De Castro vs.

Court of Appeals

De Castros’ reliance on Article 1235 of the Civil Code is misplaced. Artigo’s acceptance of partial payment
of his commission neither amounts to a waiver of the balance nor puts him in estoppel. This is the import of
Article 1235 which was explained in this wise:

“The word accept, as used in Article 1235 of the Civil Code, means to take as satisfactory or sufficient, or
agree to an incomplete or irregular performance. Hence, the mere receipt of a partial payment is not
equivalent

To the required acceptance of performance as would extinguish the whole obligation.”

There is thus a clear distinction between acceptance and mere receipt. In this case, it is evident that Artigo
merely received the partial payment without waiving the balance. Thus, there is no estoppel to speak of.

Barons Marketing Corp. Vs. Court of Appeals

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

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting for the liquidation of the latter.

Under this provision, the prestation, i.e., the object of the obligation, must be performed in one act, not in
parts.

Tolentino concedes that the right has its limitations:

Partial Prestations.—Since the creditor cannot be compelled to accept partial performance, unless otherwise
stipulated, the creditor who refuses to accept partial prestations does not incur in delay or mora accipiendi,
except when there is abuse of right or if good faith requires acceptance.

Spouses Publico vs. Bautista

“x x x x there is no subrogation to speak of in this case, precisely because the law itself proscribes the
subrogation of the third person to the rights of the creditor when payment had been made by such third
person, in the absence of an express contractual stipulation authorizing the same. The right to recover from
the debtor is based on the mere fact of payment and on considerations of justice, but it gives to the third
person who paid only a simple action for reimbursement, without the securities, guaranties and other rights
recognized in the creditor, which are extinguished by the payment. Consequently, Hiyas Bank has no interest
in the suit between [petitioners] and [respondent]. X x x”

Carandang vs. Heirs of Quirino A. De Guzman

Articles 1236 and 1237 are clear that, even in cases where the debtor has no knowledge of payment by a
third person, and even in cases where the third person paid against the will of the debtor, such payment
would produce a debt in favor of the paying third person. In fact, the only consequences for the failure to
inform or get the consent of the debtor are the following: (1) the third person can recover only insofar as the
payment has been beneficial to the debtor; and (2) the third person is not subrogated to the rights of the
creditor, such as those arising from a mortgage, guarantee or penalty.

Moreño-Lentfer vs. Wolff

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another. It applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment, and (2) the
payment is made through mistake, and not through liberality or some other cause. In theinstant case, records
show that a bank-to-bank payment was made by respondent Wolff to petitioner Cross in favor of co-petitioner
Moreño- Lentfer. Respondent was under no duty to make such payment for the benefit of Moreño-Lentfer.
There was no binding relation between respondent and the beneficiary, Moreño-Lentfer. The payment was
clearly a mistake. Since Moreño-Lentfer received something when there was no right to demand it, she had
an obligation to return it.

Cembrano vs. City of Butuan

Article 1240 of the Civil Code provides that payment shall be made to the person in whose favor the obligation
has been constituted, or his successor-in-interest, or any person authorized to receive it. Payment made by
the debtor to the person of the creditor or to one authorized by him or by the law to receive it extinguishes
the obligation. When payment is made to the wrong party, however, the obligation is not extinguished as to
the creditor who is without fault or negligence even if the debtor acted in utmost good faith and by mistake
as to the person of the creditor or through error induced by fraud of a third person

A payment in order to be effective to discharge an obligation, must be made to the proper person.—A
payment in order to be effective to discharge an obligation, must be made to the proper person. Thus,
payment must be made to the obligee himself or to an agent having authority, express or implied, to receive
the particular payment. Payment made to one having apparent authority to receive the money will, as a rule,
be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work a discharge. The receipt of money due on a judgment
by an officer authorized by law to accept it will, therefore, satisfy the debt.
Valarao vs. Court of Appeals

Because their maid had received monthly payments in the past, it is futile for petitioners to insist now that
she could not have accepted the aforementioned tender of payment, on the ground that she did not have a
special power of attorney to do so. Clearly, they are estopped from denying that she had such authority.
Under Article 1241 of the Civil Code, payment through a third person is valid “[i]f by the creditor’s conduct,
the debtor has been led to believe that the third person had authority to receive the payment.”

