Oblicon Notes

Amen | Compiled Notes – Updated by CVC (2021)
Civil Law Review 2
NOTES
I. OBLIGATIONS
A. In General
1. Definition
Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
Notes:
What is the definition of an obligation? It is best defined by Arias Ramos which reads as
follows, “an OBLIGATION is a juridical relation whereby a person (called the creditor)
may demand from another (called the debtor) the observance of a determinate conduct,
and, in case of breach, may obtain satisfaction from the assets of the latter”. This means that
where there is a right or power to demand, there is a correlative obligation or an imposition upon
a person of a definite conduct.
What are the elements of obligation? It has four definite elements as follows:
1. an active subject, who has the power to demand the prestation, known as the obligee or
creditor;
2. a passive subject, who is bound to perform the prestation, known as the obligor or
debtor;
a. These two, the active and passive subjects are considered as the personal elements
of an obligation.
b. They could be an individual person or juridical persons.
c. They must be determinable in some manner. Exceptions are the following

examples: (1) negotiable instrument payable to bearer, (2) promise of a prize or a
reward for anyone performing a certain act.
3. an object or the prestation (a particular conduct);
a. This may pertain not to a thing but to a particular conduct of the debtor; hence, a
prestation which may consist in giving (prestation consists in the delivery of a
movable or immovable thing) or doing (all kinds of services) or not doing
(abstaining from some act, may include not to give) something, e.g. it is not the
thing which the vendor must deliver, but the necessary conduct to produce the
effects of the sale that is the object.
4. the efficient cause or the juridical tie (vinculum juris) between the two subjects by
reason of which the debtor is bound in favor of the creditor to perform the prestation.
a. This pertains to the juridical or legal tie, which is the vinculum, that may either be
a relation established by the following:
i. Law (relation to give support)
ii. Bilateral acts (contracts giving rise to obligation)
iii. Unilateral acts (crimes and quasi-delict)
** All the above 4 elements are agreed upon by commentators as essential elements. The
following two are being debated.
(i) Causa debendi/ obligationes (Castan) – This is what makes the obligation demandable. This
is the proximate why of an obligation.
(ii) Form - This is controversial. This is acceptable only if form means some manifestation of
the intent of the parties.
What are the requisites of a prestation?
1. must be possible, physically and juridically;
2. must be determinable or at least determinable according to pre-established elements or

criteria; and
3. must have a possible equivalent in money (need not be for one of the parties because it
could be for the benefit of third persons; the criterion to determine whether the
obligation has a pecuniary value is not limited to the object or prestation thereof,
but extends to the sanction which corresponds to the juridical duty; this is
differentiated with creditor’s interest because the latter need not be economic or
patrimonial since it may be sentimental or ideal but the object of prestation must have an
economic value or in case of nonfulfillment, be susceptible of substitution in money or
something of patrimonial value)
How will you distinguish an obligation from natural obligations? Since the definition above
only refers to the civil obligation or those which give a right of action to compel their
performance, the same will not include the natural obligation, which are those which cannot be
enforced by court action but which are binding on the party who makes them, in conscience and
according to equity and natural justice. The differences between the two include the following:
1. Civil obligations derive their binding force from positive law while Natural obligations
derive their binding effect from equity and natural justice;
2. Civil obligations can be enforced by court action or the coercive power of public
authority while the fulfillment of Natural obligations cannot be compelled by court
action but depends exclusively from conscience.
According to Balane: Book IV starts w/ an inaccuracy. It gives the impression that obligations
& contracts are of the same status, w/c they are not. A contract is only one of the sources of
obligations. Book IV should have been simply titled "Obligations."
Etymology – two Latin words, ligare, meaning "to bind"
& ob w/c is a proposition used to intensify a verb.
Literally obligare means "to bind securely."
Hence, a better definition would be that, An obligation is a juridical relation (because there are
2 parties) whereby a person should engage or refrain fr. engaging in a certain activity for the
satisfaction of the private interests of another, who in case of non-fulfillment of such duty may
obtain from the patrimony of the former through proper judicial proceedings the very prestation
due or in default thereof, the economic equivalent (damages) that it represents. (Diaz Piero)
Characteristics of an Obligation:
1. It represents an exclusively private interest
2. It creates ties that are by nature transitory
3. It involves the power to make the juridical tie effective in case of non-fulfillment through
an economic equivalent obtained from the debtor's patrimony.
Essential Elements of an Obligation:
(1) Active Subject – This refers to the creditor or the obligee.
 A creditor generally used in an obligation to give
 while obligee is used in an obligation to do
(2) Passive Subject – This refers to the debtor or the obligor.
 debtor is used in an obligation to give
 while obligor is used in an obligation to do
The first two elements must be determinate or determinable. The following are possible
combinations:
 Both parties are determined at the time of the execution of the obligation.
 one party is determined at the constitution of the obligation & the other to be
determined subsequently in accordance with a criteria that is previously established.
 the subject is determined in accordance with his relation to a thing & therefore it
changes where the thing passes from one person to another. This is a property-linked
obligation.
(3) Object of the obligation - the conduct or activity that must be observed by the debtor, this is
always an activity or conduct, the prestation.
Requisites of an object:
 It must be licit.
 It must be possible.
 It must be determinate or determinable.
 It must have pecuniary value so that if not performed it is converted into damages.
(4) Vinculum juris- the legal tie, whereby upon default or refusal of the debtor to perform, the
creditor can go to court.
 When a person says "I promise to pay you when I like to," there is no obligation
here because there is no vinculum juris.
 Juridical tie, the efficient cause established by the various sources of

OBLIGATIONS
> by virtue of which the debtor is bound in favor of the creditor to perform the
prestation.
Efficient cause / vinculum  may either be relation established by:
1. Law (e.g. marital relation giving rise to OBLIGATION for support;
2. Bilateral acts (e.g. contracts give rise to the OBLIGATIONs stipulated therein)
3. Unilateral acts (e.g. crimes and quasi-delicts)
** All the above 3/4 elements are agreed upon by commentators as essential elements. The
following two are being debated.
(i) Causa debendi/ obligationes (Castan) – This is what makes the obligation
demandable. This is the proximate why of an obligation.
(ii) Form - This is controversial. This is acceptable only if form means some
manifestation of the intent of the parties.
TOLENTINO:
OBLIGATION “to give”  prestation consists in the delivery of a movable or an immovable

thing in order to create a real right, or for the use of the recipient, or for possession, or to return
to its owner; e.g. OBLIGATION to deliver the thing in a contract of sale, deposit, lease,
antichresis, pledge and donation.
OBLIGATION “to do”  including all kinds of work or services. E.g. contract of
employment or professional services.
OBLIGATION “not to do”  consists in abstaining from some act, e.g. duty not to create a
nuisance;
Requisites of a prestation:
1. it must be possible, physically and juridically
2. it must be determinate, or at least determinable; and
3. it must have a positive equivalent in money. (susceptible of pecuniary appreciation)
Positive Law – valid legal laws enacted by the legislative department;
Natural OBLIGATION – not sanctioned by any action but have a relative juridical
effect;
 do not grant the right of action to enforce their performance but after voluntary
fulfillment by their obligor, they authorize the retention of what has been
delivered or rendered by reason thereof (Article 1423);
2. KINDS OF OBLIGATIONS AS TO BASIS & ENFORCEABILITY
(a) NATURAL OBLIGATIONS
(Arts. 1423 – 1430  not exclusive enumeration; some others can be)
H. NATURAL OBLIGATIONS – ARTS. 1423-1430. 1155
Article 1423. Obligations are civil or natural. Civil obligations give a right of action to compel
their performance. Natural obligations, not being based on positive law but on equity & natural
law, do not grant a right of action to enforce their performance, but after voluntary fulfillment
by the obligor, they authorize the retention of what has been delivered or rendered by reason
thereof. Some natural obligations are set forth in the following articles.
Article 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription,
the obligor who voluntarily performs the contract cannot recover what he has delivered or the
value of the service he has rendered.
Article 1425. When without the knowledge or against the will of the debtor, a third person pays
a debt which the obligor is not legally bound to pay because the action thereon has prescribed,
but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he
has paid.
Article 1426. When a minor between 18 and 21 years of age who has entered into a contract
without the consent of the parents or guardian, after the annulment of the contract voluntarily
returns the whole thing or price received, notwithstanding the fact that he has not been
benefited thereby, there is no right to demand the thing or price thus returned.
Note: When the ground for annulment is the incapacity of the plaintiff, he is not bound to make
restitution except to the extent that he was benefited. However, he has natural obligation to still
deliver, and he cannot thereby recover what he has delivered.
Ratio: Because a minor at such age is deemed to have sufficient mental and moral development
to be aware of his debt of conscience. This is basically independent on the next provision on
Article 1427 below.
Illustrations:
1. A filed an action to compel B to fulfill the latter’s obligation to the former, will the action
prosper? Not necessarily because in natural obligations no court action can compel
performance because it is an action based on equity, conscience and natural justice. Natural
obligations are midway between civil obligations and the purely moral obligations. In order that
there may be a natural obligation, there must exist a juridical tie (vinculum juris) which is not
prohibited by law and which in itself could give a cause of action, but because of some special
circumstances is actually without such legal sanction or means of enforcing compliance by
invoking the intervention of the court.
Basis: Art. 1423 Obligations are civil or natural. Civil obligations give a right of action to compel their
performance. Natural obligations, not being based on positive law but on equity performance, but after
voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered
by reason thereof. Some natural obligations are set forth in the following articles.
Article 1427. When a minor between 18 and 21 years of age, who has entered into a contract
without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a
fungible thing in fulfillment of the obligation, there shall be no right to recover the same from
the obligee who has spent or consumed it in good faith.
Note: It is not the voluntary payment that prevents recovery under this article, but the fact that
the obligee has consumed or spent the thing or money in GOOD FAITH. Although it is true that
the contract can be annulled, but until it is so annulled, it exists as a civil obligation.
General rule: Upon the annulment of the contract, the party who contracted with the minor
must return whatever he may have received under the contract.
Exception: If the payment was made although by the minor, but the thing or money paid was
consumed or spent in good faith (belief that the debtor has the capacity to deliver the object;
must exist at the time that the thing was consumed or money was spent; can be recovered still by
the debtor if the good faith, even if it existed at the time of the delivery, has ceased to exist at the
time of consumption or spending).
Is the thing here always have to be consummable? No, because although non-consummable, the
debtor cannot recover, if he think is no longer in the possession of the creditor who has acted in
good faith, either he has alienated it or it has been lost, without his fault.
Article 1428. When, after an action to enforce a civil obligation has failed, the defendant
voluntarily performs the obligation, he cannot demand the return of what he has delivered or
the payment of the value of the service he has rendered.
Article 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding
the value of the property which he received by will or by the law of intestacy from the estate of
the deceased, the payment is valid & cannot be rescinded by the payer.
Article 1430. When a will is declared void because it has not been executed in accordance with
the formalities required by law, but one of the intestate heirs, after the settlement of the debts of
the deceased, pays a legacy in compliance with a clause in the defective will, the payment is
effective & irrevocable.
Note: This article includes ever licit obligation which is unenforceable because of the lack of
proper formalities.
Article 1960. If the borrower pays interest when there has been no stipulation therefor, the
provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as
the case may be.
Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
Why would this Natural Obligation be allowed in our jurisdiction? It is because equality,
morality and natural justice as the foundations of a positive law makes wisdom to this obligation
so as the so-called moral obligation.
What is the basis of natural obligation? It is from the nature of man and of things, as well as from
law and reason, there arises a natural law, which is immutable and independent of all human
regulations; as sometimes called as rational law.
What are the types of obligations?
In juridical science, four types of which include the following:
1. Moral obligation- duties of conscience completely outside of the field of law
2. Natural obligation- not sanctioned by any action but have relative juridical effect
3. Civil obligation- juridical obligations which apparently in conformity with positive law
but are contrary to juridical principles and susceptible of being annulled
4. Mixed obligation- have full juridical effect
However, jurisprudence makes only two classifications, as follows:
1. Natural obligation
2. Civil obligation
Requisites of Natural OBLIGATION:
1. there is a juridical tie between two persons (distinguishes it from moral obligation)
2. the tie is not given effect by law (distinguishes it from civil obligation)
 an OBLIGATION without a sanction, susceptible of voluntary performance, but

not through compulsion by legal means.
Voluntary fulfillment – may be understood as spontaneous, free from fraud or coercion or it

may be understood as meaning without knowledge or free from error;
-with knowledge that he cannot be compelled to pay OBLIGATION;
RATIO: “reputation” (clan)
-this is being distinguished from payment by mistake (solution indebiti) which constitutes
quasi-contract because payment by mistake is not voluntary and hence may be recovered.
-payment here is voluntary when the debtor knew of the obligation to be a natural one.
Case: Ansay vs. National Development Company
Facts: On July 25, 1956, appellants filed against appellees in the Court of First Instance of
Manila a complaint praying for a 20% Christmas bonus for the years 1954 and 1955. The court a
quo does not see how petitioners may have a cause of action to secure such bonus because:(a) A
bonus is an act of liberality and the court takes it that it is not within its judicial powers to
command respondents to be liberal;
(b) Petitioners admit that respondents are not under legal duty to give such bonus but that they
had only ask that such bonus be given to them because it is a moral obligation of respondents to
give that but as this Court understands, it has no power to compel a party to comply with a
moral obligation (Art. 142, New Civil Code.).
Issue: Whether the appellees have the legal obligation to give the claimed bonus despite the fact
that the same has been granted arising from a moral obligation or the natural obligation to do the
same.
Held: No. Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil
obligations are a right of action to compel their performance. Natural obligations, not being
based on positive law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the retention of what
has been delivered or rendered by reason thereof".
It is thus readily seen that an element of natural obligation before it can be cognizable by the
court is voluntary fulfillment by the obligor. Certainly retention can be ordered but only after
there has been voluntary performance. But here there has been no voluntary performance. In
fact, the court cannot order the performance.
At this point, we would like to reiterate what we said in the case of Philippine Education Co. vs.
CIR and the Union of Philippine Education Co., Employees (NUL) (92 Phil., 381; 48 Off. Gaz.,
5278) —
xxx xxx xxx
From the legal point of view a bonus is not a demandable and enforceable obligation. It is
so when it is made a part of the wage or salary compensation.
And while it is true that the subsequent case of H. E. Heacock vs. National Labor Union, et al.,
95 Phil., 553; 50 Off. Gaz., 4253, we stated that:
Even if a bonus is not demandable for not forming part of the wage, salary or compensation of
an employee, the same may nevertheless, be granted on equitable consideration as when it was
given in the past, though withheld in succeeding two years from low salaried employees due to
salary increases.
still the facts in said Heacock case are not the same as in the instant one, and hence the ruling
applied in said case cannot be considered in the present action.
What are imperfect and perfect obligations? Perfect obligation is one where there is a
determination of the creditor, debtor and the nature and value of the obligation while imperfect
obligation has no determination of those above.
What is its implication to natural obligation? Perfect obligation is natural obligation in a sense
that all those elements have been determined and it is only the performance that is left to the will
of the debtor.
Natural OBLIGATION vs. Moral OBLIGATION:
Natural Moral
OBLIGATION OBLIGATION
Juridical tie Exists None
Performance legal fulfillment act of pure

by debtor of an liberality which
OBLIGATION springs from
blood, affection
or benevolence
Basis of Within the entirely domain

existence of domain of law of morals
OBLIGATION
Enforceability The juridical tie moral duty is

itself produces inexistent in the
certain civil juridical point
effects; True of view
OBLIGATION
but for certain
causes cannot
be enforced by
law
Examples of natural OBLIGATIONS:
 Support of a natural child
 Indemnification of a woman seduced
 Support of relatives, by consanguinity or affinity
Case: Villaroel vs. Estrada
Facts: On May 9, 1912, Alexandra F. Callao, mother of defendant John F. Villarroel, obtained
from the spouses Mariano Estrada and Severina a loan of P1, 000 payable after seven years.
Alexandra died, leaving as the only heir to the defendant. Spouses Mariano Estrada and Severina
died too, leaving as the only heir to the plaintiff Bernardino Estrada. On August 9, 1930, the
defendant signed a document which states in duty to the plaintiff the amount of P1, 000, with an
interest of 12 percent per year. This action relates to the collection of this amount. The Court of
First Instance of Laguna, which was filed this action, condemn the defendant to pay the claimed
amount of P1, 000 with legal interest of 12 percent per year from the August 9, 1930 until fully
pay.
Issue: Whether the obligation arising from the original contract of loan, being prescribed would
still be demandable from the only heir of the original debtor.
Held: Yes because the prescribed debt of the deceased mother of the debtor was held to be a
sufficient consideration to make valid and effective the promise of the son to pay the same.
Although the action to recover the original debt has prescribed and when the lawsuit was filed in
this case, the question that arises in this appeal is primarily whether, notwithstanding such
prescription is from the action filed. However, this action is based on the original obligation
contracted by the mother of the defendant, who has prescribed, but in which the defendant
contracted on August 9, 1930 to assume the fulfillment of that obligation, as prescribed. Being
the only defendant of the primitive heir debtor entitled to succeed him in his inheritance, that
debt legally brought by his mother, but lost its effectiveness by prescription, is now, however,
for him a moral obligation, which is consideration enough to create and effective and
enforceable his obligation voluntarily contracted the August 9, 1930.
CIVIL NATURAL
OBLIGATIONS OBLIGATIONS
Source of
From positive from equity and
binding force
law natural justice
& effect
cannot be
can be enforced
compelled by
by court action or
court action but
Enforceability the coercive
depends upon
power of public
good conscience
authority
of the debtor
When can you convert a natural obligation to civil one? This can made through; (1) novation:
(2) confirmation or ratification unless contrary to law, morals or public order.
Can you guarantee a natural obligation? In principle, no. because the liability of the guarantor
presupposes that there must be a prior exhaustion of the property of the principal debtor, and
that the guarantor after paying can recover from the principal debtor—and both of these cannot
be legally done when the obligation is natural. The legal consequence of having a guaranty for a
natural obligation is to convert the same to a civil obligation because that guaranty will now be
subject to some coercive remedies to be enforced against it.
Illicit OBLIGATIONS  OBLIGATIONS which are contrary to morals and good customs do
not constitute natural OBLIGATIONS, whatever is paid under such OBLIGATIONS can be
recovered, without prejudice to the provisions of Articles 1411 and 1412, but Article 1414 may
apply.
Illustrations:
1. Differentiate civil obligation from natural obligation: In civil obligations, the obligation
can be enforced by court action; natural obligations cannot be enforced by court action. Civil
obligations are based on positive law and natural obligations are based on equity.
2. Example: The debt is 10M, the value of the estate 3M, the natural obligation is? To pay
7M. The basis of 7M? Under the law, the heir is liable to the extent of the value which they
actually received from the decedent, therefore, if they received 3M, they will only be liable
for 3M, the 7M will be a natural obligation.
3. Example: Dated feb.1, 1994, I promise to pay X the amount of 1M, signed by Y. To this
day, not a single centavo has been paid. What kind of obligation is the promissory note?
It may be considered as a civil obligation when X demanded in writing the payment from Y
before the action prescribes because written demand will toll the running of prescription of
the obligation. However, if there was no demand, since the obligation is a pure obligation,
therefore, demandable at once, the prescriptive period begins to run on feb.2, 1994, 10 years
has already lapsed, the action already prescribed, the obligation becomes a natural obligation.
Is this promissory note a pure obligation? Yes. Why? Because there is no period stated in
the promissory note. Because no period is stated in the promissory note, it is a pure
obligation? By express provision of the law, just because the parties failed to state the period
in the promissory note, does not necessarily mean that it pertains to a pure obligation,
because from the circumstances it can be inferred that the parties shall fix the period, if this
is promissory note is a contract of loan it is possible that there is a period. What possible
contract may the promissory note be that indeed this may pertain to a pure obligation?
A contract of sale. Now having said that, if this promissory note pertains to an obligation
with a period, therefore today the obligation in this promissory note, if no demand was
made, a natural obligation? Not necessarily, the period of prescription shall be counted
from the due date where the obligation must be paid. Because if this is with a period, and the
agreement is that the obligation should be paid after five years, today this is still a civil
obligation, the prescriptive period shall commence to run from the time the cause of
action accrues.
4. IN RELATION TO THE EXAMPLE OF THE HEIR WHO PAID THE DEBT OF

