their debt
within the stipulated period.
Respondent argues that the law recognizes dacion en pago as a special
form of payment whereby the debtor alienates property to the creditor in
satisfaction of a monetary obligation. [32] This does not persuade. In a true dacion
en pago, the assignment of the property extinguishes the monetary debt. [33] In
the case at bar, the alienation of the properties was by way of security, and not
by way of satisfying the debt.[34] The Dacion in Payment did not extinguish
petitioners obligation to respondent. On the contrary, under the Memorandum
of Agreement executed on the same day as the Dacion in Payment, petitioners

Facts:
Both Petitioner and Respondent were engaged in the business of buying
and selling of copra and corn. Petitioner extended a loan to Respondent
in the amount of P420,000. In consideration thereof, Guillermo
obligated himself to pay the loan and to sell copra to petitioner. Most
of the transactions involving Petitioner and Respondent were coursed
through Elena Tan, daughter of petitioner. She served as cashier in the
business of Petitioner, who primarily prepared and issued the pesada.
In case of her absence, her brother Vicente would issue the pesada.
According to Vicente, whenever they would buy copra or corn from crop
sellers, they would prepare and issue a pesada in their favor. A pesada
is a document containing details of the transaction, including the
date of sale, the weight of the crop delivered, the trucking cost, and the
net price of the crop. He then explained that when a pesada contained
the annotation pd on the total amount of the purchase price, it meant
that the crop delivered had already been paid for by petitioner.
Petitioner alleged that despite repeated demands, Respondent
remitted only P28,500. He claimed that respondent had an
outstanding balance of P391,500. Thus, convinced that Respondent
no longer had the intention to pay the loan, petitioner brought the
controversy to the Lupon Tagapamayapa. When no settlement was
reached, petitioner filed a Complaint before the Regional Trial Court
(RTC).
Respondent Guillermo countered that he had already paid the subject
loan in full. According to him, he continuously delivered and sold
copra to petitioner from April 1998 to April 1999. Respondent said they
had an oral arrangement that the net proceeds thereof shall be

applied as installment payments for the loan. He alleged that his

deliveries amounted to P420,537.68 worth of copra. To bolster his
claim, he presented copies of pesadas issued by Elena and Vicente.
He pointed out that the pesadas did not contain the notation pd,
which meant that actual payment of the net proceeds from copra
deliveries was not given to him, but was instead applied as loan
payment.
The trial court issued a Decision, ruling that the net proceeds from
Respondents copra deliveriesrepresented in the pesadas, which did
not bear the notation pdshould be applied as installment payments
for the loan. It gave weight and credence to the pesadas, as their
due execution and authenticity was established by Elena and
Vicente. However, the court did not credit the net proceeds from 12
pesadas, as they were deliveries for corn and not copra. Thus, it ruled
that the total amount of P41,585.25, which corresponded to the net
proceeds from corn deliveries, should be deducted from the amount of
P420,537.68 claimed by respondent to be the total value of his copra
deliveries. It found that respondent had not made a full payment for the
loan, as the total creditable copra deliveries merely amounted to
P378,952.43, leaving a balance of P41,047.57 in his loan. Court of
Appeals affirmed the finding of the trial court.

Issue:
Whether the delivery of copra amounted to installment payments for
the loan obtained by respondents from petitioner.

nature of sale; that is, the creditor is really buying the thing or property
of the debtor, the payment for which is to be charged against the
debtors obligation. Thus, there was partial payment every time
Respondent delivered copra to petitioner, chose not to collect the net
proceeds of his copra deliveries, and instead applied the collectible as
installment payments for his loan from Petitioner.

Serfino vs Far East Bank-Reyes

Claim for actual damages not
meritorious because there could be
no pecuniary loss that should be
compensated if there was no
assignment of credit
The spouses Serfinos claim for damages against FEBTC is premised on their
claim of ownership of the deposit with FEBTC. The deposit consists of
Magdalenas retirement benefits, which the spouses Serfino claim to have been
assigned to them under the compromise judgment. That the retirement benefits
were deposited in Graces savings account with FEBTC supposedly did not divest
them of ownership of the amount, as "the money already belongs to the
[spouses Serfino] having been absolutely assigned to them and constructively
delivered by virtue of the x x x public instrument[.]" 11 By virtue of
the assignment of credit, the spouses Serfino claim ownership of the deposit,
and they posit that FEBTC was duty bound to protect their right by preventing
the withdrawal of the deposit since the bank had been notified of the
assignment and of their claim.
We find no basis to support the spouses Serfinos claim of ownership of
the deposit.

Ruling:
The Supreme Court uphold the findings of the trial court, as affirmed
by the CA. In accordance with Article 1245 of the Civil Code provides
for a special mode of payment called dation in payment (dacin en
pago). There is dation in payment when property is alienated to the
creditor in satisfaction of a debt in money. Here, the debtor delivers
and transmits to the creditor the formers ownership over a thing as an
accepted equivalent of the payment or performance of an outstanding
debt. In such cases, Article 1245 provides that the law on sales shall
apply, since the undertaking really partakesin one senseof the

"An assignment of credit is an agreement by virtue of which the owner of a

credit, known as the assignor, by a legal cause, such as sale, dation in payment,
exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against
the debtor. It may be in the form of sale, but at times it may constitute
a dation in payment, such as when a debtor, in order to obtain a release
from his debt, assigns to his creditor a credit he has against a third
person." As a dation in payment, the assignment of credit operates as a
mode of extinguishing the obligation; the delivery and transmission of
ownership of a thing (in this case, the credit due from a third person) by the
debtor to the creditor is accepted as the equivalent of the performance of the
obligation.

In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalenas retirement benefits
as the fund from which payment shall be sourced. That the compromise
agreement authorizes recourse in case of default on other executable properties
of the spouses Cortez, to satisfy the judgment debt, further supports our
conclusion that there was no assignment of Magdalenas credit with the GSIS
that would have extinguished the obligation.

The terms of the compromise judgment, however, did not convey an intent to
equate the assignment of Magdalenas retirement benefits (the credit) as the
equivalent of the payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the compromise
judgment merely identified the fund from which payment for the
judgment debt would be sourced:

(d) That the plaintiffs shall refrain from having the judgment based upon this
Compromise Agreement executed until after one (1) week from receipt by the
defendant, Magdalena Cortez of her retirement benefits from the [GSIS] but fails
to pay within the said period the defendants judgment debt in this case, in
which case [this] Compromise Agreement [may be] executed upon any property
of the defendants that are subject to execution upon motion by the plaintiffs. 19

(c) That before the plaintiffs file a motion for execution of the decision or order
based [on this] Compromise Agreement, the defendant, Magdalena Cortez
undertake[s] and bind[s] herself to pay in full the judgment debt out of
her retirement benefits as Local [T]reasury Operation Officer in the City of
Bacolod, Philippines, upon which full payment, the plaintiffs waive, abandon and
relinquish absolutely any of their claims for attorneys fees stipulated in the
Promissory Note (Annex "A" to the Complaint). 15 [emphasis ours]

An assignment of credit not only entitles the assignee to the credit itself, but
also gives him the power to enforce it as against the debtor of the assignor.

Only when Magdalena has received and turned over to the spouses Serfino the
portion of her retirement benefits corresponding to the debt due would the debt
be deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay the
loan was extinguished by the execution of the deeds of assignment. The Court
ruled in the affirmative, given that, in the deeds involved, the respondent (the
debtor) assigned to the petitioner (the creditor) her credits "to make good" the
balance of her obligation; the parties agreed to relieve the respondent of her
obligation to pay the balance of her account, and for the petitioner to collect the
same from the respondents debtors. 17 The Court concluded that the
respondents obligation to pay the balance of her accounts with the petitioner
was extinguished, pro tanto, by the deeds of assignment of credit executed by
the respondent in favor of the petitioner.18

The compromise judgment in this case also did not give the supposed
assignees, the spouses Serfino, the power to enforce Magdalenas credit against
the GSIS. In fact, the spouses Serfino are prohibited from enforcing their claim
until after the lapse of one (1) week from Magdalenas receipt of her retirement
benefits:

Since no valid assignment of credit took place, the spouses Serfino cannot
validly claim ownership of the retirement benefits that were deposited with
FEBTC. Without ownership rights over the amount, they suffered no
pecuniary loss that has to be compensated by actual damages. The
grant of actual damages presupposes that the claimant suffered a duly proven
pecuniary loss.

Pen vs Julian
The appeal is partly meritorious.

That the petitioners are raising factual issues about the true nature of their
transaction with the respondent is already of itself, sufficient reason to forthwith
deny due course to the petition for review on certiorari. They cannot ignore that
any appeal to the Court is limited to questions of law because the Court is not a
trier of facts. As such, the factual findings of the CA should be respected and
accorded great weight, and even finality when supported by the substantial
evidence on record.8Moreover, in view of the unanimity between the RTC and
the CA on the deed of sale being void, varying only in their justifications, the
Court affirms the CA, and adopts its conclusions on the invalidity of the deed of
sale.

Nonetheless, We will take the occasion to explain why we concur with the CA's
justification in discrediting the deed of sale between the parties as pactum
commissorium.
Article 2088 of the Civil Code prohibits the creditor from appropriating the things
given by way of pledge or mortgage, or from disposing of them; any stipulation
to the contrary is null and void. The elements for pactum commissorium to exist
are as follows, to wit: (a) that there should be a pledge or mortgage wherein
property is pledged or mortgaged by way of security for the payment of the
principal obligation; and (b) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period. 9 The first
element was present considering that the property of the respondents was
mortgaged by Linda in favor of Adelaida as security for the former's
indebtedness. As to the second, the authorization for Adelaida to appropriate
the property subject of the mortgage upon Linda's default was implied from
Linda's having signed the blank deed of sale simultaneously with her signing of
the real estate mortgage. The haste with which the transfer of property was
made upon the default by Linda on her obligation, and the eventual transfer of
the property in a manner not in the form of a valid dacion en pago ultimately
confirmed the nature of the transaction as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's deed of sale had been
executed simultaneously with the real estate mortgage, the CA first compared
the unfilled deed of sale presented by Linda with the notarized deed of sale
adduced by Adelaida. The CA justly deduced that the completion and execution
of the deed of sale had been conditioned on the non-payment of the debt by
Linda, and reasonably pronounced that such circumstances rendered the
transaction pactum commissorium. The Court should not disturb or undo the
CA's conclusion in the absence of the clear showing of abuse, arbitrariness or
capriciousness
on
the
part
of
the
CA. 10chanroblesvirtuallawlibrary
The petitioners have theorized that their transaction with the respondents was a
valid dacion en pago by highlighting that it was Linda who had offered to sell
her property upon her default. Their theory cannot stand scrutiny. Dacion en
pago is in the nature of a sale because property is alienated in favor of the
creditor in satisfaction of a debt in money. 11 For a valid dacion en pago to
transpire, however, the attendance of the following elements must be
established, namely: (a) the existence of a money obligation; (b) the alienation
to the creditor of a property by the debtor with the consent of the former; and
(c) the satisfaction of the money obligation of the debtor. 12 To have a
valid dacion en pago, therefore, the alienation of the property must fully
extinguish the debt. Yet, the debt of the respondents subsisted despite the
transfer
of
the
property
in
favor
of
Adelaida.
The petitioners insist that the parties agreed that the deed of sale would not yet
contain the date and the consideration because they had still to agree on the
price.13 Their insistence is not supported by the established circumstances. It
appears that two days after the loan fell due on October 15, 1986, 14Linda
offered to sell the mortgaged property; 15 hence, the parties made the ocular
inspection of the premises on October 18, 1986. By that time, Adelaida had
already become aware that the appraiser had valued the property at

P70,000.00. If that was so, there was no plausible reason for still leaving the
consideration on the deed of sale blank if the deed was drafted by Adelaida on
October 20, 1986, especially considering that they could have conveniently
communicated with each other in the meanwhile on this significant aspect of
their transaction. It was also improbable for Adelaida to still hand the unfilled
deed of sale to Linda as her copy if, after all, the deed of sale would be
eventually notarized on October 22, 1986.
According to Article 1318 of the Civil Code, the requisites for any contract to be
valid are, namely: (a) the consent of the contracting parties; (b) the object; and
(c) the consideration. There is a perfection of a contract when there is a meeting
of the minds of the parties on each of these requisites. 16 The following passage
has fittingly discussed the process of perfection in Moreno, Jr. v. Private
Management Office:17chanroblesvirtuallawlibrary
To reach that moment of perfection, the parties must agree on the same thing in
the same sense, so that their minds meet as to all the terms. They must have a
distinct intention common to both and without doubt or difference; until all
understand alike, there can be no assent, and therefore no contract. The minds
of parties must meet at every point; nothing can be left open for further
arrangement. So long as there is any uncertainty or indefiniteness, or future
negotiations or considerations to be had between the parties, there is not a
completed contract, and in fact, there is no contract at all. 18chanrobleslaw
In a sale, the contract is perfected at the moment when the seller obligates
herself to deliver and to transfer ownership of a thing or right to the buyer for a
price certain, as to which the latter agrees.19The absence of the consideration
from Linda's copy of the deed of sale was credible proof of the lack of an
essential requisite for the sale. In other words, the meeting of the minds of the
parties so vital in the perfection of the contract of sale did not transpire. And,
even assuming that Linda's leaving the consideration blank implied the
authority of Adelaida to fill in that essential detail in the deed of sale upon
Linda's default on the loan, the conclusion of the CA that the deed of sale was
a pactum commisorium still holds, for, as earlier mentioned, all the elements
of pactum commisorium were present.
Anent interest, the CA deleted the imposition of monetary interest but decreed
compensatory interest of 12% per annum.
Interest that is the compensation fixed by the parties for the use or forbearance
of money is referred to as monetary interest. On the other hand, interest that
may be imposed by law or by the courts as penalty or indemnity for damages is
called compensatory interest. In other words, the right to recover interest arises
only either by virtue of a contract or as damages for delay or failure to pay the
principal loan on which the interest is demanded. 20chanroblesvirtuallawlibrary
The CA correctly deleted the monetary interest from the judgment. Pursuant to
Article 1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing. In order for monetary interest to be imposed,

therefore, two requirements must be present, specifically: (a) that there has
been an express stipulation for the payment of interest; and (b) that the
agreement
for
the
payment
of
interest
has
been
reduced
in
writing.21 Considering that the promissory notes contained no stipulation on the
payment of monetary interest, monetary interest cannot be validly imposed.
The CA properly imposed compensatory interest to offset the delay in the
respondents' performance of their obligation. Nonetheless, the imposition of the
legal rate of interest should be modified to conform to the prevailing
jurisprudence. The rate of 12% per annum imposed by the CA was the rate set
in accordance with Eastern Shipping Lines, Inc., v. Court of Appeals.22 In the
meanwhile, Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796
dated May 16, 2013, amending Section 2 of Circular No. 905, Series of 1982,
and Circular No. 799, Series of 2013, has lowered to 6% per annum the legal
rate of interest for a loan or forbearance of money, goods or credit starting July
1, 2013. This revision is expressly recognized in Nacar v. Gallery Frames.23 It
should be noted, however, that imposition of the legal rate of interest at 6% per
annum is prospective in application.
Accordingly, the legal rate of interest on the outstanding obligation of
P43,492.15 as of June 28, 1990, as the CA found, should be as follows: (a) from
the time of demand on October 13, 1994 until June 30, 2013, the legal rate of
interest was 12% per annum conformably with Eastern Shipping Lines; and (b)
following Nacar, from July 1, 2013 until full payment, the legal interest is 6% per
annum.

