Topic: Chapter 4: Extinguishment of Obligations - Cases

Applicable Provisions: Article 1231-1304 (Start) Date: March 3, 2021

II. Payment or Performance

B. Requisites

Case Title: Arrieta v National Rice and Corn Corporation

Ticker: Burmese Rice
Facts

• In 1952, plaintiff participated in the public bidding called by the Rice and Corn
Administration for the supply of Burmese rice. She was awarded the contract.
• Paz Arrieta and the appellant corporation entered into a Contract of Sale of Rice,
under the terms of which the former obligated herself to deliver to the latter 20,000
metric tons of Burmese Rice.
• In turn the defendant corporation committed to pay for the imported rice “by means
of an irrevocable, confirmed and assignable letter of credit in favor of the plaintiff
and/or supplier in Burma”
• Despite the commitment to pay immediately “by means of an irrevocable,
confirmed, and assignable Letter of Credit from the execution of the contract, the
defendant corporation took the first step to open a letter of credit by the forwarding
the Philippine National Bank its application for Commercial Letter of Credit.
• Paz Arrieta advised the appellant corporation of the extreme necessity for the
immediate opening of the letter of credit since she had by then made a tender to
her supplier in Burma, equivalent to 5% of the F.O.B. price and in compliance with
the regulations in Burma, this 5% will be confiscated if the required letter of credit
is not received by them.
• The Philippine National Bank informed the appellant corporation that its application
for a letter of credit has been approved by the Board of Directors with the condition
that 56% marginal cash deposit be paid and that drafts are to be paid upon
presentment.
• As it turned out, however, the appellant corporation was not in any financial position
to meet the condition.
• As a result of the delay, the allocation of appellee’s supplier in Burma was cancelled
and the 5% deposit was forfeited.
• The appellee endeavored, but failed, to restore the cancelled Burmese rice
allocation. She then offered to substitute Thailand rice instead, which was rejected
by appellant.
• The appellee sent a letter to the appellant, demanding compensation for the
damages caused her. The demand having been rejected, she instituted the case
now on appeal.
 Issue

• Whether the appellant’s failure to open immediately the letter of credit in dispute
amounted to a breach of the contract for which it may be held liable for damages.

Arguments
Ruling
Respondent
We find for the appellee.
The disputed negotiable
instrument was not
It is clear upon the records that the sole and principal
promptly secured
reason for the cancellation of the allocation contracted by
because the appellee
the appellee herein in Burma, was the failure of the letter
failed to reasonably
of credit to be opened with the contemplated period.
furnish data necessary
and required for opening
The liability of the appellant, however, stems not alone
the same, namely
form this failure or inability to satisfy the requirements of
1. the amount of the letter
the bank. Its culpability arises from its willful and deliberate
of credit
assumption of contractual obligations even as it was well
2. the person, company
aware of its financial incapacity to undertake the
or corporation in whose
prestation. We base this judgment upon the letter which
favor it is to be opened
accompanied the application filed by the appellant with the
3. The place and bank
bank which stated that it did not have sufficient deposit with
where it may be
the PNB to cover the amount required to be deposited as
negotiated
a condition for the opening of letters of credit.
The subsequent offer to We disagree.
substitute Thailand rice
for the originally Waivers are not presumed, but must be clearly and
contracted Burmese rice convincingly shown, either by express stipulation or acts
amounted to a waiver of admitting no other reasonable explanation.
whatever rights she might
have derived from the In the case at bar, no such intent to waive has been
breach of the contract. established.
Final Ruling: The decision appealed from is affirmed.
Doctrine

• Article 1170 of the Civil Code provides that:

“Those who in the performance of their performance of obligation are guilty of fraud,
negligence, or delay, and those who, in any manner contravene the tenor thereof,
are liable in damages.”
• Under this provision, not only debtors guilty of fraud, negligence, or default in the
performance of obligations are decreed liable; in general, every debtor who fails in
the performance of his obligations is bound to indemnify for the losses and the
damages caused thereby.
• The phrase “in any manner contravene the tenor” of the obligation includes any
illicit act which impairs the strict and faithful fulfillment of the obligation, or every
kind of defective performance.
Case Title: Papa v AU Valencia
Ticker: Unencashed Check
Facts