THE FATHER: X died, his heirs are ABC, ABC paid to Y 10M five days after X’s
death, after 6 months thereafter the heirs are trying to recover claiming that the estate
is only 3M, can the heirs recover the value from Y? They cannot recover if the payment is
voluntary. In natural obligation, if the payer voluntarily paid, the creditor has the right to
retain what has been paid. The question here is that whether or not the payment is
voluntary? Incidentally, in natural obligation if the payer paid without fraud, threat, or
any vitiation being employed upon the heirs, the payment is voluntary payment,
correct? Not necessarily. When will there be payment without vitiation, yet the payment
is not voluntary? What constitutes voluntary payment in natural obligation? The payer
knew that he is not compelled to pay but the payer paid, it is a voluntary payment. The more
reasonable question here is that is there such a person who is crazy enough to pay even
if he has no obligation to pay? Yes, why would he do that? Conscience. Precisely because
the obligation is based on justice (but this is not possible here in the Philippines). The more
reasonable answer is reputation. But under the facts the payment is voluntary? Not really,
because when they paid it was only 5 days after the death of X, by that time normally, they
do not know the estate of the decedent.
5. Obligation is defined under Art. 1156 as an obligation to give, to do, or not to do. Is it
correct to say that the definition is not accurate; there must be another prestation
which is not to give? No, the prestation not to give is included in not to do. Obviously in
this definition, there are only three obligations as to prestations, which are? 1.
Obligation to give; 2. Obligation to do; and 3. Obligation not to do. Briefly, this definition is
criticized because it is incomplete, why is it incomplete? It pertains only to the part of the
debtor. To the critics, obligation is a concept that would include both the debt side and the
credit side. And you agree to that? Yes sir. The credit side and the debt side are two
aspects of an obligation, do you agree to that? Yes. So a credit is an obligation? No, they
are actually opposite of each other. The difference is that a person who has a right can
compel the other; he cannot be compelled to perform his right. Thus, in Philippine law, rights
and obligations are different matters. An obligation therefore may not be waived but a
right may be exercised or not.
6. What are obligations without agreement, and 5 situations giving rise to this obligation?
These are obligations arising from all other sources besides contract. Thus, in answering the
second question, you must cite examples: 1. Payment of damages to the person who was
injured by negligence xxx. This is because agreement is required only in contracts, it is not
required in all other obligations, is only an essential element of a contract.
7. Therefore considered as essential elements of obligations are? 1. Active subject (creditor

or obligee); 2. Passive Subject (debtor or obligor); 3. Juridical tie; and 4. Prestation.
Therefore, in a contract of lease, who is active subject and who is the passive subject?
The obligation is a reciprocal contract, hence, the passive subject is the lessor in the aspect of
delivering the property leased to the lessor, and the active subject is the lessee in the aspect of
demanding for the delivery of the thing leased. In a contract of sale, who is the passive
subject? It depends, the contract of sale is a bilateral contract, hence as to payment the buyer
is the passive subject and the vendor is the active subject, while as to the delivery of the thing
sold, the buyer is the active subject while the vendor is the passive subject. Contract
resulting to a reciprocal obligation is called? A bilateral contract. The question here is,
how come the debtor is considered as the passive subject? He can be compelled to
perform the obligation. He is the one to be compelled therefore passive? Under Philippine
law, the creditor is the active subject, because if the creditor does not demand for the
performance of the obligation there will be no compulsion because if there is no demand,
there will be no delay. The debtor is actually favored by law for instance: 1. In an obligation
to pay a sum of money without a stipulation as to the place of payment, the place of payment
will be where? The place of domicile of debtor.
8. Mentioned as one of the essential requisites is the prestation, also known as what? The
object. Therefore it pertains to a thing? No. Because? The object pertains to conduct.
9. Another essential requisite is the juridical tie, also known as, ad vinculum juris or legal
tie or efficient cause. When would there be a juridical tie, what is its purpose? It binds
the party to the obligation; there is a juridical tie when one of the sources of obligation is
present. These sources of obligations, anyone of them binds the parties. Like for instance,
law, it is the law that will bind the parties. What obligation has no juridical tie? Moral
obligations.
PRESCRIPTION OF ACTIONS
What does “prescription of actions” means? It is also known as the limitation of actions which
refers to the time within which an action may be brought, or some act done, to preserve a right.
What are “Statutes of Limitation”? These are the acts limiting the time within which actions shall
be brought. They do not confer any right of action but are enacted to restrict the period within
which the right might be asserted. They can be available as defenses but not matters of
substantive right. The purpose is to protect the diligent and vigilant not those who sleep on their
rights. They are statutes of repose, the object of which is to suppress fraudulent and stale claims
from springing up at great distances of time and surprising the parties or their representatives
when all the proper vouchers and evidence are lost or the facts have become obscure from the
lapse of time or the defect memory or death or removal of witnesses. These contemplate civil
actions not criminal actions.
What is the difference between laches and prescription? Laches is concerned with the effect of
delay while prescription is concerned with the fact of delay. Laches is principally the question of
inequity of permitting a claim to be enforced while prescription is a matter of time. Laches
applies to equity while prescription is statutory/law.
Article 1139. Actions prescribed by the mere lapse of time fixed by law.
Note: For example, in computing the prescriptive period if it is a leap year, February 28 and 29
are two separate days.
What is the effect of lapse of time? It has the effect of extinguishing the action. However, this to
be availed of as a defense should be pleaded in the answer. The right of prescription however
can be waived or renounced. It is deemed waived if not timely raised or pleaded before or
during trial. Exception if it is apparent in the pleading itself.
Case: Development Bank of the Philippines vs. Spouses Patricio Confessor
Facts: On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an
agricultural loan from the Agricultural and Industrial Bank (AIB), now the Development of the
Philippines (DBP), in the sum of P2,000.00, Philippine Currency, as evidenced by a promissory
note of said date whereby they bound themselves jointly and severally to pay the account in ten
(10) equal yearly amortizations. As the obligation remained outstanding and unpaid even after
the lapse of the aforesaid ten-year period, Confesor, who was by then a member of the Congress
of the Philippines, executed a second promissory note on April 11, 1961 expressly
acknowledging said loan and promising to pay the same on or before June 15, 1961. Said
spouses not having paid the obligation on the specified date, the DBP filed a complaint dated
September 11, 1970 in the City Court of Iloilo City against the spouses for the payment of the
loan.
Issue: Whether the validity of a promissory note which was executed in consideration of a
previous promissory note, the enforcement of which is barred by prescription may still be
demandable.
Held: Yes. The right to prescription may be waived or renounced. Article 1112 of Civil Code
provides:
Art. 1112. Persons with capacity to alienate property may renounce prescription already
obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the renunciation results from acts
which imply the abandonment of the right acquired.
There is no doubt that prescription has set in as to the first promissory note of February 10, 1940.
However, when respondent Confesor executed the second promissory note on April 11,
1961 whereby he promised to pay the amount covered by the previous promissory note on
or before June 15, 1961, and upon failure to do so, agreed to the foreclosure of the
mortgage, said respondent thereby effectively and expressly renounced and waived his
right to the prescription of the action covering the first promissory note.
This Court had ruled in a similar case that –
... when a debt is already barred by prescription, it cannot be enforced by the creditor. But a new
contract recognizing and assuming the prescribed debt would be valid and enforceable ... .
Thus, it has been held —
Where, therefore, a party acknowledges the correctness of a debt and promises to pay it after the
same has prescribed and with full knowledge of the prescription he thereby waives the benefit of
prescription.
This is not a mere case of acknowledgment of a debt that has prescribed but a new promise
to pay the debt. The consideration of the new promissory note is the pre-existing obligation
under the first promissory note. The statutory limitation bars the remedy but does not
discharge the debt.
A new express promise to pay a debt barred ... will take the case from the operation of the statute
of limitations as this proceeds upon the ground that as a statutory limitation merely bars the
remedy and does not discharge the debt, there is something more than a mere moral obligation
to support a promise, to wit a – pre-existing debt which is a sufficient consideration for the new
the new promise; upon this sufficient consideration constitutes, in fact, a new cause of action.
... It is this new promise, either made in express terms or deduced from an acknowledgement as a
legal implication, which is to be regarded as reanimating the old promise, or as imparting vitality
to the remedy (which by lapse of time had become extinct) and thus enabling the creditor to
recover upon his original contract.
Under Article 165 of the Civil Code, the husband is the administrator of the conjugal partnership.
As such administrator, all debts and obligations contracted by the husband for the benefit of the
conjugal partnership, are chargeable to the conjugal partnership. 5No doubt, in this case,
respondent Confesor signed the second promissory note for the benefit of the conjugal
partnership. Hence the conjugal partnership is liable for this obligation.
Article 1140. Actions to recover movables shall prescribe 8 years from the time the possession
thereof is lost, unless the possessor has acquired the ownership by prescription for a less period,
according to Article 1132 and without prejudice to Articles 559, 1505 and 1133.
Article 1132. The ownership of movables prescribes through uninterrupted possession for four
years in good faith.
The ownership of personal property also prescribed through uninterrupted possession for 8 years,
without need of any other condition.
With regard to the right of the owner to recover personal property lost or of which he has been
illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market,
or from a merchant’s store, the provisions of Article 559 and 1505 shall be observed.
Article 1141. Real actions over immovables prescribe after 30 years. This provision is without
prejudice to what is established for the acquisition of ownership and other real rights by
prescription.
Note: While an action for reformation of instrument, such as a contract of sale with pacto de
retro alleged to be merely an equitable mortgage, is an action based upon a written contract
which must be brought within 10 years form the time the right of action accrues (Article 1144),
where however, the accrual of such right could not be established it is more logical to apply this
provision, Article 1141 because in reality the action seeks to reassert one’s title of ownership
over the real property, not to recover the same.
Article 1142. A mortgage action prescribes after 10 years.
Note: The fact that the mortgage is registered does not make its action to foreclose
imprescriptible.
Article 1143. The following rights, among others specified elsewhere in this Code, are not
extinguished by prescription:
1. To demand a right of way, regulated in Article 649;

2. To bring action to abate a public or private nuisance.
Note: Also included in the list is that provided for in Article 494 of the Civil Code which allows
no prescription to run in favor of a co-owner or co-heir against co-owners or co-heirs so long as
he expressly or impliedly recognize the co-ownership because the possession of each of the co-
owner or co-heir is in the nature of a subsisting trust and considered to be in the name of the
other.
Exception: It will prescribe if the co-owner or co-heir has possessed the property as exclusive
owner for a period sufficient to acquire the property by prescription.
Other imprescriptible actions:
1. Action by the government or a governmental entity;

2. Action for mandamus;
3. Action to enforce an express trust as long as the trustee does not repudiate the trust;
4. Action to quiet title of the property in one’s possession;
5. Action or defense to declare a contract or judgment void ab initio;
6. Action of the registered owner to recover his land.
Article 1144. The following actions must be brought within 10 years from the time the right of
action accrues:
1. Upon a written contract;

2. Upon an obligation created by law; and
3. Upon a judgment.
Note: Remember that the action for reconveyance of the title to the rightful owner prescribes in
10 years from the issuance of the title. But if fraud has been committed, and this is the basis of
action, not implied trust, the action will be barred after four years from the discovery of the
fraudulent act.
Article 1145. The following actions must be commenced within 6 years:
1. Upon an oral contract;

2. Upon a quasi-contract.
Article 1146. The following actions must be instituted within 4 years:
1. Upon an injury to the rights of the plaintiff;

2. Upon a tort or quasi-delict.
*An action based on fraud.
Note: Example of injury to the rights of the plaintiff is when there is an unjustified separation
from employment. Example of actions of tort or quasi-delict is; where real property belongs in
ownership to D and over which he was and has always been in possession but by mistake of the
cadastral clerk came to be titled in 1935 in the name of L, who had never claimed it and knew all
along that he was not the owner but only had a paper title thereto, never bothered to disturb the
possession of D until 1948 when he sought to do so, thereafter filing his reinvindicatory action to
recover the land from D in 1949, the counterclaim for reconveyance contained in the answer of
D has been filed within the period to recover on a quasi-delict.
Article 1147. The following actions must be filed within one year:
1. For forcible entry and detainer;

2. For defamation.
Article 1148. The limitations of actions mentioned in Articles 1140 to 1142 and 1144 and 1147
are without prejudice to those specified in other parts of this Code, in the Code of Commerce,
and in special laws.
Article 1149. All other actions whose periods are not fixed in this Code or in other laws must be
brought within 5 years from the time the right of action accrues.
Note: The right to collect taxes is imprescriptible.

Article 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought.
Note: It is to be computed from the day on which the corresponding action could have been
instituted. It is the legal possibility of bringing the action which determined the starting point for
the computation of the period. The period should not be made to retroact to the date of
execution of contract.
The commencement of cause of actions:
1. Closing of windows- the period of prescription for the action to close must be counted
from the day they were opened.
2. Obligation to pay upon receipt of an inheritance by the debtor- from the date of such
receipt because when the obligation is subject to a suspensive condition, prescription
begins to run from the happening of the condition.
3. Obligation without maturity date or note payable on demand- from the date of the note or
obligation NOT from demand.
4. Unpaid balance of a subscription to shares of a corporation- from the date of call or
demand.
5. Payment of money within a year but with privilege of extension- from the end of the first
year.
6. Action based on fraud- from the discovery of fraud.
7. Quasi-delict- from the day the quasi-delict accrued or was committed.
8. Action for partition and reconveyance based on implied or constructive trust- from the
date of issuance of the original certificate of title because registration is notice to the
world.
9. Period to claim inheritance- until a 3rd person claims a right under such instrument.
10. To set aside simulated written deed of pacto de retro sale- when the alleged vendees
made known their intention by overt acts not to abide by the true agreement NOT from
the date of execution of contract.
Article 1151. The time for the prescription of actions which have for their object the
enforcement of obligations to pay principal with interest or annuity runs from the last payment of
the annuity or of the interest.
Note: This is applicable only when the principal debt is already due. But where there exist a past
due mortgage which was recognized by payments of interest, prescription ran only from the past
payment of interest.
Article 1152. The period for prescription of actions to demand the fulfillment of obligations
declared by a judgment commences from the time the judgment became final.
Note: Judgment will only become final upon the expiration of the period for appeal in the trial
court. But in the SC or CA, the true judgment is that entered by the Clerk of that Court pursuant
to the dispositive portion of its decision. The period is 10 years from such entry or period
under Article 1144.
Article 1153. The period for prescription of actions to demand accounting runs from the day
the persons who should render the same cease in their functions. The period for the action
arising from the result of the accounting runs from the date when said result was recognized
by agreement of the interested parties.
Note: The period of prescription begins to run in an action to compel an accounting by a joint
account partner, from the date of the retirement of the members. For accounts, the following
rules apply:
1. For mutual current accounts, it begins to run on the date of the last item, no matter how
far back the account commenced.
2. For simple current open accounts, it begins to run from the date of each particular item.
3. Current account guaranteed by mortgage executed in a public instrument, it begins to run
from the date of the last payment.
4. When the accounting has been made between the parties in their current account dealings,
the right of action, and prescription begins to run on the date when the last balance of
prescription was struck and NOT when the business relations terminated.
Article 1154. The period during which the obligee was prevented by a fortuitous event from
enforcing his right is not reckoned against him.
Note: There is only interruption of the running of prescription when the courts cannot be kept
open and are not within the reach of the people. The Statute of Limitations does not operate
against the Government. An example of interruption is the destruction of records of the case.
Article 1155. The prescription of actions is interrupted (1) when they are filed before the
court, (2) when there is written extra-judicial demand by the creditors, and (3) when there
is any written acknowledgment of the debt by the debtor.
Note: For the first interruption, it lasts during the pendency of the action and runs anew after the
dismissal of the first action to revive judgment. When interruption of action is legally
commenced? It is from the time the complaint is docketed in Court. How about if the prescription
is interrupted by a judicial demand? The full period for the prescription must be reckoned from
the cessation of the interruption.
When there is no suspension in filing of action in court?
1. When the plaintiff desist

2. Amendment of the complaint with new or different cause of action
3. New or additional defendants
For the second interruption, it is so because since the extinctive prescription is based on
presumed abandonment of a right, it is obvious that the running of the period should be
interrupted when a demand is made by the creditor upon the debtor before the lapse of the period
fixed by law, with the burden of proof on the former. It must also be written.
For the third interruption, it is so if the acknowledgment is in writing. Does it always have to be
express? Not so because it can be implied therein, provided it is written and must apply to a
particular or specific debt. Examples are the following:
1. A promise to pay a debt.

2. Listing of mortgage indebtedness by the debtor in his schedule of liabilities filed in
insolvency proceedings.
3. Statement by one of the maker of a PN that he supposed he would have to pay it, if the
amount could not be gotten out of the estate of other drawer.
4. Notation in the handwriting of the maker to the effect that such note was renewed.
* Can be made even by a legal representative.
Instances that there is no acknowledgment of debt
1. Mere offer to compromise a suit upon a supposed debt.

2. Debtor acknowledging receipt of a statement of account but declines to recognize the
correctness of the account being exorbitant.
3. Acknowledgment of the obligation after it has already prescribed. There must be a new
and positive promise to pay in order to nullify prescription.
4. Part payment of debt.
5. The death of the debtor.
6. The transfer of right to another.
7. The institution of criminal action cannot have the effect of interruption the institution of
civil action based on quasi-delict.
8. Order to stay execution of judgment.
9. Confinement in jail.
What is the effect of acknowledgment? It will renew the obligation of the debtor and interrupts
the prescription and make it run only from such acknowledgment. Example, if the decedent
makes a will but invalid as to its form but in there he acknowledge the debt in favor of A, the
prescription runs against the claim from the date of the making of invalid will and NOT from the
date of death.
(b) CIVIL OBLIGATIONS:
Article 1157. Obligations arise from:
(1) Law; (OBLIGATIONS ex lege)
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
SOURCES OF OBLIGATIONS:
1. LAW:
Article 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be regulated by the
precepts of the law which establishes them; and as to what has not been foreseen, by the
provisions of this Book.
 an agreement is not necessary in order that a party may demand from

another the fulfillment of an OBLIGATION arising from the application of a
law in the circumstances;
Balane: Law as a source of obligation – It is my opinion that there is an overlap in the

enumeration because all obligations arise from law. Law is the only source of obligation, in the
ultimate sense. But, as a proximate source, there are five sources of obligations. Law is both the
ultimate & a proximate source of obligations.
Sources of Obligations according to Sanchez Roman.
Law & Acts. The latter are further classified, as follows:
(1) licit acts created by concurrence of wills (contracts);
(2) licit acts either voluntary or involuntary without concurrence of wills (quasi-contract);
(3) illicit acts of civil character which are not punishable, voluntary or involuntary (torts & all
damages arising from delay);
(4) illicit acts which are voluntary & are punishable by law (crimes)
Baviera: When the source of the obligation is Law, there is no need for an act or omission for the
obligation to arise.
CASE: Sagrada Orden De Predicadores Del Santismo Rosario De Filipinas vs. National
Coconut Corporation, June 30, 1952, J. Labrador.
Facts: Plaintiff owned disputed property in Pandacan, Manila which was acquired during the
Japanese occupation by Taiwan Tekkosho with TCT. When the Philippines was ceded to USA, the
same was entrusted to Alien Property Custodian, APC by the US government. APC took
possession, control and custody under the Trading with the Enemy Act. APC allowed Copra
Export Management Co. to occupy the property for a fee. RP (Republic of the Philippines) later
made representation with APC to use the same property with warehouse which was repaired by
NACOCO (National Coconut Corp.) and was leased to Dioscoro Sarile. The latter failed to pay
rentals on the property. In an action to recover possession of the property, the court nullified the
sale to Taiwan Tekkosho and cancelled its TCT and ordered reversion of title to plaintiff, and right
of recovery from NACOCO of rentals to the property.
ISSUE: WON NACOCO is liable to pay back rentals?
HELD: If defendant-appellant is liable at all, its obligations must arise from any of the 4 sources
of obligations, namely, law, contract or quasi contract, crime, or negligence. (Article 1089, Old
Civil Code.) To determine such, the following must be understood:
As to crimes: Defendant-appellant is not guilty of any offense at all, because it entered into the
premises & occupied it with the permission of the entity which had the legal control &
administration thereof, the Alien Property Administration (APA).
As to Quasi-Delict: Neither was there any negligence on its part.
As to Contract: There was also no privity (of contract or obligation) between the APA & Taiwan
Tekkosho, which had secured the possession of the property from the plaintiff-appellee by the use
of duress, such that the Alien Property Custodian or its permittee (defendant-appellant) may be
held responsible for the supposed illegality of the occupation of the property by said Tekkosho.
The APA had the control & administration of the property not as successor to the interests of the
enemy holder of the title, the Taiwan Tekkosho, but by express provision of law.
Neither is it a trustee of the former owner, the plaintiff-appellee herein, but a trustee of the US
Govt., in its own right, to the exclusion of, & against the claim or title of, the enemy owner. From
Aug. 1946, when def.-appellant took possession, to the date of the judgment on 2/28/48, the APA
had the absolute control of the property as trustee of the US Govt., with power to dispose of it by
sale or otherwise, as though it were the absolute owner.
Therefore, even if defendant were liable to the APA for rentals, these would not accrue to the
benefit of the plaintiff the old owner, but the US Govt.
Balane: Is the enumeration in Article 1157 exclusive or merely illustrative?
Doctrine: The sense that the case of Sagrada Orden tells us is that the enumeration is exclusive.
In resolving the issue of whether the defendant should be liable to pay rentals, the SC used the
process of exclusion. For there to be an obligation to pay rentals, that obligation must arise from
any of the five (5) sources of obligations. If it does not, then there is no obligation. The clear
implication of this ruling is that, these five (5) are the only sources of obligations.
The problem with Article 1157 is that it might not cover all situations. For example: Carale uses
Dove as his soap. He then hears an advertisement from Proctor & Gamble that it is offering a nice
tumbler for those who can collect 30 wrappers of Tide before Feb. 29, 1996. So, Carale stopped
using Dove & started using Tide. He was able to consume all 30 wrappers on Feb. 29, 1996. He
then went to Proctor & Gamble (P & G) to exchange the 30 Tide wrappers for a tumbler. But P &
G told Carale that their tumblers run out of stock. Carale contracted a skin allergy as a result of
using Tide in taking a bath. The question is: Does P & G have any obligation to Carale. If we
look at Article 1157, this situation does not fall in any of the five sources. So, we know have a
problem. The German Civil Code (BGB) covers this situation. The BGB has a sixth source of
obligation, the Auslobung, which means a unilateral offer.
2. CONTRACTS:
Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Article 1305. A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
Negotiation of contract is initiated by an OFFER;
Autonomy of Contract  supposing the contract is valid and enforceable, the terms of contract
not contrary to law, morals, GC, PP or PO, the stipulations therewith should be given effect.
(One of fundamental principles of contracts)
Balane: There are two parts in Article 1159.
 Obligations derived from contract has the force of law between the contracting
parties (jus civili )
 There must be compliance in good faith (jus gentium.)
CASE: People’s Car Inc. vs. Commando Security Service Agency, May 22, 1973, J.
Teehankee.
Facts: On April 5, 1970, Commando Security Service Agency’s security guard on duty at the
premises of People’s Car Inc., without authority, consent, approval, knowledge or orders from
People’s Car and/or Commando Security brought out from the compound a car belonging to a
customer and drove said car for a place or places unknown, abandoning his post as such security
guard, and while so driving, lost control of said car, causing the same to fall into a ditch. The
customer, Joseph Luy had to rent another car. People’s Car incurred actual damages of P8, 489.10.
People’s Car sued Commando Security for reimbursement.
Issue: WON Commando security is liable to damages in accordance with provisions of contract
Held: YES. Plaintiff was in law liable to its customer for the damages caused the customer's car,
which had been entrusted into its custody. Plaintiff therefore was in law justified in making good
such damages and relying in turn on defendant to honor its contract and indemnify it for such
undisputed damages, which had been caused directly by the unlawful and wrongful acts of
defendant's security guard in breach of their contract. As ordained in Article 1159, Civil Code,
"obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith."
Plaintiff in law could not tell its customer, as per the trial court's view, that "under the Guard
Service Contract it was not liable for the damage but the defendant" — since the customer could
not hold defendant to account for the damages as he had no privity of contract with defendant.
Such an approach of telling the adverse party to go to court, notwithstanding his plainly valid
claim, aside from its ethical deficiency among others, could hardly create any goodwill for
plaintiff's business, in the same way that defendant's baseless attempt to evade fully discharging
its contractual liability to plaintiff cannot be expected to have brought it more business. Worse,
the administration of justice is prejudiced, since the court dockets are unduly burdened with
unnecessary litigation.
Paragraph 4 of the contract, which limits defendant's liability for the amount of loss or
damage to any property of plaintiff to "P1,000.00 per guard post," is by its own terms
applicable only for loss or damage 'through the negligence of its guards ... during the watch
hours" provided that the same is duly reported by plaintiff within 24 hours of the occurrence and
the guard's negligence is verified after proper investigation with the attendance of both
contracting parties. Said paragraph is manifestly inapplicable to the stipulated facts of record,
which involve neither property of plaintiff that has been lost or damaged at its premises nor mere
negligence of defendant's security guard on duty.
Here, instead of defendant, through its assigned security guards, complying with its contractual
undertaking 'to safeguard and protect the business premises of (plaintiff) from theft, robbery,
vandalism and all other unlawful acts of any person or persons," defendant's own guard on
duty unlawfully and wrongfully drove out of plaintiffs premises a customer's car, lost control of
it on the highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual
damages in the total amount of P8,489.10.
Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus
incurred, since under paragraph 5 of their contract it "assumed the responsibility for the
proper performance by the guards employed of their duties and (contracted to) be solely
responsible for the acts done during their watch hours" and "specifically released (plaintiff)
from any and all liabilities ... to the third parties arising from the acts or omissions done by the
guards during their tour of duty." As plaintiff had duly discharged its liability to the third party,
its customer, Joseph Luy, for the undisputed damages of P8,489.10 caused said customer, due to
the wanton and unlawful act of defendant's guard, defendant in turn was clearly liable under the
terms of paragraph 5 of their contract to indemnify plaintiff in the same amount.
Case: Joseph Saludaga vs. far Eastern University and Edilberto De Jesus (President of FEU),
April 30, 2008, J. Ynares-Santiago.
Facts: Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern
University when he was shot by Alejandro Rosete, one of the security guards on duty at the
school premises on August 18, 1996. Rosete was brought to the police station where he
explained that the shooting was accidental. He was eventually released considering that no
formal complaint was filed against him.
Respondents, in turn, filed a Third-Party Complaint against Galaxy Development and

Management Corporation (Galaxy), the agency contracted by respondent FEU to provide
security services within its premises and Mariano D. Imperial (Galaxy’s President), to indemnify
them for whatever would be adjudged in favor of petitioner.
Petitioner is suing respondents for damages based on the alleged breach of student-school
contract for a safe and secure environment and an atmosphere conducive to learning.
Issue: Whether or not FEU could be held liable.