Orata vs. Intermediate Appellate Court

Payment in good faith to any person in possession of the credit shall release the debtor (Article 1242, Civil
Code).

Significantly, after Teodoro’s title was cancelled on November 9, 1983, the new title that replaced it was
issued in the name of his grandparent, the deceased Florencio dela Cruz. As a grandson and legal heir of
the registered owner, Teodoro was a co-owner of the property. Payment of the obligation to him discharged
the debtor, but he (Teodoro) should account to the other co-owners for their share of the credit (Articles 500
and 1214, Civil Code)

Tan Shuy vs. Maulawin

Dation in Payment; There is dation in payment when property is alienated to the creditor in satisfaction of a
debt in money; Dation in payment extinguishes the obligation to the extent of the value of the thing delivered,
either as agreed upon by the parties or as may be proved, unless the parties by agreement—express or
implied, or by their silence—consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.—Pursuant to Article 1232 of the Civil Code, an obligation is extinguished by payment or
performance. There is payment when there is delivery of money or performance of an obligation. Article 1245
of the Civil Code provides for a special mode of payment called dation in payment (dación 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 former’s 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 partakes—in one sense—of the nature of sale; that is, the
creditor is really buying the thing or property of the debtor, the payment for which is to be charged against
the debtor’s obligation. Dation in payment extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement—
express or implied, or by their silence—consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.

Same; Same; Same; Dation in payment exists when there was partial payment every time Guillermo 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 Tan Shuy.—The subsequent arrangement between Tan
Shuy and Guillermo can thus be considered as one in the nature of dation in payment. There was partial
payment every time Guillermo 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 Tan Shuy. We
therefore uphold the findings of the trial court, as affirmed by the CA, that the net proceeds from Guillermo’s
copra deliveries amounted to P378,952.43. With this partial payment, respondent remains liable for the
balance totaling P1,047.57.

Philippine Lawin Bus, Co. Vs. Court of Appeals

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.—In dacion en pago, property is alienated to the
creditor in satisfaction of a debt in money. It is “the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the obligation.” It “extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as
equivalent to the obligation, in which case the obligation is totally extinguished.

Telengtan Brothers & Sons, Inc. Vs. United States Lines, Inc.

Extraordinary inflation or deflation, as the case may be, exists when there is an unusual increase or decrease
in the purchasing power of the Philippine peso which is beyond the common fluctuation in the value of said
currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the obligation. Extraordinary inflation can
never be assumed; he who alleges the existence of such phenomenon must prove the same. The Court
holds that there has been no extraordinary inflation within the meaning of Article 1250 of the Civil Code.
Accordingly, there is no plausible reason for ordering the payment of an obligation in an amount different
from what has been agreed upon because of the purported supervention of extraordinary inflation.

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; Absent an
official pronouncement or declaration by competent authorities of the existence of extraordinary inflation
during a given period, the effects of extraordinary inflation, if that be the case, are not to be applied.—
Respondent was unable to prove the occurrence of extraordinary inflation since it filed its complaint in 1981.
Indeed, the record is bereft of any evidence, documentary or testimonial, that inflation, nay, an extraordinary
one, existed. Even if the price index of goods and services may have risen during the intervening period, this
increase, without more, cannot be considered as resulting to “extraordinary inflation” as to justify the
application of Article 1250. The erosion of the value of the Philippine peso in the past three or four decades,
starting in the mid-sixties, is, as the Court observed in Singson vs. Caltex (Phil), Inc., 342 SCRA 91 (2000),
characteristics 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 con- emplated 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, as here, the effects of extraordinary inflation, if that be the case,
are not to be applied.

Same; Same; It is only when there is a contrary agreement that extraordinary inflation will make the value of
the currency at the time of payment, not at the time of the establishment of obligation, the basis for payment.—
Article 1250 of the Code, as couched, clearly provides that the value of the peso at the time of the
establishment of the obligation shall control and be the basis of payment of the contractual obligation, unless
there is “agreement to the contrary.” It is only when there is a contrary agreement that extraordinary inflation
will make the value of the currency at the time of payment, not at the time of the establishment of obligation,
the basis for payment. The Court, in Mobil Oil Philippines, Inc. Vs. Court of Appeals and Fernando A. Pedrosa,
180 SCRA 651 (1989), formulated the same rule in the following wise: In other words, an agreement is
needed for the effects of an extraordinary inflation to be taken into account to alter the value of the currency
at the time of the establishment of the obligation which, as a rule, is always the determinative element, to be
varied by agreement that would find reason only in the supervention of extraordinary inflation or deflation.