• In 1982, AU Valencia and Co., Inc. and Felix Peñarroyo filed with the RTC a
complaint for specific performance against Myron Papa, in his capacity as
administrator of the Testate Estate of one Angela Butte.
• The complaint alleged that on June 15, 1973, petitioner, acting as attorney-in-fact
of Angela Butte, sold to Peñarroyo, through Valencia, a parcel of land; that Angela
Butte mortgaged sail parcel with other parcels to the Associated Banking
Corporation.
• Before the alleged sale, Angela passed away.
• The bank refused to release the title to the property sold to Peñarroyo, unless and
until all the mortgaged properties of the late Angela were also redeemed.
• Respondent caused the annotation on the title of an adverse claim.
• It was only upon the release of the title that respondents discovered that the
mortgage rights of the bank had been assigned to one Tomas Parpana, as special
administrator of the Estate of Ramon Papa and that the petitioner had been
collecting monthly amount from the tenants of the property, knowing that said
property had already been sold to private respondents.
• Despite repeated demands from respondents, petitioner refused and failed to
deliver the title to the property.
• Valencia and Peñarroyo filed a complaint for specific performance.
• The trial court ruled in favor of the plaintiffs.
• The CA affirmed the decision of the RTC.

Issue

• Whether the sale between plaintiffs and defendant had been consummated [Yes]

Arguments
Ruling
Petitioner
We find no merit in petitioner’s
arguments.

The sale was never consummated as he did not It is an undisputed fact that
encash the check (P 40,000) given by Valencia respondents Valencia and
and Peñarroyo in payment of the full purchase Peñarroyo had given the amounts
price of the subject lot citing Article 1249 of the of P 5,000 in case and P 40,000
Civil Code, and thus, never produced the effect pesos in check, in payment of the
of payment. purchase price of the subject lot.

Petitioner’s assertion that he never

enchased the check is not
 substantiated and is at odds with his
statement. The presumption is that
the check had been encashed.

Granting that petitioner had never

encashed the check, his failure to
do so for more than 10 years
undoubtedly resulted in the
impairment of the check through his
unreasonable and unexplained
delay.

Considering that Valencia and

Peñarroyo had fulfilled their part of
the contract of sale by delivering the
payment of the purchase price, said
respondents had the right to compel
petitioner to deliver to them the
owner’s duplicate of the TCT and
the peaceful possession and
enjoyment of the lot in question.
Final Ruling: The petition is
denied.
Doctrine

• While it is true that the delivery of a check produces the effect of payment only
when it is cashed, pursuant to Article 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 of other negotiable instruments 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.
C. Application of Payments

Case Title: Paculdo v Regalado

Ticker: Wet Market Building
Facts

• In 1990, Paculdo and Regalado entered into a contract of lease over a parcel of
land with a wet market building.
• Petitioner leased 11 other property from respondent and purchased 8 units of heavy
equipment and vehicles.
• On account of petitioner’s failure to pay rental amounts, respondent sent a demand
letter to petitioner followed by another demand later.
• Without the knowledge of the petitioner, respondent mortgaged the land subject of
the lease contract, including the improvements which petitioner introduced into the
land to Monte de Piedad Savings Bank, as a security for his loan.
• Respondent refused to accept petitioner’s daily rental payments,
• Petitioner filed with the RTC an action for injunction and damages seeking to enjoin
respondent from disturbing his possession of the property subject of the lease
contract.
• Respondent filed a complaint for ejectment against petitioner in the MTC.
• The MTC rendered a decision in favor of respondent.
• In 1994, with the support of 50 armed security guards, respondent forcibly took
possession of the wet market building.
• The RTC affirmed in toto the decision of the MTC.
• Petitioner field a petition for review with the CA alleging that he had paid an amount
for security deposit and rentals on the wet market building, but respondent, without
his consent, applied portions of the payment to his other obligations. The vouchers
and receipts indicated that the payments made were for rentals. Thus, at the time
of payment, petitioner had declared as to which obligation the payment must be
applied.
• The CA ruled that the petitioner impliedly consented to respondent’s application of
payment to his other obligations and dismissed the petition.
• Hence, the petition.

Issue

• Whether petitioner was truly in arrears in the payment of rentals on the subject
property at the time of the filing of the complaint for ejectment.

Arguments
Ruling
Petitioner Respondent
In a Nov. 19 letter, respondent
proposed that petitioner’s security
deposit for the Quirino lot, be
applied as partial payment for his
 account under the subject lot as well
as to real estate taxes on the
Quirino lot. Petitioner signed,
signifying conformity thereto.