Equitable PCI vs Ng Sheung Ngor

THE PROMISSORY
NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite respondents

It is erroneous, however, to conclude that contracts of adhesion are invalid per

se. They are, on the contrary, as binding as ordinary contracts. A party is in
reality free to accept or reject it. A contract of adhesion becomes void only when
the dominant party takes advantage of the weakness of the other party,
completely depriving the latter of the opportunity to bargain on equal footing. [61]
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But
they did not. Instead, they continuously availed of Equitable's credit facilities for
five long years.
While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total
amount due (principal, interest and penalties, if any) as of July 9, 2001. The trial
court did not explain how it arrived at the amounts of US$228,200
and P1,000,000.[62] In Metro Manila Transit Corporation v. D.M. Consunji,[63] we
reiterated that this Court is not a trier of facts and it shall pass upon them only
for compelling reasons which unfortunately are not present in this case.
[64]

Hence, we ordered the partial remand of the case for the sole purpose of

assertion that those documents were contracts of adhesion.

determining the amount of actual damages.[65]

A contract of adhesion is a contract whereby almost all of its provisions are

ESCALATION
CLAUSE VIOLATED
THE PRINCIPLE OF
MUTUALITY OF CO
NTRACTS

drafted by one party.[58] The participation of the other party is limited to affixing
his signature or his adhesion to the contract. [59] For this reason, contracts of
adhesion are strictly construed against the party who drafted it. [60]

Escalation clauses are not void per se. However, one which grants the creditor
an unbridled right to adjust the interest independently and upwardly,

completely depriving the debtor of the right to assent to an important

stipulated rate of interest. Upon maturity, the amount due was subject to legal

modification in the agreement is void. Clauses of that nature violate the

interest at the rate of 12% per annum.

principle of mutuality of contracts. [66] Article 1308[67] of the Civil Code holds that

Consequently, respondents should pay Equitable the interest rates of 12.66%

a contract must bind both contracting parties; its validity or compliance cannot

p.a. for their dollar-denominated loans and 20% p.a. for their peso-denominated

be left to the will of one of them.[68]

loans from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled
to legal interest of 12% p.a. on all amounts due.

For this reason, we have consistently held that a valid escalation clause
provides:
1.

that the rate of interest will only be increased if the

applicable maximum rate of interest is increased by law
or by the Monetary Board; and

2.

that the stipulated rate of interest will be reduced

if the applicable maximum rate of interest is reduced by
law or by the Monetary Board (de-escalation clause).[69]

THERE WAS NO
EXTRAORDINARY
DEFLATION

Extraordinary inflation exists when there is an unusual decrease in the

purchasing power of currency (that is, beyond the common fluctuation in the
value of currency) and such decrease could not be reasonably foreseen or was

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for
subsequent extensions shall be at such rate as shall be
determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for
repayment) of the loan was extended. Respondents had no choice but to accept
them. This was a violation of Article 1308 of the Civil Code. Furthermore, the

manifestly beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse situation. [73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of
the currency stipulated should intervene, 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.

assailed escalation clause did not contain the necessary provisions for validity,
that is, it neither provided that the rate of interest would be increased only if
allowed by law or the Monetary Board, nor allowed de-escalation. For these
reasons, the escalation clause was void.

For extraordinary inflation (or deflation) to affect an obligation, the

following requisites must be proven:
1.
that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng
Pilipinas (BSP)

With regard to the proper rate of interest, in New Sampaguita Builders v.

2.

that the obligation was contractual in nature;[75] and

Philippine National Bank we held that, because the escalation clause was

3.

that the parties expressly agreed to consider the

effects of the extraordinary inflation or deflation.[76]

annulled, the principal amount of the loan was subject to the original or

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose
out of a contract, the parties did not agree to recognize the effects of
extraordinary inflation (or deflation). [77] The RTC never mentioned that there was
a such stipulation either in the promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at the exchange rate
fixed by the BSP on the date of maturity.[78]

While, indeed, condition No. 7 of the contract speaks of extraordinary inflation

or devaluation as compared to Article 1250s extraordinary inflation or deflation,
we find that when the parties used the term devaluation, they really did not
intend to depart from Article 1250 of the Civil Code. Condition No. 7 of the
contract should, thus, be read in harmony with the Civil Code provision.
That this is the intention of the parties is evident from petitioners letter [22] dated
January 26, 1998, where, in demanding rental adjustment ostensibly based on
condition No. 7, petitioners made explicit reference to Article 1250 of the Civil
Code, even quoting the law verbatim. Thus, the application of Del Rosario is not
warranted. Rather, jurisprudential rules on the application of Article 1250 should

Almeda vs Bathala Marketing

ISSUE: Whether the amount of rentals due the petitioners should be

be considered.
Article 1250 of the Civil Code states:

adjusted by reason of extraordinary inflation or devaluation

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.

Petitioners reliance on the sixth condition of the contract is, likewise,

unavailing. This provision clearly states that respondent can only be held liable
for new taxes imposed after the effectivity of the contract of lease, that is, after
May 1997, and only if they pertain to the lot and the building where the leased
premises are located. Considering that RA 7716 took effect in 1994, the VAT
cannot be considered as a new tax in May 1997, as to fall within the coverage of
the sixth stipulation.
Neither can petitioners legitimately demand rental adjustment because of
extraordinary inflation or devaluation.
Petitioners contend that Article 1250 of the Civil Code does not apply to
this case because the contract stipulation speaks of extraordinary inflation or
devaluation while the Code speaks of extraordinary inflation or deflation. They
insist that the doctrine pronounced in Del Rosario v. The Shell Company,
Phils. Limited should apply.
Essential to contract construction is the ascertainment of the intention of the
contracting parties, and such determination must take into account the
contemporaneous and subsequent acts of the parties. This intention, once
ascertained, is deemed an integral part of the contract. [21]

Inflation has been defined as the sharp increase of money or credit, or both,
without a corresponding increase in business transaction. There is inflation when
there is an increase in the volume of money and credit relative to available
goods, resulting in a substantial and continuing rise in the general price level.
[23]

In a number of cases, this Court had provided a discourse on what constitutes

extraordinary inflation, thus:

[E]xtraordinary inflation exists when there is a decrease or
increase in the purchasing power of the Philippine currency
which is unusual or beyond the common fluctuation in the value
of said currency, and such increase or decrease could not have
been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of
the obligation.[24]
The factual circumstances obtaining in the present case do not make out a case
of extraordinary inflation or devaluation as would justify the application of
Article 1250 of the Civil Code.We would like to stress that the erosion of the
value of the Philippine peso in the past three or four decades, starting in the
mid-sixties, is characteristic of most currencies. And while the Court may take
judicial notice of the decline in the purchasing power of the Philippine currency

in that span of time, such downward trend of the peso cannot be considered as
the extraordinary phenomenon contemplated by Article 1250 of the Civil
Code. Furthermore, absent an official pronouncement or declaration by
competent authorities of the existence of extraordinary inflation during a given
period, the effects of extraordinary inflation are not to be applied.

Premier Dev Bank vs Central Surety

ISSUE: 1. Whether Premiere Bank waived its right of application of
payments on the loans of Central Surety.
2. In the alternative, whether the P6,000,000.00 loan of Central Surety
was extinguished by the encashment of BC Check No. 08114.
Creditor given right to apply payments
At the hub of the controversy is the statutory provision on application of
payments, specifically Article 1252 of the Civil Code, viz.:

likewise granted in the same provision is the right of the creditor to apply such
payment in case the debtor fails to direct its application. This is obvious in Art.
1252, par. 2, viz.: "If the debtor accepts from the creditor a receipt in which an
application of payment is made, the former cannot complain of the same." It is
the directory nature of this right and the subsidiary right of the creditor to apply
payments when the debtor does not elect to do so that make this right, like any
other right, waivable.
Rights may be waived, unless the waiver is contrary to law, public order, public
policy, morals or good customs, or prejudicial to a third person with a right
recognized by law.23
A debtor, in making a voluntary payment, may at the time of payment direct an
application of it to whatever account he chooses, unless he has assigned or
waived that right. If the debtor does not do so, the right passes to the creditor,
who may make such application as he chooses. But if neither party has
exercised its option, the court will apply the payment according to the justice
and equity of the case, taking into consideration all its circumstances. 24

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.

Verily, the debtors right to apply payment can be waived and even granted to
the creditor if the debtor so agrees. This was explained by former Senator Arturo
M. Tolentino, an acknowledged expert on the Civil Code, thus:

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.

xxxx

The debtors right to apply payment is not mandatory. This is clear from the use
of the word "may" rather than the word "shall" in the provision which reads: "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 the same
must be applied."
Indeed, the debtors right to apply payment has been considered merely
directory, and not mandatory,21 following this Courts earlier pronouncement
that "the ordinary acceptation of the terms may and shall may be resorted to
as guides in ascertaining the mandatory or directory character of statutory
provisions."22
Article 1252 gives the right to the debtor to choose to which of several
obligations to apply a particular payment that he tenders to the creditor. But

The following are some limitations on the right of the debtor to apply his
payment:

5) when there is an agreement as to the debts which are to be paid first, the
debtor cannot vary this agreement.
Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel
facts, it was held that:
The debtor requested Planters apply the payments to the 1981 loan rather than
to the 1978 loan. Planters refused. Planters notes it was expressly provided in
the security agreement on the 1981 loan that Planters had a legal right to direct
application of payments in its sole discretion. Appellees do not refute this.
Hence, the debtors had no right by agreement to direct the payments. This also
precludes the application of the U.S. Rule, which applies only in absence of a
statute or specific agreement. Thus the trial court erred. Planters was entitled to
apply the Hi-Plains payments as it saw fit.

In the case at bench, the records show that Premiere Bank and Central Surety
entered into several contracts of loan, securities by way of pledges, and
suretyship agreements. In at least two (2) promissory notes between the
parties, Promissory Note No. 714-Y and Promissory Note No. 376-X, Central
Surety expressly agreed to grant Premiere Bank the authority to apply any and
all of Central Suretys payments, thus:
In case I/We have several obligations with [Premiere Bank], I/We hereby
empower [Premiere Bank] to apply without notice and in any manner it sees fit,
any or all of my/our deposits and payments to any of my/our obligations
whether due or not. Any such application of deposits or payments shall be
conclusive and binding upon us.
This proviso is representative of all the other Promissory Notes involved in this
case. It is in the exercise of this express authority under the Promissory Notes,
and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank
applied payments made by Central Surety, as it deemed fit, to the several debts
of the latter.
All debts were due; There was no
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties material to this case,
Promissory Note No. 714-Y dated August 20, 1999, in the amount
of P6,000,000.00 and secured by the pledge of the Wack Wack Membership, was
past the due and demand stage. By its terms, Premiere Bank was entitled to
declare said Note and all sums payable thereunder immediately due and
payable, without need of "presentment, demand, protest or notice of any kind."
The subsequent demand made by Premiere Bank was, therefore, merely a
superfluity, which cannot be equated with a waiver of the right to demand
payment of all the matured obligations of Central Surety to Premiere Bank.
Moreover, this Court may take judicial notice that the standard practice in
commercial transactions to send demand letters has become part and parcel of
every collection effort, especially in light of the legal requirement that demand
is a prerequisite before default may set in, subject to certain well-known
exceptions, including the situation where the law or the obligations expressly
declare it unnecessary.28
Neither can it be said that Premiere Bank waived its right to apply payments
when it specifically demanded payment of the P6,000,000.00 loan under
Promissory Note No. 714-Y. It is an elementary rule that the existence of a
waiver must be positively demonstrated since a waiver by implication is not
normally countenanced. The norm is that a waiver must not only be voluntary,
but must have been made knowingly, intelligently, and with sufficient

awareness of the relevant circumstances and likely consequences. There must

be persuasive evidence to show an actual intention to relinquish the right. Mere
silence on the part of the holder of the right should not be construed as a
surrender thereof; the courts must indulge every reasonable presumption
against the existence and validity of such waiver.
Besides, in this case, any inference of a waiver of Premiere Banks, as creditor,
right to apply payments is eschewed by the express provision of the Promissory
Note that: "no failure on the part of [Premiere Bank] to exercise, and no delay in
exercising any right hereunder, shall operate as a waiver thereof."
Thus, we find it unnecessary to rule on the applicability of the equitable
principle of waiver that the Court of Appeals ascribed to the demand made by
Premiere Bank upon Central Surety to pay the amount of P6,000,000.00, in the
face of both the express provisions of the law and the agreements entered into
by the parties. After all, a diligent creditor should not needlessly be interfered
with in the prosecution of his legal remedies.
When Central Surety directed the application of its payment to a specific debt, it
knew it had another debt with Premiere Bank, that covered by Promissory Note
367-Z, which had been renewed under Promissory Note 376-X, in the amount
of P40.898 Million. Central Surety is aware that Promissory Note 367-Z (or 376X) contains the same provision as in Promissory Note No 714-Y which grants the
Premiere Bank authority to apply payments made by Central Surety,

Espina vs CA
FACTS
Mario S. Espina is the registered owner of a Condominium Unit No. 403, Victoria
Valley Condominium,Valley Golf Subdivision, Antipolo, Rizal.
Mario S. Espina and Rene G. Diaz executed a Provisional Deed of Sale, whereby
the former sold to the latter the aforesaid condominium unit for the amount of
P100,000.00 to be paid upon the execution of the contract and the balance of
P1,400,000.00 to be paid through six (6) PCI Bank postdated checks.
Subsequently, in a letter dated January 22, 1992, Diaz informed Espina that his
checking account with PCI Bank has been closed and a new checking account
with the same bank is opened and that the postdated checks issued will be
replaced with new ones in the same bank.
On January 25, 1992, Diaz through his wife Ms. Socorro Diaz paid Mario Espina
P200,000.00, acknowledged by him as partial payment for the condominium
unit subject of this controversy.

On July 26, 1992, Espina sent Diaz a "Notice of Cancellation" of the Provisional
Deed of Sale. However, despite this notice, Espina still accepted payment from
Diaz per Metrobank Check No. 395694 dated andencashed on October 28, 1992
in the amount of P100,000.00.

premises and to pay his back rentals. Failing to do so, respondent's possession
became unlawful and his eviction was proper. Hence, on February 24, 1993,
petitioner filed with the Municipal Trial Court, Antipolo, Rizal an action for
Unlawful Detainer against respondent Diaz.

On February 24, 1993, Espina filed a complaint for Unlawful Detainer against
Diaz before the Municipal Trial Court of Antipolo. The trial court ruled in favor of
Espina and ordered Diaz and all persons claiming rights under him to vacate the
condominium unit.

The respondent contends that the petitioner's subsequent acceptance of such

payment effectively withdrew the cancellation of the provisional sale. The
Supreme Court did not agree. Unless the application of payment is expressly
indicated, the payment shall be applied to the obligation most onerous to the
debtor. In this case, the unpaid rentals constituted the more onerous obligation
of the respondent to petitioner. As the payment did not fully settle the unpaid
rentals, petitioner's cause of action for ejectment survives. Thus, the Court of
Appeals erred in ruling that the payment was "additional payment" for the
purchase of the property. The Court grants the petition for review on certiorari,
and reversed the decision of the Court of Appeals.

Diaz appealed to the Regional Trial Court and the said appellate court affirmed
in all respects the decisionof the trial court. Diaz filed with the Court of Appeals
a petition for review, and the Court of Appeals reversed the appealed decision
and dismissed the complaint for Unlawful Detainer with costs against Espina.
Espina filed a motion for reconsideration of the decision of the Court of Appeals,
and this was denied. Hence, this appeal via petition for review on certiorari.
Issue:
Whether or not the Court of Appeals erred in ruling that the provisional deed of
sale novated the existing contract of lease and that petitioner had no cause of
action for ejectment against respondent Diaz.

Yulim vs Internationl Bank

Marquez vs Elisan Credit

Held:

Rebuttable presumptions; Article 1176 vis-a-vis Article 1253

The Supreme Courts answer is no. The novation must be clearly proved since
its existence is notpresumed. "In this light, novation is never presumed; it must
be proven as a fact either by express stipulation of the parties or by implication
derived from an irreconcilable incompatibility between old and new obligations
or contracts." Novation takes place only if the parties expressly so provide,
otherwise,the original contract remains in force. In other words, the parties to a
contract must expressly agree thatthey are abrogating their old contract in favor
of a new one. Where there is no clear agreement to create a new contract in
place of the existing one, novation cannot be presumed to take place, unless
the terms of the new contract are fully incompatible with the former agreement
on every point. Thus, a deed of cession of the right to repurchase a piece of land
does not supersede a contract of lease over the same property.

There is a need to analyze and harmonize Article 1176 and Article 1253 of the
Civil Code to determine whether the daily payments made after the second
loan's maturity should be credited against the interest or against the principal.