Held: YES. When an academic institution accepts students for enrollment, there is established
a contract between them, resulting in bilateral obligations which both parties are bound to
comply with. For its part, the school undertakes to provide the student with an education that
would presumably suffice to equip him with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the student covenants to abide by the school’s
academic requirements and observe its rules and regulations.
Respondent FEU failed to discharge the burden of proving that they exercised due diligence in
providing a safe learning environment for their students. It failed to show that they undertook
steps to ascertain and confirm that the security guards assigned to them actually possess the
qualifications required in the Security Service Agreement. It was not proven that they examined
the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its
contract with Galaxy. Total reliance on the security agency about these matters or failure to
check the papers stating the qualifications of the guards is negligence on the part of
respondents. A learning institution should not be allowed to completely relinquish or
abdicate security matters in its premises to the security agency it hired. To do so would
result to contracting away its inherent obligation to ensure a safe learning environment for its
students.
Respondent FEU is liable to petitioner for damages.
FEU cannot be held liable for damages under Art. 2180 of the Civil Code because respondents
are not the employers of Rosete. The latter was employed by Galaxy. The instructions issued by
respondents Security Consultant to Galaxy and its security guards are ordinarily no more than
requests commonly envisaged in the contract for services entered into by a principal and a
security agency. They cannot be construed as the element of control as to treat respondents as the
employers of Rosete. It had no hand in selecting thesecurity guards. Thus, the duty to observe the
diligence of a good father of a family cannot be demanded from the said client
FALLO
“For these acts of negligence and for having supplied respondent FEU with an unqualified
security guard, which resulted to the latters breach of obligation to petitioner, it is proper to hold
Galaxy liable to respondent FEU for such damages equivalent to the above-mentioned amounts
awarded to petitioner. Unlike respondent De Jesus, we deem Imperial to be solidarily liable with
Galaxy for being grossly negligent in directing the affairs of the security agency.”
Case: Faustino Cruz vs. J.M. Tuason & Company, Inc. and Gregorio Araneta, Inc., April 29,
1977, J. Barredo.
Facts: Plaintiff-appellant's complaint below shows that he alleged two separate causes of action,
namely:
(1) that upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land
in question on the strength of an "informacion posesoria") plaintiff made permanent
improvements valued at P30,400.00 on said land having an area of more or less 20 quinones and
for which he also incurred expenses in the amount of P7,781.74, and since defendants-appellees
are being benefited by said improvements, he is entitled to reimbursement from them of said
amounts and
(2) that in 1952, defendants availed of plaintiff's services as an intermediary with the Deudors to
work for the amicable settlement of Civil Case No. Q-135, then pending also in the Court of First
Instance of Quezon City, and involving 50 quinones of land, of Which the 20 quinones
aforementioned form part, and notwithstanding his having performed his services, as in fact, a
compromise agreement entered into on March 16, 1963 between the Deudors and the defendants
was approved by the court, the latter have refused to convey to him the 3,000 square meters of
land occupied by him, (a part of the 20 quinones above) which said defendants had promised
to do "within ten years from and after date of signing of the compromise agreement", as
consideration for his services.
Issue: Whether or not Faustino Cruz can claim reimbursement for the expenses and services
rendered.
Held: NO. We hold that the allegations in his complaint do not sufficiently Appellants' reliance
on Article 2142 of Civil Code is misplaced. Said article provides:
Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract
to the end that no one shall be unjustly enriched or benefited at the expense of another.
From the very language of this provision, it is obvious that a presumed qauasi-contract cannot
emerge as against one party when the subject mater thereof is already covered by an existing
contract with another party. Predicated on the principle that no one should be allowed to unjustly
enrich himself at the expense of another, Article 2124 creates the legal fiction of a quasi-contract
precisely because of the absence of any actual agreement between the parties concerned.
Corollarily, if the one who claims having enriched somebody has done so pursuant to a contract
with a third party, his cause of action should be against the latter, who in turn may, if there is any
ground therefor, seek relief against the party benefited. It is essential that the act by which the
defendant is benefited must have been voluntary and unilateral on the part of the plaintiff. As one
distinguished civilian puts it, "The act is voluntary because the actor in quasi-contracts is not
bound by any pre-existing obligation to act. It is unilateral, because it arises from the sole will
of the actor who is not previously bound by any reciprocal or bilateral agreement. The reason
why the law creates a juridical relations and imposes certain obligation is to prevent a
situation where a person is able to benefit or take advantage of such lawful, voluntary and
unilateral acts at the expense of said actor." (Ambrosio Padilla, Civil Law, Vol. VI, p. 748,
1969 ed.) In the case at bar, since appellant has a clearer and more direct recourse against
the Deudors with whom he had entered into an agreement regarding the improvements
and expenditures made by him on the land of appellees it Cannot be said, in the sense
contemplated in Article 2142, that appellees have been enriched at the expense of appellant.
Case: Gutierrez Hermanos vs. Engracio Orense, December 4, 1914, J. Torres.
Facts: Engracio Orense is the owner of a parcel of land situated in Albay. On February 14, 1907,
Jose Duran, Orense’s nephew, with the latter’s knowledge and consent, sold and conveyed to
Hermanos’ company for P1,500 the aforementioned land with the reservation of the former the
right to repurchase it for the same price within a period of 4 years. But the same land was not
repurchased by Jose Duran, being insolvent, which correspondingly caused damage to the firm of
Hermanos. Despite repeated demand upon Jose Duran, the latter never vacated nor transferred
ownership to Hermanos’s firm, the said land. His refusal was based on the allegations that he
had been and was then the owner of the said property, which was registered in his name in the
property registry; that he had not executed any written power of attorney to Jose Duran, nor
had he given the latter any verbal authorization to sell the said property to the plaintiff firm in
his name; and that, prior to the execution of the deed of sale, the defendant performed no act
such as might have induced the plaintiff to believe that Jose Duran was empowered and
authorized by the defendant to effect the said sale.
The plaintiff firm, therefore, charged Jose Duran, in the Court of First Instance of the said
province, with estafa, for having represented himself in the said deed of sale to be the absolute
owner of the aforesaid land and improvements, whereas in reality they did not belong to him, but
to the defendant Orense. However, at the trial of the case Engracio Orense, called as a witness,
being interrogated by the fiscal as to whether he and consented to Duran's selling the said
property under right of redemption to the firm of Gutierrez Hermanos, replied that he had. In
view of this statement by the defendant, the court acquitted Jose Duran of the charge of estafa.
As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle, Engacio
Orense, the owner of the property, to the effect that he had consented to his nephew
Duran's selling the property under right of repurchase to Gutierrez Hermanos, counsel for
this firm filed a complainant praying, among other remedies, that the defendant Orense be
compelled to execute a deed for the transfer and conveyance to the plaintiff company of all the
right, title and interest with Orense had in the property sold, and to pay to the same the rental of
the property due from February 14, 1911.
Issue: Whether or not Orense can be compelled to deliver the property to Hermanos as premised
above.
Held: YES. It having been proven at the trial that he gave his consent to the said sale, it follows
that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran,
who accepted it in the same way by selling the said property. The principal must therefore fulfill
all the obligations contracted by the agent, who acted within the scope of his authority. (Civil
Code, arts. 1709, 1710 and 1727.)
Even should it be held that the said consent was granted subsequently to the sale, it is
unquestionable that the defendant, the owner of the property, approved the action of his
nephew, who in this case acted as the manager of his uncle's business, and Orense'r
ratification produced the effect of an express authorization to make the said sale. (Civil Code,
arts. 1888 and 1892.)
Article 1259 of the Civil Code prescribes: "No one can contract in the name of another
without being authorized by him or without his legal representation according to law.
A contract executed in the name of another by one who has neither his authorization nor
legal representation shall be void, unless it should be ratified by the person in whose
name it was executed before being revoked by the other contracting party.
The sworn statement made by the defendant, Orense, while testifying as a witness at the
trial of Duran for estafa, virtually confirms and ratifies the sale of his property effected by
his nephew, Duran, and, pursuant to article 1313 of the Civil Code, remedies all defects
which the contract may have contained from the moment of its execution.
The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and void in
the beginning, but afterwards became perfectly valid and cured of the defect of nullity it bore at
its execution by the confirmation solemnly made by the said owner upon his stating under oath to
the judge that he himself consented to his nephew Jose Duran's making the said sale. Moreover,
pursuant to article 1309 of the Code, the right of action for nullification that could have been
brought became legally extinguished from the moment the contract was validly confirmed and
ratified, and, in the present case, it is unquestionable that the defendant did confirm the said
contract of sale and consent to its execution.
If the defendant Orense acknowledged and admitted under oath that he had consented to Jose
Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it
permissible for him afterward to deny that admission, to the prejudice of the purchaser, who
gave P1,500 for the said property.
The contract of sale of the said property contained in the notarial instrument of February 14,
1907, is alleged to be invalid, null and void under the provisions of paragraph 5 of section 335 of
the Code of Civil Procedure, because the authority which Orense may have given to Duran
to make the said contract of sale is not shown to have been in writing and signed by Orense,
but the record discloses satisfactory and conclusive proof that the defendant Orense gave
his consent to the contract of sale executed in a public instrument by his nephew Jose
Duran. Such consent was proven in a criminal action by the sworn testimony of the principal
and presented in this civil suit by other sworn testimony of the same principal and by other
evidence to which the defendant made no objection. Therefore the principal is bound to abide by
the consequences of his agency as though it had actually been given in writing (Conlu vs.
Araneta and Guanko, 15 Phil. Rep., 387; Gallemit vs. Tabiliran, 20 Phil. Rep., 241; Kuenzle &
Streiff vs. Jiongco, 22 Phil. Rep., 110.)
The repeated and successive statements made by the defendant Orense in two actions,
wherein he affirmed that he had given his consent to the sale of his property, meet the
requirements of the law and legally excuse the lack of written authority, and, as they are a
full ratification of the acts executed by his nephew Jose Duran, they produce the effects of
an express power of agency.
3. QUASI-CONTRACTS:
Article 1160. Obligations derived from quasi-contracts shall be subject to the provisions
of Chapter 1, Title XVII, of this Book.
QUASI-CONTRACT is a juridical relation which arises from certain unlawful, voluntary and
unilateral acts to the end that no one may be unjustly enriched or benefited at the expense of
another.
The act must be:
(1) Lawful – thus different from delict which is unlawful;

(2) Voluntary – thus different from quasi-delict which is based on fault or negligence or
lack of foresight;
(3) Unilateral – thus different from contract, in which parties agree.
e.g. in Negotiorum Gestio:
 Benefits Conferred Voluntarily
 For preservation of Property or Business
EXTRA-CONTRACTUAL OBLIGATIONS
(OBLIGATIONS without an agreement / based in IMPLIED CONSENT)
Q: HOW MANY?
A: In NCC, 2, nominate and “some” innominate Quasi Contract.
a. Quasi-contracts
Article 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at
the expense of another.
Article 2143. The provisions for quasi-contracts in this Chapter do not exclude other
quasi-contracts which may come within the purview of the preceding article.
b. Negotiorum Gestio
Article 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to continue
the same until the termination of the affair and its incidents, or to require the person
concerned to substitute him, if the owner is in a position to do so.
This juridical relation does not arise in either of these instances: ELEMENTS –
(1) When the property or business is not neglected or abandoned;

(2) If in fact the manager has been tacitly authorized by the owner.
In the first case, the provisions of articles 1317, 1403, No. 1, and 1404 regarding
unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book shall be applicable.
 NEGOTIORUM GESTIO – juridical relation which arises whenever a person

voluntarily takes charge of an agency or management of the business or property of
another without any power or authority from the latter.
Illustration:
1. Scenario: Lumubog na barko, what if this one of the missing persons landed on a remote
island and only one resident is present there or only one family is living there in the island.
Anyway this resident found the dead body of the missing person, and he found it necessary to
bury the dead and he spent a sum of money of 400php. At any rate this resident, met the aunt of
the decease, and demanded reimbursement for the burial, is the resident’s demand valid? Well if
you read the provisions of the quasi-contract, there is an obligation to reimburse the person. In
other words, you have the obligation to reimburse. But back to the question, is there a valid
demand? NO. if you know, because the law on quasi-contract would tell you that he has the right
to seek reimbursement from anyone who is oblige to give support and an aunt Is not oblige under
the law to give support. There’s no civil obligation to give support.
Case: Rustico Adille vs. CA, Asejo’s, January 29, 1988, J. Sarmiento.
Facts: Feliza Azul owns a parcel of land. She married twice in her lifetime; the first, with one
Bernabe Adille with whom she had as an only child, herein defendant Rustico Adille; in her
second marriage with one Procopio Asejo, her children were herein plaintiffs. Sometime in 1939,
said Felisa sold the property in pacto de retro to certain 3rd persons, period of repurchase being
3 years, but she died in 1942 without being able to redeem and after her death, but during the
period of redemption, herein defendant repurchased, by himself alone, and after that, he executed
a deed of extra-judicial partition representing himself to be the only heir and child of his mother
Felisa with the consequence that he was able to secure title in his name alone also, so that OCT.
No. 21137 in the name of his mother was transferred to his name, that was in 1955; that was why
after some efforts of compromise had failed, his half-brothers and sisters, herein plaintiffs (The
Asejo siblings), filed present case for partition with accounting on the position that he was only
a trustee on an implied trust when he redeemed,-and this is the evidence, but as it also turned out
that one of plaintiffs, Emeteria Asejo was occupying a portion, defendant counterclaimed for her
to vacate that.
Issue: Whether or not Adille can acquire exclusive ownership over the land.
Held: NO. It is the view of the respondent Court that the petitioner, in taking over the property,
did so either on behalf of his co-heirs, in which event, he had constituted himself a negotiorum
gestor under Article 2144 of the Civil Code, or for his exclusive benefit, in which case, he is
guilty of fraud, and must act as trustee, the private respondents being the beneficiaries, under
the Article 1456. The evidence, of course, points to the second alternative the petitioner having
asserted claims of exclusive ownership over the property and having acted in fraud of his co-
heirs. He cannot therefore be said to have assume the mere management of the property
abandoned by his co-heirs, the situation Article 2144 of the Code contemplates. In any case,
as the respondent Court itself affirms, the result would be the same whether it is one or the other.
The petitioner would remain liable to the Private respondents, his co-heirs.
c. Solutio indebiti
Article 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.
 SOLUTIO INDEBITI – juridical relation which arise whenever person unduly delivers
a thing through or by mistake of another who has no right to demand it.
Case: Dometila Andres, doing business under the name and style “IRENE’S WEARING
APPAREL” vs. Manufacturers Hanover & Trust Corporation, CA, September 15, 1989, J.
Cortes.
Facts: Petitioner, using the business name "Irene's Wearing Apparel," was engaged in the
manufacture of ladies garments, children's wear, men's apparel and linens for local and foreign
buyers. Among its foreign buyers was Facets Funwear, Inc. (hereinafter referred to as FACETS)
of the United States. In the course of the business transaction between the two, FACETS from
time to time remitted certain amounts of money to petitioner in payment for the items it had
purchased. Sometime in August 1980, FACETS instructed the First National State Bank of New
Jersey, Newark, New Jersey, U.S.A. (hereinafter referred to as FNSB) to transfer $10,000.00 to
petitioner via Philippine National Bank, Sta. Cruz Branch, Manila (hereinafter referred to as
PNB).
Acting on said instruction, FNSB instructed private respondent Manufacturers Hanover and
Trust Corporation to effect the above- mentioned transfer through its facilities and to charge the
amount to the account of FNSB with private respondent. Although private respondent was able
to send a telex to PNB to pay petitioner $10,000.00 through the Pilipinas Bank, where petitioner
had an account, the payment was not effected immediately because the payee designated in the
telex was only "Wearing Apparel." Upon query by PNB, private respondent sent PNB another
telex dated August 27, 1980 stating that the payment was to be made to "Irene's Wearing
Apparel." On August 28, 1980, petitioner received the remittance of $10,000.00 through Demand
Draft No. 225654 of the PNB.
Meanwhile, on August 25, 1980, after learning about the delay in the remittance of the money to
petitioner, FACETS informed FNSB about the situation. On September 8, 1980, unaware that
petitioner had already received the remittance, FACETS informed private respondent about the
delay and at the same time amended its instruction by asking it to effect the payment through the
Philippine Commercial and Industrial Bank (hereinafter referred to as PCIB) instead of PNB.
Accordingly, private respondent, which was also unaware that petitioner had already received the
remittance of $10,000.00 from PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence,
on September 11, 1980, petitioner received a second $10,000.00 remittance.
Private respondent asked petitioner for the return of the second remittance of $10,000.00 but the
latter refused to pay.
Issue: Whether or not Mantrust can recover the second remittance worth $10,000.
Held: YES. The contract of petitioner, as regards the sale of garments and other textile products,
was with FACETS. It was the latter and not private respondent which was indebted to petitioner.
On the other hand, the contract for the transmittal of dollars from the United States to petitioner
was entered into by private respondent with FNSB. Petitioner, although named as the payee was
not privy to the contract of remittance of dollars. Neither was private respondent a party to the
contract of sale between petitioner and FACETS. There being no contractual relation between
them, petitioner has no right to apply the second $10,000.00 remittance delivered by mistake by
private respondent to the outstanding account of FACETS.
Art. 2154. If something received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
This provision is taken from Art. 1895 of the Spanish Civil Code which provided that:
Art. 1895. If a thing is received when there was no right to claim it and which, through an error,
has been unduly delivered, an obligation to restore it arises.
In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking through Mr. Justice Bocobo
explained the nature of this article thus:
Article 1895 [now Article 2154] of the Civil Code abovequoted, is therefore applicable. This
legal provision, which determines the quasi-contract of solution indebiti, is one of the concrete
manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of
another. In the Roman Law Digest the maxim was formulated thus: "Jure naturae acquum est,
neminem cum alterius detrimento et injuria fieri locupletiorem." And the Partidas declared:
"Ninguno non deue enriquecerse tortizeramente con dano de otro." Such axiom has grown
through the centuries in legislation, in the science of law and in court decisions. The lawmaker
has found it one of the helpful guides in framing statutes and codes. Thus, it is unfolded in many
articles scattered in the Spanish Civil Code. (See for example, articles, 360, 361, 464, 647, 648,
797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil Code.) This time-honored aphorism
has also been adopted by jurists in their study of the conflict of rights. It has been accepted by the
courts, which have not hesitated to apply it when the exigencies of right and equity demanded its
assertion. It is a part of that affluent reservoir of justice upon which judicial discretion draws
whenever the statutory laws are inadequate because they do not speak or do so with a confused
voice. [at p. 632.]
For this article to apply the following requisites must concur: "(1) that he who paid was not
under obligation to do so; and, (2) that payment was made by reason of an essential mistake of
fact" [City of Cebu v. Piccio, 110 Phil. 558, 563 (1960)].
It is undisputed that private respondent delivered the second $10,000.00 remittance. However,
petitioner contends that the doctrine of solutio indebiti, does not apply because its requisites are
absent.
First, it is argued that petitioner had the right to demand and therefore to retain the second
$10,000.00 remittance. It is alleged that even after the two $10,000.00 remittances are credited
to petitioner's receivables from FACETS, the latter allegedly still had a balance of $49,324.00.
Hence, it is argued that the last $10,000.00 remittance being in payment of a pre-existing debt,
petitioner was not thereby unjustly enriched.
Petitioner invokes the equitable principle that when one of two innocent persons must suffer by
the wrongful act of a third person, the loss must be borne by the one whose negligence was the
proximate cause of the loss.
The rule is that principles of equity cannot be applied if there is a provision of law specifically
applicable to a case. ... The common law principle that where one of two innocent persons must
suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his
misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which
is covered by an express provision of the new Civil Code, specifically Article 559. Between a
common law principle and a statutory provision, the latter must prevail in this jurisdiction. [at p.
135.]
Having shown that Art. 2154 of the Civil Code, which embodies the doctrine of solutio
indebiti, applies in the case at bar, the Court must reject the common law principle invoked by
petitioner.
Case: Gonzalo Puyat & Sons, Inc. vs. City of Manila and Marcelo Sarmiento, as City
Treasurer, April 30, 1963, J. Paredes.
Facts: Gonzalo Puyat & Sons, Inc. is engaged in the business of manufacturing and selling all
kinds of furniture at its factory in Manila. Pursuant to Ordinance No. 3364, Manila assessed from
Puyat retail dealer’s tax which the latter paid without protest in the erroneous belief that it was
liable therefore. Puyat subsequently found that it was exempt from said taxes as provided under
Ordinance No. 3816, Puyat claimed for refund.
Issue: Whether the taxes paid without protest are refundable.
Held: YES. Appellants do not dispute the fact that appellee-company is exempted from the
payment of the tax in question.This is manifest from the reply of appellant City Treasurer stating
that sales of manufactured products at the factory site are not taxable either under the
Wholesalers Ordinance or under the Retailers' Ordinance. With this admission, it would seem
clear that the taxes collected from appellee were paid, thru an error or mistake, which places said
act of payment within the pale of the new Civil Code provision on solutio indebiti. The appellant
City of Manila, at the very start, notwithstanding the Ordinance imposing the Retailer's Tax, had
no right to demand payment thereof..
"If something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligationto retun it arises" (Art. 2154, NCC)..
Appelle categorically stated that the payment was not voluntarily made, (a fact found also
by the lower court),but on the erronoues belief, that they were due. Under this
circumstance, the amount paid, even without protest is recoverable. "If the payer was in
doubt whether the debt was due, he may recover if he proves that it was not due" (Art.
2156, NCC). Appellee had duly proved that taxes were not lawfully due. There is, therefore,
no doubt that the provisions of solutio indebtiti, the new Civil Code, apply to the admitted facts
of the case.
"Payment by reason of a mistake in the contruction or application of a doubtful or difficult

question of law may come within the scope of the preceding article" (Art. 21555)..
There is no gainsaying the fact that the payments made by appellee was due to a mistake in the
construction of a doubtful question of law.
Not applicable in case of VAT Tax Credits or Refunds
CBK POWER CORP. VS. CIR
GR. NOS. 198729-30, JANUARY 15, 2014, CJ Sereno
FACTS: Petitioner is engaged in the operation, maintenance, and management of the Kalayaan II
pumped-storage hydroelectric power plant, etc. located in Laguna. It filed an application for VAT
Zero-Rate with the BIR which was approved. Thus, it filed administrative claims for the issuance
of tax credit certificates for its alleged unutilized input taxes. For its inaction, CBK filed a Petition
for Review with the CTA. It denied the claim for the 1st quarter of 2005 for being filed at of time
but granted those for 2nd and 3rd quarter. However, the CTA en banc declared that the judicial
claim for the 1st and 2nd 3rd quarters of 2005 were belatedly filed.
ISSUE: Whether or not solutio indebiti is applicable in case of refund of unutilized input tax in
VAT
HELD: No. devoid of merit is the applicability of the principle of solutio indebiti to the present
case. According to this principle, if something is received when there is no right to demand it, and
it was unduly delivered through mistake, the obligation to return it arises. In that situation, a
creditor-debtor relationship is created under a quasi-contract, whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake, and the person
who has no right to receive the payment becomes obligated to return it.The quasi-contract of
solutio indebiti is based on the ancient principle that no one shall enrich oneself unjustly at the
expense of another.There is solutio indebiti when:
(1) 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) Payment is made through mistake, and not through liberality or some other cause.
Though the principle of solutio indebiti may be applicable to some instances of claims for a refund,
the elements thereof are wanting in this case.
First, there exists a binding relation between petitioner and the CIR, the former being a taxpayer
obligated to pay VAT.
Second, the payment of input tax was not made through mistake, since petitioner was legally
obligated to pay for that liability. The entitlement to a refund or credit of excess input tax is
solely based on the distinctive nature of the VAT system. At the time of payment of the input
VAT, the amount paid was correct and proper.
Finally, equity, which has been aptly described as “a justice outside legality,” is applied only in the
absence of, and never against, statutory law or judicial rules of procedure. Section 112 is a positive
rule that should preempt and prevail over all abstract arguments based only on equity.
Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed
against the taxpayer.
4. ACTS OR OMISSIONS PUNISHED BY LAW (DELICT or CRIMES  but not Felony