In an earlier letter, respondent

informed petitioner that the payment
was to be applied not only to
petitioner’s accounts under both the
subject land and the Quirino lot but
also to the heavy equipment.
Petitioner claimed that the amount
applied for the heavy equipment
was critical because it was
equivalent to more than 2 months
rental of the subject property, which
was the basis for the ejectment
case in the MTC.

The controversy stemmed from the

fact that unlike the Nov. 19 letter,
which bore a conformity portion, the
earlier letter did not contain the
signature of petitioner.

At the time petitioner made the

payments, he made it clear to
respondent that they were to be
applied to his rental obligations on
the Wet Market Building.
The Statement of Account prepared
by respondent was not the receipt
contemplated under the law. The
Assuming that receipt is the evidence of payment
petitioner expressed at executed at the time of payment,
the time of payment and not the statement of account
which among his executed several days thereafter.
His silence is not
obligations were to be
consent but is in fact a
satisfied first, petitioner There was no clear assent by
rejection.
is estopped by his petitioner to the change in the
assent to the manner of application of payment.
application made by the The petitioner’s silence as regards
respondent. the application of payment of
respondent cannot mean that he
consented thereto. There was no
meeting of the minds.
 Assuming arguendo that, as alleged
by respondent, petitioner did not, at
the time the payments were made,
choose the obligation to be satisfied
first, respondent may exercise the
right to apply the payments to the
other obligations petitioner. But this
is subject to the condition that the
petitioner must give his consent.
In the case, the purchase price of
the heavy equipment was not yet
due at the time the payment was
made. Hence, the application made
by respondent is contrary to the
provisions of law.
Final Ruling: The Court grants the
petition.
Doctrine

• The right to specify which among his various obligations to the same creditor is to
be satisfied first rests with the debtor, to wit:
“Article 1252. He who has various debts of the same kind in favor of one and the
same creditor, may declare at the time of making the payment, to which of them
the same must be applied. Unless the parties so stipulate, or when the application
of payment is made by the party for whose benefit the term has been constituted,
application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the
payment is made, the former cannot complain of the same, unless there is a cause
for invalidating the contract.”
• 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.

E. Dation in Payments

Case Title: DBP v Court of Appeals

Ticker: Fishpond
Facts

• Lydia Cuba obtained loans from the DBP. As security for said loans, she executed
two Deeds of Assignment of her Leasehold rights.
• She failed to pay her loan.
• Without foreclosure proceedings, DBP appropriated the Leasehold Rights of
plaintiff over the fishpond in question.
• DBP then executed a Deed of Conditional Sale of the Leasehold Rights in favor of
Cuba over the same fishpond in question.
• Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale.
• DBP then sent a Notice of Rescission and took possession of the Leasehold Rights
over the fishpond
• The trial court resolved the issue in favor or Cuba.
• The CA ruled that the trial court erred in its decision.

Issue

• Whether the DBP validly appropriated the Leasehold Rights of Cuba [No]

Arguments
Ruling
Respondent
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.

Nor did the assignment constitute dation in payment under Article 1245
of the Civil Code.

It bears stressing that the assignment, being in its essence a

mortgage, was but a security and not a satisfaction of indebtedness.
Condition No. 12 did not provide that the ownership over the leasehold
rights would automatically pass to DBP upon CUBA’s failure to pay the
loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise
dispose of the said real rights, in case of default by CUBA, and to apply
Condition No
the proceeds to the payment of the loan. This provision is a standard
12 of the deed
condition in mortgage contracts and is in conformity with Article 2087
of assignment
of the Civil Code, which authorizes the mortgagee to foreclose the
constituted
mortgage and alienate the mortgaged property for the payment of the
pactum
principal obligation.
commissorium
At any rate, DBP’s act of appropriating CUBA’s leasehold rights was
violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the
payment of a debt.
Final Ruling: WHEREFORE, the 25 May 1994 Decision of the Court
of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED, except
as to the award of P50,000 as moral damages, which is hereby
sustained
 Doctrine

• Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtor’s property.
• The elements of pactum commissorium are as follows:
1. There should be a property mortgaged by way of security for the payment of the
principal obligation
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.

Case Title: Filinvest Credit Corp. v Philippine Acetylene Co.