In the provisional deed of sale in this case, after the initial down payment,
respondent's checks in payment of six installments all bounced and were
dishonored upon presentment for the reason that the bank account was closed.
Consequently, on July 26, 1992, petitioner terminated the provisional deed of
sale by a notarial notice of cancellation. Nonetheless, respondent Diaz
continued to occupy the premises, as lessee, but failed to pay the rentals due.
On October 28, 1992, respondent made a payment of P100,000.00 that may be
applied either to the back rentals or for the purchase of the condominium unit.
On February 13, 1993, petitioner gave respondent a notice to vacate the

Article 1176 provides that:

"The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said
interest has been paid.
xxx."
On the other hand, Article 1253 states:LawlibraryofCRAlaw
"If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered."
The above provisions appear to be contradictory but they in fact support, and
are in conformity with, each other. Both provisions are also presumptions and,
as such, lose their legal efficacy in the face of proof or evidence to the contrary.
Thus, the settlement of the first issue depends on which of these presumptions
prevails under the given facts of the case.
There are two undisputed facts crucial in resolving the first issue: (1) the
petitioner failed to pay the full amount of the second loan upon maturity; and
(2) the second loan was subject to interest, and in case of default, to penalty
and attorney's fees.

But before proceeding any further, we first tackle the petitioner's denial of the
genuineness and due execution of the second promissory note. He denies that
he stipulated upon and consented to the interest, penalty and attorney's fees
because he purportedly signed the promissory note in blank. 23redarclaw
This allegation deserves scant consideration. It is self-serving and unsupported
by evidence.
As aptly observed by the RTC and the CA, the promissory notes securing the first
and second loan contained exactly the same terms and conditions. They were
mirror-image of each other except for the date and amount of principal Thus, we
see sufficient basis to believe that the petitioner knew or was aware of such
terms and conditions even assuming that the entries on the interest and penalty
charges were in blank when he signed the promissory note.

principal without any reservation.

On the other hand, the presumption under Article 1253 resolves doubts
involving payment of interest-bearing debts. It is a given under this Article that
the debt produces interest. The doubt pertains to the application of payment;
the uncertainty is on whether the amount received by the creditor is payment
for the principal or the interest. Article 1253 resolves this doubt by providing a
hierarchy: payments shall first be applied to the interest; payment shall then be
applied to the principal only after the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that payments shall
first be applied to the interest and not to the principal shall govern if two facts
exist: (1) the debt produces interest (e.g., the payment of interest is expressly
stipulated) and (2) the principal remains unpaid.

Moreover, we find it significant that the petitioner does not deny the
genuineness and due execution of the first promissory note. Only when he failed
to pay the second loan did he impugn the validity of the interest, penalty and
attorney's fees. The CA and the RTC also noted that the petitioner is a schooled
individual, an engineer by profession, who, because of these credentials, will not
just sign a document in blank without appreciating the import of his
action.24redarclaw

The exception is a situation covered under Article 1176, i.e., when the creditor
waives payment of the interest despite the presence of (1) and (2) above. In
such case, the payments shall obviously be credited to the principal.

These considerations strongly militate against the petitioner's claim that he did
not consent to and stipulated on the interest and penalty charges of the second
loan. Thus, he did not only fail to fully pay the second loan upon maturity; the
loan was also subject to interest, penalty and attorney's fees.

Under this analysis, we rule that the respondent properly credited the daily
payments to the interest and not to the principal because: (1) the debt produces
interest, i.e., the promissory note securing the second loan provided for
payment of interest; (2) a portion of the second loan remained unpaid upon
maturity; and (3) the respondent did not waive the payment of interest.

Since the doubt in the present case pertains to the application of the daily
payments, Article 1253 shall apply. Only when there is a waiver of interest shall
Article 1176 become relevant.

Article 1176 in relation to Article 1253

There was no waiver of interest
Article 1176 falls under Chapter I (Nature and Effect of Obligations) while
Article 1253 falls under Subsection I (Application of Payments), Chapter IV
(Extinguishment of Obligations) of Book IV (Obligations and Contracts) of
the Civil Code.
The structuring of these provisions, properly taken into account, means that
Article 1176 should be treated as a general presumption subject to the more
specific presumption under Article 1253. Article 1176 is relevant on questions
pertaining to the effects and nature of obligations in general, while Article 1253
is specifically pertinent on questions involving application of payments and
extinguishment of obligations.
A textual analysis of the above provisions yields the results we discuss at length
below:LawlibraryofCRAlaw
The presumption under Article 1176 does not resolve the question of whether
the amount received by the creditor is a payment for the principal or interest.
Under this article the amount received by the creditor is the payment for the
principal, but a doubt arises on whether or not the interest is waived because
the creditor accepts the payment for the principal without reservation with
respect to the interest. Article 1176 resolves this doubt by presuming that the
creditor waives the payment of interest because he accepts payment for the

The fact that the official receipts did not indicate whether the payments were
made for the principal or the interest does not prove that the respondent waived
the interest.
We reiterate that the petitioner made the daily payments after the second loan
had already matured and a portion of the principal remained unpaid. As
stipulated, the principal is subject to 26% annual interest.
All these show that the petitioner was already in default of the principal when he
started making the daily payments. The stipulations providing for the 10%
monthly penalty and the additional 25% attorney's fees on the unpaid amount
also became effective as a result of the petitioner's failure to pay in full upon
maturity.
In other words, the so-called interest for default25 (as distinguished from
the stipulated monetary interest of 26% per annum) in the form of the 10%
monthly penalty accrued and became due and demandable. Thus, when the
petitioner started making the daily payments, two types of interest were at the
same time accruing, the 26% stipulated monetary interest and the interest for
default in the form of the 10% monthly penalty.

Article 1253 covers both types of interest. As noted by learned civilist, Arturo M.
Tolentino, no distinction should be made because the law makes no such
distinction. He explained:LawlibraryofCRAlaw
"Furthermore, the interest for default arises because of non-performance by the
debtor, and to allow him to apply payment to the capital without first
satisfying such interest, would be to place him in a better position than
a debtor who has not incurred in delay. The delay should worsen, not
improve, the position of a debtor."26 [Emphasis supplied.]
The petitioner failed to specify which of the two types of interest the respondent
allegedly waived. The respondent waived neither.
In Swagman Hotels and Travel Inc. v. Court of Appeals,27 we applied Article 1253
of the Civil Code in resolving whether the debtor has waived the payments of
interest when he issued receipts describing the payments as "capital
repayment." We held that,
"Under Article 1253 of the Civil Code, if the debt produces interest, payment of
the principal shall not be deemed to have been made until the interest has been
covered. In this case, the private respondent would not have signed the
receipts describing the payments made by the petitioner as "capital
repayment" if the obligation to pay the interest was still subsisting.
"There was therefore a novation of the terms of the three promissory notes in
that the interest was waived..."28 [Emphasis supplied.]
The same ruling was made in an older case 29 where the creditor issued a receipt
which specifically identified the payment as referring to the principal. We held
that the interest allegedly due cannot be recovered, in conformity with Article
1110 of the Old Civil Code, a receipt from the creditor for the principal, that
contains no stipulation regarding interest, extinguishes the obligation of the
debtor with regard thereto when the receipt issued by the creditor showed that
no reservation whatever was made with respect to the interest.
In both of these cases, it was clearly established that the creditors accepted the
payment of the principal. The creditors were deemed to have waived the
payment of interest because they issued receipts expressly referring to the
payment of the principal without any reservation with respect to the interest. As
a result, the interests due were deemed waived. It was immaterial whether the
creditors intended to waive the interest or not. The law presumed such waiver
because the creditors accepted the payment of the principal without reservation
with respect to the interest.
In the present case, it was not proven that the respondent accepted the
payment of the principal. The silence of the receipts on whether the daily
payments were credited against the unpaid balance of the principal or the
accrued interest does not mean that the respondent waived the payment of
interest. There is no presumption of waiver of interest without any evidence
showing that the respondent accepted the daily installments as payments for
the principal.
Ideally, the respondent could have been more specific by indicating on the
receipts that the daily payments were being credited against the interest. Its
failure to do so, however, should not be taken against it. The respondent had
the right to credit the daily payments against the interest applying Article 1253.

It bears stressing that the petitioner was already in default. Under the
promissory note, the petitioner waived demand in case of non-payment upon
due date.30 The stipulated interest and interest for default have both accrued.
The only logical result, following Article 1253 of the Civil Code, is that the daily
payments were first applied against either or both the stipulated interest and
interest for default.
Moreover, Article 1253 is viewed as having an obligatory character and not
merely suppletory. It cannot be dispensed with except by mutual agreement.
The creditor may oppose an application of payment made by the debtor
contrary to this rule.31redarclaw
In any case, the promissory note provided that "interest not paid when due shall
be added to, and become part of the principal and shall likewise bear interest at
the same rate, compounded monthly."32redarclaw
Hence, even if we assume that the daily payments were applied against the
principal, the principal had also increased by the amount of unpaid interest and
the interest on such unpaid interest. Even under this assumption, it is doubtful
whether the petitioner had indeed fully paid the second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of interest, penalty
and attorney's fees to be exorbitant, iniquitous, unconscionable and excessive.
The courts can and should reduce such astronomical rates as reason and equity
demand.
Article 1229 of the Civil Code provides:
"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."
Article 2227 of the Civil Code ordains:
"Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
More importantly, Article 1306 of the Civil Code is emphatic:
"The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy."
Thus, stipulations imposing excessive rates of interest and penalty are void for
being contrary to morals, if not against the law.33redarclaw
Further, we have repeatedly held that while Central Bank Circular No. 905-82,
which took effect on January 1, 1983, effectively removed the ceiling on interest
rates for both secured and unsecured loans, regardless of maturity, nothing in
the said circular could possibly be read as granting carte blanche authority to
lenders to raise interest rates to levels that would be unduly burdensome, to the
point of oppression on their borrowers.34redarclaw

In exercising this power to determine what is iniquitous and unconscionable,

courts must consider the circumstances of each case since what may be
iniquitous and unconscionable in one may be totally just and equitable in
another.35redarclaw
In the recent case of MCMP Construction Corp. v. Monark Equipment Corp.,36 we
reduced the interest rate of twenty-four percent (24%) per annum to twelve
percent (12%) per annum; the penalty and collection charge of three percent
(3%) per month, or thirty-six percent (36%) per annum, to six percent (6%) per
annum; and the amount of attorney's fees from twenty-five percent (25%) of the
total amount due to five percent (5%).
Applying the foregoing principles, we hereby reduce the stipulated rates as
follows: the interest of twenty-six percent (26%) per annum is reduced to two
percent (2%) per annum; the penalty charge of ten percent (10%) per month, or
one-hundred twenty percent (120%) per annum is reduced to two percent (2%)
per annum; and the amount of attorney's fees from twenty-five percent (25%) of
the total amount due to two percent (2%) of the total amount due.
We believe the markedly reduced rates are reasonable, equitable and just under
the circumstances.
It is not entirely the petitioner's fault that he honestly, albeit wrongly, believed
that the second loan had been fully paid. The respondent is partly to blame for
issuing receipts not indicating that the daily payments were being applied
against the interest.
Moreover, the reduction of the rates is justified in the context of its computation
period. In Trade & Investment Dev't Corp. of the Phil. v. Roblett Industrial
Construction Corp.,37 we equitably reduced the interest rate because the case
was decided with finality sixteen years after the filing of the complaint. We
noted that the amount of the loan swelled to a considerably disproportionate
sum, far exceeding the principal debt.
It is the same in the present case where the complaint was filed almost twentyyears ago.

Pabugais vs Sahilwani
ISSUES: (1) Was there a valid consignation? and (2) Can petitioner
withdraw the amount consigned as a matter of right?
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment
and it generally requires a prior tender of payment. [22] In order that consignation

may be effective, the debtor must show that: (1) there was a debt due; (2) the
consignation of the obligation had been made because the creditor to
whom tender of payment was made refused to accept it, or because he was
absent or incapacitated, or because several persons claimed to be entitled to
receive the amount due or because the title to the obligation has been lost; (3)
previous notice of the consignation had been given to the person interested in
the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made the person
interested was notified thereof. Failure in any of these requirements is enough
ground to render a consignation ineffective.
The issues to be resolved in the instant case concerns one of the important
requisites of consignation, i.e, the existence of a valid tender of payment. As
testified by the counsel for respondent, the reasons why his client did not
accept petitioners tender of payment were (1) the check mentioned in the
August 5, 1994 letter of petitioner manifesting that he is settling the obligation
was not attached to the said letter; and (2) the amount tendered was
insufficient to cover the obligation. It is obvious that the reason for respondents
non-acceptance of the tender of payment was the alleged insufficiency thereof
and not because the said check was not tendered to respondent, or because it
was in the form of managers check. While it is true that in general, a managers
check is not legal tender, the creditor has the option of refusing or accepting it.
[24]
Payment in check by the debtor may be acceptable as valid, if no prompt
objection to said payment is made. [25] Consequently, petitioners tender of
payment in the form of managers check is valid.
Anent the sufficiency of the amount tendered, it appears that only the
interest of 18% per annum on the P600,000.00 option/reservation fee stated in
the default clause of the Agreement And Undertaking was agreed upon by the
parties, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the balance
of the purchase price within the stipulated due date, the sum of P600,000.00
shall be deemed forfeited, on the other hand, should the SECOND PARTY [herein
petitioner] fail to deliver within the stipulated period the documents hereby
undertaken, the SECOND PARTY shall return the sum of P600,000.00 with
interest at 18% per annum.[26]
The managers check in the amount of P672,900.00 (representing the
P600,000.00 option/reservation fee plus 18% interest per annum computed from
December 3, 1993 to August 3, 1994)which was tendered but refused by
respondent, and thereafter consigned with the court, was enough to satisfy the
obligation.

There being a valid tender of payment in an amount sufficient to extinguish

the obligation, the consignation is valid.

tenable; (2) of whether petitioners possession of the subject property

is founded on contract or not

As regards petitioners right to withdraw the amount consigned, reliance on

Article 1260 of the Civil Code is misplaced. The said Article provides
Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.

Petitioners failed to present any written memorandum of the alleged lease

arrangements between them and Gualberto De Venecia. The receipts claimed to
have been issued by the owner were not presented on the excuse that the
March 19, 1996 fire burned the same. Simply put, there is a dearth of evidence
to substantiate the averred lessor-lessee relationship. x x x.

Before the creditor has accepted the consignation, or before a judicial

confirmation that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force.

Consistent with this Courts long-standing policy, when the three courts below
have consistently and unanimously ruled on a factual issue, such ruling is
deemed final and conclusive upon this Court, especially in the absence of any
cogent reason to depart therefrom.

The amount consigned with the trial court can no longer be withdrawn by
petitioner because respondents prayer in his answer that the amount consigned
be awarded to him is equivalent to an acceptance of the consignation, which
has the effect of extinguishing petitioners obligation.

From the absence of proof of any contractual basis for petitioners possession of
the subject premises, the only legal implication is that their possession thereof
is by mere tolerance. In Roxas vs. Court of Appeals, we ruled:

Moreover, petitioner failed to manifest his intention to comply with the

Agreement And Undertaking by delivering the necessary documents and the lot
subject of the sale to respondent in exchange for the amount
deposited. Withdrawal of the money consigned would enrich petitioner and
unjustly prejudice respondent.
The withdrawal of the amount deposited in order to pay attorneys fees to
petitioners counsel, Atty. De Guzman, Jr., violates Article 1491 of the Civil Code
which forbids lawyers from acquiring by assignment, property and rights which
are the object of any litigation in which they may take part by virtue of their
profession.[27] Furthermore, Rule 10 of the Canons of Professional Ethics provides
that the lawyer should not purchase any interest in the subject matter of the
litigation which he is conducting. The assailed transaction falls within the
prohibition because the Deed assigning the amount of P672,900.00 to Atty. De
Guzman, Jr., as part of his attorneys fees was executed during the pendency of
this case with the Court of Appeals. In his Motion to Intervene, Atty. De Guzman,
Jr., not only asserted ownership over said amount, but likewise prayed that the
same be released to him. That petitioner knowingly and voluntarily assigned the
subject amount to his counsel did not remove their agreement within the ambit
of the prohibitory provisions. To grant the withdrawal would be to sanction a
void contract.