Citibank, N.A. (Formerly First National City Bank) vs. Sabeniano

Same; Same; Same; A check, whether a manager’s check or ordinary check, is not legal tender, and an offer
of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee
or creditor.—Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment
to the bank was made using checks, since the checks would still be subject to clearing. The purpose for the
provisional receipts was merely to acknowledge the delivery of the checks to the possession of the bank, but
not yet of payment. This bank practice finds legitimacy in the pronouncement of this Court that a check,
whether an MC or an ordinary check, is not legal tender and, therefore, cannot constitute valid tender of
payment. In Philippine Airlines, Inc. V. Court of Appeals, 181 SCRA 557 (1990), this Court elucidated that:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code;
Bryan Landon Co. V. American Bank, 7 Phil. 255; Tan Sunco, v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A
check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment
of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery
of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

Equitable PCI Bank vs. Ng Sheung Ngor

Escalation Clauses; Principle of Mutuality of Contracts; Escalation clauses are not void per se but 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 modification in the agreement” is void—clauses of that nature
violate the principle of mutuality of contracts.—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 modification in the agreement” is void. Clauses of that nature
violate the principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind
both contracting parties; its validity or compliance cannot be left to the will of one of them. 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).

Where the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated
rate of interest. —With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank, 435 SCRA 565 (2004), we held that, because the escalation clause was annulled, the principal amount
of the loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.

Same; Same; Extraordinary Inflation or Deflation; Words and Phrases; “Extraordinary Inflation” and
“Extraordinary Deflation,” Defined. —Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation in the value of currency) and such
decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the
time of the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.

Same; Same; Same; Requisites; Despite the devaluation of the peso, the Bangko Sentral ng Pilipinas (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).—
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); 2. That the obligation was contractual in nature; and 3. That the parties expressly agreed to
consider the effects of the extraordinary inflation or deflation. 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).
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.

Papa vs. A.U. Valencia and Co., Inc.

Same; Same; Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the
impairment of the check through his unreasonable and unexplained delay.—Granting that petitioner had
never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the
impairment of the check through his unreasonable and unexplained delay.

Same; Same; Obligations; The acceptance of a check implies an undertaking of due diligence in presenting
it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to
operate as actual payment of the debt or obligation for which it was given. —While it is true that the delivery
of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the
rule is otherwise if the debtor is prejudiced by the creditor’s unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from
whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of
the debt or obligation for which it was given. It has, likewise, been held that if no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused. This
is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument
is impaired. The payee of a check would be a creditor under this provision and if its non-payment is caused
by his negligence, payment will be deemed effected and the obligation for which the check was given as
conditional payment will be discharged.

Philippine Airlines, Inc. Vs. Court of Appeals

Civil Law; Payment; The payment to the absconding sheriff by check in his name did not operate as
satisfaction of the judgment debt.—Under the peculiar circumstances of this case, the payment to the
absconding sheriff by check in his name did not operate as a satisfaction of the judgment debt.

Same; Same; A payment in order to be effective to discharge an obligation must be made to the proper
person.—In general, a payment, in order to be effective to discharge an obligation, must be made to the
proper person. Thus, payment must be made to the obligee himself or to an agent having authority, express
or implied, to receive the particular payment (Ulen v. Knecttle, 50 Wyo. 94, 58 [2d] 446, 11 ALR 65). Payment
made to one having apparent authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act
for the creditor, it will work a discharge (Hendry v. Benlisa, 37 Fla. 609, 20 SO 800, 34 LRA 283). The receipt
of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy the debt.
Same; Same; Same; Ordinarily, payment by the judgment debtor in the case at bar, to the sheriff should be
valid payment to extinguish the judgment debt.—The theory is where payment is made to a person authorized
and recognized by the creditor, the payment to such a person so authorized is deemed payment to the
creditor. Under ordinary circumstances, payment by the judgment debtor in the case at bar, to the sheriff
should be valid payment to extinguish the judgment debt.