Ticker: Chevrolet
Facts

• In 1971, defendant purchased from Alexander Lim a Chevrolet with a downpayment

and the balance payable, under the terms and conditions of the promissory note,
at a monthly installment for 34 months with interest of 12% per annum on each
unpaid installment and attorney’s fees.
• As security for the payment of said promissory note, defendant executed a chattel
mortgage over the same motor vehicle.
• Subsequently, Lim assigned to the Filinvest Finance Corporation all his rights, title,
and interests in the promissory note.
• By virtue of a merger, the rights were assigned to the petitioner corporation which
in effect, the payment of the unpaid balance owed by defendant to Lim was
financed by plaintiff such that Lim became fully paid.
• Defendant failed to comply with the terms and conditions set forth in the promissory
note and chattel mortgage since it had defaulted in the payment of nine successive
installments.
• Petitioner sent a demand letter for payment.
• Defendant replied with its decision to “return the mortgaged property, which return
shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the Civil
Code”
• Accordingly, the Chevrolet was returned together with the document “Voluntary
Surrender with Special Power of Attorney to Sell”.
• Filinvest wrote a letter to defendant informing the latter that the former cannot sell
the Chevrolet as there were unpaid taxes on the said vehicle. It offered to deliver
back the car but the defendant refused to accept it.
• Filinvest instituted an action for collection of a sum of money with damages.

Issue

• Whether the return of the Chevrolet to the petitioner by virtue of the voluntary
surrender totally extinguished the obligation [No]
Arguments
Ruling
Respondent
The mere return of the Chevrolet does not constitute dation in payment
in the absence of express or implied showing of the true intention of the
parties.
When it
returned the The evidence fails to show that Filinvest consented, or at least intended,
car, the that the mere delivery to, and acceptance by him of the car be construed
obligation for as actual payment.
the unpaid
price has The fact that the car was delivered to him does not necessarily mean
been that ownership, as juridically contemplated by dacion en pago, was
extinguished transferred. In the absence of clear consent to the preferred special
through mode of payment, there can be no transfer of ownership.
dacion en
pago The “Voluntary Surrender with Special Power of Attorney to Sell”,
Filinvest, in essence was constituted as a mere agent to sell the car, not
as its property, for if it were, he would have full discretion of the
disposition of the property.
Final Ruling: The judgment appealed from is affirmed.
Doctrine

• Article 1245. Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.
• Dacion en pago, according to Manresa, is the transmission of the ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of
an obligation. As a special mode of payment, 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 of which is to
be charged against the debtor’s debt.
• 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, to have the effect of totally extinguishing the debt or
obligation.
F. Tender in Payment and Consignation

Case Title: TLG International Continental Enterprising Inc. v. Flores

Ticker: Complaint Dismissed
Facts

• Respondent in an order dated October 5, 1971, granted petitioner's "Motion to

Intervene" and admitted its "Complaint In Intervention", in Civil Case No. 14880,
(Bearcon Trading Co., Inc. vs. Juan Fabella Et Al).
• The aforecited case was an action for declaratory relief involving the rights of
Bearcon Trading Co., Inc. as lessee of the premises of the aforesaid defendants.
• Petitioner intervened as sub-lessee of Bearcon over the property, and the
purpose of its intervention was to protect its rights as such sub-lessee and to
enable it, during pendency of the case, to make a consignation of the monthly
rentals as it was "at a loss as to who is lawfully and rightfully entitled to receive
payments of the monthly" rentals.
• As a consequence of the admission of the "Complaint In Intervention", petitioner
deposited with the Clerk of Court of the Court of First Instance of Rizal, the
following sums by way of rentals:
October 27, 1971 P900.00
November 29, 1971 600.00
January 19, 1972 750.00
March 8, 1972 1,500.00
or a total of P3,750.00, which deposits are properly covered by official receipts.
• On October 20, 1971, defendants in Civil Case No. 14880, filed with said Court,
an "Omnibus Motion" in which they prayed that the complaint, as well as the
Complaint In Intervention, be dismissed on the ground that the subject matter
thereof could be better ventilated in the ejectment case filed by Juan Fabella
against Bearcon Trading Co., Inc. (Civil Case No. 3979) then pending
• The court a quo issued an "Omnibus Order", dismissing both the complaint and
the complaint in intervention.
• Petitioner filed its Motion to withdraw the sums it deposited, as "the order
dismissing the ... case as well as the complaint, left the intervenor without any
recourse but to apply for authority to withdraw the ... amount ... and turn over the
same to the defendants in accordance with the understanding arrived at between
the parties hereto". This was denied by Respondent.