Lloberera vs Fernandez
ISSUES:
(1)
Whether
consignation
made
by
petitioners
in
contemplation of article 1256 of the new civil code is not legally

A person who occupies the land of another at the latters tolerance or

permission, without any contract between them, is necessarily bound by an
implied promise that he will vacate upon demand, failing which, a summary
action for ejectment is the proper remedy against him.
The judgment favoring the ejectment of petitioners being consistent with law
and jurisprudence can only be affirmed. The alleged consignation of the P20.00
monthly rental to a bank account in respondents name cannot save the day for
the petitioners simply because of the absence of any contractual basis for their
claim to rightful possession of the subject property. Consignation based on
Article 1256 of the Civil Code indispensably requires a creditor-debtor
relationship between the parties, in the absence of which, the legal effects
thereof cannot be availed of.
Article 1256 pertinently provides:
Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility
by the consignation of the thing or sum due.
Unless there is an unjust refusal by a creditor to accept payment from a debtor,
Article 1256 cannot apply. In the present case, the possession of the property by
the petitioners being by mere tolerance as they failed to establish through
competent evidence the existence of any contractual relations between them
and the respondent, the latter has no obligation to receive any payment from
them. Since respondent is not a creditor to petitioners as far as the

alleged P20.00 monthly rental payment is concerned, respondent cannot be

compelled to receive such payment even through consignation under Article
1256. The bank deposit made by the petitioners intended as consignation has
no legal effect insofar as the respondent is concerned.
Finally, as regards the damages awarded by the MTCC in favor of the
respondent, as affirmed by both the RTC and the CA, petitioners failed to
present any convincing argument for the Court to modify the same. The facts of
the case duly warrant payment by the petitioners to respondent of actual and
compensatory damages for depriving the latter of the beneficial use and
possession of the property. Also, the unjustified refusal to surrender possession
of the property by the petitioners who were fully aware that they cannot present
any competent evidence before the court to prove their claim to rightful
possession as against the true owners is a valid legal basis to award attorneys
fees as damages, as well as litigation expenses and cost of suit.
Rule 70 of the Rules of Court relevantly reads:
Sec. 17. Judgment. If after trial the court finds that the allegations of the
complaint are true, it shall render judgment in favor of the plaintiff for the
restitution of the premises, the sum justly due as arrears of rent or as
reasonable compensation for the use and occupation of the premises, attorneys
fees and costs. If it finds that said allegations are not true, it shall render
judgment for the defendant to recover his costs. If a counterclaim is established,
the court shall render judgment for the sum found in arrears from either party
and award costs as justice requires. (Emphasis supplied).
There is no doubt whatsoever that it is within the MTCCs competence and
jurisdiction to award attorneys fees and costs in an ejectment case. After
thoroughly considering petitioners arguments in this respect, the Court cannot
find any strong and compelling reason to disturb the unanimous ruling of the
three (3) courts below on the matter of damages.

Benos vs Lawilao
The Benos spouses argue that consolidation is not proper because the Lawilao
spouses violated the terms of the contract by not paying the bank loan; that
having breached the terms of the contract, the Lawilao spouses cannot insist on
the performance thereof by the Benos spouses; that the contract was actually
an equitable mortgage as shown by the inadequacy of the consideration for the
subject property; and that respondent-spouses remedy should have been for
recovery of the loan or foreclosure of mortgage.

The Lawilao spouses, on the other hand, assert that the Pacto de Retro Sale
reflected the parties true agreement; that the Benos spouses cannot vary its
terms and conditions because they did not put in issue in their pleadings its
ambiguity, mistake or imperfection as well as its failure to express the parties
true intention; that the Benos spouses admitted its genuineness and due
execution; and that the delivery of the property to the Lawilao spouses after the
execution of the contract shows that the agreement was a sale with a right of
repurchase and not an equitable mortgage.
The Lawilao spouses also claim that they complied with their obligation when
they offered to pay the loan to the bank and filed a petition for consignation;
and that because of the failure of the Benos spouses to redeem the property,
the title and ownership thereof immediately vested in them (Lawilao spouses).
ISSUE: Whether the Lawilao spouses can consolidate ownership over
the subject property
Contrary to the aforesaid findings, the evidence shows that the Lawilao spouses
did not make a valid tender of payment and consignation of the balance of the
contract price. As correctly found by the Regional Trial Court:
As matters stand, no valid tender of payment and/or consignation of the
P150,000.00 which the Appellant (Lawilaos) still owes the Appellee
(Benos) has been effected by the former. The amount of P159,000.00
deposited with the MCTC is in relation to Civil Case No. 310 earlier
dismissed by said court, and not to the instant action. Hence, this Court
cannot automatically apply such sum in satisfaction of the aforesaid
debt of the Appellant and order the Appellee creditor to accept the
same.12 (Emphasis supplied)
The Lawilao spouses did not appeal said finding, and it has become final and
binding on them. Although they had repeatedly alleged in their pleadings that
the amount of P159,000.00 was still with the trial court which the Benos
spouses could withdraw anytime, they never made any step to withdraw the
amount and thereafter consign it. Compliance with the requirements of tender
and consignation to have the effect of payment are mandatory. Thus
Tender of payment is the manifestation by debtors of their desire to
comply with or to pay their obligation. If the creditor refuses the tender
of payment without just cause, the debtors are discharged from the
obligation by the consignation of the sum due. Consignation is made by
depositing the proper amount to the judicial authority, before whom the
tender of payment and the announcement of the consignation shall be
proved. All interested parties are to be notified of the consignation.
Compliance with these requisites is mandatory.13 (Emphasis supplied)

In the instant case, records show that the Lawilao spouses filed the petition for
consignation against the bank in Civil Case No. 310 without notifying the Benos
spouses. The petition was dismissed for lack of cause of action against the bank.
Hence, the Lawilao spouses failed to prove their offer to pay the balance of the
purchase price and consignation. In fact, even before the filing of the
consignation case, the Lawilao spouses never notified the Benos spouses of
their offer to pay.
Thus, as far as the Benos are concerned, there was no full and complete
payment of the contract price, which gives them the right to rescind the
contract pursuant to Articles 1191 in relation to Article 1592 of the Civil Code

Cacayorin vs Armed Forces

Petitioners Arguments
Petitioners assert that the elements which make up a valid case for consignation
are present in their Complaint. They add that since a deed of absolute sale has
been issued in their favor, and possession of the property has been surrendered
to them, not to mention that title has been placed in their name, the HLURB lost
jurisdiction over their case. And for this same reason, petitioners argue that
their case may not be said to be one for specific performance of contractual and
legal obligations under PD 957 as nothing more was left to be done in order to
perfect or consolidate their title.
Petitioners thus pray that the herein assailed Decision and Resolution of the CA
be set aside, and that the trial court be ordered to continue with the
proceedings in Civil Case No. 3812.
Respondent's Arguments
Respondent, on the other hand, insists in its Comment20 that jurisdiction over
petitioners case lies with the HLURB, as it springs from their contractual relation
as seller and buyer, respectively, of a subdivision lot. The prayer in petitioners
Complaint involves the surrender or delivery of the title after full payment of the
purchase price, which respondent claims are reciprocal obligations in a sale
transaction covered by PD 957. Respondent adds that in effect, petitioners are
exacting specific performance from it, which places their case within the
jurisdiction of the HLURB.
Does the Complaint in Civil Case No. 3812 make out a case for consignation? It
alleges that:

6.0 Not long after however, RBST 22 closed shop and defendant
Philippine Deposit Insurance Corporation (PDIC) was appointed as its
receiver. The plaintiffs, through a representative, made a verbal inquiry
to the PDIC regarding the payment of their loan but were told that it has
no information or record of the said loan. This made [sic] the plaintiffs in
quandary as to where or whom they will pay their loan, which they
intend to pay in full, so as to cancel the annotation of mortgage in their
title.
7.0 It was discovered that the loan papers of the plaintiffs, including
the duplicate original of their title, were in the possession of defendant
AFPMBAI. It was unclear though why the said documents including the
title were in the possession of AFPMBAI. These papers should have been
in RBSTs possession and given to PDIC after its closure in the latters
capacity as receiver.
8.0 Plaintiffs are now intending to pay in full their real estate loan but
could not decide where to pay the same because of RBST [sic] closure
and PDICs failure to locate the loan records and title. This courts
intervention is now needed in order to determine to [sic] where or whom
the loan should be paid.
9.0 Plaintiffs hereby respectfully prays [sic] for this court to allow the
deposit of the amount of Php77,418.00 as full payment of their principal
loan, excluding interest, pursuant to the Loan and Mortgage Agreement
on 4 July 1994.
From the above allegations, it appears that the petitioners debt is outstanding;
that the Rural Banks receiver, PDIC, informed petitioners that it has no record of
their loan even as it took over the affairs of the Rural Bank, which on record is
the petitioners creditor as per the July 4, 1994 Loan and Mortgage Agreement;
that one way or another, AFPMBAI came into possession of the loan documents
as well as TCT No. 37017; that petitioners are ready to pay the loan in full;
however, under the circumstances, they do not know which of the two the
Rural Bank or AFPMBAI should receive full payment of the purchase price, or to
whom tender of payment must validly be made.
Under Article 1256 of the Civil Code, 24 the debtor shall be released from
responsibility by the consignation of the thing or sum due, without need of prior
tender of payment, when the creditor is absent or unknown, or when he is
incapacitated to receive the payment at the time it is due, or when two or more
persons claim the same right to collect, or when the title to the obligation has
been lost. Applying Article 1256 to the petitioners case as shaped by the
allegations in their Complaint, the Court finds that a case for consignation has
been made out, as it now appears that there are two entities which petitioners

must deal with in order to fully secure their title to the property: 1) the Rural
Bank (through PDIC), which is the apparent creditor under the July 4, 1994 Loan
and Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of
the loan documents and the certificate of title, and the one making demands
upon petitioners to pay. Clearly, the allegations in the Complaint present a
situation where the creditor is unknown, or that two or more entities appear to
possess the same right to collect from petitioners. Whatever transpired between
the Rural Bank or PDIC and AFPMBAI in respect of petitioners loan account, if
any, such that AFPMBAI came into possession of the loan documents and TCT
No. 37017, it appears that petitioners were not informed thereof, nor made privy
thereto.
Indeed, the instant case presents a unique situation where the buyer, through
no fault of his own, was able to obtain title to real property in his name even
before he could pay the purchase price in full. There appears to be no vitiated
consent, nor is there any other impediment to the consummation of their
agreement, just as it appears that it would be to the best interests of all parties
to the sale that it be once and for all completed and terminated. For this reason,
Civil Case No. 3812 should at this juncture be allowed to proceed.
Moreover, petitioners position is buttressed by AFPMBAIs own admission in its
Comment25 that it made oral and written demands upon the former, which
naturally aggravated their confusion as to who was their rightful creditor to
whom payment should be made the Rural Bank or AFPMBAI. Its subsequent
filing of the Motion to Dismiss runs counter to its demands to pay. If it wanted to
be paid with alacrity, then it should not have moved to dismiss Civil Case No.
3812, which was brought precisely by the petitioners in order to be able to
finally settle their obligation in full.
Finally, the lack of prior tender of payment by the petitioners is not fatal to their
consignation case. They filed the case for the exact reason that they were at a
loss as to which between the two the Rural Bank or AFPMBAI was entitled to
such a tender of payment. Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment, where the ground
for consignation is that the creditor is unknown, or does not appear at the place
of payment; or is incapacitated to receive the payment at the time it is due; or
when, without just cause, he refuses to give a receipt; or when two or more
persons claim the same right to collect; or when the title of the obligation has
been lost.
Consignation is necessarily judicial; hence, jurisdiction lies with the
RTC, not with the HLURB.

Phil National Construction vs CA

Facts: Petitioner and private respondents herein entered into a lease contract
which involves a parcel of land owned by the private respondents. This land is
allotted for the rock crushing project of the petitioner. The term of lease
stipulated in the contract is for 5 years, commencing on the date after the
issuance of industrial clearance by the Ministry of Human Settlements. It is with
a monthly rate of Php 20,000, which will be paid annually.
The petitioner obtained a Temporary use permit form the Ministry of
Human Settlements. Thereafter, The petitioner herein, upon the demand of
payment by the private respondents for the first annual rental, expressed their
intention to terminate the contract as it had decided for the discontinuance of
the project due to financial as well as technical difficulties. The private
respondents did not agreed to it and thus filed an action against the petitioner
with the RTC.
The RTC ruled in favor of the respondents and ordered the petitioner to
pay the private respondents with the amount of rentals for 2 years. It was
affirmed by CA. Hence, the present petition.
Upon their appeal to the Supreme Court, the petitioner invoked Art.
1266 and the principle of rebus sic stantibus. They assert that they should be
released from the obligatory force of the contract of lease because the purpose
of the contract did not materialize because of the unforeseen events and causes
beyond its control, citing the abrupt change in the political climate after the
EDSA revolution and financial difficulties.
Issue: Whether or not the petitioner can apply Art. 1266 and the principle of
rebus sic stantibus in order for them to be released from the obligatory force of
the contract of lease.
Ruling: NO. First, the Court ruled that they cannot invoke Art. 1266 because
this provision is only applicable to the obligations to do and not on obligations
to give. Obligations to do includes all kinds of work and services, while an
obligation to give includes the delivery of a movable and immovable thing in
order to create a real right.
In the case at bar, the obligation to pay rentals or deliver the thing in a
contract of lease falls within the prestation to give, hence, it is not covered
within the scope of Art. 1266.
Second, the Court ruled that the petitioner can neither apply the
principle of rebus sic stantibus with the facts of this case. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to exist. This theory is said to
be the basis of Art. 1267.
In this case, petitioner wants the Court to believe that the abrupt
change in the political climate of the country after the EDSA Revolution and its
poor financial condition rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner. However, the

court opined that prior to the execution of the lease contract, the petitioner had
already knowledge of the political climate and political turmoil of the country at
that time, as well as its consequences. But, notwithstanding this prior
knowledge of the situation, the petitioner still entered into the lease contract
with the respondents.
Finally, on petitioners alleged poor financial condition, the same will
neither release the petitioner from the binding effect of the contract. According
to the prior cases decided by the SC, mere pecuniary inability to fulfil an
engagement, does not discharge a contractual obligation.

Magat Jr vs CA
Affirming the validity of the contract, we next discuss whether the contract
was breached.
Guerrero testified that a permit to import the transceivers from Japan was
denied by the Radio Control Board. He stated that he, together with Aligada,
Victorino and a certain John Dauden personally went to the Radio Control Office,
and were denied a permit to import. They also went to the Office of the
President, where Secretary Ronaldo B. Zamora explained that radios were
"banned like guns because of martial law." [44] Guerrero testified that this
prevented him from securing a letter of credit from the Central Bank. [45] This
testimony was not rebutted.
The law provides that "[w]hen the service (required by the contract) has
become so manifestly beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part." [46] Here, Guerrero's inability to
secure a letter of credit and to comply with his obligation was a direct
consequence of the denial of the permit to import. For this, he cannot be
faulted.
Even if we assume that there was a breach of contract, damages cannot be
awarded. Damnum absque injuria.

He borrowed equipment as a prudent and swift alternative. There was no proof

that he resorted to this option with a deliberate and malicious intent to dishonor
his contract with Victorino. An award of damages surely cannot be based on
mere hypotheses, conjectures and surmises. Good faith is presumed, the burden
of proving bad faith rests on the one alleging it. [50] Petitioners did not effectively
discharge the burden in this case.
To recover moral damages in an action for breach of contract, the breach
must be palpably wanton, reckless, malicious, in bad faith, oppressive or
abusive.[51] This is not the case here.
Exemplary damages also cannot be awarded. Guerrero did not act in a
wanton, fraudulent, reckless, oppressive or malevolent manner. [52]
Neither can actual damages be awarded. True, indemnification for damages
contemplates not only actual loss suffered (damnum emergens) but unrealized
profits (lucrum cessans) as well.[53]However, to be entitled to adequate
compensation for pecuniary loss, the loss must be actually suffered and duly
proved.[54] To recover actual damages, the amount of loss must not only be
capable of proof, but must be proven with a reasonable degree of certainty. The
claim must be premised upon competent proof or upon the best evidence
obtainable, such as receipts or other documentary proof.
Only the testimony of Aligada was presented to substantiate petitioners' claim
for unrealized profits.[57] Aligada testified that as a result of the cancellation of
the contract, Victorino had to suspend transactions with his Japanese supplier
for six (6) months. Aligada stated that the volume of Victorino's business with
Subic Naval Base also diminished significantly. Aligada approximated that
Victorino's unrealized business opportunities amounted to P400,000.00. Being a
witness for Victorino's heirs and standing to gain from the contract's fulfillment,
Aligada's testimony is self-serving. It is also hearsay. We fail to see how this
"evidence" proves actual damages with a "reasonable degree of certainty." If
proof is "flimsy", we cannot award actual damages
BPI vs CA

There was no bad faith.

Bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud. [48] Guerrero
honestly relied on the representations of the Radio Control Office and the Office
of the President.
[47]

True, Guerrero borrowed equipment from the Subic Naval Base authorities
at zero cost.[49] This does not automatically translate to bad faith. Guerrero was
faced with the danger of the cancellation of his contract with Subic Naval Base.

More importantly, the respondent court erred when it failed to rule that legal
compensation is proper. Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other.18 Article 1290 of the
Civil Code provides that when all the requisites mentioned in Article 1279 are
present, compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation. Legal compensation operates even against the will
of the interested parties and even without the consent of them.19 Since this
compensation takes place ipso jure, its effects arise on the very day on which all

its requisites concur.20 When used as a defense, it retroacts to the date when
its requisites are fulfilled.21
Article 1279 states that 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;

Referring to the fourth and fifth assignments of error, we must bear in mind
that, in general, "acceptance", in the sense in which this term is used in the
Negotiable Instruments Law9 is not required for checks, for the same are
payable on demand.10 Indeed, "acceptance" and "payment" are, within the
purview of said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.11 In the
words of the Law,12 "the acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer," which, in the case of checks, is the
payment, on demand, of a given sum of money. Upon the other hand, actual
payment of the amount of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's obligation to pay the
aforementioned sum, but, also, a compliance with such obligation.

(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.

The elements of legal compensation are all present in the case at bar. The
obligors bound principally are at the same time creditors of each other.
Petitioner bank stands as a debtor of the private respondent, a depositor. At the
same time, said bank is the creditor of the private respondent with respect to
the dishonored U.S. Treasury Warrant which the latter illegally transferred to his
joint account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.
It is true that the joint account of private respondent and his wife was debited in
the case at bar. We hold that the presence of private respondents wife does not
negate the element of mutuality of parties, i.e., that they must be creditors and
debtors of each other in their own right. The wife of private respondent is not a
party in the case at bar. She never asserted any right to the debited U.S.
Treasury Warrant. Indeed, the right of the petitioner bank to make the debit is
clear and cannot be doubted. To frustrate the application of legal compensation
on the ground that the parties are not all mutually obligated would result in
unjust enrichment on the part of the private respondent and his wife who herself
out of honesty has not objected to the debit.
The rule as to mutuality is strictly applied at law. But not in equity, where to
allow the same would defeat a clear right or permit irremediable injustice

PNB vs CA

EGV Realty vs CA
It is petitioners assertion that the ruling of the Court of Appeals to offset
the alleged losses as a result of the robberies in the amount of P12,295.00 from
the unpaid monthly dues of P13,142.67 is unfounded because respondent
Unisphere is not the owner of the goods lost but a third party,
Amtrade. Respondent Unisphere, on its part, claims that this issue is factual,
hence, not a proper issue to raise before this Court.
ISSUE: Whether or not set-off or compensation has taken place in the instant case
Compensation or offset under the New Civil Code takes place only when two
persons or entities in their own rights, are creditors and debtors of each
other. (Art. 1278). xxx
A distinction must be made between a debt and a mere claim. A debt is an
amount actually ascertained. It is a claim which has been formally passed upon
by the courts or quasi-judicial bodies to which it can in law be submitted and
has been declared to be a debt. A claim, on the other hand, is a debt in
embryo. It is mere evidence of a debt and must pass thru the process prescribed
by law before it develops into what is properly called a debt. (Vallarta vs. CA,
163 SCRA 587). Absent, however, any such categorical admission by an obligor
or final adjudication, no compensation or off-set can take place. Unless admitted
by a debtor himself, the conclusion that he is in truth indebted to another
cannot be definitely and finally pronounced, no matter how convinced he may
be from the examination of the pertinent records of the validity of that
conclusion the indebtedness must be one that is admitted by the alleged debtor
or pronounced by final judgment of a competent court or in this case by the
Commission (Villanueva vs. Tantuico, 182 SCRA 263).

There can be no doubt that Unisphere is indebted to the Corporation for its
unpaid monthly dues in the amount of P13,142.67. This is admitted. But
whether the Corporation is indebted to Unisphere is vigorously disputed by the
former.
It appears quite clear that the offsetting of debts does not extend to
unliquidated, disputed claims arising from tort or breach of contract. (Compania
General de Tobacos vs. French and Unson, 39 Phil. 34; Lorenzo and Martinez vs.
herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to the
Corporation on September 23, 1983 without notifying the latter. It was only on
February 24, 1984, or five months after, that it informed the corporation of its
suspension of payment of the condominium dues to offset the losses it suffered
because of the robberies.
In resisting the finding which underscores their negligence, E.G.V. Realty and
Cristina condominium corporation, would have this Court appreciate in their
favor the admission of Mr. Alfonso Zamora of Unisphere that there was no such
agreement among the unit owners that any member who incurred losses will be
indemnified from the common contribution. (TSN, July 7, 1987, p. 60).
The herein appellees further argue that the cause of action for reimbursement
of the value of the items lost because of the robberies should be against the
security agency and not the Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code which
provides:
ART. 1170.- Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner contravene the tenor
thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer with
respect to the losses suffered by Unisphere in the amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on November
28, 1981 and July 26, 1982 inside 301 Cristina Condominium.

xxx xxx xxx

From the undisputed facts, plaintiff was remissed (sic) within its obligation to
provide safety to respondent inside its unit. This was demonstrated by the fact
that two robbery incidents befell respondents under the negligent eye of
plaintiffs hired security guards. It can be safely pronounced that plaintiff has not
complied with what was incumbent upon it to do in a proper manner.
Since it has been determined and proven by the evidence presented before the
hearing office of respondent SEC that Unisphere indeed suffered losses because
of the robbery incidents and since it (Unisphere) did not refute its liability to the
corporation for the unpaid monthly dues in the amount of P13,142. 67, this
amount should be set-off against the aforestated losses of Unisphere. [7]
We fully agree with the appellate courts dissertation on the nature and
character of a set-off or compensation. However, we cannot subscribe to its
conclusion that a set-off or compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take place when
two persons, in their own right, are creditors and debtors of each
other. Compensation is a mode of extinguishing to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors an
creditors of each other and 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. [8] Article 1279 of the same Code
provides:
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;

Plaintiff admits that it had secured the services of Jimenez Protective and
Security Agency to safeguard the Condominium premises under its instructions
and supervision, but which failed to detect the robbery incidents that occurred
twice at Unit 301 of respondent, canting (sic) away bulk items.

(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

Absent any showing that all of these requisites exist, compensation may
not take place.
While respondent Unisphere does not deny its liability for its unpaid dues to
petitioners, the latter do not admit any responsibility for the loss suffered by the
former occasioned by the burglary. At best, what respondent Unisphere has
against petitioners is just a claim, not a debt. Such being the case, it is not
enforceable in court. It is only the debts that are enforceable in court, there
being no apparent defenses inherent in them. [9] Respondent Unispheres claim
for its loss has not been passed upon by any legal authority so as to elevate it to
the level of a debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,
[10]
that:
Compensation or offset takes place by operation of law when two (2) persons, in
their own right, are creditor and debtor of each other. For compensation to take
place, a distinction must be made between a debt and a mere claim. A debt is a
claim which has been formally passed upon by the highest authority to which it
can in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass
thru the process prescribed by law before it develops into what is properly called
a debt.[11]
Tested by the foregoing yardstick, it has not been sufficiently established
that compensation or set-off is proper here as there is lack of evidence to show
that petitioners E.G.V. Realty and CCC and respondent Unisphere are mutually
debtors and creditors to each other.
Considering the foregoing disquisition, therefore, we find that respondent
Court of Appeals committed reversible error in ruling that compensation or setoff is proper in the instant case.

Metrobank vs Tonda

by HTAC's Vice President for Finance, METROBANK was informed that the
amount "may be applied anytime to the payment of the trust receipts account
upon implementation of the parties of the terms of the restructuring." [13] The
parties failed to agree on the terms of the loan restructuring agreement as the
offer by the TONDAS to restructure the loan was followed by a series of counteroffers which yielded nothing. It is axiomatic that acceptance of an offer must be
unqualified and absolute[14] to perfect a contract. The alleged payment of the
trust receipts accounts never became effectual on account of the failure of the
parties to finalize a loan restructuring arrangement.
Second, the handwritten note by the METROBANK officer
acknowledging receipt of the checks amounting to P2.8 Million made
no reference to the TONDAS' trust receipt obligations, and we cannot
presume that it was anything more than an ordinary bank deposit. The
Court of Appeals citing the case of Tan Tiong Tick vs. American
Apothecories[15] implied that in making the deposit, the TONDAS are
entitled to set off, by way of compensation, their obligations to
METROBANK. However, Article 1288 of the Civil Code provides that
"compensation shall not be proper when one of the debts consists in
civil liability arising from a penal offense" as in the case at
bar. The raison d'etre for this is that, "if one of the debts consists in
civil liability arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of such obligation is
imperative."
Third, reliance on the negotiations for the settlement of the trust receipts
obligations between the TONDAS and METROBANK is simply misplaced. The
negotiations pertain and affect only the civil aspect of the case but does not
preclude prosecution for the offense already committed. It has been held that
"[a]ny compromise relating to the civil liability arising from an offense does not
automatically terminate the criminal proceeding against or extinguish the
criminal liability of the malefactor."[17] All told, the P2.8 Million deposit could not
be considered as having settled the trust receipts obligations of the TONDAS to
the end of extinguishing any incipient criminal culpability arising therefrom

Trinidad vs Acapulco
Compensation is not proper when one debts consists in civil liability
arising from a penal offense. The raison d'etre for this is that, "if one of
the debts consists in civil liability arising from a penal offense,
compensation would be improper and inadvisable because the
satisfaction of such obligation is imperative
First, the amount of P2.8 million was not directly paid to METROBANK to
settle the trust receipt accounts, but deposited in a joint account of Joaquin G.
Tonda and a certain Wang Tien En. In a letter dated February 28, 1992, signed

First United Constructors vs Bayanihan

Legal compensation was permissible

Legal compensation takes place when the requirements set forth in Article 1278
and Article 1279 of the Civil Code are present, to wit:
Article 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other."
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consists 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.
As to whether petitioners could avail themselves of compensation, both the RTC
and CA ruled that they could not because the claims of petitioners against
respondent were not liquidated and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount
of P71,350.00 stated in their counterclaim, and the CA concurred in the finding,
stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants
were charging plaintiff only for the following items of repair:
1. Cost of repair and spare parts -

P46,800.00

2. Cost of repair and spare parts -

24,550.00

P71,350.00
Said amounts may be considered to have been spent for repairs covered by the
warranty period of three (3) months. While the invoices (Exhs. "2-B" and "3-A")
dated September 26, 1992 and September 18, 1992, this delay in repairs is
attributable to the fact that when defects were brought to the attention of the
plaintiff in the letter of August 14, 1992 (Exh. "8") which was within the
warranty period, the plaintiff did not respond with the required repairs and
actual repairs were undertaken by defendants. Thereafter, the spare parts
covered by Exhibits "2-B" and "3-A" pertain to the engine, which was covered by
the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded
correction of defects. In their letter of August 22, 1992 (Exh. "9") they
demanded replacement. In their letter of August 27, 1992 (Exh. "10"), they
demanded replacement/repair. In September, 1992, they undertook repairs
themselves (Exhs. "2-B" and "3-A") and demanded payment for the expenses in
their letter of December 16, 1992 (Exh. "1"). All other items of expenses
connected with subsequent breakdowns are no longer chargeable to plaintiff
which granted only a 3-month warranty. x x x
Considering that preponderant evidence showing that petitioners had spent the
amount of P71,350.00 for the repairs and spare parts of the second dump truck
within the warranty period of three months supported the finding of the two
lower courts, the Court accepts their finding. Verily, factual findings of the trial
court, when affirmed by the CA, are conclusive on the Court when supported by
the evidence on record.
A debt is liquidated when its existence and amount are determined. Accordingly,
an unliquidated claim set up as a counterclaim by a defendant can be set off
against the plaintiffs claim from the moment it is liquidated by judgment.
Article 1290 of the Civil Code provides that when all the requisites mentioned in
Article 1279 of the Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount. With
petitioners expenses for the repair of the dump truck being already established
and determined with certainty by the lower courts, it follows that legal
compensation could take place because all the requirements were present.
Hence, the amount of P71,350.00 should be set off against petitioners unpaid
obligation of P735,000.00, leaving a balance of P663,650.00, the amount
petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and
appellate courts.1wphi1 The legal interest rate to be imposed from February
11, 1993, the time of the extrajudicial demand by respondent, should be 6% per

annum in the absence of any stipulation in writing in accordance with Article

2209 of the Civil Code, which provides:
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.

Phil. Trust vs Roxas

We agree with the Court of Appeals that it was too late for PTC to set
up legal compensation as a defense because the Main Case had
already reached the execution stage. The rule is that once a decision
becomes final and executory, execution shall issue as a matter of right, 24 and
the issuance of a writ of execution is the court's ministerial duty, compellable by
mandamus.25 This is in accordance with the doctrine of immutability of final
judgments, which states that a judgment that has become final and executory is
immutable and unalterable, and may no longer be modified in any respect, even
if the modification is meant to correct what is perceived to be an erroneous
conclusion of fact or law, and regardless of whether the modification is
attempted to be made by the court rendering it or by the highest Court of the
land.26 Although there are recognized exceptions to this doctrine, one of which is
where there is a supervening event that renders execution inequitable or
unjust,27 none obtains in this case.
First, there is nothing unjust or inequitable in the issuance of the writ of
execution in this case because execution will have no effect on the unpaid loan
obligation of the Spouses Roxas to PTC. The Spouses Roxas' unpaid loan
obligation to PTC is the subject of a separate case now pending before the Court
of Appeals, CA-G.R. CV No. 30340. Thus, there exists a proper forum where PTC
may be allowed to recover whatever is due from the Spouses Roxas. What is
inequitable is to allow PTC to recover its credit in full in CA-G.R. CV No. 30340
while concurrently being allowed to offset its judgment debt in this case. In such
instance, there would effectively be double recovery on the part of PTCwhich
we cannot sanction because of the fundamental proscription against unjust
enrichment.28
Second, it would be more unjust to stay the execution of a decision that had
become final and executory twenty three (23) years ago. There should be an
end to litigation, for public policy dictates that once a judgment becomes final,
executory, and unappealable, the prevailing party should not be denied the
fruits of his victory by some subterfuge devised by the losing party. 29 Unjustified
delay in the enforcement of a judgment sets at naught the role and purpose of
the courts to resolve justiciable controversies with finality. 30 To accept PTC's
contentions would not only be unfair to private respondents but, more
importantly, would defeat a vital poliey consideration behind the doctrine of
immutability of final judgments.
B

The Bataan RTC and the Court of Appeals also correctly ruled that PTC should
have raised the argument on legal compensation at the trial stage. The 1964
Rules of Court, which was then in effect at the time the Main Case was filed by
the Spouses Roxas in 1980, provides that:cralawlawlibrary
RULE 9. Effect of Pleadings
Sec. 2. Defenses and objections not pleaded deemed waived. Defenses and
objections not pleaded either in a motion to dismiss or in the answer
are deemed waived; except the failure to state a cause of action which may
be alleged in a later pleading, if one is permitted, or by motion for judgment on
the pleadings, or at the trial on the merits; but in the last instance, the motion
shall be disposed of as provided in section 5 of Rule 10 in the light of any
evidence which may have been received. Whenever it appears that the court
has no jurisdiction over the subject-matter, it shall dismiss the
action.31 (Emphasis added)chanrobleslaw
Although legal compensation takes place by operation of law, it must be alleged
and proved as a defense by the debtor who claims its benefits. Only after it is
proved will its effects retroact to the moment when all the requisites under
Article
1279
of
the
Civil
Code
have
concurred. 32
PTC's contention that it could not have raised legal compensation as a defense
because it was not yet a debtor of the Spouses Roxas when it filed its answer is
unconvincing. Under Rule 8, Section 2 of the 1964 Rules of Court, "[a] party may
set forth two or more statements of a claim or defense alternatively or
hypothetically, either in one cause of action or defense or in separate causes of
action or defenses."33 Thus, the defense of compensation would have been
proper and allowed under the rules even if PTC disclaimed any liability at the
time it filed its answer. In Marquez v. Valencia,34 we held that when a defendant
failed to set up such alternative defenses and chosen or elected to rely on one
only, the overruling thereof was a complete determination of the controversy
between the parties, which bars a subsequent action based upon an unpleaded
defense. Unmistakably, the rationale behind this is the proscription against the
splitting
of
causes
of
action.
In any case, even if PTC were excused from pleading compensation as a defense
in its answer, we note that PTC still failed to raise this defense in its motion for
reconsideration of the Bataan RTC decision and in its subsequent appeal. Hence,
there can be no other conclusion than that PTC is already estopped from raising
the issue of legal compensation.
It is fairly clear to us that the reason why PTC did not raise legal compensation
as a defense in the Main Case is because it was banking on a favorable ruling on
its counterclaim in the other case, Civil Case No. 130873. It was presumably an
informed choice arrived at by PTC and its counsel, with full knowledge of the
consequences of its failure to plead this specific claim/defense in the Main Case.