which is limited only to those punished under RPC)
Article 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost. This same rule shall be observed if he does it in contravention of the
tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be
undone.
Balane: Crime as a source of obligation – There are many crimes from which, civil liability
arises in their commission, in addition to the criminal penalty attached to them. This underlines the
two aspects in a crime: one, as an offense against the state, & two as an offense against the
victim. It is in the latter case that civil liability is recoverable.
 As far as crime is concerned, civil law is not concerned with the penal liability but
only with the civil liability.
Performance at debtor’s cost  non-compliance with OBLIGATION to do, creditor may do it

himself or get a 3rd person at the expense of the debtor;
 when OBLIGATION to do can only be performed by debtor he cannot compelled to do

so by force, the only remedy is damages;
Article 2177. Responsibility for fault or negligence under the preceding article is entirely
separate and distinct from the civil liability arising from negligence under the Penal
Code. But the plaintiff cannot recover damages twice for the same act or omission of the
defendant.
TITLE V - Civil Liability, RPC: CHAPTER ONE - Persons Civilly Liable for Felonies
Article 100. Civil liability of a person guilty of felony. - Every person criminally liable
for a felony is also civilly liable.
[CHAPTER 2, RPC: What Civil Liability Includes]
Article 104. What is included in civil liability. – The civil liability established in articles
100, 101, 102, and 103 of this Code includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
Baviera: Requisites of enforcing the subsidiary obligation of the employer under the RPC:
-criminal case was filed against the employee
-the act or negligence arose during or in connection with the performance of the latter’s
employment
-the employee is found guilty of criminal negligence
-a writ of execution has been returned unsatisfied, i.e. employee has been found to be insolvent.
There is no res judicata as regards the Employer as there is a difference in the Cause of Action.
Quasi-delict (QD) differs from an action based on delict on the following grounds:
QUASI DELICT DELICT
it is subsidiary (imputed) ER’s liability is primary

in RPC
Diligence of good father In RPC, such defense of

of the family may be set GFF is not available
up by the ER as a
defense
A person while not criminally liable may still be civilly liable  Failure of the plaintiff to
reserve in the criminal case his right to file a separate civil action is not fatal to the civil action after
the acquittal of the accused.
 When the acquittal is based on ground that the guilt of the accused has not been proved
beyond reasonable doubt, plaintiff has the right to institute a civil action for damages
(culpa aquiliana).
Q: Is it possible that even if there is a contract between the parties, a quasi-delict can still be
committed by one against the other regarding the area covered by the contract?
A: Yes, according to the case of Araneta v. de Joya, 57 SCRA 59. The same act can give rise to
obligations arising from different sources. For example, Alinea is the owner of a bus co., the Alinea
Bus Co., Molina is a driver of one of the buses of Alinea Bus Co. Lagdameo rode the bus being
driven by Molina. As a result of the reckless driving of Molina, Lagdameo suffered injuries. In
this case, Lagdameo has a choice-- he can sue on either contract, quasi-delict or on crime. If he
decided to sue on the breach of the contract of carriage, all he has to prove is the (existence of the
contract) & that it was not performed. In this case, he can sue the common carrier but not the
driver because he has no contract with the driver. If he sues on quasi-delict, he can sue both the
common carrier & the driver. The defense of the driver would be diligence in driving (or
fortuitous event.) The defense of the common carrier would be diligence in the selection &
supervision of employees. If he sues under crime, he has to sue the driver. In case the driver is
convicted & has been sentenced to pay civil liability, the employer (Alinea Bus Co.) is subsidiarily
liable. If Molina is insolvent, Alinea Bus Co. will pay.
 Notice that the choice of cause of action will determine three things: the theory of the
plaintiff, the defense of the defendant & the question of whom to sue.
 Again, remember that in this case, the victim has a choice. Provided that he is consistent
with his theory & provided, further, that he cannot recover damages twice for the same
injury.
Baviera: The terms of the contract cannot be against mandatory & prohibitive laws. And if the
contract is valid, it shall have the force of law between the contracting parties.
5. QUASI-DELICTS: (culpa aquiliana / negligence / torts*)
[NCC, CHAPTER 2 - Quasi-delicts]
Article 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties, is called a quasi-delict and
is governed by the provisions of this Chapter. (memorize!)
Article 1162. Obligations derived from quasi-delicts shall be governed by the

provisions of Chapter 2, Title XVII of this Book, and by special laws.
* Torts is seldom used by SC in this jurisdiction, it is broader term for actionable wrong which
may not be negligence, may be malicious tortuous act which is not anymore Quasi Delict.
 QUASI-DELICTS – the fault or negligence of a person who, by his act or omission

connected or not with, but independent from any contractual relation, causes damage to
another person;
 The omission to do something which ordinarily reasonable men guided by those

considerations which ordinarily regulate the conduct of human affairs, would do; or doing
something which prudent and reasonable men would not do.
 Liability on Quasi Delict is based on equity, man is responsible not only for acts conscious
and intentional acts but also for his lack of foresight, care and diligence which may cause
harm to another.
 ELEMENTS:
(1) A duty on the part of the defendant to protect the plaintiff from the injury of which
the latter complains;
(2) A failure to perform that duty, and
(3) An injury to the plaintiff through such failure.
 TEST OF NEGLIGENCE: Would a prudent man, in the position of the person on who
negligence is attributed, foresee harm to the person injured as a reasonable consequence of
the course about to be pursued?
 KINDS OF NEGLIGENCE:
(1) Culpa aquiliana, also known as culpa extra-contractual, or negligence as a source
of OBLIGATION, QUASI-DELICT;
 Governed by Arts. 2176-2194
 NO contractual relation at all
(2) Culpa contractual, or negligence in the performance of a contractual
OBLIGATION.
 Governed by Article 1179 (common carrier), & all on contracts
 PERSONS LIABLE: (IMPUTED/vicarious LIABILITY, 2180)
1. father / mother
2. guardians
3. owners/managers
4. employers
5. the State
6. teachers
 The responsibility shall cease if they can prove that they have observed diligence of
good father of the family to prevent damage;
REQUISITES OF LIABILITY (IMPUTED):
1. the fault of negligence of the defendant
2. the damage suffered or incurred by the plaintiff
3. the relation of the fault or negligence and damage incurred by the plaintiff
Balane:
The Code Commission did not choose to use tort. This is because tort does not exactly have the
same meaning as quasi-delict. Tort [BROADER] covers intentional torts which in quasi-delict is
considered as civil liability arising from acts or omissions punishable by law. There are some QD
which are not covered by tort. Dean Bocobo suggested the ancient term culpa aquiliana. But this
did not merit the approval of the Code Commission.
A TORT is a civil wrong (an actionable wrong) consisting of a violation of a right or a breach
of duty for which the law grants a remedy in damages or other relief. The right is created by law
in favor of a person called a creditor to compel another called a debtor to observe duty or a
prestation either to render what is due him or to refrain from causing him injury.
Classes of Torts According to Manner of Commission
1. Intentional Torts
a. tortfeasor desires to cause the consequences of his act, or
b. tortfeasor believes that the consequences are substantially certain to result

from it
c. ex. Article 26, 32 & 33 (CC)
2. Negligent Torts:
d. tortfeasor’s conduct merely creates a forseeable risk of harm which may or

may not occur
e. Article 2176 (CC)
3. Strict Liability Torts:
f. Ex. Article 2183 & 2187 (CC)
Q: If there is a contract between the parties, can there be a quasi-delict committed by one against
the other regarding the area covered by the contract?
A: If you look at Article 2176, you get the impression that if there is a contract between the
parties, they cannot be liable for quasi-delict on an area covered by the contract. The case of
Cangco has not really resolve this controversy.
Case: Jose Cangco vs. Manila Railroad Co., October 14, 1918, J. Fisher.
Facts: Cangco was an employee of Manila Railroad Co. He takes the train going home from work.
That day he alighted from the train while it was still slightly in motion. He landed on the elevated
platform on top of some sacks of watermelon which made him fall violently, rolled away from the
platform under the moving train where he badly crashed and lacerated his right arm. It happened at
night between 7-8pm and the station was poorly lit. Resulting from such incident, Cangco’s arm
was amputated twice. The seriousness of his injury made him file a case for damages against MRR
Co. The latter then interposed the defense that the direct and proximate cause of the injury
suffered by the plaintiff was his own contributory negligence in failing to wait until the train
had come to a complete stop before alighting.
Issue: Whether or not the conduct of Cangco was characterized by imprudence so as to hold him
liable because of his contributory negligence.
Held: NO. can not be doubted that the employees of the railroad company were guilty of
negligence in piling these sacks on the platform in the manner above stated; that their presence
caused the plaintiff to fall as he alighted from the train; and that they therefore constituted an
effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the
defendant company is liable for the damage thereby occasioned unless recovery is barred by
the plaintiff's own contributory negligence.
It is important to note that the foundation of the legal liability of the defendant is the contract of
carriage, and that the obligation to respond for the damage which plaintiff has suffered arises, if
at all, from the breach of that contract by reason of the failure of defendant to exercise due care
in its performance. That is to say, its liability is direct and immediate, differing essentially, in
legal viewpoint from that presumptive responsibility for the negligence of its servants,
[RESPONDEAT SUPERIOR], which can be rebutted by proof of the exercise of due care in
their selection and supervision. (presumption juris tantum, rebuttable). Imputed liability in NCC
is not applicable to obligations arising ex contractu, but only to extra-contractual obligations, or
to use the technical form of expression, that article relates only to culpa aquiliana and not to
culpa contractual.
Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual

obligation has its source in the breach or omission of those mutual duties which civilized
society imposes upon it members, or which arise from these relations, other than contractual, of
certain members of society to others, generally embraced in the concept of status.
The fundamental distinction between obligations of this character and those which arise from
contract, rests upon the fact that in cases of non-contractual obligation it is the wrongful or
negligent act or omission itself which creates the vinculum juris, whereas in contractual
relations the vinculum exists independently of the breach of the voluntary duty assumed by the
parties when entering into the contractual relation.
The contract of defendant to transport plaintiff carried with it, by implication, the duty to
carry him in safety and to provide safe means of entering and leaving its trains (contract of
carriage). That duty, being contractual, was direct and immediate, and its non-performance could
not be excused by proof that the fault was morally imputable to defendant's servants.
The railroad company's defense involves the assumption that even granting that the negligent
conduct of its servants in placing an obstruction upon the platform was a breach of its contractual
obligation to maintain safe means of approaching and leaving its trains, the direct and
proximate cause of the injury suffered by plaintiff was his own contributory negligence in
failing to wait until the train had come to a complete stop before alighting (Doctrine of
comparative negligence, Rakes doctrine). If the accident was caused by plaintiff's own
negligence, no liability is imposed upon defendant's negligence and plaintiff's negligence merely
contributed to his injury, the damages should be apportioned. It is, therefore, important to
ascertain if defendant was in fact guilty of negligence.
The test by which to determine whether the passenger has been guilty of
negligence in attempting to alight from a moving railway train, is that of ordinary
or reasonable care. It is to be considered whether an ordinarily prudent person, of
the age, sex and condition of the passenger, would have acted as the passenger acted
under the circumstances disclosed by the evidence. This care has been defined to be,
not the care which may or should be used by the prudent man generally, but the care
which a man of ordinary prudence would use under similar circumstances, to avoid
injury." (Thompson, Commentaries on Negligence, vol. 3, sec. 3010.)
RULING: …that the train was barely moving when plaintiff alighted is shown conclusively by
the fact that it came to stop within six meters from the place where he stepped from it.
Thousands of person alight from trains under these conditions every day of the year, and sustain
no injury where the company has kept its platform free from dangerous obstructions. There is no
reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had
it not been for defendant's negligent failure to perform its duty to provide a safe alighting place.
Balane: There are two important principles that we learn from this case:
The difference in concept between contract & quasi-delict is that in a contract, there is a pre-
existing juridical tie between the parties. Violation of the contract gives rise to liability but
not to the juridical tie. Juridical tie is not borne by a violation. In quasi-delict, it is precisely
the wrongful act which gives rise to the juridical tie. Liability & juridical tie are
simultaneous.
Contracts & quasi-delicts create two concentric circles with quasi-delict as the bigger circle.
[Note: There is a little mistake in Cangco. The SC said that the driver can be sued under culpa
contractual. This is wrong. The driver cannot be sued as he has no privity of contract with the
passenger.]
CASE DOCTRINE: Where there could still be Quasi Delict even when there is contract of
carriage.
CASE: NARCISO GUTIERREZ VS. BONIFACIO GUTIERREZ, ET AL., SEPTEMBER

23, 1931, J. MALCOLM.
FACTS: On February 2, 1930, a passenger truck and an automobile of private ownership

collided while attempting to pass each other on the Talon bridge on the Manila South Road in the
municipality of Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo
Velasco, and was owned by Saturnino Cortez. The automobile was being operated by Bonifacio
Gutierrez, a lad 18 years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs.
Manuel Gutierrez. At the time of the collision, the father was not in the car, but the mother,
together will several other members of the Gutierrez family, seven in all, were accommodated
therein. A passenger in the autobus, by the name of Narciso Gutierrez, was en route from San
Pablo, Laguna, to Manila. The collision between the bus and the automobile resulted in Narciso
Gutierrez suffering a fracture right leg which required medical attendance for a considerable
period of time, and which even at the date of the trial appears not to have healed properly.
Issue: Whether or not Bonifacio’s father, not present during the incident could be held liable for
damages to Narciso.
HELD: The court found both drivers negligent. The owner of the truck was made liable for culpa
contractual, under the contract of carriage. The owner of the car was made liable under Article
2180, imputed liability for culpa aquiliana. In amplification of so much of the above
pronouncement as concerns the Gutierrez family, it may be explained that the youth Bonifacio
was in incompetent chauffeur, that he was driving at an excessive rate of speed, and that, on
approaching the bridge and the truck, he lost his head and so contributed by his negligence to the
accident. The guaranty given by the father at the time the son was granted a license to operate
motor vehicles made the father responsible for the acts of his son. Based on these facts, pursuant
to the provisions of article 1903 of the Civil Code, the father alone and not the minor or the
mother, would be liable for the damages caused by the minor.
The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo
Velasco rests on a different basis, namely, that of contract which, we think, has been sufficiently
demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason
for this conclusion reaches to the findings of the trial court concerning the position of the truck
on the bridge, the speed in operating the machine, and the lack of care employed by the
chauffeur. While these facts are not as clearly evidenced as are those which convict the other
defendant, we nevertheless hesitate to disregard the points emphasized by the trial judge. In its
broader aspects, the case is one of two drivers approaching a narrow bridge from opposite
directions, with neither being willing to slow up and give the right of way to the other, with the
inevitable result of a collision and an accident.
The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the
case is contradictory in the extreme and leads us far afield into speculative matters.
FRAUD NEGLIGENCE
dolo Culpa
Nature of Act involves mere want of

willfulness or care or
deliberate diligence, not
intent to cause voluntary act or
damage or omission
injury to
another
Gives rise to the act itself the want or care

OBLIGATION or diligence
 A single act may be a crime and a QD at the same time; (Article 100, RPC)
 Injured party cannot recover damages twice for the same act or omission of
defendant; (must choose 1 Remedy)
QUASI-DELICT CRIME
As to nature of private right public right

Right violated
Is a Wrong the individual the State

against
Criminal not needed Necessary

Intent
Legal Basis for Broad penal law necessary

liability
Liability for every QD gives there are crimes

Damages rise to liability for without civil
damages liability
Form of reparation for punishment/fine/

Redress injury imprisonment
suffered/indemnifi
cation/compensati
on
Quantum of Preponderance Beyond reasonable

Evidence doubt
Compromise can be criminal liability

compromised can never be
compromised
REQUISITES FOR LIABILITY: (onus)
(1) Wrongful act or omission imputable to the defendant by reason of his fault or negligence;
(2) Damage or injury proven by the person claiming recovery;
(3) A direct causal connection between the negligent act and the injury.
DOCTRINE OF PROXIMATE CAUSE  is that which, in natural and continuous sequence,

unbroken by any efficient intervening cause, produces injury and without which the result would
not have occurred.
The exemplification by the Court in one case is simple and explicit; viz: "(T)he proximate legal
cause is that acting first and producing the injury, either immediately or by setting other events
in motion, all constituting a natural and continuous chain of events, each having a close causal
connection with its immediate predecessor, the final event in the chain immediately affecting the
injury as a natural and probable result of the cause which first acted under such circumstances
that the person responsible for the first event should, as an ordinarily prudent and intelligent
person, have reasonable ground to expect at the moment of his act or default that an injury to
some person might probably result therefrom."
Illustrations:
1. Sources of obligations: 1157: Are there other sources of obligations aside from those
provided by law? No. Art. 1157 is exclusive based on the case of Sagrada.
2. Who may be considered privy to the contract? Heirs, successors in interest.
3. There are certain facts which need not be proven, there is no need to allege such facts
because the law presumes the existence of a right and presumes the existence of a fact, hence,
it is not always true that whoever alleges the fact must prove the existence of such fact.
4. Contracts: How would you know if there are obligations arising from a contract? By
considering the terms and conditions of contract, by reading the terms and conditions of the
contract, you will determine whether or not there is an obligation arising from such contract.
Incidentally, does it mean that there is no stipulation, therefore an agreement is not part
of the contract? Not necessarily, an obligation may arise even without a stipulation like
warranty against eviction. A limitation provided by law as to terms and conditions? It
must not be contrary to law, morals, public policy. But before an obligation arises, what
transpires? Negotiation. Negotiation is initiated by what? Offer. During the negotiation,
the offeror withdrew the offer, will there be an obligation? Yes. What source? It depends
if there is bad faith, if there is negligence on the part of the offeror in not communicating as
soon as possible the same is quasi-delict. If bad faith, Art. 19, 20, and 21 I which is law, but
the SC generally would consider the source of obligation as tort.
5. People’s car Case: Issue: Whether or not commando is liable for the entire amount of
damages instead of only 1,000.00
6. The owner of the house left the house for a short vacation, the very night, they left, their
house was burned, the neighbors saved some of their appliances, what is the
relationship? Negotiorum gestio, do you agree? No, these appliances are not managed; this
will fall under quasi-delict because in negotiorum gestio there must be abandonment or
neglect of the property. Another reason why this is not negotiorum gestio, this falls under the
other quasi-contracts. An obligation arising from quasi-contract, even if the obligor was
not unjustly enriched, or is it required that he must be unjustly enriched if he will not
perform an obligation under quasi-contract? Despite 2142, is it possible that in a quasi-
contract there will be no unjust enrichment? Yes, read the provisions on negotiorum
gestio, expressly provided by law, even if the owner is not enriched or unjustly enriched, if
he has an obligation. It will appear therefore that the principles behind quasi-contracts
are not really the principle of unjust enrichment. Thus, in other countries, the principle
behind this obligations is, like in the U.S. law and quasi-contracts are considered to fall
under one source only implied contracts, from that alone the basis is consent given by
the obligor.
7. A bought a sack of rice from B, P625, A gave 1K to B, B gave the sack of rice to A, B
gave 475 to A, what relationship was created? Solutio indebiti. What is the obligation?
To return the excess P100.
8. The quasi-contracts are provided for in article 2165-2175, is this exclusive? No. it is not
exclusive as provided for in article 2143.
9. Act or omission punishable by law? These are crimes or delicts. As to this source, once a
person in criminally liable, he is also civilly liable? Not necessarily, because are crimes
that does not make the criminal civilly liable such as treason and rebellion. The kinds of
civil liability arising from this source? Restitution, reparation, and indemnification. Every
time there is this civil liability, all of these are present? Not necessarily. Example: what
will be lacking? Restitution is lacking in rape. When is restitution present? Theft. But even
in murder or homicide, restitution is not possible. If a person committed an act
punished by law and there is sufficient evidence to prove such fact beyond reasonable
doubt, nonetheless, is it possible for him not to be committed? Yes, if the law exempts
him from liability, when there is an exempting circumstance, such as minority, so if there is
exempting circumstance there is civil liability? Yes. Of those enumerated, generally, is
there civil liability? Yes, when will there be no civil liability, and what will be the basis
thereof? Quasi-delict, why not delict? Because there is no conviction. If there is no
conviction, there is no civil liability under delict. In justifying circumstance, can there be
civil liability? As a rule no civil liability, except paragraph 4.
10. Torts, culpa acquiliana, culpa extra contractual, quasi delict: Under 2176 is simply,
Fault or Negligence, is there a difference? Yes. Culpa extra contractual is a good name
for quasi delict? This is outside of the contract, if CEC, quasi delict? This does not seem
right, culpa extra contractual, outside of the contract, outside of the contract there are how
many sources of obligations, four, necessarily quasi delict? No. Can there be negligence in
the performance of an obligation arising from law, Yes, can a gestor be negligent, Yes, but is
that negligence quasi delict? NO because it will fall under quasi-contract. The use of the
word torts is criticized because? torts is not the same as quasi-delict, torts is a much
broader term that quasi delict, because torts include intentional, malicious, while quasi-delict
includes negligence only, is this correct? 2176 first article in quasi-delict, it provides for
fault or negligence, it did not mention negligence only. The next article 2177, from this
article, may an act be the basis of liability under two sources of obligation, Yes. the only
obligation provided by law is? He cannot recover twice. So if A was able to recover from
one case, he will not have the right to recover in any other case, correct? Yes The
Supreme Court held that he can recover the difference if the second award is greater for
instance in case 1 100K Case 2 150K, he has the right to recover 50K, but not 250K.
Ultimately, the claim of the author that quasi delict should be limited to negligent act, has
not been supported by the justices of the SC, the SC would always claim, that a single act
may be a basis of an action under delict, under quasi delict, may be even under contract if
there is a pre-existing contract, it is up to the aggrieved party to choose his cause of action,
however, if he chooses one cause of action, he must comply to the requirements of the cause
of action, for example he chose delict, then he has to have the accused convicted. But if
contract, the law already presumes that there is negligence in case of non performance. This
recommendation that quasi delict should be limited to negligent act has no basis under
the law, and has no application here in our country, the best arguments to this issue is
this, if the act is punished by law, you should have the right to recover civil liability only
be ensuring that the accused will be convicted, otherwise, that will encourage the people
to commit crime, people will think that it is okay to commit a crime because they can
pay their way out of it, however, in the situation where the husband is killed the mother
is the only one left with five kids, will you fault them by accepting the damages? I think
not.
11. A man buried a victim of princess of the stars, the relative of the victim appeared the
man demanded payment, from the relative P300, can he demand from the relative
payment for burying the victim? The obligation created here is quasi delict, however, the
man cannot demand payment from the relative because the persons who may be compelled is
the persons who is liable to give the victim support.
C. COMPLIANCE WITH OBLIGATIONS:
Article 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith.
Article 1163. Every person obliged to give something is also obliged to take care of it
with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care.
Article 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until the
same has been delivered to him.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in

addition to the right granted him by article 1170, may compel the debtor to make the
delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied
with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons
who do not have the same interest, he shall be responsible for any fortuitous event until
he has effected the delivery.
Article 1166. The obligation to give a determinate thing includes that of delivering all
its accessions and accessories, even though they may not have been mentioned.
According to Balane:
Three types of obligations- (1) obligation to give; (2) obligation to do; & (3) obligation not to do.
I. Obligation to give
A. Specific thing
B. Generic thing
II. To do
III. Not to do (this includes all negative obligations like obligation not to give.)
Kinds of performance.--
1. specific performance - performance by the debtor himself (applies only to