Unless authorized to do so by law or by consent of the obligee, a public officer has no authority to accept
anything other than money in payment of an obligation under a judgment being executed.—In the absence
of an agreement, either express or implied, payment means the discharge of a debt or obligation in money
(US v. Robertson, 5 Pet. [US] 641, 8 L. Ed. 257) and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson
v. Gill, 79 Md. 312, 29 A 527, 25 LRA 200, 47 Am. St. Rep. 402). Consequently, unless authorized to do so
by law or by consent of the obligee, a public officer has no authority to accept anything other than money in
payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff
of the petitioner’s checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt.

Ligget & Myers Tobacco Corp. Vs. Associated Insurance & Surety Co., Inc., and Consolidated Underwriters,
Inc.

OBLIGATIONS AND CONTRACTS; CHOICE OF APPLICATION OF PAYMENT WHERE DEBTOR HAS

TWO OBLIGATIONS; WHEN ISSUE OF WHICH OBLIGATION IS MORE ONEROUS TO DEBTOR
DECISIVE.—The issue of when. Of two obligations, the secured or the unsecured, is more onerous to the
debtor, would only be decisive where payment can not be applied in accordance with the rules immediately
preceding Article 1254 of the New Civil Code.

PPLICATION OF PAYMENT BY CREDITOR WITH DEBTOR'S CONSENT.—Under Article 1172 of the

Spanish Civil Code (Article 1252 of New Civil Code), the exercise of the exclusive right of the debtor to make
the application of payments, terminates at the moment of payment. On the other hand, the initiative of the
creditor may be shown even after the delivery of the receipt, either to make application of the payment, if the
same has not been done, or to modify what has been stated therein, provided, of course, that he obtains in
every case the acceptance of the debtor expressly or tacitly.

Premiere Development Bank vs. Central Surety & Insurance Company, Inc.

Obligations and Contracts; Payment; Application of Payments; Statutory Construction; The debtor’s right to
apply payment is not mandatory—this is clear from the use of the word “may” rather than the word “shall” in
Article 1252 of the Civil Code; 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.—The debtor’s 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 debtor’s
right to apply payment has been considered merely directory, and not mandatory, following this Court’s 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.”

Same; Same; Waivers; It is the directory nature of the debtor’s right to choose which obligations to apply a
particular payment 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.—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 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.

Same; Same; Same; If neither party has exercised its option, to apply the payment, the court will apply the
payment according to the justice and equity of the case, taking into consideration all its circumstances.—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.

Magdalena Estates, Inc. Vs. Rodriguez

The rules contained in Articles 1252 and 1254 of the New Civil Code apply to a person owing several debts
of the same kind to a single creditor. They cannot be made applicable to a person whose obligation as a
mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled to
have all payments made applied exclusively to said obligation and to no other. Besides Article 1253 of the
New Civil Code is merely directory and not mandatory.

Paculdo vs. Regalado

Civil Law; Obligations; Right to specify which among his various obligations to the same creditor is to be
satisfied first rests with the debtor. —The right to specify which among his various obligations to the same
creditor is to be satisfied first rests with the debtor, as provided by law.

Same; Same; No payment is to be made to a debt that is not yet due and the payment has to be applied first
to the debt most onerous to the debtor.—Under the law, if the debtor did not declare at the time he made the
payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline—
no payment is to be made to a debt that is not yet due and the payment has to be applied first to the debt
most onerous to the debtor.

Development Bank of the Philippines vs. Court of Appeals

Cession; There is no payment by cession under Article 1255 of the Civil Code where there is only one creditor.
—Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain
and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two
or more creditors and involves the assignment of all the debtor’s property.

Same; Same; Same; Same; Dation; An assignment which is essentially a mortgage cannot constitute dation
in payment under Article 1245 of the Civil Code.—Nor did the assignment constitute dation in payment under
Article 1245 of the Civil Code, which reads: “Dation in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law on sales.” It bears stressing that the
assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.

Cinco vs CA

While Esters refusal was unjustified and unreasonable, we cannot agree with Manuels position that this
refusal had the effect of payment that extinguished his obligation to MTLC. Article 1256 is clear and
unequivocal on this point when it provides that

ARTICLE 1256. If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.
[Emphasis supplied.]