Unfortunately for PTC, its counterclaim in the other case was disallowed. Having
adopted the wrong legal strategy, PTC cannot now expediently change its
theory of the case or its defense at the execution stage of the Main Case.
Following the doctrine of election of remedies, 35 PTC's choice of setting up the
Spouses Roxas' unpaid loan obligation as a counterclaim in Civil Case No.
130873, which has gone to judgment on the merits but is pending appeal,
precludes it from raising compensation of the same loan obligation for the
purpose of opposing the writ of execution in the Main Case. Equitable in nature,
the doctrine of election of remedies is designed to mitigate possible unfairness
to both parties. It rests on the moral premise that it is fair to hold people
responsible for their choices. The purpose of the doctrine is not to prevent any
recourse to any remedy, but to prevent a double redress for a single wrong.

Licaros vs Gatmaitan

Garcia vs Llamas
ISSUE: Whether there was novation of the obligation
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint
and solidary debtor by insisting that novation took place, either through the
substitution of De Jesus as sole debtor or the replacement of the promissory
note by the check. Alternatively, the former argues that the original obligation
was extinguished when the latter, who was his co-obligor, paid the loan with the
check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,[9] the delivery of a check produces the effect of payment
only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. [10] Article 1293 of the
Civil Code defines novation as follows:

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 rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the change
does not come from -- and may even be made without the knowledge of -- the
debtor, since it consists of a third persons assumption of the obligation. As such,
it logically requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. [11] Both modes of substitution by
the debtor require the consent of the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of the
former. It is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement. [13] Whether
extinctive or modificatory, novation is made either by changing the object or the
principal conditions, referred to as objective or real novation; or by substituting
the person of the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation.[14] For novation to
take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.[15]
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the old
one on every point.[16] The test of incompatibility is whether the two obligations
can stand together, each one with its own independent existence. [17]
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check

would take the place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed, the check had
been issued precisely to answer for the obligation. On the one hand, the note
evidences the loan obligation; and on the other, the check answers for it. Verily,
the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also
constitutes novation[18] -- change the terms and conditions of the
obligation. Such payment was already provided for in the promissory note and,
like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation
was novated by the substitution of debtors. In order to change the person of the
debtor, the old one must be expressly released from the obligation, and the
third person or new debtor must assume the formers place in the relation.
[19]
Well-settled is the rule that novation is never presumed.[20] Consequently,
that which arises from a purported change in the person of the debtor must be
clear and express.[21] It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his place, or
that the joint and solidary obligation was cancelled and substituted by the
solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de
Jesus either, the nature of the obligation being solidary due to the fact that the
promissory note expressly declared that the liability of appellants thereunder is
joint and [solidary.] Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to collect from one
of the solidary debtors, he may still proceed against the other or others. x x x [22]
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new debtor.
[23]
Since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express. It cannot be supposed, without
clear proof, that the present respondent has done away with his right to exact
fulfillment from either of the solidary debtors.
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can
be released from it only upon its extinguishment. Respondents acceptance of his

check did not change the person of the debtor, because

and solidary obligor is required to pay the entirety of the obligation.

joint

It must be noted that in a solidary obligation, the creditor is entitled to demand

the satisfaction of the whole obligation from any or all of the debtors. [26] It is up
to the former to determine against whom to enforce collection. [27] Having made
himself jointly and severally liable with De Jesus, petitioner is therefore
liable[28] for the entire obligation

California Bus Lines vs State Investments

CBLI first contends that the Restructuring Agreement did not merely
change the incidental elements of the obligation under all sixteen (16)
promissory notes, but it also increased the obligations of CBLI with the addition
of new obligations that were incompatible with the old obligations in the said
notes.[37] CBLI adds that even if the restructuring agreement did not totally
extinguish the obligations under the sixteen (16) promissory notes, the July 24,
1984, compromise agreement executed in Civil Case No. 0023-P did. [38] CBLI
cites paragraph 5 of the compromise agreement which states that the
agreement between it and CBLI was in full and final settlement, adjudication
and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case. According to CBLI, inasmuch as the
five promissory notes were subject matters of the Civil Case No. 0023-P, the
decision approving the compromise agreement operated as res judicata in the
present case.[39]
Novation has been defined as the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which terminates
the first, either by changing the object or principal conditions, or by substituting
the person of the debtor, or subrogating a third person in the rights of the
creditor.[40]
Novation, in its broad concept, may either be extinctive or modificatory.
It is extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when the
old obligation subsists to the extent it remains compatible with the amendatory
agreement.[42] An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the
debtor or subrogating a third person in the rights of the creditor (subjective or
personal).[43] Novation has two functions: one to extinguish an existing
obligation, the other to substitute a new one in its place. [44] For novation to take
place, four essential requisites have to be met, namely, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation.
[41]

[45]

Novation is never presumed,[46] and the animus novandi, whether totally or

partially, must appear by express agreement of the parties, or by their acts that
are too clear and unequivocal to be mistaken.[47]
The extinguishment of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly. [48] The

term "expressly" means that the contracting parties incontrovertibly disclose

that their object in executing the new contract is to extinguish the old one.
[49]
Upon the other hand, no specific form is required for an implied novation, and
all that is prescribed by law would be an incompatibility between the two
contracts.[50] While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.
There are two ways which could indicate, in fine, the presence
of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. The first is when novation has been
explicitly stated and declared in unequivocal terms. The second is when the old
and the new obligations are incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one
having its independent existence.[51] If they cannot, they are incompatible and
the latter obligation novates the first.[52] Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and insufficient to extinguish
the original obligation.[53]
The necessity to prove the foregoing by clear and convincing evidence is
accentuated where the obligation of the debtor invoking the defense
of novation has already matured.[54]
With respect to obligations to pay a sum of money, this Court has
consistently applied the well-settled rule that the obligation is not novated by an
instrument that expressly recognizes the old, changes only the terms of
payment, and adds other obligations not incompatible with the old ones, or
where the new contract merely supplements the old one.[55]
In Inchausti & Co. v. Yulo
this Court held 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. In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this Court declared that it
is well settled that a mere extension of payment and the addition of another
obligation not incompatible with the old one is not a novation thereof.
[56]

2. Interest: 14% per annum;

3. Failure to pay any of the installments would render the entire
remaining balance due and payable at the option of the holder
of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and comaker (its president, Mr. Dionisio O. Llamas, Jr)
were solidarily liable of attorneys fees and expenses of 25% of
the amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance

In this case, the attendant facts do not make out a case of novation. The
restructuring agreement between Delta and CBLI executed on October 7, 1981,
shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding
of novation by implication.[59] However, our review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement.

NOW, THEREFORE, for and in consideration of the foregoing premises, the

parties hereby agree and covenant as follows:

The five promissory notes, which Delta assigned to SIHI on September 13,
1983, contained the following common stipulations:

Daily payments of P11,000.00 from

October 1 to December 31, 1981

1. They were payable in 60 monthly installments up to July 31, 1985;

1. That the past due installment referred to above plus the current and/or falling
due amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and
52 to 57 shall be paid by CBL and/or LLAMAS in accordance with the following
schedule of payments:

Daily payments of P12,000.00 from

January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from
April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily
cash payments due to DMC in accordance with the schedule in paragraph
1. DMC may send a collector to receive the amount due at CBLs premises. All
delayed remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in
accordance with paragraph of the restructured past due installments above
mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the
operations of CBL pertaining to the financial and field operations and service
and maintenance matters of M.A.N. units. Records needed by the DMC
representatives in monitoring said operations shall be made available by CBL
and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and
52 to 57, CBL or LLAMAS shall remit in lump sum whatever balance is left after
deducting all payments made from what is due and payable to DMC in
accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to
57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed
upon and the total accumulated unremitted amount has reached and (sic)
equivalent of Sixty (60) days, DMC and Silverio shall exercise any or all of the
following options:
(a) The whole sum remaining then unpaid plus 2% penalty per
month and 16% interest per annum on total past due
installments will immediately become due and payable. In the
event of judicial proceedings to enforce collection, CBL and
LLAMAS will pay to DMC an additional sum equivalent to 25%
of the amount due for attorneys fees and expenses of

collection, whether actually incurred or not, in addition to the

cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel
Mortgage over various M.A.N. Diesel bus with Nos. CU 80-39,
80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time
that CBL and/or LLAMAS have remitted and/or updated their
past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the
M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at
the time of purchase, an inventory of spare parts consisting of at least ninety
(90%) percent of the needs of CBL based on a moving 6-month requirement to
be prepared and submitted by CBL, and acceptable to DMC, within the first
week of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the
relationship between the parties and that the Chattel Mortgage over various
M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44
and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall
continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to
Notary Public Alberto G. Doller and to instruct him not to proceed with the public
auction sale of the shares of stock of CBL subject-matter of the Deed of Pledge
of Shares. LLAMAS, on the other hand, undertakes to move for the immediate
dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto
G. Doller, et al., Court of First Instance of Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement, instead of
containing provisions absolutely incompatible with the obligations of the
judgment, expressly ratifies such obligations in paragraph 8 and contains
provisions for satisfying them. There was no change in the object of the prior
obligations. The restructuring agreement merely provided for a new schedule of
payments and additional security in paragraph 6 (c) giving Delta authority to
take over the management and operations of CBLI in case CBLI fails to pay
installments equivalent to 60 days. Where the parties to the new obligation
expressly recognize the continuing existence and validity of the old one, there
can be no novation.[61] Moreover, this Court has ruled that an agreement
subsequently executed between a seller and a buyer that provided for a
different schedule and manner of payment, to restructure the mode of
payments by the buyer so that it could settle its outstanding obligation in spite
of its delinquency in payment, is not tantamount to novation. [62]
The addition of other obligations likewise did not extinguish the promissory
notes. In Young v. CA[63], this Court ruled that a change in the incidental
elements of, or an addition of such element to, an obligation, unless otherwise
expressed by the parties will not result in its extinguishment.

In fine, the restructuring agreement can stand together with the promissory
notes.
Neither is there merit in CBLIs argument that the compromise agreement
dated July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged the
five promissory notes. Both Delta and CBLI cannot deny that the five promissory
notes were no longer subject of Civil Case No. 0023-P when they entered into
the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no
more right to compromise the same. Deltas limited authority to collect for SIHI
stipulated in the September 13, 1985, Deed of Sale cannot be construed to
include the power to compromise CBLIs obligations in the said promissory
notes. An authority to compromise, by express provision of Article 1878 [64] of the
Civil Code, requires a special power of attorney, which is not present in this
case. Incidentally, Deltas authority to collect in behalf of SIHI was, by express
provision of the Continuing Deed of Assignment, [65] automatically revoked when
SIHI opted to collect directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring
CBLI to remit the payments directly to SIHI effectively revoked Deltas limited
right to collect in behalf of SIHI. This should have dispelled CBLIs erroneous
notion that Delta was acting in behalf of SIHI, with authority to compromise the
five promissory notes.
But more importantly, the compromise agreement itself provided that it
covered the rights and obligations only of Delta and CBLI and that it did not
refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject
promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement
that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and
between the plaintiffs and the defendants as well as their lawyers, and
operates as full and final settlement, adjudication and termination of all their
rights and obligations as of the date of this agreement, and of the issues in this
case.[66]
Even in the absence of such a provision, the compromise agreement still
cannot bind SIHI under the settled rule that a compromise agreement
determines the rights and obligations of only the parties to it. [67] Therefore, we
hold that the compromise agreement covered the rights and obligations only of
Delta and CBLI and only with respect to the eleven (11) other promissory notes
that remained with Delta.

Aquintey vs Tibong
ISSUE: whether the obligation of respondents to pay the balance of
their loans, including interest, was partially extinguished by the
execution of the deeds of assignment in favor of petitioner, relative to

the loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely
Cirilo in the total amount of P371,000.00
There is no longer a need for the Court to still resolve the issue of whether
respondents' obligation to pay the balance of their loan account to petitioner
was partially extinguished by the promissory notes executed by Juliet Tibong,
Corazon Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and
Antoinette Manuel because, as admitted by petitioner, she was able to collect
the amounts under the notes from said debtors and applied them to
respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of
the ways by which obligations are extinguished. Obligations may be modified by
changing their object or principal creditor or by substituting the person of the
debtor. The burden to prove the defense that an obligation has been
extinguished by novation falls on the debtor. The nature of novation was
extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar
Soriano, Jr., as follows:
Novation may either be extinctive or modificatory, much being
dependent on the nature of the change and the intention of the parties.
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 incompatibility between the old and new
obligation be total on every point such that the old obligation is
completely superseded by the new one. The test of incompatibility is
whether they can stand together, each one having an independent
existence; if they cannot and are irreconciliable, the subsequent
obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in
its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation; (2) an agreement of
all parties concerned to a new contract; (3) the extinguishment of the
old obligation; and (4) the birth of a valid new obligation. Novation is
merely modificatory where the change brought about by any
subsequent agreement is merely incidental to the main obligation (e.g.,
a change in interest rates or an extension of time to pay); in this
instance, the new agreement will not have the effect of extinguishing
the first but would merely supplement it or supplant some but not all of
its provisions. (Citations Omitted)