OBLIGATION to give )
2. substitute performance - performance at the expense of the debtor
3. equivalent performance - grant of damages
Articles 1163 - 1166 cover obligation to give.
Three Accessory Obligations:
1. Article 1163- To take care of the thing with the diligence of a good father of a family until
actual delivery.
2. Article 1164- To deliver the fruits to the creditor (fruits produced after obligation to deliver
arises.)
3. Article 1166- To deliver accessions & accessories.
Balane:
 From the time the obligation arises, the creditor has a personal right against the debtor as
to the fruits. But he has no real right over them until actual delivery.
 Real right is a right which is enforceable against the whole world. He has only the
personal right against the debtor with regard to the undelivered fruits.
 This is because of the principle Non nudis pactis, sed traditione, dominia rerum
transferentur (It is not by mere agreement, but by delivery, is ownership transferred.)
 Personal right arises from the time the obligation to deliver arises whereas the real right
does not arise until actual delivery.
Articles 1165 – 1167- Remedies Available to the Creditor (specific performance, substitute
performance, equivalent performance.)
A. In obligations to give
1. A determinate thing
a. Specific performance
b. Equivalent performance
2. A generic thing, all remedies are available
B. In an obligation to do, make a distinction:
In obligation to do, which is purely personal  only equivalent performance is available
In an obligation to do which is not personal:
a. substitute performance
b. equivalent performance
Note: In obligations to do, specific performance is not available.  The reason for this is that
specific performance will give rise to involuntary servitude.
C. Obligation not to do
1. substitute performance
2. equivalent performance.
 In all these cases, the creditor has the option of resolution or rescission under Article
1191. In addition, he can also claim damages.
Article 1244. The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act

or forbearance against the obligee's will.
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.
Article 1246. When the obligation consists in the delivery of an indeterminate or generic
thing, whose quality and circumstances have not been stated, the creditor cannot demand a
thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken into consideration.
Article 1460. A thing is determinate when it is particularly designated or physical

segregated from all others of the same class.
The requisite that a thing be determinate is satisfied if at the time the contract is entered
into, the thing is capable of being made determinate without the necessity of a new or
further agreement between the parties
Article 442. Natural fruits are the spontaneous products of the soil, and the young and
other products of animals.
Industrial fruits are those produced by lands of any kind through cultivation or labor.
Civil fruits are the rents of buildings, the price of leases of lands and other property and
the amount of perpetual or life annuities or other similar income
NATURE AND EFFECTS OF OBLIGATIONS
OBJECT OF THE OBLIGATION:
1. to give  real OBLIGATION  determinate (specific) or indeterminate (generic)
2. to do 
3. not to do  personal OBLIGATION  positive (to do) or negative (not to do)
REAL OBLIGATION:
a. DETERMINATE OBLIGATION – particularly designated from a particular class;
PRINCIPAL OBLIGATION – to give (to deliver) a determinate thing;
ACCESSORY OBLIGATION – exists even when not expressly stipulated;
(1) Article 1163 – to take care of the thing with proper diligence of a good father
of the family;
(2) Article 1164 – to deliver the fruits;
(441)  natural / industrial / civil
 the OBLIGATION to deliver arises only if the creditor is entitled;
(3) Article 1166 – delivery of the accessions and of the accessories (Art 440);
b. GENERIC THING  is one that is indicated only by its kinds, without being distinguished
from others of the same kind. (indeterminate)
 In an OBLIGATION to deliver a generic thing, the object is determinable; when

delivered it becomes determinate.
DELIMITED GENERIC  not totally generic nor specific; obligation to deliver one of
SEVERAL things; does not have designation nor physical segregation; Rule re Fortuitous
Events still apply.
DETERMINATION OF DILIGENCE REQUIRED:
(1) LAW  e.g. extra ordinary diligence required in Common carriers
(2) Stipulation of Parties

(3) Presumed: diligence of a Good father of the Family if none is specified/expressed by law or
agreement.
REAL RIGHT  is the power by a person over a specific thing, susceptible of being exercised
against the whole world.
PERSONAL RIGHT  belongs to a person who may demand from another, as a definite
passive subject, the fulfillment of a prestation.
 From the moment the OBLIGATION to deliver a determinate thing arises, the creditors
earns a personal right over the thing and its fruits, but only delivery or tradition
transfers ownership that is a real right over the thing against the whole world.
 For failure to deliver, the creditor’s remedy is not reivindicacion but specific
performance.
[CHAPTER 2: Right of Accession – GENERAL PROVISIONS]
Article 440. The ownership of property gives the right by accession to everything which
is produced thereby, or which is incorporated or attached thereto, either naturally or
artificially.
Kinds of Fruits;
1) CIVIL – derived by virtue of juridical relation
2) Natural – spontaneous products of the soil and the young and other products of animals;
3) Industrial – produced by lands of any kind through cultivation or labor or by reason of

human labor.
Illustrations:
1. Which article is enshrined with the compliance of the obligation ? Article 19 of the Civil
Code.
2. How should an obligation be complied with? To answer, I would ask you after reading
Article 19, to know what is the source of the obligation. Because if you know the source
then you will know how such obligation should be complied with. If the source of
obligation is a contract, then may be the party has already stipulated as to how the
obligation should be complied with.
3. Obligation arising from law, the law itself will provide the manner of compliance of the
obligation. But in recent years, thus the common law specially on economic matters, is
that congress will just set the policies, and the IRR will have to be formulated by the
executive dept., and as a rule you should know the IRR. Even if we know the source of
the obligation, we may still not know on how to comply the obligation, because the
parties did not stipulate or the law did not provide, so how should we perform? Finally,
the civil code will tell us on how to comply in relation to the kind of obligation as to
prestation. But most of the provision is on the prestation to give so I will focus on that. In
relation to this obligations, how should this obligations be complied with, first you should
know as to what kind of thing is to be delivered. If it is a determinate thing or a generic
thing.
4. Generic Thing: How should this obligation be complied with? There is a rule that should
be followed. What a debtor cannot compel the creditor to accept a thing that is inferior of
quality. A thing of such kind the debtor also cannot demand which is of superior quality.
In other words, the thing that is to be delivered to the creditor is not of inferior nor
superior quality. What should be delivered depends on the purpose of the
constitution of the obligation.
5. Determinate Thing: if A has an obligation to deliver to B, KIA PRIDE 1996, but instead
of delivering that car, the creditor offered to deliver a brand new BMW, series 9 black
convertible. May the obligation be extinguished? Yes. If the creditor accepts the BMW.
Why? Because when the law said that the creditor cannot be compelled to accept but he
may want to accept. In fact if the creditor accepts, what is the mode of extinguishment?
The mode of extinguishment is Dacion En Pago, an act of thing was delivered by the
debtor to the creditor in satisfaction of his death.
6. Last question, why would anyone refuse to accept the BMW? Maybe there are gems in
the old car.
7. The accessory obligations, the debtor should preserve the thing. This obligation starts
from the constitution of the obligation until the delivery of the thing. Not all obligations
have this accessory the obligations. E.g. to deliver a generic thing.
8. As to the fruits of the thing . Who is entitled to the fruits of the thing accrued after the
constitution of the obligation? The Code provides: he will be entitled to the fruits of the
thing from the time the obligation to deliver arises. Art 1164
D. KINDS OF CIVIL OBLIGATIONS:
1. AS TO PERFECTION & EXTINGUISHMENT:
a. PURE
(CHAPTER 3) Different Kinds of OBLIGATIONS
SECTION 1 - Pure and Conditional OBLIGATIONS
Article 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable,

without prejudice to the effects of the happening of the event.
Article 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the court may fix the duration
thereof.
The court shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the court shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the court, the period cannot be
changed by them.
 A pure obligation is one which is not subject to a condition or a term and it is immediately
demandable that there is nothing to exempt the debtor from compliance therewith.
(Floriano vs. Delgado)
 What is a demand note? It is subject to neither a suspensive condition nor a suspensive

period. The demand is not a condition precedent , since the effectivity and binding effect of
the note does not depend upon the making of the demand: the note is binding even before
the demand is made. Neither does the demand constitute an implied suspensive period
since there is nothing to prevent the creditor from making a demand.
Case: Hongkong and Shanghai Banking Corp., Ltd. Staff Retirement Plan vs. Spouses
Bienvenido and Editha Broqueza, November 17, 2012, J. Carpio.
Facts: Spouses Broqueza, as employees of HSBC and members of Petitioner HSBC-SRP

(purposely for the benefit of the employees), obtained loans specifically, car and appliance loan
which are to be paid through automatic salary deduction. The promissory note appears to have
this period for which the employees can pay for the loan: “… on or before until fully paid…”
Meanwhile, when a labor dispute arose between HSBC and its employees, majority of the
employees of the former were terminated including herein respondent (with supposed co-
respondent Gerong who was eventually withdrawn through a manifestation because she settled
her OBLIGATIONS to the company). Because of such dismissal, herein respondents were not
able to pay the monthly amortizations of their loans. Thus, the HSBC-SRP considered the
accounts for respondents as delinquent. Demand to pay the obligation were made upon
respondents but failed to pay the same. In a civil suit for recovery and collection of sum of
money against respondents, MeTC ruled that the nature of HSBC-SRP’s demands for payment is
civil and has no connection to the labor dispute and that by reason of the respondents’
termination from employment, it resulted in the loss of continued benefits under the retirement
plan. Thus, the loans secured by their future retirement benefits to which they are no longer
entitled are reduced to unsecured and pure civil OBLIGATIONS. As unsecured and pure
OBLIGATIONS, the loans are immediately demandable. RTC affirmed the MeTC. But CA
reversed the same saying that HSBC-SRP’s complaints for recovery of sum of money against
respondents are premature as the loan OBLIGATIONS have not yet matured. Thus, no cause of
action accrued in favor of HSBC-SRP. Hence, this appeal.
Issue: Whether or not the interpretation of the subject promissory note is correctly classified by
MeTC and RTC as being a pure obligation.
Held: YES. In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil
Code:
Aright 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at once.
x x x. (Emphasis supplied.)
We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in
the Promissory Notes. The RTC is correct in ruling that since the Promissory Notes do not
contain a period, HSBCL-SRP has the right to demand immediate payment. Article 1179 of
the Civil Code applies. The spouses Broqueza’s obligation to pay HSBCL-SRP is a pure
obligation. The fact that HSBCL-SRP was content with the prior monthly check-off from Editha
Broqueza’s salary is of no moment. Once Editha Broqueza defaulted in her monthly payment,
HSBCL-SRP made a demand to enforce a pure obligation.
In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s dismissal from
HSBC in December 1993, she "religiously paid the loan amortizations, which HSBC collected
through payroll check-ofollowing:" A definite amount is paid to HSBCL-SRP on a specific date.
Editha Broqueza authorized HSBCL-SRP to make deductions from her payroll until her loans
are fully paid. Editha Broqueza, however, defaulted in her monthly loan payment due to her
dismissal. Despite the spouses Broqueza’s protestations, the payroll deduction is merely a
convenient mode of payment and not the sole source of payment for the loans. HSBCL-SRP
never agreed that the loans will be paid only through salary deductions. Neither did HSBCL-
SRP agree that if Editha Broqueza ceases to be an employee of HSBC, her obligation to pay the
loans will be suspended. HSBCL-SRP can immediately demand payment of the loans at anytime
because the obligation to pay has no period. Moreover, the spouses Broqueza have already
incurred in default in paying the monthly installments.
CASE: re Article 1179, par. 1

Case: In the matter of the Intestate Estate of Justo Palanca, deceased, George Pay vs.
Segundina Chua Vda. De Palanca, June 28, 1974, J. Fernando.
Facts: George Pay as creditor of the late Justo Palanca (who died in Manila on July 3, 1963)
claimed payment from the latter premised from a promissory note dated January 30, 1952, which
has the following details: “For value received from time to time since 1947, we jointly and
severally promise to pay to Mr. George Pay at his office the sum of P26, 900 with 12% interest
rate per annum upon receipt by either of the undersigned of cash payment from the Estate of the
late Don Carlos Palanca and Justo Palanca or upon demand”. Then came this paragraph: "The
Court has inquired whether any cash payment has been received by either of the signers of this
promissory note from the Estate of the late Carlos Palanca. Petitioner informed that he does not
insist on this provision but that petitioner is only claiming on his right under the promissory
note." After which, came the ruling that the wording of the promissory note being "upon
demand," the obligation was immediately due. Since it was dated January 30, 1952, it was
clear that more "than ten (10) years has already transpired from that time until to date. The
action, therefore, of the creditor has definitely prescribed." The result, as above noted, was the
dismissal of the petition.
Issue: Whether or not Pay’s claim against the estate of the deceased through the promissory note
has already prescribed.
Held: YES. The obligation being due and demandable, it would appear that the filing of the
suit after fifteen years was much too late. For again, according to the Civil Code, which is based
on Section 43 of Act No. 190, the prescriptive period for a written contract is that of ten years.
From the manner in which the promissory note was executed, it would appear that petitioner was
hopeful that the satisfaction of his credit could he realized either through the debtor sued
receiving cash payment from the estate of the late Carlos Palanca presumptively as one of the
heirs, or, as expressed therein, "upon demand." There is nothing in the record that would
indicate whether or not the first alternative was fulfilled. What is undeniable is that on
August 26, 1967, more than fifteen years after the execution of the promissory note on
January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit is
rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance
does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is
demandable at once." This used to be Article 1113 of the Spanish Civil Code of 1889.
Q: Does the happening of a condition give rise to the OBLIGATION?
A: Not necessarily, only if suspensive condition; if resolutory condition, the happening

extinguishes the OBLIGATION;
Q: In an OBLIGATION with a TERM will the answer above be the same?
A: Yes.
b. CONDITIONAL
Article 1181. In conditional OBLIGATIONS, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition.
Article 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon the will
of a third person, the obligation shall take effect in conformity with the provisions of this
Code.
Balane:  We are talking here of a suspensive condition.
First sentence of Article 1182.
 The condition must be suspensive, potestative & depends on the sole will of the
debtor.
EXAMPLE: "I promise to sell you my car for P1.00 whenever I like."
Q: Why does it make the obligation void?
A: Because such an obligation lacks one of the essential elements of an obligation, the vinculum
juris, the binding force- the means by which it is enforceable in couright In this case, there is no
binding force. There is no obligation. It is a joke.
Potestative Condition  is one which depends solely on the will of either one party.
EXAMPLE: "I will give you my plantation in Davao provided you reside in Davao
permanently."
Casual Condition  is one where the condition is made to depend upon a third person or upon
chance.
EXAMPLE: "I will give you my land in Floridablanca if Mt. Pinatubo erupts this year."
Mixed Condition  is one which depends partly upon the will of one of the parties & partly on
either chance or the will of a third person.
Q: What if the condition is suspensive, potestative & depends solely on the will of the
creditor, is the conditional obligation valid?
A: Yes. In fact, the obligation is not even a condition obligation. It is a pure obligation, binding
at once.
CASE: the term which parties attempted to fix were so uncertain it must be regarded as condition
Case: Smith Bell & Co., Ltd. vs. Vicente Sotelo Matti, March 9, 1922, J/ Romualdez.
Facts: In August 1918, plaintiff corporation and defendant entered into contracts whereby the
former obligated itself to sell and the latter to puchase from it the following which accordingly
delivered with dates below:
Items/Products Prices Delivery date Actual date of

under the delivery
promissory
note
2 steel tanks P21,000 “to be shipped April 27, 1919

from New York
to Manila within
3 or 4 months”
2 expellers P25,000/each “to be shipped October 26,

from San 1918
Francisco in the
month of
September,
1918 or as soon
as possible”
2 electric motors P2,000/each “Approximate February 27,

delivery within 1919
90 days—This
is not
guaranteed”
In all these contracts, there is a final clause as follows:
The sellers are not responsible for delays caused by fires, riots on land or on the sea,
strikes or other causes known as "Force Majeure" entirely beyond the control of the
sellers or their representatives.
Smith Bell notified Mr. Sotelo of the arrival of these goods but the latter refused to receive and
pay the pay prices stipulated. The plaintiff brought suit against the defendant, based on four
separate causes of action, alleging, among other facts, that it immediately notified the defendant of
the arrival of the goods, and asked instructions from him as to the delivery thereof, and that the
defendant refused to receive any of them and to pay their price. The case having been tried, the
court below absolved the defendants from the complaint insofar as the tanks and the electric
motors were concerned, but rendered judgment against them, ordering them to "receive the
aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos (P50,00), the price of
the said goods, with legal interest thereon from July 26, 1919, and costs." Both parties appeal
from this judgment.
Issue: Whether or not under the contract being entered into by the parties, the plaintiff
corporation is held in delay by reason of the period stipulated in the contract.
Held: NO. Under these stipulations, it cannot be said that any definite date was fixed for
the delivery of the goods. As to the tanks, the agreement was that the delivery was to be
made "within 3 or 4 months," but that period was subject to the contingencies referred to
in a subsequent clause. With regard to the expellers, the contract says "within the month of
September, 1918," but to this is added "or as soon as possible." And with reference to the motors,
the contract contains this expression, "Approximate delivery within ninety days," but right after
this, it is noted that "this is not guaranteed." The oral evidence falls short of fixing such period.
From the record it appears that these contracts were executed at the time of the world war when
there existed rigid restrictions on the export from the United States of articles like the machinery
in question, and maritime, as well as railroad, transportation was difficult, which fact was known
to the parties; hence clauses were inserted in the contracts, regarding "Government regulations,
railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States
Government," in connection with the tanks and "Priority Certificate, subject to the United State
Government requirements," with respect to the motors. At the time of the execution of the
contracts, the parties were not unmindful of the contingency of the United States Government
not allowing the export of the goods, nor of the fact that the other foreseen circumstances therein
stated might prevent it.
Considering these contracts in the light of the civil law, we cannot but conclude that the
term which the parties attempted to fix is so uncertain that one cannot tell just whether, as
a matter of fact, those articles could be brought to Manila or not. If that is the case, as we
think it is, the OBLIGATIONS must be regarded as conditional.
OBLIGATIONS for the performance of which a day certain has been fixed shall be demandable
only when the day arrives.
A day certain is understood to be one which must necessarily arrive, even though its date be
unknown.
If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is
conditional and shall be governed by the rules of the next preceding section. (referring to pure
and conditional OBLIGATIONS). (Aright 1125, Civ. Code.)
And as the export of the machinery in question was, as stated in the contract, contingent upon the
sellers obtaining certificate of priority and permission of the United States Government, subject
to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but
upon the will of third persons who could in no way be compelled to fulfill the condition. In cases
like this, which are not expressly provided for, but impliedly covered, by the Civil Code,
the obligor will be deemed to have sufficiently performed his part of the obligation, if he
has done all that was in his power, even if the condition has not been fulfilled in reality.
Article 1183. Impossible conditions, those contrary to good customs or public policy and
those prohibited by law shall annul the obligation which depends upon them. If the
obligation is divisible, that part thereof which is not affected by the impossible or
unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having been
agreed upon.
Balane:
This refers to a suspensive condition.
There are 2 classes of impossible conditions:
1. Impossible in fact
EXAMPLE: "I promise to sell my car to Mr. M for P2 if he can swim across the Pacific
Ocean for 2 hours."
2. Impossible in law  or one which attaches an illegal condition
EXAMPLE: "I promise to sell my car to Mr. M for P2 on condition that he burns the
College of Law."
Effect of Impossible Condition  It annuls the obligation which depends upon them.
 The entire juridical tie is tainted by the impossible condition. Correlate this with Articles
727 & 873.
Article 727. Illegal or impossible conditions in simple & remuneratory donations shall be
considered as not imposed.
Article 873. Impossible conditions & those contrary to law or good customs shall be considered
as not imposed & shall in no manner prejudice the heir, even if the testator should otherwise
provide.
Tolentino:
 In contracts, an impossible condition annuls the contract.
 In gratuitous dispositions, the impossible condition is simply disregarded.
Balane: The first statement is inaccurate because donation is a contract & in a donation, the
impossible condition does not annul the contract. It is simply disregarded. The proper way to say
it is that:
 In an onerous transaction, an impossible condition annuls the conditional obligation.
 In a gratuitous disposition, as in a donation or testamentary disposition, an impossible

condition attached to the disposition is simply considered as not imposed.
Q: Why is there a difference?
A: Because in a donation as well as in a testamentary disposition, the causa or consideration is the

liberality of the donor or testator, as the case may be. Even if you take away the impossible
condition, there is still a reason for the disposition to exist- liberality. They (donation &
testamentary disposition) have both their underpinnings, liberality. But in an onerous transaction,
since an onerous prestation which is reciprocal requires concomitant performances, that impossible
condition becomes part of the causa. Therefore, if the condition is impossible, there is failure of
causa. In no causa, there is also no contract.
Paras:
 Positive suspensive condition to do an impossible/ illegal thing  The obligation is void

(Article 1183, par. 1.)
 A negative condition (not to do an impossible thing)  Just disregard the condition