In short, a refusal without just cause is not equivalent to payment; to have the effect of payment and the
consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of payment
and consignation.

Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty,

Inc., is the definitive act of offering the creditor what is due him or her, together with the demand that the
creditor accept the same. When a creditor refuses the debtors tender of payment, the law allows the
consignation of the thing or the sum due. Tender and consignation have the effect of payment, as by
consignation, the thing due is deposited and

Placed at the disposal of the judicial authorities for the creditor to collect.

A sad twist in this case for Manuel was that he could not avail of consignation to extinguish his obligation to
MTLC, as PNB would not release the proceeds of the loan unless and until Ester had signed the deed of
release/cancellation of mortgage, which she unjustly refused to do. Hence, to compel Ester to accept the
loan proceeds and to prevent their mortgaged properties from being foreclosed, the spouses Go Cinco found
it necessary to institute the present case for specific performance and damages.

Meat Packing Corporation of the Philippines vs. Sandiganbayan

Distinction Between Consignation and Tender of Payment.—Consignation is the act of depositing the thing
due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment,
and it generally requires a prior tender of payment. It should be distinguished from tender of payment. Tender
is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and
from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the
attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and extinguishes the obligation.

Llobrera vs. Fernandez

Consignation; 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.—
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 respondent’s 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.

Where the possession of the property by certain persons is by mere tolerance of the owner, the latter has no
obligation to receive any payment from them.—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.

McLaughlin vs. Court of Appeals

Where an obligor fails to follow a valid tender of payment with a court consignation, the court may allow him
time to pay his obligation without rescinding the deed of sale.—However, inasmuch as petitioner did not
accept the aforesaid amount, it was incumbent on private respondent to deposit the same with the court in
order to be released from responsibility. Since private respondent did not deposit said amount with the court,
his obligation was not paid and he is liable in addition for the payment of the monthly rental of P1,000.00 from
January 1, 1981 until said obligation is duly paid, in accordance with paragraph 3 of the Compromise
Agreement. Upon full payment of the amount of P76,059.71 and the rentals in arrears, private respondent
shall be entitled to a deed of absolute sale in his favor of the real property in question.

Soco vs. Militante

The tenant must comply strictly and fully, not merely substantially with the requisites of consignation for the
same to produce the effects of payment.—We do not agree with the questioned decision. We hold that the
essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law,
Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a mandatory construction is
clearly evident and plain from the very language of the codal provisions themselves which require absolute
compliance with the essential requisites therein provided. Substantial compliance is not enough for that would
render only a directory construction to the law. The use of the words “shall” and “must” which are imperative,
operating to impose a duty which may be enforced, positively indicate that all the essential requisites of a
valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must
be essentially done in order that consignation shall be valid and effectual

Same; Same; Same; Same; Consignation defined.—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. (Limkako vs. Teodoro, 74 Phil. 313)

Requisites of a valid consignation.—In order that consignation may be effective, the debtor must first comply
with certain requirements prescribed by law. The debtor must show (1) that there was a debt due: (2) that
the consignation of the obligation had been made because the creditor to whom tender of payment was made
refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be
entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation had
been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the
amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the consignation
had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these
requirements is enough ground to render a consignation ineffective. (Jose Ponce de Leon vs. Santiago
Syjuco, Inc., 90 Phil. 311).

Same; Same; Without prior notice, a consignation is void as payment. —Without the notice first announced
to the persons interested in the fulfillment of the obligation, the consignation as a payment is void.

Same; Same; Tender of payment if made by means of a check is valid if creditor makes no prompt objection,
but such practice does not estopped from later demanding payment in cash.—In order to be valid, the tender
of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as
valid, if no prompt objection to said payment is made (Desbarats vs. Vda. de Mortera, L-4915, May 25, 1956)
the fact that in previous years payment in check was accepted does not place its creditor in estoppel from
requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30, 1958). Thus, the tender
of a check to pay for an obligation is not a valid tender of payment thereof (Desbarats vs. Vda. de Mortera,
supra). See Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104 SCRA 174-179.

Same; Same; Tender of payment distinguished from consignation.

—Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation,
that is, an act preparatory to the consignation, which is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be
extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a
private settlement before proceeding to the solemnities of consignation. (8 Manresa 325).

Pabugais vs. Sahijwani

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.–Consignation
is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept
or refuses to accept payment and it generally requires a prior tender of payment. In order that consignation
may be effective, the debtor must 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 creditor’s prayer in his answer that the amount consigned be awarded to him is equivalent to an
acceptance of the consignation, hence, the debtor can no longer withdraw the amount consigned.–The
amount consigned with the trial court can no longer be withdrawn by petitioner because respondent’s 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 petitioner’s obligation.

Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation

Obligations; Subrogation; Legal Subrogation; Legal subrogation is that which takes place by operation of law.
—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.

Bangko Sentral ng Pilipinas vs. Commission on Audit

To warrant the application of set off under Article 1278 of the Civil Code, the debtor’s admission of his
obligation must be clear and categorical and not one which merely arise by inference or implication from the
customary execution of official documents in assuming the responsibilities of a predecessor, as in the instant
case.—To warrant the application of set off under Article 1278 of the Civil Code, the debtor’s admission of
his obligation must be clear and categorical and not one which merely arise by inference or implication from
the customary execution of official documents in assuming the responsibilities of a predecessor, as in the
instant case. Neither would respondent’s signature in the list of unaccounted properties as of February 28,
1995 operate as an acknowledgement of an obligation. Suffice it to state that said signature alone hardly
satisfies the requisite open and direct recognition of an obligation that would justify the diminution of
retirement benefits. There must be an independent evidence showing the employee’s intention to
unmistakably recognize his indebtedness which was never shown in the present controversy.

Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc.

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

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

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

Same; Same; Same; Novation is not implied when the parties to the new obligation expressly negated the
lapsing of the old obligation.—Neither can the petitioners anchor their defense on implied novation. Absent
an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete
incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation
by implication. But where, as in this case, the parties to the new obligation expressly recognize the continuing
existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the
old obligation, there can be no novation. The issue of implied novation is not reached at all.

Cruz vs. Court of Appeals

Civil Law; Obligations and Contracts; Novation; Requisites in order for novation to take place.—Novation,
one of the modes of extinguishing an obligation, requires the concurrence of the following: (1) there is a
previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is
extinguished; and (4) there is a valid new contract.

Same; Same; Same; Novation may be express or implied.— Novation may be express or implied. Article
1292 of the Code provides: “In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms [express novation], or that the old and the
new obligations be on every point incompatible with each other [implied novation].”

Garcia vs. Llamas

Civil Law; Obligations; Extinguishment; Novation; Definition. —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. Article 1293 of the Civil Code defines novation.

Same; Same; Same; Same; Kinds; In general, there are two (2) modes of substituting the person of the
debtor: (1) expromision and (2) delegacion.—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 person’s
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. Both modes of substitution
by the debtor require the consent of the creditor.

Same; Same; Same; Same; Same; Novation may also be extinctive and modificatory.—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. 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.

For novation to take place, the following requisites must concur.—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.

Same; Same; Same; Same; Same; Novation may also be express or implied.—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. The test
of incompatibility is whether the two obligations can stand together, each one with its own independent
existence.

Same; Same; Same; Same; Proof; Well-settled is the rule that nova-tion is never presumed.—Well-settled is
the rule that novation is never presumed. Consequently, that which arises from a purported change in the
person of the debtor must be clear and express.
Ledonio vs. Capitol Development Corporation

Contracts; Assignments of Credit; Subrogation; Words and Phrases; “Assignment of Credit,” and
“Subrogation,” Defined; 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, the Court still cannot definitively rule that assignment of credit
and conventional subrogation are one and the same.—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.

Same; Same; Same; “Assignment of Credit” and “Subrogation,” Distinguished; 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 while conventional subrogation requires an agreement among
the parties concerned—the original creditor, the debtor, and the new creditor.—A noted authority on civil law
provided a discourse 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 subrogation is not identical to assignment
of credit. In the former, the debtor’s consent is necessary; in the latter, it is not required. Subrogation
extinguishes an obligation and gives rise to a new one; 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.

Metropollitan Bank and Trust Company vs. Rural Bank of Gerona, Inc.