Novation which consists in substituting a new debtor (delegado) in the place of

the original one (delegante) may be made even without the knowledge or
against the will of the latter but not without the consent of the creditor.
Substitution of the person of the debtor may be effected by delegacion,
meaning, the debtor offers, and the creditor (delegatario), accepts a third
person who consents to the substitution and assumes the obligation. Thus, the
consent of those three persons is necessary. In this kind of novation, it is not
enough to extend the juridical relation to a third person; it is necessary that the
old debtor be released from the obligation, and the third person or new debtor
take his place in the relation. Without such release, there is no novation; the
third person who has assumed the obligation of the debtor merely becomes a
co-debtor or a surety. If there is no agreement as to solidarity, the first and the
new debtor are considered obligated jointly.
In Di Franco v. Steinbaum, the appellate court ruled that as to the consideration
necessary to support a contract of novation, the rule is the same as in other
contracts. The consideration need not be pecuniary or even beneficial to the
person promising. It is sufficient if it be a loss of an inconvenience, such as the
relinquishment of a right or the discharge of a debt, the postponement of a
remedy, the discontinuance of a suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller, the Circuit Court of Appeals ruled
that the theory of novation is that the new debtor contracts with the
old debtor that he will pay the debt, and also to the same effect with
the creditor, while the latter agrees to accept the new debtor for the
old. A novation is not made by showing that the substituted debtor agreed to
pay the debt; it must appear that he agreed with the creditor to do
so. Moreover, the agreement must be based on the consideration of the
creditor's agreement to look to the new debtor instead of the old. It is
not essential that acceptance of the terms of the novation and release of the
debtor be shown by express agreement. Facts and circumstances surrounding
the transaction and the subsequent conduct of the parties may show
acceptance as clearly as an express agreement, albeit implied. 72
We find in this case that the CA correctly found that respondents' obligation to
pay the balance of their account with petitioner was extinguished, pro tanto, by
the deeds of assignment of credit executed by respondent Felicidad in favor of
petitioner.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dation in payment,
exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against
the debtor. It may be in the form of sale, but at times it may constitute

a dation in payment, such as when a debtor, in order to obtain a release from

his debt, assigns to his creditor a credit he has against a third person.
In Vda. de Jayme v. Court of Appeals, the Court held that dacion en pago is the
delivery and transmission of ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of the obligation. It is a special
mode of payment where the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged
against the debtor's obligation. As such, the essential elements of a contract of
sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is
an objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of the
contract of sale, while the debt is considered as the purchase price. In any case,
common consent is an essential prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or obligation.
The requisites for dacion en pago are: (1) there must be a performance of the
prestation in lieu of payment (animo solvendi) which may consist in the delivery
of a corporeal thing or a real right or a credit against the third person; (2) there
must be some difference between the prestation due and that which is given in
substitution (aliud pro alio); and (3) there must be an agreement between the
creditor and debtor that the obligation is immediately extinguished by reason of
the performance of a prestation different from that due.
All the requisites for a valid dation in payment are present in this case. As
gleaned from the deeds, respondent Felicidad assigned to petitioner her credits
"to make good" the balance of her obligation. Felicidad testified that she
executed the deeds to enable her to make partial payments of her account,
since she could not comply with petitioner's frenetic demands to pay the
account in cash. Petitioner and respondent Felicidad agreed to relieve the latter
of her obligation to pay the balance of her account, and for petitioner to collect
the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to
affix their conformity to the deeds. In an assignment of credit, however, the
consent of the debtor is not essential for its perfection; the knowledge thereof or
lack of it affecting only the efficaciousness or inefficaciousness of any payment
that might have been made. The assignment binds the debtor upon acquiring
knowledge of the assignment but he is entitled, even then, to raise against the
assignee the same defenses he could set up against the assignor necessary in
order that assignment may fully produce legal effects. Thus, the duty to pay
does not depend on the consent of the debtor. The purpose of the notice is only

to inform that debtor from the date of the assignment. Payment should be made
to the assignee and not to the original creditor.
The transfer of rights takes place upon perfection of the contract, and ownership
of the right, including all appurtenant accessory rights, is acquired by the
assignee who steps into the shoes of the original creditor as subrogee of the
latter from that amount, the ownership of the right is acquired by the assignee.
The law does not require any formal notice to bind the debtor to the assignee,
all that the law requires is knowledge of the assignment. Even if the debtor had
not been notified, but came to know of the assignment by whatever means, the
debtor is bound by it. If the document of assignment is public, it is evidence
even against a third person of the facts which gave rise to its execution and of
the date of the latter. The transfer of the credit must therefore be held valid and
effective from the moment it is made to appear in such instrument, and third
persons must recognize it as such, in view of the authenticity of the document,
which precludes all suspicion of fraud with respect to the date of the transfer or
assignment of the credit.
As gleaned from the deeds executed by respondent Felicidad relative to the
accounts of her other debtors, petitioner was authorized to collect the amounts
of P6,000.00 from Cabang, and P63,600.00 from Cirilo. They obliged themselves
to pay petitioner. Respondent Felicidad, likewise, unequivocably declared that
Cabang and Cirilo no longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent Felicidad
executed the deeds, petitioner no longer attempted to collect from respondents
the balance of their accounts. It was only in 1999, or after nine (9) years had
elapsed that petitioner attempted to collect from respondents. In the meantime,
petitioner had collected from respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized petitioner in the
deeds to collect the debtors' accounts, and for the latter to pay the same
directly, it cannot thereby be considered that respondent merely authorized
petitioner to collect the accounts of respondents' debtors and for her to apply
her collections in partial payments of their accounts. It bears stressing that
petitioner, as assignee, acquired all the rights and remedies passed by Felicidad,
as assignee, at the time of the assignment. Such rights and remedies include
the right to collect her debtors' obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that
case, the Court ruled that the mere fact that novation does not follow as a
matter of course when the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation when there is no
agreement that the first debtor would be released from responsibility. Thus, the
creditor can still enforce the obligation against the original debtor.

In the present case, petitioner and respondent Felicidad agreed that the
amounts due from respondents' debtors were intended to "make good in part"
the account of respondents. Case law is that, an assignment will, ordinarily, be
interpreted or construed in accordance with the rules of construction governing
contracts generally, the primary object being always to ascertain and carry out
the intention of the parties. This intention is to be derived from a consideration
of the whole instrument, all parts of which should be given effect, and is to be
sought in the words and language employed.
Indeed, the Court must not go beyond the rational scope of the words used in
construing an assignment, words should be construed according to their
ordinary meaning, unless something in the assignment indicates that they are
being used in a special sense. So, if the words are free from ambiguity and
expressed plainly the purpose of the instrument, there is no occasion for
interpretation; but where necessary, words must be interpreted in the light of
the particular subject matter. And surrounding circumstances may be
considered in order to understand more perfectly the intention of the parties.
Thus, the object to be accomplished through the assignment, and the relations
and conduct of the parties may be considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment should be
construed most strictly against the assignor, the general rule is that any
ambiguity or uncertainty in the meaning of an assignment will be resolved
against the party who prepared it; hence, if the assignment was prepared by the
assignee, it will be construed most strictly against him or her. One who chooses
the words by which a right is given ought to be held to the strict interpretation
of them, rather than the other who only accepts them

Ricarze vs CA
Petitioner next argues that in no way was PCIB subrogated to the rights of
Caltex, considering that he has no knowledge of the subrogation much less gave
his consent to it. Alternatively, he posits that if subrogation was proper, then the
charges against him should be dismissed, the two Informations being "defective
and void due to false allegations."
Petitioner was charged of the crime of estafa complex with falsification
document. In estafa one of the essential elements "to prejudice of another" as
mandated by article 315 of the Revise Penal Code.
The element of "to the prejudice of another" being as essential element of the
felony should be clearly indicated and charged in the information with TRUTH
AND LEGAL PRECISION.
PCIBs comment that petitioner failed to make a distinction between legal and
conventional subrogation. Subrogation is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his rights. It may either be
legal or conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts. Instances of legal

subrogation are those provided in Article 1302 of the Civil Code. Conventional
subrogation, on the other hand, is that which takes place by agreement of the
parties. Thus, petitioners acquiescence is not necessary for subrogation to take
place because the instant case is one of legal subrogation that occurs by
operation of law, and without need of the debtors knowledge

Ledonio vs Capitol Development

This Court cannot sustain petitioner's contention and hereby declares that the
transaction between Ms. Picache and respondent was an assignment of credit,
not conventional subrogation, and does not require petitioner's consent as
debtor for its validity and enforceability.
An assignment of credit has been defined as an agreement by virtue of which
the owner of a credit (known as the assignor), by a legal cause - such as
sale, dation in payment or exchange or donation - and without need of the
debtor's consent, transfers that credit and its accessory rights to another
(known as the assignee), who acquires the power to enforce it, to the same
extent as the assignor could have enforced it against the debtor.
On the other hand, subrogation, by definition, is the transfer of all the rights of
the creditor to a third person, who substitutes him in all his rights. It may either
be legal or conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties.
Although it may be said that the effect of the assignment of credit is to
subrogate the assignee in the rights of the original creditor, this Court still
cannot definitively rule that assignment of credit and conventional subrogation
are one and the same.
A noted authority on civil law provided a discourse 22 on the difference between
these two transactions, to wit
Conventional Subrogation and Assignment of Credits. 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. In fact it is expressly provided
(article 769) that conventional redemption shall be governed by the
provisions on assignment of credit.
Under our Code, however, conventional
identical to assignment of credit. In the
consent is necessary; in the latter, it is not
extinguishes an obligation and gives rise to a

subrogation is not
former, the debtor's
required. Subrogation
new 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 is
not remedied by the assignment of the creditor's right to another.
(Emphasis supplied.)
This Court has consistently adhered to the foregoing distinction between an
assignment of credit and a conventional subrogation. Such distinction is crucial
because it would determine the necessity of the debtor's consent. In an
assignment of credit, the consent of the debtor is not necessary in order that
the assignment may fully produce the legal effects. What the law requires in an
assignment of credit is not the consent of the debtor, but merely notice to him
as the assignment takes effect only from the time he has knowledge thereof. A
creditor may, therefore, validly assign his credit and its accessories without the
debtor's consent. On the other hand, conventional subrogation requires an
agreement among the parties concerned the original creditor, the debtor, and
the new creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties.
Article 1300 of the Civil Code provides that conventional subrogation must be
clearly established in order that it may take effect. Since it is petitioner who
claims that there is conventional subrogation in this case, the burden of proof
rests upon him to establish the same by a preponderance of evidence.
In Licaros v. Gatmaitan, this Court ruled that there was conventional
subrogation, not just an assignment of credit; thus, consent of the debtor is
required for the effectivity of the subrogation. This Court arrived at such a
conclusion in said case based on its following findings
We agree with the finding of the Court of Appeals that the Memorandum
of Agreement dated July 29, 1988 was in the nature of a conventional
subrogation which requires the consent of the debtor, Anglo-Asean
Bank, for its validity. We note with approval the following
pronouncement of the Court of Appeals:
"Immediately discernible from above is the common feature of
contracts involving conventional subrogation, namely, the
approval of the debtor to the subrogation of a third person in
place of the creditor. That Gatmaitan and Licaros had intended
to treat their agreement as one of conventional subrogation is
plainly borne by a stipulation in their Memorandum of
Agreement, to wit:
"WHEREAS, the parties herein have come to an
agreement on the nature, form and extent of their

mutual prestations which they now record herein with

the express conformity of the third parties concerned"
(emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a
mere "assignee" of appellee's credit, there is simply no sense for them
to have stipulated in their agreement that the same is conditioned on
the "express conformity" thereto of Anglo-Asean Bank. That they did so
only accentuates their intention to treat the agreement as one of
conventional subrogation. And it is basic in the interpretation of
contracts that the intention of the parties must be the one pursued
(Rule 130, Section 12, Rules of Court).
xxxx
Aside for the 'whereas clause" cited by the appellate court in its
decision, we likewise note that on the signature page, right under the
place reserved for the signatures of petitioner and respondent, there is,
typewritten, the words "WITH OUR CONFORME." Under this notation, the
words "ANGLO-ASEAN BANK AND TRUST" were written by hand. To our
mind, this provision which contemplates the signed conformity of AngloAsean Bank, taken together with the aforementioned preambulatory
clause leads to the conclusion that both parties intended that AngloAsean Bank should signify its agreement and conformity to the
contractual arrangement between petitioner and respondent. The fact
that Anglo-Asean Bank did not give such consent rendered the
agreement inoperative considering that, as previously discussed, the
consent of the debtor is needed in the subrogation of a third person to
the rights of a creditor.

petitioner to the transaction, nor any space provided for his signature on the
said document.

Heirs of Servando Franco vs Gonzales

Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on
February 5, 1992 by respondent Veronica whereby Servandos obligation was
fixed at P750,000.00. They insist that even the maturity date was extended until
February 29, 1992. Such changes, they assert, were incompatible with those of
the original agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent
one that extinguishes the first, either by changing the object or the principal
conditions, or by substituting the person of the debtor, or by subrogating a third
person in the rights of the creditor. [16] For a valid novation to take place, there
must be, therefore: (a) a previous valid obligation; (b) an agreement of the
parties to make a new contract; (c) an extinguishment of the old contract; and
(d) a valid new contract.[17] In short, the new obligation extinguishes the prior
agreement only when the substitution is unequivocally declared, or the old and
the new obligations are incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation upon compliance

None of the foregoing circumstances are attendant in the present case. The
Assignment of Credit, dated 1 April 1989, executed by Ms. Picache in favor of
respondent, was a simple deed of assignment. There is nothing in the said
Assignment of Credit which imparts to this Court, whether literally or
deductively, that a conventional subrogation was intended by the parties
thereto. The terms of the Assignment of Credit only convey the straightforward
intention of Ms. Picache to "sell, assign, transfer, and convey" to respondent the
debt due her from petitioner, as evidenced by the two promissory notes of the
latter, dated 9 November 1988 and 10 November 1988, for the consideration
of P60,000.00. By virtue of the same document, Ms. Picache gave respondent
full power "to sue for, collect and discharge, or sell and assign" the very same
debt. The Assignment of Credit was signed solely by Ms. Picache, witnessed by
two other persons. No reference was made to securing the conforme of

with either of these two conditions.[18]

The receipt dated February 5, 1992, excerpted below, did not create a new
obligation incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No.
001700 in the amount of P400,00.00 as partial payment of loan.
Balance of P375,000.00 to be paid on or before FEBRUARY 29,
1992. In case of default an interest will be charged as stipulated
in the promissory note subject of this case.

(Sgd)
V. Gonzalez[19]

The receipt dated February 5, 1992 was only the proof of Servandos payment of
his obligation as confirmed by the decision of the RTC. It did not establish the

To be clear, novation is not presumed. This means that the parties to a contract
should expressly agree to abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new obligations must be
incompatible on every point. [20] According to California Bus Lines, Inc. v. State
Investment House, Inc.:[21]

that an obligation to pay a sum of money is not novated by an instrument that

expressly recognizes the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or the new contract merely
supplements the old one.[24] A new contract that is a mere reiteration,
acknowledgment or ratification of the old contract with slight modifications or

The extinguishment of the old obligation by the new one is a

necessary element of novation which may be effected either
expressly or impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really
no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone
for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
There is incompatibility when the two obligations cannot stand together, each
one having its independent existence. If the two obligations cannot stand
together,

novation of his agreement with the respondents. Indeed, the Court has ruled

the latter obligation novates

the first.[22] Changes

that breed

incompatibility must be essential in nature and not merely accidental. The

incompatibility must affect any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the change is
merely modificatory in nature and insufficient to extinguish the original
obligation.[23]

alterations as to the cause or object or principal conditions can stand together

with the former one, and there can be no incompatibility between them.
[25]

Moreover, a creditors acceptance of payment after demand does not operate

as a modification of the original contract.[26]

Worth noting is that Servandos liability was joint and solidary with his codebtors. In a solidary obligation, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. [27] The choice to
determine against whom the collection is enforced belongs to the creditor until
the obligation is fully satisfied.[28] Thus, the obligation was being enforced
against Servando, who, in order to escape liability, should have presented
evidence to prove that his obligation had already been cancelled by the new
obligation or that another debtor had assumed his place. In case of change in
the person of the debtor, the substitution must be clear and express, [29] and
made with the consent of the creditor.[30] Yet, these circumstances did not obtain
herein, proving precisely that Servando remained a solidary debtor against
whom the entire or part of the obligation might be enforced.

In light of the foregoing, the issuance of the receipt created no new obligation.
Instead, the respondents only thereby recognized the original obligation by
stating in the receipt that the P400,000.00 was partial payment of loan and by

Lastly, the extension of the maturity date did not constitute a novation of the
previous agreement. It is settled that an extension of the term or period of the
maturity date does not result in novation.

referring to the promissory note subject of the case in imposing the interest.
The loan mentioned

in

the

receipt

was

still

the

same

loan

the P500,000.00 extended to Servando. Advertence to the interest stipulated in

the promissory note indicated that the contract still subsisted, not replaced and
extinguished, as the petitioners claim.

Ace Foods vs Micropacific

involving
The petition lacks merit.

A contract is what the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it. The real nature of a
contract may be determined from the express terms of the written agreement
and from the contemporaneous and subsequent acts of the contracting parties.