 A condition not to do an illegal thing (negative)  This is not expressly provided for in
the provision but is implied. The obligation is valid.
EXAMPLE: "I will sell you a piece of land provided you do not plant marijuana on it."
Article 1184. The condition that some event happen at a determinate time shall extinguish
the obligation as soon as the time expires or if it has become indubitable that the event will
not take place.
Balane: This article refers to suspensive conditions. If the condition is resolutory, the effect is the
opposite.
Article 1185. The condition that some event will not happen at a determinate time shall
render the obligation effective from the moment the time indicated has elapsed, or if it has
become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have
probably been contemplated, bearing in mind the nature of the obligation.
Balane: This article refers to a suspensive condition.
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.
Balane: This article refers to a suspensive condition.
Doctrine of Constructive Compliance  There are three requisites in order that this article may
apply:
1. Intent on the part of the obligor to prevent fulfillment of the condition. The intent does not
have to be malicious. (intent to prevent)
2. Actual prevention of compliance by the obligor (actual prevention)
3. Constructive compliance can have application only if the condition is potestative. It can
also apply to mixed condition as to that part which the obligor should perform.
Kinds of Conditional OBLIGATIONS:
a. Suspensive Condition (Condition precedent)
Article 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when
the obligation imposes reciprocal prestations upon the parties, the fruits and interests during
the pendency of the condition shall be deemed to have been mutually compensated. If the
obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless
from the nature and circumstances of the obligation it should be inferred that the intention of
the person constituting the same was different.
 In OBLIGATIONS to do and not to do, the court shall determine, in each case, the
retroactive effect of the condition that has been complied with.
Balane:
This article refers to suspensive condition. This article sets forth the rule of retroactivity in an
obligation to give. This rule is logical but impractical. Many modern Civil Codes have discarded
it.
No Retroactivity as to the Fruits  Notice that there is no retroactivity with respect to the fruits.
The fruits are deemed to cancel out each other. If only one of the thing produces fruits, there is no
obligation to deliver the fruits.
Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case of a
suspensive condition.
Balane: This article refers to suspensive conditions.
Bring the appropriate actions  According to JBL Reyes, the phrase "may xxx bring the
appropriate actions" is inaccurate. To bring action is to file a suit. But the creditor is not
restricted to filing a suit.
The proper verb is not "bring" but "take." For example, in a sale of land subject to suspensive
condition, the creditor should have the suspensive condition annotated on the title of the land. This
is not bringing an appropriate action but taking an appropriate action.
The principle in this article is: Vigilantibus et non dormientibus jura subveniunt  which
means that the laws aid those who are vigilant, not those who sleep upon their rights.
Q: Why does Article 1188 give the creditor a recourse although technically the creditor still have
no right?
A: Because as a matter of fact, although technically the creditor still have no right, he is already
expecting a right. You cannot let the creditor sit & fold his arms & wait for his right of expectancy
to be rendered illusory.
Article 1189. When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages;
it is understood that the thing is lost when it perishes, or goes out of commerce, or
disappears in such a way that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be
borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the
rescission of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the
benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that
granted to the usufructuary. (1122)
(b) Resolutory Condition (Condition subsequent)
Balane: Article 1190 refers to resolutory conditions. This is just the opposite of Article 1189.
Article 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to each
other what they have received.
In case of the loss, deterioration or improvement of the thing, the provisions which, with
respect to the debtor, are laid down in the preceding article shall be applied to the party
who is bound to return.
As for the OBLIGATIONS to do and not to do, the provisions of the second paragraph of
article 1187 shall be observed as regards the effect of the extinguishment of the obligation.
Balane: A condition is a future & uncertain event upon which an obligation or provision is
made to depend.
Tolentino: Futurity & uncertainty must concur as characteristics of the event.
 A past thing can never be a condition. A condition is always future & uncertain.
Past event unknown to the parties  It is really the knowledge of the event which constitutes
the future. It is the knowledge which is future & uncertain.
EXAMPLE: "I will treat you for lunch if you get the highest score in the Civil Law Final
Exams (on the assumption that Prof. Balane has already finished checking the papers.)"
Here, the event (getting the highest score) is already a past event, yet the knowledge is
future & uncertain.
Condition compared to a term 
Condition Term
As to element Same, may be Same, always

of futurity past event future
unknown to
parties
in the aspect of uncertain certain

certainty
Conditions can either be:
1. Suspensive condition (condition precedent) wherein the happening of the event gives
birth to an obligation
2. Resolutory condition (condition subsequent) wherein the happening of the event will
extinguish the obligation.
c. WITH A TERM OR PERIOD:
Article 1180. When the debtor binds himself to pay when his means permit him to do so,
the obligation shall be deemed to be one with a period, subject to the provisions of article
1197.
Balane: A term is a future and certain event upon which the demandability (or extinguishment)
of an obligation depends.
Tolentino: Period must be (1) future (2) certain and (3) possible.
A term can either be:
1. Suspensive term (ex die- from the day) or one the arrival of which will make the
obligation demandable;
2. Resolutory term (in die- into the day) or one the arrival of which will extinguish the
obligation. The period after which the performance must terminate.
Terms classified according to source;
1. Legal, period fixed by law
2. voluntary, stipulated by parties
3. judicial, fixed/allowed by court
May also be, (a) express, specified
(b) tacit, e.g. stipulated to do some work which may only be done at a particular season.
Or,
1. Original period
2. Grace period, extension fixed by parties
Or
a. definite, fixed known date or time,
b. indefinite, event will happen but not known when
Effect of Period: OBLIGATION with term are demandable only when day fixed for
performance arrive; right of action arises only when date fixed arrives;
Article 1193. OBLIGATIONS for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
OBLIGATIONS with a resolutory period take effect at once, but terminate upon arrival
of the day certain.
A day certain is understood to be that which must necessarily come, although it may not
be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section.
MANRESA: A term or period is an interval of time, which, exerting an influence on an obligation

as a consequence of a juridical act, either suspends its demandability or produces its
extinguishment.
Distinguished from Condition:
CONDITION TERM / PERIOD
As to uncertain event an event that must necessarily

fulfillment come, whether on a date
known before hand or at a time
which cannot be predetermined
As to influence a condition has no effect upon the

on the gives rise to an existence of OBLIGATIONS,
obligation obligation or but only their demandability or
extinguishes performance
one already
existing
Effect May have NO retroactive effect, except

retroactive when there is a special
effect agreement
As to time may refer to a always refer to the future

past event
unknown to the
parties
As to will of a condition a period left to the debtor's will

debtor which depends merely empowers the court to
exclusively on fix such period
the will of the
debtor annuls
the obligation
Balane: In a (suspensive) term, the obligation has already arisen except that it is not yet
demandable.
Article 1194. In case of loss, deterioration or improvement of the thing before the arrival of the
day certain, the rules in article 1189 shall be observed.
Balane: There are three requisites in order for Article 1189 to apply--
1. There is loss, deterioration or delay

2. There is an obligation to deliver a determinate thing (on the part of the debtor)
3. There is loss, deterioration or improvement before the happening of the condition.
4. The condition happens.
Article 1195. Anything paid or delivered before the arrival of the period, the obligor being
unaware of the period or believing that the obligation has become due and demandable, may be
recovered, with the fruits and interests.
 Article 1195 applies only in OBLIGATION to give;
Balane:
Mistaken Premature Delivery  This article assumes 2 things:
(1) the delivery was by mistake;
(2) the mistake was discovered before the term arrives.
 Both the things & the fruits can be recovered.
If the term has already arrived, the question is moot & academic. But can he recover the fruits
produced during the meantime? It depends on what school of thought you follow:
Tolentino: According to one school of thought, the debtor is entitled to the fruits produced in the
meantime.
Caguioa: According to another school of thought, all the fruits received during the pendency of
the term belong to the creditor.
When fruits & interests cannot be recovered notwithstanding premature delivery:
1. When the obligation is reciprocal & there has been premature performance (by both
parties);
2. When the obligation is a loan in which the debtor is bound to pay interest;
3. When the period is for the creditor's exclusive benefit;
4. When the debtor is aware of the period & pays anyway. (Knowledge, tacit waiver of
benefit of term)
2. Presumed for whose benefit: BOTH
Article 1196. Whenever in an obligation a period is designated, it is presumed to have been

established for the benefit of both the creditor and the debtor, unless from the tenor of the same
or other circumstances it should appear that the period has been established in favor of one or of
the other.
Balane:
General rule: If a period is attached in an obligation, the presumption is that it is for the benefit of
both parties.
 The consequence is that the creditor cannot compel the performance before the arrival of
the term; the debtor cannot compel acceptance before the arrival of the term.
If the term is for the benefit of the creditor  The creditor can demand performance anytime;
but the debtor cannot insist on payment before the period.
If the term is for the benefit of the debtor  The creditor cannot demand performance anytime;
but the debtor can insist on performance anytime.
EXAMPLE:
"I promise to pay within 60 days." This is a term for the benefit of the debtor.
"I promise to pay Clara the sum of P100, 000 on or before Oct. 31, 1996." This is a term for the
benefit of the debtor.
-In contract of Loan, without interest, term is usually for benefit of debtor, thus he may pay in
advance;
-If there is stipulation as to interest, period is generally for both parties, debtor cannot pay in
advance vs. will of creditor; unless he also pays interest in full.
3. When NO period is fixed
Balane:
Cases where the Court may fix a period 
1. Article 1197, par. 1
Article 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the court may fix the duration
thereof.
The court shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the court shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the court, the period cannot be
changed by them.
Exceptions:
Article 1682. The lease of a piece of rural land, when its duration has not been fixed, is
understood to have been made for all the time necessary for the gathering of the fruits which the
whole estate leased may yield in one year, or which it may yield once, although two or more
years may have to elapse for the purpose.
Article 1687. If the period for the lease has not been fixed, it is understood to be from year to
year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to
week, if the rent is weekly; & from day to day, if the rent is to be paid daily. xxx
Article 1606 in pacto de retro sale where the period is not specified by the parties
Article 1606. The right referred to in article 1601 (the right of conventional redemption on the
part of the vendor a retro), in the absence of an express agreement, shall last four years from the
date of the contract.
XXX
 contract of services for an indefinite term (because fixing of a period by the court may
amount to involuntary servitude)
Article 1197. Xxx
The court shall also fix the duration of the period when it depends upon the will of the debtor.
Article 1191. Xxx
the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
Article 1687. xxx
However, even though a monthly rent is paid, & no period for the lease has been set, the court
may fix a longer term for the lease after the lessee has occupied the premises for over one year.
If the rent is weekly, the court may likewise determine a longer period after the lessee has been
in possession for over six months. In case of daily rent, the court may also fix a longer period
after the lessee has stayed in the place for over one month.
Article 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of article 1197.
CASE: Where obligation does not fix a period; When fixing a period is mere formality —
Case: Chavez vs. Gonzales, 32 SCRA 547.
Facts: In the early part of July 1963, Rosendo Chavez delivered to Fructuoso Gonzales, who is a
typewriter repairer, a portable typewriter for routine cleaning and servicing. Gonzales was not
able to finish job after some time despite repeated reminder. Gonzales merely gave assurances
but failed to comply with the same. In October 1963, Gonzales asked from Chavez the sum of
P6.00 for the purchase of spare parts which amount was duly given to the former. On October
26, 1963, Chavez asked for the return of the typewriter. Gonzales just delivered it in a wrapped
package. And it was only upon reaching home that Chavez found out that the typewriter was in
shambles, with the interior cover and some parts and screws missing. On October 29, 1963,
Chavez demanded the return of the missing parts and the P6.00 which was heeded to. Thereafter,
Chavez had the typewriter repaired for P89.85. Chavez sued for damages.
Issue: Whether or not Gonzales is liable for damages for the subsequent repair of the typewriter
of Chavez.
Held: YES. The SC found that both Chavez and Gonzales had a perfected contract for cleaning
and servicing of typewriter intending for Gonzales to finish the work at some future time
although such time was not specified and that such time had passed without the work having
been accomplished, for Gonzales returned the typewriter cannibalized and unrepaired, which in
itself is a breach of obligation, without demanding that he should be given more time to finish
the job or compensation for the work he had already done. The time for compliance having
evidently expired and there being a breach of contract by non-compliance, Gonzales cannot
invoke Article 1197 for he admitted non-performance by returning the typewriter that he was
obliged to repair. The fixing of a period would thus be a mere formality and would serve no
purpose than to delay. For such, Gonzales is liable under Article 1167 for the cost of the
execution of the obligation in a proper manner.
Case: Vicente Singson Encarnacion vs. Jacinta Baldomar, Oct. 4, 1946, J. Hilado.
Facts: Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila,
some six years ago leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a
month-to-month basis for the monthly rental of P35. After Manila was liberated in the last war,
specifically on March 16, 1945, and on April 7, of the same year, plaintiff Singson Encarnacion
notified defendants, the said mother and son, to vacate the house above-mentioned on or before
April 15, 1945, because plaintiff needed it for his offices as a result of the destruction of the
building where said plaintiff had said offices before. Despite this demand, defendants insisted
on continuing their occupancy. When the original action was lodged with the Municipal Court
of Manila on April 20, 1945, defendants were in arrears in the payment of the rental
corresponding to said month, the agrees rental being payable within the first five days of each
month. That rental was paid prior to the hearing of the case in the municipal court, as a
consequence of which said court entered judgment for restitution and payment of rentals at the
rate of P35 a month from May 1, 1945, until defendants completely vacate the premises. In the
Court of First Instance, the defendants interposed defense that the contract which they had
celebrated with plaintiff since the beginning authorized them to continue occupying the house
indefinitely and while they should faithfully fulfill their OBLIGATIONS as respects the
payment of the rentals. However, Vicente Singson Encarnacion, jr., contended that the lease had
always and since the beginning been upon a month-to-month basis. The Court of First Instance
gave more credence to the lessor.
Issue: Whether the contract can be interpreted as a month-to-month basis thereby giving more
credence to the effect that herein lessor can eject lessee at anytime possible.
Held: YES. We think that the Court of First Instance was right in so declaring. Furthermore,
carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would
leave to the sole and exclusive will of one of the contracting parties (defendants in this case) the
validity and fulfillment of the contract of lease, within the meaning of article 1256 of the Civil
Code, since the continuance and fulfillment of the contract would then depend solely and
exclusively upon their free and uncontrolled choice between continuing paying the rentals or not,
completely depriving the owner of all say in the matter. If this defense were to be allowed, so
long as defendants elected to continue the lease by continuing the payment of the rentals,
the owner would never be able to discontinue it; conversely, although the owner should
desire the lease to continue, the lessees could effectively thwart his purpose if they should
prefer to terminate the contract by the simple expedient of stopping payment of the rentals.
This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d ed.,
pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.)
Case: Dario and Gaudencio Eleizegui vs. Manila Lawn Tennis Club, May 19, 1903, J.
Arellano.
Facts: This suit concerns the lease of a piece of land for a fixed consideration and to endure at
the will of the lessee. By the contract of lease the lessee is expressly authorized to make
improvements upon the land, by erecting buildings of both permanent and temporary character,
by making fills, laying pipes, and making such other improvements as might be considered
desirable for the comfort and amusement of the members. "The court is of the opinion that the
contract of lease was terminated by the notice given by the plaintiff on August 28 of last year . . .
." And such is the theory maintained by the plaintiffs, which expressly rests upon article 1581 of
the Civil Code, the law which was in force at the time the contract was entered into (January 25,
1890). The judge, in giving to this notice the effect of terminating the lease, undoubtedly
considers that it is governed by the article relied upon by the plaintiffs, which is of the following
tenor: "When the term has not been fixed for the lease, it is understood to be for years when an
annual rental has been fixed, for months when the rent is monthly. . . ." The second clause of the
contract provides as follows: "The rent of the said land is fixed at 25 pesos per month." (P. 11,
Bill of Exceptions.)
In accordance with such a theory, the plaintiffs might have terminated the lease the month
following the making of the contract — at any time after the first month, which, strictly
speaking, would be the only month with respect to which they were expressly bound, they not
being bound for each successive month except by a tacit renewal (aright 1566) — an effect
which they might prevent by giving the required notice. The OBLIGATIONS which, with the
force of law, the lessors assumed by the contract entered into, so far as pertaining to the issues,
are the following: "First. . . . They lease the above-described land to Mr. Williamson, who takes
it on lease, . . . for all the time the members of the said club may desire to use it . . . Third. . . .
the owners of the land undertake to maintain the club as tenant as long as the latter shall see fit,
without altering in the slightest degree the conditions of this contract, even though the estate be
sold."
It is evident that they had no intention of stipulating that they reserved the right to give such
notice. Clause 3 begins as follows: "Mr. Williamson, or whoever may succeed him as secretary
of said club, may terminate this lease whenever desired without other formality than that of
giving a month's notice. The owners of the land undertake to maintain the club as tenant as long
as the latter shall see fit."
Although the relief asked for in the complaint, drawn in accordance with the new form of
procedure established by the prevailing Code, is the restitution of the land to the plaintiffs (a
formula common to various actions), nevertheless the action which is maintained can be no other
than that of desahucio, in accordance with the substantive law governing the contract. The lessor
— says article 1569 of the Civil Code — may judicially dispossess the lessee upon the expiration
of the conventional term or of the legal term; the conventional term — that is, the one agreed
upon by the parties; the legal term, in defect of the conventional, fixed for leases by articles 1577
and 1581.
Issue: Whether or not the duration of the term of lease can be fixed by the couright
Held: The Civil Code has made provision for such a case in all kinds of OBLIGATIONS. In
speaking in general of OBLIGATIONS with a term it has supplied the deficiency of the former
law with respect to the "duration of the term when it has been left to the will of the debtor," and
provides that in this case the term shall be fixed by the court. (Aright 1128, sec. 2.) In every
contract, as laid down by the authorities, there is always a creditor who is entitled to demand the
performance, and a debtor upon whom rests the obligation to perform the undertaking. In
bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this
contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554,
and is the debtor with respect to the OBLIGATIONS imposed by articles 1555 and 1561. The
term within which performance of the latter obligation is due is what has been left to the will of
the debtor. This term it is which must be fixed by the court.
Case: Philippine Banking Corporation representing the estate of Justina Santos Y Canon
Faustino, deceased vs. Lui She in her own behalf and as administratrix of the intestate
estate of Wong Heng, deceased., 21 SCRA 53.
Facts: Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a
piece of land in Manila. This parcel, with an area of 2,582.30 square meters, is located on Rizal
Avenue and opens into Florentino Torres street at the back and Katubusan street on one side. In
it are two residential houses with entrance on Florentino Torres street and the Hen Wah
Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong
Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time lessee of a
portion of the property, paying a monthly rental of P2,620.
On September 22, 1957 Justina Santos became the owner of the entire property as her sister died
with no other heir. Then already well advanced in years, being at the time 90 years old, blind,
crippled and an invalid, she was left with no other relative to live with. Her only companions in
the house were her 17 dogs and 8 maids. Her otherwise dreary existence was brightened now and
then by the visits of Wong's four children who had become the joy of her life. Wong himself was
the trusted man to whom she delivered various amounts for safekeeping, including rentals from
her property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid
as lessee of a part of the Rizal Avenue property. Wong also took care of the payment; in her
behalf, of taxes, lawyers' fees, funeral expenses, masses, salaries of maids and security guard,
and her household expenses.
"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos
executed on November 15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the
portion then already leased to him and another portion fronting Florentino Torres street. The
lease was for 50 years, although the lessee was given the right to withdraw at any time from the
agreement; the monthly rental was P3,120. The contract covered an area of 1,124 square meters.
Ten days later (November 25), the contract was amended (Plff Exh. 4) so as to make it cover the
entire property, including the portion on which the house of Justina Santos stood, at an additional
monthly rental of P360. For his part Wong undertook to pay, out of the rental due from him, an
amount not exceeding P1,000 a month for the food of her dogs and the salaries of her maids.
On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to
buy the leased premises for P120,000, payable within ten years at a monthly installment of
P1,000. The option, written in Tagalog, imposed on him the obligation to pay for the food of the
dogs and the salaries of the maids in her household, the charge not to exceed P1,800 a month.
The option was conditioned on his obtaining Philippine citizenship, a petition for which was then
pending in the Court of First Instance of Rizal. It appears, however, that this application for
naturalization was withdrawn when it was discovered that he was not a resident of Rizal. On
October 28, 1958 she filed a petition to adopt him and his children on the erroneous belief that
adoption would confer on them Philippine citizenship. The error was discovered and the
proceedings were abandoned.
On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the
term of the lease to 99 years, and another (Plff Exh. 6) fixing the term of the option of 50 years.
In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees
to respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later
date (November 4, 1959) she appears to have a change of hearight Claiming that the various
contracts were made by her because of machinations and inducements practiced by him, she now
directed her executor to secure the annulment of the contracts.
On November 18 the present action was filed in the Court of First Instance of Manila. The
complaint alleged that the contracts were obtained by Wong "through fraud, misrepresentation,
inequitable conduct, undue influence and abuse of confidence and trust of and (by) taking
advantage of the helplessness of the plaintiff and were made to circumvent the constitutional
provision prohibiting aliens from acquiring lands in the Philippines and also of the Philippine
Naturalization Laws."
From this judgment both parties appealed directly to this Couright After the case was submitted
for decision, both parties died, Wong Heng on October 21, 1962 and Justina Santos on December
28, 1964. Wong was substituted by his wife, Lui She, the other defendant in this case, while
Justina Santos was substituted by the Philippine Banking Corporation.
Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the
lease contract (Plff Exh. 3) should have been annulled along with the four other contracts (Plff
Exhs. 4-7) because it lacks mutuality; because it included a portion which, at the time, was in
custodia legis; because the contract was obtained in violation of the fiduciary relations of the
parties; because her consent was obtained through undue influence, fraud and misrepresentation;
and because the lease contract, like the rest of the contracts, is absolutely simulated.
Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from
this agreement." It is claimed that this stipulation offends article 1308 of the Civil Code which
provides that "the contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them."
Issue: Whether or not the option given to Wong to buy the property despite him being an alien is
valid.
Held: NO. Taken singly, the contracts show nothing that is necessarily illegal, but considered
collectively, they reveal an insidious pattern to subvert by indirection what the Constitution
directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option
giving an alien the right to buy real property on condition that he is granted Philippine
citizenship. As this Court said in Krivenko v. Register of Deeds:20
[A]liens are not completely excluded by the Constitution from the use of lands for
residential purposes. Since their residence in the Philippines is temporary, they may be
granted temporary rights such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by
virtue of which the Filipino owner cannot sell or otherwise dispose of his property, 21 this to last
for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership
whereby the owner divests himself in stages not only of the right to enjoy the land ( jus
possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it ( jus
disponendi) — rights the sum total of which make up ownership. It is just as if today the
possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until
ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this
is just exactly what the parties in this case did within the space of one year, with the result that
Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done,
then the Constitutional ban against alien landholding in the Philippines, as announced in
Krivenko v. Register of Deeds,22 is indeed in grave peril.
Case: Lim vs. People
Facts: Lourdes Lim is a businesswoman who went to Maria Ayroso and proposed to the latter to
sell Ayroso’s tobacco. Ayroso agreed to the proposition to sell her tobacco consisting of 615
kilos at P1.30/kilo. The agreement reads: “This is to certify that I have received from Maria
Ayroso of Nueva Ecija, 615 kilos of leaf tobacco to be sold at P1.30/kilo. The proceed in the
amount of P799.50 will be given to her as soon as it was sold”. Of the P799.50, only P240 was
paid by Lim. Lim failed to pay the balance. Ayroso filed an Estafa case against Lim.
Issue: Whether Lim’s obligation to pay Ayroso is immediately demandable as soon as the
tobacco was disposed of.
Held: YES. The SC ruled that it was clear in the agreement that the proceeds of the sale of the
tobacco should be turned over to the complainant as soon as the same was sold, or, that the
obligation was immediately demandable as soon as the tobacco was disposed of. Hence, Article
1197 of the NCC, which provides that the court may fix the duration of the obligation if it does
not fix a period, does not apply. The agreement cannot be understood to mean that the duration
of the period depends upon the will of the debtor which the court can fix the duration thereof.
Instead the agreement between them was one of agency with the OBLIGATION to return the
unsold tobacco and the proceeds of the sale demandable.
Case: Gregorio Araneta, Inc. vs. Phil. Sugar Estates Dev., May 31, 1967, J.B.L. Reyes.
Facts: J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City,
otherwise known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its
name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof
with an area of 43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine
Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of purchase
and sale with mortgage, that the buyer will —
Build on the said parcel land the Sto. Domingo Church and Convent
while the seller for its part will —
Construct streets on the NE and NW and SW sides of the land herein sold so that the
latter will be a block surrounded by streets on all four sides; and the street on the NE
side shall be named "Sto. Domingo Avenue;"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing
the streets, is unable to finish the construction of the street in the Northeast side named (Sto.
Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958,
Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co.,
Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in
the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to
perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the
latter particularly setting up the principal defense that the action was premature since its
obligation to construct the streets in question was without a definite period which needs to he
fixed first by the court in a proper suit for that purpose before a complaint for specific
performance will prosper.
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period
within which defendants will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did
not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation
and that the evidence presented at the trial was insufficient to warrant the fixing of such a period.
Issue: Whether the period fixed by the court is proper.
Held: We agree with the petitioner that the decision of the Court of Appeals, affirming that of
the Court of First Instance is legally untenable. The fixing of a period by the court under Article
1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner
(defendant below) placed the absence of a period in issue by pleading in its answer that the
contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner
Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation to construct
and complete the streets." Neither of the court below seems to have noticed that, on the
hypothesis stated, what the answer put in issue was not whether the court should fix the time of
performance, but whether or not the parties agreed that the petitioner should have reasonable
time to perform its part of the bargain. If the contract so provided, then there was a period fixed,
a "reasonable time;" and all that the court should have done was to determine if that reasonable
time had already elapsed when suit was filed if it had passed, then the court should declare that
petitioner had breached the contract, as averred in the complaint, and fix the resulting damages.
On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to
dismiss the action for being premature. But in no case can it be logically held that under the plea
above quoted, the intervention of the court to fix the period for performance was warranted, for
Article 1197 is precisely predicated on the absence of any period fixed by the parties.
Even on the assumption that the court should have found that no reasonable time or no period at
all had been fixed (and the trial court's amended decision nowhere declared any such fact) still,
the complaint not having sought that the Court should set a period, the court could not proceed to
do so unless the complaint in as first amended; for the original decision is clear that the
complaint proceeded on the theory that the period for performance had already elapsed, that the
contract had been breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is
clear that the period can not be set arbitrarily. The law expressly prescribes that —
the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that
"the proven facts precisely warrant the fixing of such a period," a statement manifestly
insufficient to explain how the two period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court
must first determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor)," but from the nature and the circumstances it can be
inferred that a period was intended" (Aright 1197, pars. 1 and 2). This preliminary point
settled, the Court must then proceed to the second step, and decide what period was "probably
contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period
merely because in its opinion it is or should be reasonable, but must set the time that the
parties are shown to have intended. As the record stands, the trial Court appears to have pulled
the two-year period set in its decision out of thin air, since no circumstances are mentioned to
support it. Plainly, this is not warranted by the Civil Code.
Case: Pacifica Millare vs. Hon. Hernando, Antonio Co and Elsa Co., June 30, 1987, J.
Feliciano.
Facts: Pacifica Millare, lessor and spouses Co lessee in a 5-year contract of lease of People’s
Restaurant, a commercial establishment located at the corner of McKinley and Pratt Streets in
Bangued, Abra. At the last week of the 5-year period, the lessor offered to extend the lease if
spouses Co will agree to increase rental from P350 to P1200 a month. The spouses counter-offered
the rental to P700 but this discussion was set aside. Later, a demand letter was issued by lessor to
vacate premises without renewal of expired contract which the lessor disagreed and filed an
ejectment case. The spouses Co filed a separate case for the court to order renewal of contract and
fix rental at P700 a month. Spouses deposited monthly rental in court while the plaintiff filed
Motion to Dismiss for lack of jurisdiction and no cause of action but the same was denied.
Issue: Whether the Spouses Co have valid cause of action in claiming renewal of lease contract.
Held: YES. There was implied renewal of lease contract but only on a month-to-month basis, but
not for another 5 years. Hence, par. 1 of Article 1197 is clearly inapplicable, since the Contract of
Lease did in fact fix an original period of 5 years, which had expired. It is also clear from par. 13 of
the contract that the parties reserved to themselves the faculty of agreeing upon the period of the
renewal contract. The 2nd par. of Article 1197 is equally inapplicable since the duration of the
renewal period was not left to the will of the lessee alone, but rather to the will of both the lessor &
the lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists.
Here, the contract was not renewed at all, there was in fact no contract at all the period of which
could have been fixed. SC agreed the TRO and injunction.
Article 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of article 1197.
4. When debtor loses the benefit of period
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he gives
a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;
(5) When the debtor attempts to abscond.
(6) Article 2109 - If the creditor is deceived on the substance or quality of the thing pledged, he
may either claim another thing in its stead, or demand immediate payment of the principal
obligation. (The sixth ground was added by Prof. Balane.)
Effects of Loss of Term (Article 1198):
 OBLIGATION becomes immediately due & demandable even if period has not yet
expired.
 OBLIGATION is converted to a pure OBLIGATION
 Insolvency of DEBTOR – need not be judicially declared; state of financial difficulty is