Subrogation; As the entity against which the collection was enforced, Metrobank was subrogated to the rights
of Central Bank and has a cause of action to recover from the defendant-bank the amounts it paid to the
Central Bank, plus 14% per annum interest.—Article 1303 of the Civil Code states that subrogation transfers
to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against
third persons. As the entity against which the collection was enforced, Metrobank was subrogated to the
rights of Central Bank and has a cause of action to recover from RBG the amounts it paid to the Central
Bank, plus 14% per annum interest. Under this situation, impleading the Central Bank as a party is completely
unnecessary. We note that the CA erroneously believed that the Central Bank’s presence is necessary “in
order x x x to shed light on the matter of reversals made by it concerning the loan applications of the end
users and to have a complete determination or settlement of the claim.” In so far as Metrobank is concerned,
however, the Central Bank’s presence and the reasons for its reversals of the IBRD loans are immaterial
after subrogation has taken place; Metrobank’s interest is simply to collect the amounts it paid the Central
Bank. Whatever cause of action RBG may have against the Central Bank for the unexplained reversals and
any undue deductions is for RBG to ventilate as a third-party claim; if it has not done so at this point, then
the matter should be dealt with in a separate case that should not in any way further delay the disposition of
the present case that had been pending before the courts since 1980.

Metropolitan Bank and Trust Company vs. Tonda

Compensation is not proper when one of the debts consists in civil liability arising from a penal offense, the
raison d’etre for this being that if one of the debts consists in civil liability arising from a penal offense,
compensation would be improper and inadvisable because the satisfaction of such obligation is imperative.—
The handwritten note by the METROBANK officer acknowledging receipt of the checks amounting to P2.8
Million made no reference to the TONDAS’ trust receipt obligations, and we cannot presume that it was
anything more than an ordinary bank deposit. The Court of Appeals citing the case of Tan Tiong Tick vs.
American Apothecaries implied that in making the deposit, the 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.”

Millar vs. Court of Appeals

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

Same; Same; Same; Same; Where new obligation merely reiterates or ratifies old obligation.—Where the
new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations
or slight modifications with respect to the cause or object or conditions of the latter, such changes do not
effectuate any substantial incompatibility between the two obligations. Only those essential and principal
changes introduced by the new obligation producing an alteration or modification of the essence of the old
obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense
constitutes a sufficient indicium of incompatibility, especially in the light of (a) the explanation by the petitioner
that the reduced indebtedness was the result of the partial payments made by the respondent before the
execution of the chattel mortgage agreement and (b) the latter’s admissions bearing thereon.

Perez vs. Court of Appeals

No legal compensation can take place where the loan instruments to be set-off are not yet due and
demandable.—Since, on the respective dates of maturity, specifically, August 6, 1974 and August 13, 1974,
respectively, Ramon C. Mojica was still the holder of those bills, it can be safely assumed that it was he who
had asked for the roll-overs on the said dates. MEVER was bound by the roll-overs since the assignment to
it was made only on September 9, 1974. The inevitable result of the roll-overs of the principals was that Bill
No. 1298 and Bill No. 1419 were not yet due and demandable as of the date of their assignment by MOJICA
to MEVER on September 9, 1974, nor as of October 3, 1974 when MEVER surrendered said Bills to
CONGENERIC. As a consequence, no legal compensation could have taken place because, for it to exist,
the two debts, among other requisites, must be due and demandable.

Rillo vs. Court of Appeals

Novation is never presumed, and in the absence of an express agreement, novation takes place only when
the old and the new obligations are incompatible on every point; A compromise agreement clarifying the total
sum owed by a buyer, with the view that he would find it easier to comply with his obligations under the
Contract to Sell does not novate said Contract to Sell.—Petitioner further contends that the contract to sell
has been novated by the parties agreement of March 12, 1989. The contention cannot be sustained. Article
1292 of the Civil Code provides that “In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.” Novation is never presumed. Parties to a contract
must expressly agree that they are abrogating their old contract in favor of a new one. In the absence of an
express agreement, novation takes place only when the old and the new obligations are incompatible on
every point. In the case at bar, the parties executed their May 12, 1989 “compromise agreement” precisely
to give life to their “Contract to Sell.” It merely clarified the total sum owed by petitioner RILLO to private
respondent CORB REALTY with the view that the former would find it easier to comply with his obligations
under the Contract to Sell. In fine, the “compromise agreement” can stand together with the Contract to Sell.