However, in the construction or interpretation of an instrument, the intention

of the parties is primordial and is to be pursued. The denomination or title
given by the parties in their contract is not conclusive of the nature of its
contents.
The very essence of a contract of sale is the transfer of ownership in
exchange for a price paid or promised. This may be gleaned from Article
1458 of the Civil Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties obligates
himself to transfer the ownership and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (Emphasis supplied)
Corollary thereto, a contract of sale is classified as a consensual contract,
which means that the sale is perfected by mere consent. No particular form is
required for its validity. Upon perfection of the contract, the parties may
reciprocally demand performance, i.e., the vendee may compel transfer of
ownership of the object of the sale, and the vendor may require the vendee to
pay the thing sold.
In contrast, a contract to sell is defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the property
despite delivery thereof to the prospective buyer, binds himself to sell the
property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, i.e., the full payment of the purchase price. A contract to sell may
not even be considered as a conditional contract of sale where the seller
may likewise reserve title to the property subject of the sale until the fulfillment
of a suspensive condition, because in a conditional contract of sale, the first
element of consent is present, although it is conditioned upon the happening of
a contingent event which may or may not occur.
In this case, the Court concurs with the CA that the parties have agreed to a
contract of sale and not to a contract to sell as adjudged by the RTC. Bearing in
mind its consensual nature, a contract of sale had been perfected at the precise
moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order,
accepted the latters proposal to sell the subject products in consideration of the
purchase price of P646,464.00. From that point in time, the reciprocal
obligations of the parties i.e., on the one hand, of MTCL to deliver the said
products to ACE Foods, and, on the other hand, of ACE Foods to pay the
purchase price therefor within thirty (30) days from delivery already arose and
consequently may be demanded. Article 1475 of the Civil Code makes this clear:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject
to the provisions of the law governing the form of contracts.
At this juncture, the Court must dispel the notion that the stipulation anent
MTCLs reservation of ownership of the subject products as reflected in the
Invoice Receipt, i.e., the title reservation stipulation, changed the complexion of
the transaction from a contract of sale into a contract to sell. Records are bereft
of any showing that the said stipulation novated the contract of sale between
the parties which, to repeat, already existed at the precise moment ACE Foods
accepted MTCLs proposal. To be sure, novation, in its broad concept, may either
be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it
remains compatible with the amendatory agreement. In either case, however,
novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that
are too clear and unequivocal to be mistaken.
In the present case, it has not been shown that the title reservation stipulation
appearing in the Invoice Receipt had been included or had subsequently
modified or superseded the original agreement of the parties. The fact that the
Invoice Receipt was signed by a representative of ACE Foods does not, by and of
itself, prove animus novandi since: (a) it was not shown that the signatory was
authorized by ACE Foods (the actual party to the transaction) to novate the
original agreement; (b) the signature only proves that the Invoice Receipt was
received by a representative of ACE Foods to show the fact of delivery; and (c)
as matter of judicial notice, invoices are generally issued at the consummation
stage of the contract and not its perfection, and have been even treated as
documents which are not actionable per se, although they may prove sufficient
delivery. Thus, absent any clear indication that the title reservation stipulation
was actually agreed upon, the Court must deem the same to be a mere
unilateral imposition on the part of MTCL which has no effect on the nature of
the parties original agreement as a contract of sale. Perforce, the obligations
arising thereto, among others, ACE Foodss obligation to pay the purchase
price as well as to accept the delivery of the goods, remain enforceable
and subsisting.1wphi1
As a final point, it may not be amiss to state that the return of the subject
products pursuant to a rescissory action is neither warranted by ACE Foodss
claims of breach either with respect to MTCLs breach of its purported "after
delivery services" obligations or the defective condition of the products - since
such claims were not adequately proven in this case. The rule is clear: each

party must prove his own affirmative allegation; one who asserts the affirmative
of the issue has the burden of presenting at the trial such amount of evidence
required by law to obtain a favorable judgment, which in civil cases, is by
preponderance of evidence. This, however, ACE Foods failed to observe as
regards its allegations of breach. Hence, the same cannot be sustained.

BPI vs Domingo
FACTS
Respondent Amador Domingo and his deceased wife, Mercy, executed a
Promissory Note(PN) in favor of Makati Auto Center, Inc. (in the sum of Php
629,856) which is payable in 48 successive monthly instalments (in the amount
of Php 13, 122 each). They simultaneously executed a Deed of Chattel Mortgage
over a 1993 Mazda 323 to secure the payment of their PN. Makati Auto Center
then assigned and transferred all its rights and interests over the said PN and
chattel mortgage to Far East Bank and Trust Company (FEBTC).
Subsequently, the Securities and Exchange Commission approved and
issued the Certificate of Filing of the Articles of Merger and Plan of Merger by
and between BPI, the surviving corporation, and the FEBTC, the absorbed
corporation. By virtue of the said merger, all the assets and liabilities of FEBTC
were transferred to and absorbed by BPI.
The Sps Domingo defaulted when they failed to pay 21 monthly
instalments that had fallen due consecutively. BPI, being the surviving
corporation after the merger, demanded that the sps Domingo pay the balance
of the PN including accrued late payment charges/ interests or to return the
possession of the subject vehicle for the purpose of foreclosure in accordance
with the undertaking stated in the chattel mortgage. When the Sps Domingo still
failed to comply, BPI filed a Complaint with the MeTC.
In their answer, Sps Domingo raised one of their contentions that Mercy
once obtained a car loan form FEBTC but the car was later sold to Carmelita
Gonzales with the banks conformity and the buyer subsequently assumed
payment of the balance of the mortgaged loan.
During the cross-examination, the witness presented by the prosecution
stated that Carmelita cannot be included as a defendant of this case because
the Sps dont have a document executed by the latter in behalf of the FEBTC.
The bank did not approved the Deed of Sale with Assumption of Mortgage.
On the other hand, Amador, who testified for the defense, stated that
his wife bought a car and was mortgaged to FEBTC. He identified the Chattel
Mortgage and the PN he executed together with his wife. In connection with the
execution of this PN, he recalled that his wife issued 48 checks. The 12 checks
were cleared by the Bank. While they were still paying for the car, Carmelita
Gonzales got interested to buy the car and is willing to assume the mortgage.
After furnishing the bank with the Deed of Sale duly notarized, Carmelita
subsequently issued a check payable to FEBTC and the remaining postdated

checks were returned to them. Then, Carmelita made payments from November
1995 to December 1995. Amador alleged that from the time Carmelita started
to pay, they never received any demand letter from the Bank. Thereafter, they
received a demand letter coming from a law firm representing FEBTC. On their
reply, thru his lawyer, they stated that the vehicle for which the loan was
obtained was sold to Carmelita Gonzales with knowledge and approval.
Now, the MeTC rendered its decision in favour of BPI as the bank was to
establish by preponderance of evidence a valid cause of action against the Sps
Domingo. According to this court, novation is never presumed and must be
clearly shown by express agreement of by acts of equal import. To effect a
subjective novation by a change in the person of the debtor, it is necessary that
the old debtor be released expressly from the obligation and the third person or
new debtor assumes his place. Without such release there is no novation and
the third person who assumes the debtors obligation merely becomes a codebtor or surety. And if at all, Carmelita only became the Sps Domingos codebtor or surety.
Amador then appealed before the RTC. The RTC reversed the decision of MeTC.
It ruled that in novation, consent of the creditor to the substitution of the debtor
need not be by express agreement, it can be merely implied. The consent is not
required to be in any specific or particular form; only requirement being that it
must be given by the creditor in one way or another. To the RTC, the following
circumstances demonstrated the implied consent of the BPI to the novation: (1)
BPI had knowledge of the Deed of Sale and Assumption of Mortgage executed
between Mercy and Carmelita, but it did not interpose any objection to the
same; (2) BPI (thru FEBTC) returned the personal checks of the Sps Domingo
and accepted the payments made by Carmelita. The RTC also noted that BPI
made a demand for payment upon the sps Domingo only after 30 months from
the time Carmelita assumed payments for the installments due. The RTC
reasoned that if the Sps Domingo truly remained as debtors, BPI would not have
wasted time in demanding payments.
This decision was affirmed by the CA.
Issue: Whether or not there had been novation of the loan obligation with
chattel mortgage of the sps Domingo to BPI so that the sps Domingo will be
released form said obligation and Carmelita was substituted as debtor.
Ruling:The Court ruled in the negative.
As a general rule, a novation implies a waiver of the right the creditor
had before the novation, such waiver must be express. Based on Jurisprudence,
the court adduced that in order to give novation its legal effect, the law requires
that the creditor should consent to the substitution of a new debtor. This
consent must be given expressly for the reason that, since novation
extinguishes the personality of the first debtor who is to be substituted by a new
one, it implies on the part of the creditor a waiver of the right that he had before
novation, which waiver must be express and recognized by law in declaring that
a waiver of right may not be performed unless the will to waive is undisputably
shown by him who holds the right.

The Court disagrees with the inferences made by the Court of Appeals and the
RTC.
First, that BPI (or FEBTC) had a copy of the Deed of Absolute Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its file and it
does not mean that it had consented to the same. The Court notes that the
documents of BPI concerning the car loan and chattel mortgage are still in the
name of the Sps Domingo. No new PN or Chattel mortage had been executed
between BPI and Carmelita. Even the account itself is still in the names of the
Sps Domingo. Furthermore, the court opined that the absence of objection on
the part of BPI cannot be presumed as consent. Jurisprudence requires
presentation of proof of consent, not mere absence of objection.
Second, the consent of BPI to the substitution of debtors cannot be
deduced from its acceptance of payments form Carmelita, absent proof of its
clear and unmistakable consent to release the spouses Domingo from their
obligation. Since the Sps Domingo remained as debtors of BPI, together with
Carmelita, the fact that BPI demanded payment from the Sps 30 months after
accepting the payment from Carmelita is insignificant. Citing a jurisprudence,
the Court opined that the mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from
responsibility, does not constitute a novation, and the creditor can still enforce
the obligation against the original debtor.
And third, there is no sufficient or competent evidence to establish the
return of the checks to the Sps Domingo and the assurance made by FEBTC that
the Sps Domingo were already released from their obligation. The Court said
that Amador had no personal knowledge of what had happened when Mercy and
Carmelita went to the bank so his testimony on the matter was hearsay, which,
if not excluded, deserves no credence; as Amador failed to provide FEBTC or the
bank a copy of the Deed of Sale and Assumption of Mortgage and failed to
present it to the Court.
The Court is therefore convinced that there is no novation in this case
and Amador remains a debtor of BPI. The Court reinstates the judgement of the
MeTC.

Fort Bonifacio Dev, Corp vs Fong

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.50 As such, the stipulations in
contracts are binding on them unless the contract is contrary to law, morals,
good
customs,
public
order
or
public
policy. 51
The same principle on obligatory force applies by extension to the contracting
partys assignees, in turn, by virtue of the principle of relativity of contracts
which is fleshed out in Article 1311 of the Civil Code, viz.:
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the contract

are not transmissible by their nature, or by stipulation or by provision of law. The

heir is not liable beyond the value of the property he received from the
decedent.
x x x x (Emphasis supplied)
The reason that a contracting partys assignees, although seemingly a third
party to the transaction, remain bound by the original partys transaction under
the relativity principle further lies in the concept of subrogation, which inheres
in assignment.
Case law states that when a person assigns his credit to another person, the
latter is deemed subrogated to the rights as well as to the obligations of the
former.52 By virtue of the Deed of Assignment, the assignee is deemed
subrogated to the rights and obligations of the assignor and is bound by exactly
the same conditions as those which bound the assignor. 53 Accordingly, an
assignee cannot acquire greater rights than those pertaining to the assignor. 54
The general rule is that an assignee of a non-negotiable chose in action acquires
no greater right than what was possessed by his assignor and simply stands into
the shoes of the latter.

ASB Reality vs Ortigas

FACTS:
Respondent Ortigas & Company Limited Partnership (Ortigas) entered into a
Deed of Sale with Amethyst Pearl Corporation (Amethyst) involving the parcel of
land situated in Barrio Oranbo, Pasig City and registered under Transfer
Certificate of Title (TCT) No. 65118 of the Register of Deeds of Rizal for the
consideration of P2,024,000.00.
The Deed of Sale contained the following stipulations, among others: the subject
lot has been segregated by ORTIGAS from its subdivisions to form part of a
zonified BUILDING AREA pursuant to its controlled real estate development
project and subdivision scheme, and is subject to the following covenants which
form part of the consideration of ORTIGAS sale to VENDEE and its assigns,
namely: The building to be constructed on the lot shall be of reinforced
concrete, cement hollow blocks and other high-quality materials. The final plans
and specifications of the said building shall be submitted to ORTIGAS for
approval not later than six (6) months from date hereof. The VENDEE shall finish
construction of its building within four (4) years from December 31, 1991.
As a result, the Register of Deeds of Rizal cancelled TCT No. 65118 and issued
TCT No. PT-94175 in the name of Amethyst. The conditions contained in the
Deed of Sale were also annotated on TCT No. PT-94175 as encumbrances.

On December 28, 1996, Amethyst assigned the subject property to its sole
stockholder, petitioner ASB Realty Corporation (the petitioner), under a so-called
Deed of Assignment in Liquidation in consideration of 10,000 shares of the
petitioners outstanding capital stock. Thus, the property was transferred to the
petitioner free from any liens or encumbrances except those duly annotated on
TCT No. PT-94175. The Register of Deeds of Rizal cancelled TCT No. PT-94175
and issued TCT No. PT-105797 in the name of the petitioner with the same
encumbrances annotated on TCT No. PT-94175.
On July 7, 2000, Ortigas filed its complaint for specific performance against the
petitioner before the Regional Trial Court and alleged, among others, that:
While the lot may be used only for office and residential purposes, defendant
introduced constructions on the property which are commercial in nature, like
restaurants, retail stores and the like. The commercial structures constructed by
defendant on the property extend up to the boundary lines of the lot in question
violating the setbacks established in the contract. Defendant likewise failed to
submit the final plans and specifications of its proposed building not later than
six (6) months from June 29, 1994 and to complete construction of the same
within four (4) years from December 31, 1991. Being situated in a first-class
office building area, it was agreed that no advertisements or any kind of
commercial signs shall be allowed on the lot or the improvements therein but
this was violated by defendant when it put up commercial signs and
advertisements all over the area.
For reliefs, Ortigas prayed for the reconveyance of the subject property, or,
alternatively, for the demolition of the structures and improvements thereon,
plus the payment of penalties, attorneys fees and costs of suit.
After trial on the merits, the RTC rendered its decision on December 14, 2009,
and dismissed the complaint. Ortigas appealed to the CA, which initially
affirmed the RTC. Acting on Ortigas Motion for Reconsideration, however, the
CA promulgated its assailed amended decision on January 9, 2012, whereby it
reversed the decision.

ISSUE:
Whether the substitution of the petitioner in the place of Amethyst did result in
the novation of the Deed of Sale.

RULING:
The Supreme Court ruled that the substitution of the petitioner in the place of
Amethyst did not result in the novation of the Deed of Sale. The express terms
of the Deed of Assignment in Liquidation, indicate that Amethyst transferred to
the petitioner only the tangible asset consisting of the parcel of land covered by
TCT No. PT-94175 registered in the name of Amethyst. By no means did
Amethyst assign the rights or duties it had assumed under the Deed of Sale.
The petitioner thus became vested with the ownership of the parcel of land free
from any lien or encumbrance except those that are duly annotated on the
[title] from the time Amethyst executed the Deed of Assignment in Liquidation.
By acquiring the parcel of land with notice of the covenants contained in the
Deed of Sale between the vendor (Ortigas) and the vendee (Amethyst), the
petitioner bound itself to acknowledge and respect the encumbrance. Even so,
the petitioner did not step into the shoes of Amethyst as a party in the Deed of
Sale. Thus, the annotation of the covenants contained in the Deed of Sale did
not give rise to a liability on the part of the petitioner as the
purchaser/successor-in-interest without its express assumption of the duties or
obligations subject of the annotation.
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.
To be clear, contractual obligations, unlike contractual rights or benefits, are
generally not assignable. But there are recognized means by which obligations
may be transferred, such as by sub-contract and novation. In this case, the
substitution of the petitioner in the place of Amethyst did not result in the
novation of the Deed of Sale. To start with, it does not appear from the records
that the consent of Ortigas to the substitution had been obtained despite its
essentiality to the novation. Secondly, the petitioner did not expressly assume
Amethysts obligations under the Deed of Sale, whether through the Deed of
Assignment in Liquidation or another document. And thirdly, the consent of the
new obligor (i.e., the petitioner), which was as essential to the novation as that
of the obligee (i.e., Ortigas), was not obtained.