Issue

• Whether or not Respondent could authorize the withdrawal of the deposits

considering that according to Respondent, the Court "has not ordered the
intervenor to make any deposit in connection" with the case [Yes]
 Arguments
Ruling
Respondent
in cases of consignation the debtor is entitled as a matter of right
to withdraw the deposit made with the court, before the
consignation is accepted by the creditor or prior to the judicial
approval of such consignation. This is explicit from the second
paragraph of Article 1260 of the new Civil Code which states that:
"Before the creditor has accepted the consignation, or before a
judicial declaration that the consignation has been properly made,
the debtor may withdraw the thing or the sum deposited, allowing
the obligation to remain in force"

In the case at bar, the case was dismissed before the amount
deposited was either accepted by the creditor or a declaration
made by the Court approving such consignation. Such dismissal
rendered the consignation ineffectual. Under such circumstances
it was incumbent upon Respondent to have allowed the
withdrawal by petitioner of the sums of money deposited by it with
the Court.
This contention ignores the fact that the deposit was made by
Respondent
petitioner as a consequence of the admission by the Court of its
nevertheless
"Complaint In Intervention". It must be noted that the aforesaid
insists that the
deposit was made with and officially receipted by the Clerk of
Court had no
Court.
authority to
authorize its
The deposit was made pursuant to Article 1258 of the new Civil
withdrawal since it
Code which states that: "Consignation shall be made by
"has not ordered
depositing the things due at the disposal of judicial authority,
intervenor to make"
before whom the tender of payment shall be proved, in a proper
the deposit.
case, ...". It was therefore money received by the Clerk of Court.
Final Ruling: WHEREFORE, Respondent is directed to grant the
withdrawal of the deposit in accordance with the foregoing.

Case Title: McLaughlin v. Court of Appeals

Ticker: Manager’s Check
Facts

• In 1977, petitioner Luisa McLaughlin and private respondent Ramon Flores

entered into a contract of conditional sale of real property.
• The conditional sale fixed a downpayment with the balance to be paid not later
than May 31, 1977. The parties also agreed that the balance shall bear interest
at the rate of 1% per month until the purchase price was failed.
• In 1979, petitioner field a complaint in the CFI for the rescission of the deed of
conditional sale due to the failure of private respondent to pay the balance on
the stipulated time.
 • The parties submitted a Compromise Agreement, on the basis of which the court
rendered a decision.
• In the Compromise Agreement, private respondent acknowledged his
indebtedness to the petitioner and the parties agreed that the said amount will
be paid in tranches (upon the signing & 2 other installments.)
• As agreed upon, the private respondent paid P 50,000 upon the signing of the
agreement and in addition, he paid an “escalation cost” of 25,000.
• In 1980, petitioner wrote to private respondent demanding that the latter pay the
balance. This demand included the 2 installments.
• Private respondent sent a reply letter signifying his intention to pay and at the
same time demanding to see the certificate of title of the property and the tax
payment receipts.
• Petitioner filed a motion for writ of execution alleging that private respondent
failed to pay the installment due on June 1980. The trial court granted the motion.
• Private respondent filed a motion for reconsideration tendering at the same time
a Pacific Banking Corporation certified manager’s check payable to the order of
the petitioner, covering the entire obligation including the 2 nd installment.
• The CA reversed the decision of the RTC.

Issue

• Whether the tender of payment made by private respondent was valid [Yes]

Arguments
Ruling
Petitioner
We agree with the appellate court that it would be inequitable to
cancel the contract of conditional sale and to have the amount
RA 6652 (the already paid by the private respondent forfeited in favor of the
Maceda Law) petitioner, particularly after private respondent had tendered the full
recognizes and payment.
reaffirms the
vendor’s right to In the case at bar, there was substantial compliance with the
cancel the compromise agreement.
contract to sell
upon breach and Petitioner’s payment was well within the 30-day grace period
nonpayment of granted by law.
the stipulated
installments but The tender made by private respondent of a certified bank
requires a grace manager’s check payable to petitioner was a valid tender of
period after at payment.
least two years
or regular However, although private respondent had made a valid tender of
installment payment which preserved his rights as vendee in the contract of
payments conditional sale of real property, he did not follow it with a
consignation or deposit of the sum due with the court.
 He remains liable for the payment of his obligation because of his
failure to deposit the amount due with the court.
Final Ruling: The decision appealed from is affirmed.
Doctrine