Silahis Marketing Corp. vs. Intermediate Appellate Court

Compensation, defined; When proper; Compensation takes place when two persons, in their own right, are
creditors and debtors to each other.—It must be remembered that compensation takes place when two
persons, in their own right, are creditors and debtors to each other. Article 1279 of the Civil Code provides
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; [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.”

When compensation is not proper; Compensation is not proper where the claim of the person asserting the
set-off against the other is not clear nor liquidated.—When all the requisites mentioned in Art. 1279 of the
Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge
of the creditors and debtors. Article 1279 requires, among others, that in order that legal compensation shall
take place, “the two debts be due” and “they be liquidated and demandable.” Compensation is not proper
where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation
cannot extend to unliquidated, disputed claim existing from breach of contract.

Reyes vs. BPI Family Savings Bank, Inc.

Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which terminates the first, either by changing the object or principal conditions, or by
substituting the person of the debtor, or subrogating a third person in the rights of the creditor. Article 1292
of the Civil Code on novation further provides: Article 1292. In order that an obligation may be extinguished
by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other.

The cancellation of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly.—The cancellation of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly. While there is really no hard and
fast rule to determine what might constitute sufficient change resulting in novation, the touchstone, however,
is irreconcilable incompatibility between the old and the new obligations.

Same; Same; Same; With respect to obligations to pay a sum of money, the obligation is not novated by an
instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old one.—The well-settled rule
is that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible
with the old ones, or the new contract merely supplements the old one.

Trinidad vs. Acapulco

Compensation takes effect by operation of law even without the consent or knowledge of the parties
concerned when all the requisites mentioned in Article 1279 of the Civil Code are present. This is in
consonance with Article 1290 of the Civil Code which provides that: Article 1290. When all the requisites
mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.

Since it takes place ipso jure, when used as a defense, it retroacts to the date when all its requisites are
fulfilled.

United Planters Sugar Milling Co., Inc. vs. Court of Appeals

Concept of Conventional Compensation; Requisites of Conventional Compensation.—It might seem that APT
has no right to set-off payments with UPSUMCO for under Article 1279 (1), it is necessary for compensation
that the obligors “be bound principally, and that he be at the same time a principal creditor of the other.” There
is, concededly, no mutual creditor-debtor relation between APT and UPSUMCO. However, we recognize the
concept of conventional compensation, defined as occurring “when the parties agree to compensate their
mutual obligations even if some requisite is lacking, such as that provided in Article 1282.” It is intended to
eliminate or overcome obstacles which prevent ipso jure extinguishment of their obligations. Legal
compensation takes place by operation of law when all the requisites are present, as opposed to conventional
compensation which takes place when the parties agree to compensate their mutual obligations even in the
absence of some requisites. The only requisites of conventional compensation are (1) that each of the parties
can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of
their credits.

Same; Same; Same; Same; Same; The absence of the mutual creditor-debtor relation between the new
creditor Asset Privatization Trust (APT) and United Planters Sugar Milling Co. (UPSUMCO) cannot negate
the conventional compensation.—As soon as PNB assigned its credit to APT, the mutual creditor- debtor
relation between PNB and UPSUMCO ceased to exist. However, PNB and UPSUMCO had agreed to a
conventional compensation, a relationship which does not require the presence of all the requisites under
Article 1279. And PNB too had assigned all its rights as creditor to APT, including its rights under conventional
compensation. The absence of the mutual creditor-debtor relation between the new creditor APT and
UPSUMCO cannot negate the conventional compensation. Accordingly, APT, as the assignee of credit of
PNB, had the right to set-off the outstanding obligations of UPSUMCO on the basis of conventional
compensation before the condonation took effect on 3 September 1987

Valmonte vs. Court of Appeals

Merger, Defined. —The Court of Appeals erred not on the application of the principle of merger. Merger as
one of the means of extinguishing an obligation has the following elements: (1) the merger of the characters
of the creditor and debtor must be in the same person; (2) it must take place in the person of either the
principal creditor or the principal debtor; and (3) it must be complete and definite.