enough.
Balane: In number one, factual insolvency is enough. A judicial declaration of insolvency is not
required.
Summary of the Different Kinds of OBLIGATIONS As to Perfection and Extinguishment
DIFFERENT KINDS OF OBLIGATIONS:
PURE AND CONDITIONAL OBLIGATIONS – when the OBLIGATION contains no terms

or conditions;
CONDITIONAL OBLIGATIONS – one which is subject to condition;
CONDITION – every future and uncertain event upon which an OBLIGATION or

provision is made to depend;
FUTURE & UNCERTAIN EVENT – the acquisition or resolution of the rights is made to
depend by those who execute the juridical act;
CLASSIFICATION OF CONDITIONS:
1. SUSPENSIVE – the happening of the former gives rise to an OBLIGATION;
2. RESOLUTORY – the happening of the latter extinguishes rights already existing.
PAST BUT UNKNOWN – a condition may refer to past event unknown to the parties;
IMPOSSIBLE CONDITION:
1. PHYSICALLY IMPOSSIBLE – when it is contrary to law of nature;
2. JUDICIALLY IMPOSSIBLE – when contrary to law, morals, good customs and public
safety
PURE OBLIGATIONS  when it is not subject to a term, period and no condition;
- demandable at once
- it is immediate demandability, give time for debtor to comply
PERIOD- is an event that is future but certain (just a matter of time); e.g. passing this class
(Civil law Review 2)
PAST EVENT – cannot be future event, cannot be considered uncertain;
SUSPENSIVE CONDITION:
*rights are acquired, upon the happening of a condition.
Article 1181 – OBLIGATION created upon the happening of a condition
RESOLUTORY- extinguished, or loss of existing rights, upon the happening of a condition
*Thus a contract may be perfected but its demandability suspended.
Article 1186 – deemed constructively fulfilled; applied only to suspensive not to resolutory
condition
Article 1187 – effects of conditional OBLIGATION to give;
E.g. A sold a house & lot to B, 1M
Condition: if B will pass the bar exam
Term: effect retroacts after the passing is announced on April;
Jan.2004 Sept. 2004 Oct.04 Apr.05
perfection (without condition/ condition
Pure)
[1544] Retroactive effect
Article 1188 – preserve his interest
PROTECT HIS EXPECTANCY
1. Register with the Registry of Property
2. witness
3. possession in good faith
4. Injunction  if the sell was not consummated or not for sale
RESOLUTORY CONDITION
Article 1190 – no exception, nothing will be left.
SUSPENSIVE CONDITION – upon the happening of the condition, the OBLIGATION exists
(“existence of OBLIGATION is affected”)
CLASSIFICATION OF CONDITION:
1. POTESTATIVE – when the fulfillment of the condition depends upon the will of the
party to the OBLIGATION;
2. CAUSAL – depends upon chance 2nd or 3rd person
3. MIXED – depends partly upon the will of the party & partly upon chance or a 3rd person
Article 1182: Potestative – sole will of the debtor
 Potestative suspensive is VOID.
Example. A will give 5% commission to B, but it depends on the will of A, void;
 All other potestative conditions, valid.
Article 1183 – impossible condition
1. physical impossibility
2. legal impossibility
Article 873 – impossible testamentary conditions
 disregard
Ex. Article 727 – donation
CONDITION PERIOD / TERM
1. future & uncertain 1. future &certain

event
2. suspensive condition 2.suspensive

period/“demandability”
3. resolutory condition 3. resolutory period

SUSPENSIVE PERIOD – prior to the period, there is already an OBLIGATION, but it is

suspensive by the period;
Article 1164- the OBLIGATION to deliver arises upon the perfection of the contract if subject
to suspensive period & not suspensive condition
RESOLUTORY PERIOD – “terminated” but the effects that accrued in the past will remain;
RESOLUTORY CONDITION – “extinguishes” as if nothing happens; retroactive effect of

OBLIGATION;
EFFECTS OF FORTUITOUS EVENT IN PERIOD / TERM:
-the contract shall be deemed suspended but the Fortuitous Event shall not stop the running of
the term or period agreed upon;
Article 1195 – advanced payment
Article 1196 – benefit of period
Presumption – if the period is designated, the benefit is for both the creditor & debtor
Exception: the tenor of the same or other circumstances, it should appear that the period has
been established in favor of one or the other;
Article 1197 – 3 reasons why the court will fix the period:
1. if the OBLIGATION does not fix a period, but from its nature & circumstances it
can be inferred that a period was intended by the parties;
2. in the duration of the time depends upon the will of the debtor
3. if the debtor binds himself to pay when his means permit him to do so
Article 1198 – memorize!
Article 1198. The debtor shall lose every right to make use of the period WHEN:
(1) after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) he does not furnish to the creditor the guaranties or securities which he has promised;
(3) by his own acts he has impaired said guaranties or securities after their establishment,
and when through a fortuitous event they disappear, unless he immediately gives new
ones equally satisfactory;
(4) the debtor violates any undertaking, in consideration of which the creditor agreed to the
period;
(5) the debtor attempts to abscond.
Q: How could there be guaranty when debtor is insolvent?
A: 3rd person (surety)
Q: when is OBLIGATION due & demandable even if period has expired?
A: if debtor has lost right to make use of such period (Article 1198)
Illustrations:
1. As to when the obligation will arise? It will depend on the nature of the obligation. How
would you know what kind of obligation? It depends on the stipulation of the party, if the
source of obligation is the law then the law may provide how the obligation may be complied
with. Having said that another important consideration, we should go to the nature of
the obligation as to prestation whether it is an obligation to give, to do, or not to do
because whatever may be the cause of prestation there will be general rules as to how
the obligation are to be complied with.
2. Specifically xxx a valid obligation, an obligation to give a generic thing what would be
the source of this obligation? What contract? Would that be a valid obligation as to the
sale of the car? CAN THERE BE A VALID OBLIGATION ARISING FROM A
CONTRACT OF SALE INVOLVING A GENERIC THING? No specific thing has
been agreed by a party. When would there be a valid sale of a car which is a generic
car? When a thing, though generic is capable of being determined without a need of a new
agreement. Therefore, a car per se as an object of a sale cannot be a valid sale.
Therefore, may there be a valid obligation to deliver a generic thing as generic as a car
or a condo unit, if there is such obligation it will arise from what source? Yes, it may
arise from other sources like a legacy, in a will a car is given to an heir, maybe a donation
involving a car, no particular, the law does not require a specific thing in order for an
obligation to arise.
3. Assuming in the will of X a car was given, I hereby give a car to my favorite grandchild
A, now upon the death of X, the executor delivered to A a brand new Toyota Yaris, A
refused to accept the car and demanded for a brand new Mitsubishi lancer, who is
correct? In an obligation to deliver a generic thing and the features of the thing has not been
determined, the law provides that the debtor cannot deliver an inferior kind neither the
creditor can demand for a superior thing. The problem in this rule is that how would we
know if the thing being offered is just the appropriate thing, what is superior and
inferior is very subjective? The purpose of the testator. What do you think would be the
purpose of the testator that the grandchild is entitled to a better car? When for instance
the purpose of the testator is to give the grandchild a race car. Having said that, therefore
the child may be entitled to a car better than Yaris? Not necessarily. So what possible
circumstances would affect the claim? If the estate cannot afford the car, the legitimes
might be affected. So what is the solution? May be the executor may deliver a cheaper car
like an altis not an evolution. Again sec. 1246 is very much relevant rule as regards
obligation to deliver a generic thing.
4. A obliged himself to deliver a brand new Mitsubishi lancer dlx 2008 black, due October
30, October 25, the B creditor demanded for the delivery of the car, A did not deliver
until Nov. 1, the car he intended to deliver to B was destroyed probably of earthquake,
can A be compelled to deliver the car? Yes the debtor can be compelled to deliver the
thing. Is A already in default? The demand here is premature; demand should be made
when the obligation is already due for a person to incur in delay. Having said that can A be
compelled to perform the obligation? Yes because the reason here is the object involved is
a generic thing and when a generic thing is lost because of fortuitous event, the obligation is
not extinguished because generic things do not perish. In other words, in OBLIGATIONS
to give a very important consideration is whether a thing to be delivered is generic or
determinate.
5. Obligation to deliver a limited generic thing, like one of the horses of A, 5 of the horses
of A died, what is the effect? It depends on the number of horses that A has, because if A
still has other horses then there are other horses that may be delivered, the obligation is not
extinguished. An obligation to deliver a limited generic thing will only be extinguished if
all of the thing belonging to that group will perish due to fortuitous event.
6. An obligation to deliver a determinate thing, the principal obligation of the debtor here
is? The very thing which he promised to deliver in other words if A the debtor promised to
deliver to B his Toyota Yaris, but instead, he offered to deliver brand new MB sporights
car worth 4M, will the obligation be extinguished? It may be extinguished; while the
creditor may not be compelled to he may accept the delivery of another thing. Now in this
scenario, what is the mode of extinguishment? Novation, more specifically, dacion in
payment which shall be governed by law on sales.
7. What are the accessory OBLIGATIONS of an obligation to deliver a generic thing? An

obligation to preserve and to take good care of the thing with the diligence of a father of a
good family. If the debtor xxx however, the creditor wanted to hold the debtor liable for
the loss, but the creditor was not able to prove that the debtor failed to exercise due
care, can the debtor be held liable? Yes, if there is another standard of care required, also
known as utmost diligence. Therefore, if there is no stipulation as to degree of diligence,
therefore the degree of diligence is diligence of a good father of a family? Not
necessarily, the law may provide for the degree of diligence necessary, like what law, like the
law on common carrier.
8. A obliged himself to deliver and to transfer ownership to B a female pig, the agreement
was entered January 1, the delivery was made May 1, however, when the pig was
delivered to B, he demanded for the delivery of piglets, the piglets was born in February
15, does A have the right over the piglet? It will depend when the time the obligation to
deliver arises because the law provides that the creditor has the right to the fruits of the thing
from the time the obligation to deliver arises, however, he will only have real rights over the
fruits when the same has been delivered. This reasonable because for example A owns the
pig, if he was aware that in feb 15 the pig is pregnant, therefore he would want to
deliver the pig only after 4 months when the pig has already gave birth. Therefore the
obligation as to when to deliver will depend on? First as to the answer that the
obligation will become due upon demand in what aspect will demand affect the time the
obligation will become due? Do you agree that an obligation becomes demandable upon
demand? As I mentioned earlier, you cannot demand if the obligation is not yet due,
therefore demand has nothing to do with being due, because if it is not yet due you cannot
demand validly, therefore the effect of demand is what? To suspend the running of the
prescriptive period. Therefore an obligation becomes due when? It depends on the
obligation. What kind of obligation? Whether the obligation is pure, conditional, or with a
term. Thus, in which obligation or OBLIGATIONS would the obligation be due and
demandable at once? Pure obligation and conditional obligation when the condition is
resolutory because upon the happening of the resolutory condition it will extinguish the
obligation.
9. When would therefore an obligation be considered a pure obligation? A pure obligation

is considered as such when it does not depend upon a future and uncertain event this is
apparently correct, do you agree with this? This is wrong, why wrong? It should be future
or uncertain event, why or where lies the difference in or and and? if and it can pertain to
only condition and you are not pertaining to term, while if you use or future will pertain to a
term, thus, if or is used, both the term and condition is excluded.
10. A promissory note is what kind of obligation as to perfection and extinguishment?

According to the SC in the case of Pay v. Palanca, it appears to be an alternative obligation, it
may be considered as a pure or conditional obligation, because as worded there appears to be
a condition but it also appears that it is demandable at once. What was the phrase in that
promissory note which is the basis that the same is with condition? Upon receipt of the
share from the estate of Don Palanca. On the other hand, the phrase UPON DEMAND is
the basis why the PN seemed to be a pure obligation. The trial court ruled that the PN was
a pure obligation, the judge here asked the plaintiff, under what cause of action have
you filed this case, upon receipt or upon demand? The plaintiff said upon demand, the
trial court here held that the action for compel performance has already prescribed. A
PROMISSORY NOTE IS CONSIDERED A PURE OBLIGATION, therefore it is
demandable at once, the prescriptive period begins to run from the time the cause of
action accrued, in this case the period of prescription began to run at the time of
execution.
11. BAR EXAM QUESTION: A grandfather promised the grandchild that he will give the
GC a brand new car if he passed the bar examination, thereafter the GC passed the bar
exam, the GC demanded the GF said that his obligation is void because it depends upon
a potestative condition, is the GF correct? In this case, the condition is passing the bar
exam, and therefore the answer is the obligation is valid because the condition is not purely
potestative, the condition does not purely depend on the will of the debtor. The rule relative
in this case is if the happening of the condition depends upon the sole will of the debtor
the obligation is void. Having said this, aright 1182, in a conditional obligation when the
condition depends solely upon the will of the debtor it is always void correct? Not
necessarily. When may it be a valid obligation? When the condition is resolutory. What is
the rationale behind this, why would the law consider an obligation void when it
depends on a suspensive condition, the happening of which depends solely on the will of
the debtor? Because then the debtor may make sure that the obligation will not happen.
What if the debtor said, I will give you my car if I go to Baguio, this is void, but what if
he went to Baguio 2 days after, can he be compelled to deliver his car? The obligation is
void; a supervening event that makes the obligation valid will not make the void obligation
valid. Passing the bar exam is a mixed obligation, CASUAL, in other words passing the
bar is not dependent upon the will of the examinee, why? Because it will also depend
upon the SC, or it depends upon the examiner. Let’s assume that passing the bar is a
potestative condition, therefore the GF was correct that his obligation is void? No, why
not? Because in order that the obligation to be void, the happening of the event must depend
solely on the will of the debtor, here, the GF will not take the exam, the GC, so the
happening of the condition does not depend on his own will.
12. If the debtor promised to pay “if his son does not die of cancer within one year” what is
the status of the obligation? There are two important provisions in relation to effect
conditions to OBLIGATIONS are aright 1182 or the provision about impossible
obligation. When the condition is an impossible condition, it will annul the obligation,
however the SC will not use the phrase shall annul because in fact the obligation is
void, shall annul presupposes valid but it shall be annulled, which is wrong in the first
place the obligation is impossible, the obligation will never arise. The more accurate
statement is THE OBLIGATION IS VOID. In this problem what kind of condition is
involved? If the son does not die of cancer within 1 year. This condition is? Suspensive.
Passing the bar exam, give me an example when it would be a resolutory condition? I
will give continuous support until you pass the bar exam. In the first problem, if his son
does not die, what kind of condition? Aside from suspensive, it is possible, it is negative,
and mixed condition not only dependent on the will of the debtor but other factors as well.
Having said this, if the obligation is an impossible condition, therefore the obligation
may not be a valid obligation? It may, if the condition is negative impossible condition,
because under the law, the law provides that the negative impossible condition is deemed not
written, therefore the effect is? The obligation becomes a pure obligation because no
condition is attached to the obligation. In this discussion therefore, the happening of the
condition does not depend solely on the will of the debtor, the condition is also possible,
so when will the obligation become due? If the son does not die of cancer after 1 year.
Even before the expiration of period may the son be compelled to pay? Yes when the son
recovers from cancer or when the son dies of other causes not cancer.
13. A agreed with B, he promised to give his condo unit to B if B will not become a priest in
10 years. 2 weeks after the agreement, B entered the seminary; therefore it is already
certain the obligation will not arise? The condition is suspensive; the condition may still be
demandable. Because when B entered the seminary it does not necessarily confirm that he
will become a priest because he might still get out of the seminary. The condition here is
that B will not become a priest, this is a negative condition, in a negative condition,
ordinarily, and when will it be certain that the condition will not arise? If within the 10th
year he already becomes a priest. Therefore, in relation to the obligation, if 2 weeks after
the obligation B entered the seminary? Not necessarily.
14. The debtor prevented the happening of the condition; he may be compelled to perform
the obligation? Not necessarily, it must be an intention of the debtor. Assuming he
voluntarily prevented, does this mean that he is compelled? Not necessarily. When will
the debtor voluntarily prevent the happening of the condition and the performance of
obligation will not arise? When he prevented the happening of the condition as matter of a
right.
15. BAR EXAM QUESTION: In 2001 A obliged himself to deliver a house and lot to B
upon B’s passing the bar exam, B passed the bar exam in 2005, however when B passed
the bar exam it so happen that A already sold the house and lot to C in 2003, who has
the better right over the house and lot? B. the effect of the happening of the condition in a
conditional obligation will retroact to the time of the constitution of the agreement as if the
condition has already happened before the property was sold to C, this does not have an
exception? The exception is when C is a buyer in good faith, when would C be a buyer in
good faith? when the agreement between A and B is not registered. Assuming that B has a
better right, therefore B demanded for the delivery of the property and he also
demanded for the rental, is it a valid claim? this may seem a unilateral obligation,
although a good answer is if the obligation of A is unilateral obligation, who is entitled to
the fruits if this problem pertains to a unilateral obligation, in the first place what
transaction may have been entered into by A and B in the obligation to give? it may be
xxx so who will be entitled? the donor, why the donor absolutely? No it is very clear from
the agreement of the party that the fruits will pertain to the creditor from the time of
constitution. If this is donation when will the creditor be entitled to the fruits? Upon the
happening of the condition unless it is shown that the intention of the debtor is to give to the
creditor even the fruits of the property. However, if the obligation is reciprocal? In the
contract of sale, and therefore what is considered the fruits in relation to the obligation of B,
as to A the fruit is the rental, in the first place if the obligation is sale what is obligation of
B, payment and interest. The payment and interest are the fruits.
16. Before the happening of the condition, what is the implication, did the condition happen
or not? Not yet. Before the happening of the condition what if an action was filed by the
creditor against the debtor will that action prosper? Yes it may prosper it will depend on
the action, whether it is xxx even if the right of the creditor is an inchoate right such right is
already protected. Example of this action: Annotation so that third persons will be bound by
their agreement.
17. Obligation to deliver a condo unit, before of the happening of the condition, the debtor
had the condo renovated, the condition happened, the creditor demanded for the
delivery of the condo unit, the debtor claimed that he can only be compelled to deliver if
he is reimbursed for the expenses of the renovation, until then he has the right to retain
the condo unit, is the contention correct? The debtor has the right to remove those that
may be removed without damaging the property.
18. A term pertain to an event, correct? Yes. When may a term pertain to an event? When
the event is uncertain, like what? Death. But the definite term example? Dec. 25, 2009.
Now, is it correct to say that just like a conditional obligation, in obligation with a term,
depending whether the term is suspensive or resolutory the obligation will arise or the
obligation will be extinguished? The error in the statement is when it provides that upon the
arrival of the period the obligation arises because in an obligation with a term there is already
an obligation, the arrival of the period will result in the demandability of the obligation,
because since this is a term IT IS CERTAIN TO HAPPEN, THE PERIOD WILL ARRIVE
BUT THE TIME OF HAPPENING IS JUST UNCERTAIN.
19. The kinds of periods discussed in the case of Eleizegui: Legal, voluntary. There will
always be a period in contract of sale? No. when will there be a period in a contract of
sale? Period as to payment of the price which is known as sale on credit, if it is installment
sale on installment. This is correct because even on lease there is a period. Legal – a period
fixed by law, Example: Period provided by law like in contracts of lease if the parties failed
to agree as to the period, depends on the manner of payment if annually 1 year and if
monthly 30 days. Judicial period – Aright 1180 if the obligor will pay if his means permits
him to do so.
20. BAR EXAM QUESTION: A borrowed money from B in Jan 1 payable at the end of the
year, the same was secured by a real estate mortgage, they agreed that B can occupy the
house and lot during the period agreed upon, however, by June 30 of that year, A
offered to pay the entire indebtedness and demanded B vacate the house, can the
creditor be compelled to accept the payment? Can the creditor be compelled to vacate
the house? It depends whether the period is solely for the benefit of the debtor or both the
debtor or the creditor. If the same is for the benefit of the debtor what is the right? Xxx
(2) OBLIGATIONS according to plurality of objects:
A. Simple
B. Multiple
C. Conjunctive  where the debtor must perform more than one prestation
Q: A promised to deliver to B his carabao, dog & goat. What kind of OBLIGATION is this?
A: conjunctive obligation.
D. Alternative OBLIGATIONS  where the debtor must perform any of several prestations,
when several objects due, the fulfillment of one is sufficient, generally the debtor chooses
which one.
E. Facultative  where only one thing is due but the debtor has reserved the right to substitute it
with another (Article 1206)
-election here is never granted to creditor

Q: In conjunctive, right to choose is always with debtor?
A: NO. No right to choose because all must be performed.
Q: In Alternative, right to choose can be given to 3rd person?
A: YES. (Article 1000) as long as it is not contrary to law, morals, public order, public policy and
etc.
Q: In an agreement where there is no stipulation as to who has right to choose?
A: It depends. If Alternative, generally debtor chooses; if facultative, only with debtor
Q: What if debtor has right to choose and he delays?
A: right is not lost by mere delay; (before creditor files his action)
(b) Alternative OBLIGATIONS
Article 1199. A person alternatively bound by different prestations shall completely perform one
of them.
The creditor cannot be compelled to receive part of one & part of the other undertaking.
Tolentino: The characteristic of alternative OBLIGATIONS is that, several objects being due, the
fulfillment of one is sufficient xxx.
Article 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful or
which could not have been the object of the obligation.
Balane:
Q: To whom does the right of choice belong?
A: General rule: To the debtor (Article 1200)
Exception: When expressly granted to the creditor (cannot be implied).
* There is a third possibility where the choice may be made by a third person upon agreement of
the parties. (expressed)
Q: What is the technical term of the act of making a choice in alternative OBLIGATIONS?
A: Concentration.
 The right to choose is indivisible  debtor can’t choose part of one prestation and part of
another;
 Here, plaintiff’s action must be in alternative form;
Article 1201. The choice shall produce no effect except from the time it has been
communicated.
Balane:
Requirement of Communication of choice  If the choice belongs to the creditor, of course, he

has to communicate his choice to the debtor. The debtor is not a prophet.
No required form  may be ORAL, IN WRITING, TACITLY, OR OTHER UNEQUIVOCAL