• We have held that in such cases a mere tender of payment is enough, if made
on time, as a basis for action against the vendee to compel him to resell. But that
tender does not in itself relieve the vendor from his obligation to pay the price
when the redemption is allowed by the court. In other words, tender of payment
is sufficient to compel redemption but is not in itself a payment that relieves the
vendor from his liability to pay the redemption price.
• According to Article 1256 of the Civil Code, 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, and
that consignation alone shall produce the same effect in the five cases
enumerated therein; Article 1257 provides that in order that the consignation of
the thing (or sum due) may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation; and Article 1258 provides
that consignation shall be made by depositing the thing (or sum) due at the
disposal of the judicial authority and that the interested parties shall also be
notified thereof.

Case Title: Soco v Militante

Ticker: Commercial Building
Facts

• The decision of the present petition for review holds that there was substantial
compliance with the requisites of consignation and so ruled in favor private
respondent, Regino Francisco, lessee owned by the building owned by the
petitioner Solenad Soco, declaring the payments of the rentals valid and
effective, dismissed the complaint and ordered the lessor to pay the lessee moral
and exemplary damages.
• Soco and Francisco entered into a contract of lease in 1973 whereby Soco
leased her commercial building to the latter for a period of 10 years renewable
for another 10 years at the option of the lessee.
• Francisco noticed that Soco did not anymore send her collector for the payment
of the rentals and at times there were payments made but no receipts were
issued.
• He then sent his payment for rentals by checks which were received by Soco.
• In view of the alleged non-payment of rental of the leased premises, Soco filed
the instant case of illegal detainer.

Issue
• Whether the consignation of the rentals was valid to discharge effectively the
lessee’s obligation to pay the same.
 Ruling

• We do not agree with the questioned decision. We hold that the essential
requisite of a valid consignation must be complied with fully and strictly in
accordance with Articles 1256 to 1261 of the Civil Code.
• The respondent lessee has utterly failed to prove the following requisites of a
valid consignation.

Final Ruling: The assailed decision is

reversed.
Doctrine

• According to 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
the responsibility by the consignation of the thing or sum due.
• Consignation alone shall produce the same effect in the following cases:
1. When the creditor is absent or unknown, or does not appear at the place of
payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect;
5. When the title of the obligation has been lost.
• 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 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.
3. That previous notice of the consignation had been given to the person
interested in the performance of the obligation
4. That the amount due was placed at the disposal of the court
5. That after the consignation had been made, the person interested was
notified thereof.
• 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, 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. Thus, the tender of a check to pay for an
obligation is not a valid tender of payment.
• Tender of payment must be distinguished from consignation. Tender is the
antecedent, 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.

III. Loss or Impossibility

Case Title: Naga Telephone Co v Court of Appeals

Ticker: NATELCO
Facts

• Petitioner NATELCO is a telephone company rendering local as well as long

distance telephone service in Naga City while private respondent Camarines Sur
II Electric Cooperative, Inc (CASURECO II) is a private corporation established
for the purpose of operating an electric power service in the same city.
• In 1977, the parties entered into a contract for the use buy the petitioners I the
operation the electric light posts of CASURECO. In consideration therefor,
petitioners agreed to install, free of charge, 10 telephone connections for the use
by the private respondent.
• After 10 years, private respondent filed for the reformation of the contract with
damages.
• The trial court ruled that the contract be reformed to abolish the iniquities therein.
• The CA affirmed the decision of the trial court based on Article 1267 of the Civil
Code.
• Hence, the present petition.

Issue

• Whether the continued enforcement of the contract between the parties has,
through the years, become too iniquitous or disadvantageous to the plaintiff
[Yes]

Arguments
Ruling
Petitioner
Article 1267 is not
The obligation of private respondent consists in allowing the
applicable primarily
petitioners to use its posts in Naga, which is the service
because the contract
contemplated in said article.
does not involve the
rendition of service or a
The private respondent has sufficiently made out a cause of
personal prestation and
action under Article 1267. We, therefore, release the parties
it is not for future
from their correlative obligations under the contract. However,
service with future
we have to take into account the possible consequences of
unusual change
 merely releasing the parties therefrom which will result in
disruption of essential service to the public.
Final Ruling: The petition is denied.
Doctrine

• Article 1267 speaks of “service” which has become so difficult. Taking into
consideration the rationale behind this provision, the term “service” should be
understood as referring to the performance of the obligation.
• Article 1267 does not require that the contract be for future service with future
unusual change. According to Sen. Arturo Tolentino, Article 1267 states in our
law the doctrine of unforeseen events. This is said to be based on the discredited
theory of rebus sic stantibus in public international law; 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. Considering practical
needs and the demands of equity and good faith, the disappearance of the basis
of a contract gives rise to a right to relief in favor of the party prejudiced.

Case Title: Philippine National Construction Corp. (PNCC) v Court of Appeals

Ticker: Industrial Permit
Facts

• In 1985, the parties entered into a lease contract.

• On January 7, 1986, petitioner obtained from the Ministry of Human Settlements
a Temporary Use Permit for the propose crushing project.
• In 1986, private respondents wrote petitioner requesting payment of the first
annual rental.
• Petitioner argued that under par. 1 of the lease contract, payment of rental would
commence on the date of the issuance of an industrial clearance by the Ministry
of Human Settlements, and not from the date of signing of the contract. It then
expressed its intention to terminate the contract.
• Private respondents instituted with the RTC an action against petitioner for
specific performance with damages.
• The trial court rendered a decision ordering petitioner to pay private respondents
the amount which represented the amount of rentals for two years with legal
interest.
• The CA affirmed the decision of the RTC.

Issue

• Whether Article 1266 and 1267 apply in the case [No]

 Arguments
Ruling
Petitioner
Invoking Article 1266 and the
Petitioner cannot take refuge in Article 1266, since it is
principle of rebus sic
only applicable to obligations “to do” and not obligations
stantibus, petitioner asserts
“to give”. The obligation to pay rentals or deliver the
that it should be released
thing in the contract of lease falls within the prestation
from the obligatory force of
“to give”, hence, it is not covered within the scope of
the contract because the
Article 1266.
purpose of the contract did
not materialize due to
The principle of rebus sic stantibus neither fits in with the
unforeseen events and
facts of the case.
causes beyond its control
Final Ruling: The petition is denied.
Doctrine

• The law recognizes exceptions to the principle of the obligatory force of

contracts, one of which is laid done in Article 1266, to wit:
“The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.”
• Article 12657, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus. The
parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is therefore only in absolutely exceptional changes
of circumstances that equity demands assistance for the debtor.

IV. Condonation or Remission

Case Title: Victor Yam & Yek Sun Lent v Court of Appeals
Ticker: IGLF
Facts

• In 1979, the parties in the case entered into a Loan Agreement with Assumption
of Solidary Liability whereby petitioners were given a loan of P 500,000.00 by
private respondent.
• Petitioners subsequently obtained a second Industrial Guarantee and Loan Fund
(IGLF) loan evidenced by two promissory notes.
• In 1985, petitioners had paid their first loan. Private respondent was placed
under receivership by the Central Bank and Ricardo Lirio and Cristina Destajo
were appointed as receiver and inhouse examiner, respectively.
• In 1986, petitioners made a partial payment on the second loan. They later wrote
a letter to private respondent, proposing to settle their obligation.
• Private respondent replied with a counter-offer that the penalty charges would
be reduced provided petitioners can pay their obligation on a stipulated date.
 • Petitioners paid by means of a check a partial amount. The corresponding
voucher for the check bears the notation: “full payment of IGLF Loan”
• Private respondent sent two demand letters, seeking payment of the balance.
• As petitioners did not respond, private respondent filed this case in the RTC.
• The RTC ordered petitioners to pay the loan balance.
• The CA affirmed the decision of the RTC in toto.

Issue

• Whether petitioners are liable for the payment of the penalties and service
charges on their loan [Yes]

Arguments
Ruling
Petitioner
They have fully paid their obligation. Yam and his
wife met with the president of the respondent
The alleged agreement to condone
corporation, during which the latter agreed to
was not reduced in writing.
waive the penalties and charges provided
petitioners paid the principal and interest.
Final Ruling: The decision of the
CA is affirmed.
Doctrine

• Article 1270, par. 2 of the Civil Code provides that express condonation must
comply with the forms of donation.
• Art. 748, par. 3 provides that the donation and acceptance of a movable, the
value of which exceeds P 5,000.00 must be made in writing, otherwise, the same
shall be void.
• Art. 417 par. 1 states that obligations, actually referring to credits, are considered
movable property.

VI. Compensation

Case Title: Silahis Marketing Corporation v Intermediate Appellate Court

Ticker: Debit Memo
Facts

• On various dates in 1975, Gregorio de Leon, doing business under the name
of Mark Industrial Sales, sold and delivered to Silahis various items of
merchandise covered by several invoices payable within 30 days from the date
of the covering invoices.
• Allegedly due to Silahis’ failure to pay its account upon maturity despite
repeated demands, de Leon filed before the CFI a complaint for the collection
of the said accounts including accrued interest and attorney’s fees.
• Silahis presented a debit memo as unrealized profit for a supposed
commission that Silahis should have received from de Leon.
• The lower court confirmed the liability of Silahis for the claim of de Leon but at
the same time ruled that it be offset by Silahis’ counterclaim as contained in the
debit memo.
• The IAC set aside the decision of the lower court and dismissed the
counterclaim for lack of legal basis.

Issue

• Whether the private respondent is liable to the petitioner [No]

Ruling

• We have carefully gone over the record of this case particularly the debit memo
upon which petitioner’s counterclaim rests and found nothing contained therein
to show that private respondent obligated himself to set-off or compensate
petitioner’s outstanding accounts with the alleged unrealized commission from
the assailed sale of sprockets.
• Whether private respondent is liable to pay the petitioner a commission on the
subject sale is vigorously disputed. This circumstance prevents legal
compensation from taking place.

Final Ruling: The questioned

decision is affirmed.
Doctrine

• Compensation takes place when two persons, in their own right, are creditors
and debtors to each other.
• Article 1279 provides the requisites for compensation to occur.
• When all the requisites are present, compensation takes effect by operation of
law, even without the consent or knowledge of the creditor 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.
Case Title: Montemayor v Millora
Ticker: Attorney’s Fees
Facts

• In 1990, respondent Vicente Millora obtained a loan of P 400,000 from petitioner

Dr. Jesus Montemayor as evidenced by a promissory note executed by Vicente.
• Subsequently, the interest rate initially stipulated was raised.
• Vincent’s last payment was short than what was due.
• Jesus made several demands for Vicente to settle his obligation but to no avail.
• Jesus filed before the RTC a complaint for sum of money. Vicente filed a
counterclaim. Vicente claimed that he handled several cases for Jesus but he
was summarily dismissed.
• The RTC ordered Vicente to pay his monetary obligation.
• At the same time, the trial court found merit in Vicente’s counterclaim and
ordered Jesus to pay Vicente his attorney’s fees equivalent to the amount of
Vicente’s monetary liability, and which shall be set off with the amount Vicente
is adjudged to pay Jesus.
• The CA affirmed the decision of the RTC.
• Hence, the petition.

Issue

• Whether the absence of a specific amount in the decision representing

respondent’s counterclaim, the same could be validly offset against the specific
amount of award mentioned in the decision in favor of the petitioner.

Arguments
Ruling
Petitioner
Petition lacks merit.

The decision of the RTC is already final and executory,

hence, immutable. It can no longer be subject of an
appeal.
Such disposition by the RTC The trial court merely awarded to Vicente attorney’s
leaves the matter of fees based on quantum meruit without specifying the
computation of the attorney’s exact amount thereof.
fees uncertain and, hence,
the writ of execution cannot Here, both obligations are liquidated and may be validly
be implemented compensated.
Final Ruling: The petition for review on certiorari is
denied.
Doctrine

• For legal compensation to take place, the requirements set forth in Articles 1278
and 1279 of the Civil Code must be present.
• “A debt is liquidated when its existence and amount are determined. It is not
necessary that it be admitted by the debtor. Nor is it necessary that the credit
appear in a final judgment in order that it can be considered as liquidated; it is
enough that its exact amount is known. And a debt is considered liquidated, not
only when it is expressed in definite figures which do not require verification, but
also when the determination of the exact amount depends only on a simple
arithmetical operation.”
• “When the defendant, who has an unliquidated counterclaim, and a judgment is
rendered liquidating such claim, it can be compensated against the plaintiff’s
claim from the moment it is liquidated by judgment.”