MEANS.
Q: If the choice belongs to the debtor, why require communication before performance if the
choice belongs to him anyway?
A: To give the creditor an opportunity to consent to the choice or impugn it. (Ong v. Sempio-Dy,
46 P 592.)
BUT how can the creditor impugn it if the choice belongs to the debtor? The better reason would
be to give the creditor a chance to prepare for the performance.
Not CONSENT: Only declaration of choice made, communicated to the other party, unilateral
declaration will;
Articles 1202 to 1205 talk of the loss of some of the prestations before performance.
1. If the choice is to the debtor's
a. When only one prestation is left (whether or not the rest of the prestations have been lost
through fortuitous event or through the fault of the debtor), the debtor may perform the one that is
left.- Article 1202.
Article 1202. The debtor shall lose the right of choice when among the prestations whereby he is
alternatively bound, only one is practicable.
b. If the choice is limited through the creditor's own acts, the debtor can ask for resolution
plus damages.
Article 1203. If through the creditor's acts the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages.
c. If everything is lost through the debtor's fault, the latter is liable to indemnify the creditor
for damages.
Article 1204. The creditor shall have a right to indemnity for damages when, through the fault
of the debtor, all the things which are alternatively the object of the obligation have been lost, or
the compliance of the obligation has become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or
that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded.
d. If some things are lost through the debtor's fault, the debtor can still choose from those
remaining.
e. If all are lost through fortuitous event, the obligation is extinguished.
f. If all prestations but one are lost through fortuitous event, & the remaining prestation was
lost through the debtor's fault, the latter is liable to indemnify the creditor for damages.
g. If all but one are lost through the fault of the debtor & the last one was lost through
fortuitous event, the obligation is extinguished.
2. Choice is the creditor's
Article 1205. When the choice has been expressly given to the creditor, the obligation shall cease
to be alternative from the day when the selection has been communicated to the debtor.Until
then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by
delivering that which the creditor should choose from among the remainder, or that which
remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim
any of those subsisting, or the price of that which, through the fault of the former, has
disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall
upon the price of any one of them, also with indemnity for damages.
The same rules shall be applied to OBLIGATIONS to do or not to do in case one, some or all of
the prestations should become impossible.
a. If one or some are lost through fortuitous event, the creditor may choose from those
remaining.- Article 1205 (1)
b. If one or some are lost through the debtor's fault, the creditor has choice from the remainder
or the value of the things lost plus damages.- Article 1205 (2), supra.
c. If all are lost through the debtor's fault, the choice of the creditor shall fall upon the price of
any of them, with indemnity for damages.-- Article 1205 (3), supra.
d. If some are lost through the creditor's fault, the creditor may choose from the remainder.
e. If all are lost through fortuitous event, the obligation is extinguished.
f. If all are lost through the creditor's fault, the obligation is extinguished.
Distinguished from Facultative OBLIGATIONS:
Article 1206. When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the negligence of the
obligor, does not render him liable. But once the substitution has been made, the obligor is liable
for the loss of the substitute on account of his delay, negligence or fraud.
Tolentino: Facultative vs. Alternative -
Alternative Facultative
OBLIGATION OBLIGATION
As to contents of there are various only ONE principal

the obligation prestations all of prestation
which constitute constitutes the
parts of the obligation, the
obligation accessory being
only a means to
facilitate payment.
As to nullity the nullity of one the nullity of the

prestation does not principal prestation
invalidate the invalidates the
obligation, which is obligation & the
still in force with creditor cannot
respect to those demand the
which have no vice substitute even
when this is valid
As to choice the right to choose only the debtor can

may be given to the choose the
creditor substitute
prestation.
As to effect of loss only the the impossibility of

impossibility of all the principal
the prestations due prestation is
without fault of the sufficient to
debtor extinguishes extinguish the
the obligation obligation, even if
the substitute is
possible
Balane:
Facultative OBLIGATIONS always involve choice by the debtor.
 In theory, it is easy to distinguish a facultative obligation from an alternative one. But in

practice, it is difficult to distinguish the two. You just have to find out what the parties
really intended.
 Only One prestation is DUE and enforceable by the creditor at the time of choice; if the
substitute becomes impossible d/t fault of debtor the OBLIGATION is not affected, thus no
damages;
 If after choosing the substitute and choice is communicated to creditor, the principal
prestation becomes impossible, OBLIGATION is not extinguished but has become a
simple OBLIGATION that must be performed; and he will be liable for damages in delay,
neglect or bad faith.
 If principal OBLIGATION becomes impossible by fault or negligence of creditor, debtor

cannot be compelled to perform the substitute (no more substitute, becomes simple) –
extinguished.
3. AS TO RIGHTS & OBLIGATIONS OF MULTIPLE PARTIES:
[Joint & Solidary OBLIGATIONS, Articles 1207-1222]
a. Joint OBLIGATIONS
Balane: A joint obligation is one in which each of the debtors is liable only for a proportionate
part of the debt or each creditor is entitled only to a proportionate part of the credit. In joint
OBLIGATIONS, there are as many OBLIGATIONS as there are debtors multiplied by the number
of creditors.
There are three kinds of joint OBLIGATIONS:
1) Active joint  where the obligation is joint on the creditor's side;
2) Passive joint  where the obligation is joint on the debtor's side; &
3) Multiple Joint  where there are multiple parties on each side of a joint obligation.
Tolentino:
The joint obligation has been variously termed mancomunada or mancomunada simple or pro
rata;
In the PROMISSORY NOTE the phrase "We promise to pay," used by 2 or more signers, creates a
pro rata liability (JOINT);
While “I promise to pay” followed by signatures of 2 or more persons – solidary; individually and
collectively; individually and jointly.
JOINT character is PRESUMED: WHEN no stipulation as to liability of several debtors,

presumption is joint, and each is liable only for his proportionate part of the OBLIGATION;
J/FO of court as to several defendants when solidarity has not been specified, the liability of the
defendants is joint; court cannot amend.
Effects of Joint Liability:
1. The demand by one creditor upon one debtor, produces the effects of default only with
respect to the creditor who demanded & the debtor on whom the demand was made, but
not with respect to the others;
2. The interruption of prescription by the judicial demand of one creditor upon a debtor does
not benefit the other creditors nor interrupt the prescription as to other debtors. On the
same principle, a partial payment or acknowledgement made by one of several joint debtors
does not stop the running of the statute of limitations as to the others;
3. The vices of each obligation arising from the personal defect of a particular debtor or
creditor does not affect the obligation or rights of the others;
4. The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it
authorize a creditor to demand anything from his co-creditors;
5. In the joint divisible obligation, the defense of res judicata is not extended from one debtor
to another. (Manresa)
Article 1208. If from the law, or the nature or the wording of the OBLIGATIONS to which the
preceding article refers the contrary does not appear, the credit or debt shall be presumed to be
divided into as many equal shares as there are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the Rules of Court governing the multiplicity of
suits.
Disjunctive OBLIGATION: This is not covered by New Civil Code; there are 2 or more creditors
and 2 or more debtors but they are named disjunctively as debtors and creditors in the alternative.
*The rules on solidary OBLIGATIONS must apply  because if rules on alternative

OBLIGATIONS will be applied then the debtor will generally be given the choice to whom shall
he give payment.
Example: A binds himself to pay P100 either to X or Y  A or B will pay 100 to X.
b. Indivisible OBLIGATIONS
Article 1209. If the division is impossible, the right of the creditors may be prejudiced only by
their collective acts, & the debt can be enforced only by proceeding against all the debtors. If one
of the latter should be insolvent, the other shall not be liable for his share.
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility.
 The OBLIGATION here is joint, even if the performance is indivisible;
Joint Indivisible OBLIGATION: There are several debtors or creditors but the prestation is
indivisible  Example: Delivery of a house or a determinate thing;
 Fulfillment requires the concurrence of ALL debtors, although they are each for his part; and on
side of creditors, collective action required for acts which may be prejudicial;
 Consent required, must still communicate choice after consensus.
INDIVISIBILIT
SOLIDARITY
Y
Refers to the
prestation, which Refers to the legal tie or
is not capable of vinculum defining the extent
partial of liability
performance
Each cannot
Effects to Joint Each may demand the full
demand more
creditors prestation
than his share
Each is not liable

Effects to joint Each has the duty to comply
for more than his
debtors with entire prestation
share
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. The debtors who may have been
ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding
portion of the price of the thing or of the value of the service in which the obligation consists.
If there is plurality of creditors to only one debtor, the OBLIGATION can be performed by
delivery of the object to all the creditors jointly;
 Delivery to only one creditor makes the debtor liable for damages to the other debtors for
non-performance, unless they have authorized this one creditor to collect in their behalf;
 If only one or some, not all creditors demand fulfillment the debtor may refuse to deliver
and insist that all the creditors together receive the thing, if not consignation to the court
may be had;
 In non-performance, debtor is liable for damages  here with respect to damages, the
prestation becomes divisible, each creditor may recover proportionately.
Q: Is an OBLIGATION-not do divisible or not?
A: No (Tolentino)
A: OBLIGATION-not do when there are several debtors, is a joint indivisible OBLIGATION.
c. Solidary OBLIGATIONS
Balane:
A solidary obligation is one in which the debtor is liable for the entire obligation or each creditor
is entitled to demand the whole obligation. If there is only one obligation, it is a solidary
obligation.
There are three kinds of solidarity:
(1) Active solidarity where there are several creditors with one debtor in a solidary obligation;
(2) Passive solidarity where there is one creditor with several debtors solidary bound;
(3) Mixed Solidarity where there are several creditors & several debtors in a solidary
obligation.
According to Tolentino:
 Solidary OBLIGATIONS may also be referred to as mancomunada solidaria or joint &

several or in solidum.
 It has also been held that the terms "juntos o separadamente" in a promissory note creates a
solidary responsibility;
 Where there are no words used to indicate the character of a liability, the phrase "I promise to
pay," followed by the signatures of 2 or more persons, gives rise to an individual or solidary
responsibility.
 The words "individually & collectively" also create a solidary liability. So does an agreement
to be "individually liable" or "individually & jointly liable."
c.1. Active Solidarity

Article 1211. Solidarity may exist although the creditors & the debtors may not be bound in the
same manner & by the same periods & conditions.
Article 1207. The concurrence of two or more creditors or of two or more debtors in one & the
same obligation does not imply that each one of the former has a right to demand, or that each
one of the latter is bound to render, entire compliance with the prestation. There is solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.
Balane:
Q: When is an obligation with several parties on either side Joint or Solidary?
A: The presumption is that an obligation is joint because a joint obligation is less onerous that a
solidary one.
There is solidary obligation in the following::
(1) When the obligation expressly so states – stipulation by parties;
(2) When a will expressly makes charging or a condition in solidum;
(3) When the law requires  crimes, conspiracy, act or one is act of all; in torts – joint
tortfeasors
 The liability of joint tortfeasors, which include all persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it, after it is done, if done for their benefit. (Tolentino)
(4) nature of the obligation requires solidarity – Article 19-22, NCC;
 A moral wrong cannot be divided into parts, thus must be solidary; akin to Quasi
Delicts/ Quasi Contracts (Articles 2183 & 2187)
 Liability may arise from the provisions of Articles 19 to 22 of the NCC. If 2 or more persons
acting jointly become liable under these provisions, their liability should be solidary because
of the nature of the obligation. xxx The acts giving rise to liability under these articles have a
common element- they are morally wrong.
 Article 10, RPC; Article 2194, & Article 2157, NCC
Art. 10. Offenses not subject to the provisions of this Code. — Offenses which are or in the
future may be punishable under special laws are not subject to the provisions of this Code. This
Code shall be supplementary to such laws, unless the latter should specially provide the
contrary.
Article 2194. The responsibility of two or more persons who are liable for quasi-delict is
solidary.
Art. 2157. The responsibility of two or more payees, when there has been payment of what is not
due, is solidary. (n)
(5) Imposed by final judgment upon several defendants – must be expressed in the judgement
for the obligation, cannot be amended after finality.
Characteristics of Active Solidarity (solidary creditors): (Tolentino)
ESSENCE  Mutual agency, or mutual representation, which consists in the authority of each
creditor to claim & enforce the rights. Of all, with the resulting OBLIGATION to pay each one
what belongs to him.
1. Since it is a reciprocal agency, the death of a solidary creditor does not transmit the
solidarity to each of his heirs but to all of them taken together;
 (Similar to Article 1005 where brothers & sisters of decedent inherit in their own
right per capita while nephews & nieces, per stirpes by right of representation.)
2. Each creditor represents others in the act of requiring payment, & in all other acts which
tend to secure the credit or make it more advantageous. Hence, if he receives only a
partial payment, he must divide it among the other creditors. He can interrupt the period of
prescription or render the debtor in default, for the benefit of all other creditors;
3. A credit once paid is shared equally among the creditors unless a different intention
appears;
4. Debtor may pay any of the creditors but if any demand, judicial or extrajudicial is made on
him, he must pay only to the one demanding payment (Article 1214);
5. One creditor does not represent the others in such acts as novation, compensation &
remission (even if the credit becomes more advantageous). In these cases, even if the
debtor is released, the other creditors can still enforce their rights against the creditor who
made the novation, compensation or remission; (Art. 1212 in relation to Art. 1215)
6. Each creditor may renounce his right even against the will of the debtor, & the latter need
not thereafter pay the obligation to the former.
Characteristics of Passive Solidarity (solidary debtors)
ESSENCE  each debtor can be made to answer for the others, with resulting right to the debtor-
payor to recover from others their respective shares, akin to mutual guaranty (Manresa):
1. Each debtor may be required to pay the entire obligation but after payment, he can recover
from the co-debtors their respective shares (this is something similar to subrogation);
2. Interruption of prescription as to one debtor affects all the others; but the renunciation by
one debtor of prescription already had does not prejudice the others, because the
extinguishment of the obligation by prescription extinguishes also the mutual

representation among the solidary debtors.
3. The debtor who is required to pay may set up by way of compensation his own claim
against the creditor, in this case, the effect is the same as that of payment;
4. The total remission of the debt in favor of a debtor releases all the debtors; but when this
remission affects only the share of one debtor, the other debtors are still liable for the
balance of the obligation.
5. All the debtors are liable for the loss of the thing due, even if such loss is caused by the
fault of only one of them, or by fortuitous event after one of the debtors has incurred in
delay;
6. The interests due by reason of the delay of one of the debtors are borne by all of them.
Legal Bonds in solidarity may be uniform or varied:
Uniform  when debtors are bound by same conditions and clauses;
Varied  where obligors, although liable for the same prestation, are nevertheless not subject
to same terms and conditions; before fulfillment of such condition or arrival of such term,
an action may be brought against such debtor or any other solidary debtor for recovery of
the entire OBLIGATION, minus the portion corresponding to the debtor affected by the
varied condition or term; upon happening however, this portion may be claimed by creditor
from any of the debtors.
 When one of solidary debtors is bound by varied terms and conditions, for instance a
suspensive condition or a suspensive period, creditors may still demand for fulfillment of
the whole prestation prior to the happening of the condition or arrival of the term, minus
the share of this debtor bound by varied condition/term. This latter portion may be
demanded from anyone of the debtors soon as the term arrives or condition happens.
 Example: Is sureties who are solidarily liable without their debtors but binds themselves to
varied conditions distinct from the principal debtors; BUT, the OBLIGATION of surety
may not be greater than that of ea principal debtor, nor more burdensome.
 An OBLIGATION to pay sum of money is not novated in a new instrument wherein the
old is ratified, by changing only the terms of payment and adding other OBLIGATIONS not
incompatible with the old one. [Inchausti & Co. v. Yulo, 34 Phil 978, 1908]
Case Doctrine: The owner of the bus is not jointly and severally liable to the bus driver who
was criminally charged for a criminal act but instead subsidiarily liable thereto.
Case: Rolito Calang and Philtranco Service Enterprises, Inc. vs. People, August 3, 2010.
Facts: At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No.
7001, owned by Philtranco along Daang Maharlika Highway in Barangay Lambao, Sta.
Margarita, Samar when its rear left side hit the front left portion of a Sarao jeep coming from the
opposite direction. As a result of the collision, Cresencio Pinohermoso, the jeep’s driver, lost
control of the vehicle, and bumped and killed Jose Mabansag, a bystander who was standing
along the highway’s shoulder. The jeep turned turtle three (3) times before finally stopping at
about 25 meters from the point of impact. Two of the jeep’s passengers, Armando Nablo and an
unidentified woman, were instantly killed, while the other passengers sustained serious physical
injuries.
The prosecution charged Calang with multiple homicide, multiple serious physical injuries and
damage to property thru reckless imprudence before the Regional Trial Court (RTC), Branch 31,
Calbayog City.
The RTC ordered Calang and Philtranco, jointly and severally, to pay P50,000.00 as death
indemnity to the heirs of Armando; P50,000.00 as death indemnity to the heirs of Mabansag;
and P90,083.93 as actual damages to the private complainants.
The petitioners appealed the RTC decision to the Court of Appeals (CA), docketed as CA-G.R.
CR No. 25522. The CA, in its decision dated November 20, 2009, affirmed the RTC decision in
toto. The CA ruled that petitioner Calang failed to exercise due care and precaution in driving the
Philtranco bus. According to the CA, various eyewitnesses testified that the bus was traveling
fast and encroached into the opposite lane when it evaded a pushcart that was on the side of the
road. In addition, he failed to slacken his speed, despite admitting that he had already seen the
jeep coming from the opposite direction when it was still half a kilometer away. The CA further
ruled that Calang demonstrated a reckless attitude when he drove the bus, despite knowing that it
was suffering from loose compression, hence, not roadworthy.
The CA added that the RTC correctly held Philtranco jointly and severally liable with
petitioner Calang, for failing to prove that it had exercised the diligence of a good father of the
family to prevent the accident.
Issue: Whether or not Calang and Philtranco will be correctly held jointly and solidarily liable to
the victims of the collision.
Held: NO. We, however, hold that the RTC and the CA both erred in holding Philtranco jointly
and severally liable with Calang. We emphasize that Calang was charged criminally before the
RTC. Undisputedly, Philtranco was not a direct party in this case. Since the cause of action
against Calang was based on delict, both the RTC and the CA erred in holding Philtranco jointly
and severally liable with Calang, based on quasi-delict under Articles 21761 and 21802 of the
Civil Code. Articles 2176 and 2180 of the Civil Code pertain to the vicarious liability of an
employer for quasi-delicts that an employee has committed. Such provision of law does not
apply to civil liability arising from delict.
If at all, Philtranco’s liability may only be subsidiary. Article 102 of the Revised Penal Code
states the subsidiary civil liabilities of innkeepers, tavernkeepers and proprietors of
establishments, as follows:
In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or
corporations shall be civilly liable for crimes committed in their establishments, in all cases
where a violation of municipal ordinances or some general or special police regulations shall
have been committed by them or their employees.
Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft within
their houses from guests lodging therein, or for the payment of the value thereof, provided that
such guests shall have notified in advance the innkeeper himself, or the person representing him,
of the deposit of such goods within the inn; and shall furthermore have followed the directions
which such innkeeper or his representative may have given them with respect to the care of and
vigilance over such goods. No liability shall attach in case of robbery with violence against or
intimidation of persons unless committed by the innkeeper’s employees.
The foregoing subsidiary liability applies to employers, according to Article 103 of the Revised
Penal Code, which reads:
The subsidiary liability established in the next preceding article shall also apply to employers,
teachers, persons, and corporations engaged in any kind of industry for felonies committed by
their servants, pupils, workmen, apprentices, or employees in the discharge of their duties.
The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are
deemed written into the judgments in cases to which they are applicable. Thus, in the dispositive
portion of its decision, the trial court need not expressly pronounce the subsidiary liability of the
employer. Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence
must exist establishing that (1) they are indeed the employers of the convicted employees; (2)
they are engaged in some kind of industry; (3) the crime was committed by the employees in the
discharge of their duties; and (4) the execution against the latter has not been satisfied due to
insolvency. The determination of these conditions may be done in the same criminal action in
which the employee’s liability, criminal and civil, has been pronounced, in a hearing set for that
precise purpose, with due notice to the employer, as part of the proceedings for the execution of
the judgment.
CASE: An agreement to be “individually liable” or “individually and jointly” liable denotes

a solidary obligation, not a joint liability.
RONQUILLO V. CA [132 S 274, Sept. 28, 1983]
FACTS: In a collection case, parties entered into a compromise agreement wherein the plaintiff
Antonio So areed to reduce its total claim of P117, 498.95 to only P110,000 and defendants
Ernesto Ronquillo, Offshore Catertrade Inc., Johnny Tan and Pilar Tan agreed to acknowledge the
validity of such claim and further bind themselves to initially pay out of the total indebtedness, the
amount of P55,000 on or before December 24, 1979, the balance of P55,000, defendants,
individually and jointly agree to pay within a period of 6 months from January 30, 1980.
However, defendants failed to pay the initial sum on December 24, 1979. Ronquillo asked that his
¼ share of P13, 750 be accepted as payment. But So nevertheless asked for the execution of the
decision in its entirety against all defendants, jointly and severally. Ronquillo opposed it by saying
that it was not expressly declared that it was solidary. The trial court ruled that liability was
solidary.
ISSUE: Whether the nature of liability as termed “jointly and severally” of the defendants means
being solidary; hence the full payment can be demanded by anyone of the defendant and thereby
correctly rejecting the tender of payment of Ronquillo of his ¼ share only.
HELD: YES.
In this regard, Article 1207 and 1208 of the Civil Code provides —
Art. 1207. The concurrence of two or more debtors in one and the same obligation does not
imply that each one of the former has a right to demand, or that each one of the latter is
bound to render, entire compliance with the prestation. Then is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or debt shall be presumed
to be divided into as many equal shares as there are creditors and debtors, the credits or
debts being considered distinct from one another, subject to the Rules of Court governing
the multiplicity of quits.
The decision of the lower court based on the parties' compromise agreement, provides:
1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants
agree to acknowledge the validity of such claim and further bind themselves to initially pay out
of the total indebtedness of P110,000.00, the amount of P5,000.00 on or before December 24,
1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a
period of six months from January 1980 or before June 30, 1980. (Emphasis supply)
Clearly then, by the express term of the compromise agreement and the decision based upon it,
the defendants obligated themselves to pay their obligation "individually and jointly".
The term "individually" has the same meaning as "collectively", "separately",

"distinctively", respectively or "severally". An agreement to be "individually liable"
undoubtedly creates a several obligation, and a "several obligation is one by which one
individual binds himself to perform the whole obligation.
In the case of Parot vs. Gemora, We therein ruled that "the phrase juntos or separadamente or in
the promissory note is an express statement making each of the persons who signed it
individually liable for the payment of the fun amount of the obligation contained therein."
Likewise in Un Pak Leung vs. Negorra, We held that "in the absence of a finding of facts that the
defendants made themselves individually hable for the debt incurred they are each liable only for
one-half of said amount
The obligation in the case at bar being described as "individually and jointly", the same is
therefore enforceable against one of the numerous obligors.
CASE DOCTRINE: The direct liability of the insurer under indemnity contracts against
Third Party Liability does not mean that the insurer can be held solidarily liable with the
insured &/ or the other parties found at fault.
MALAYAN INSURANCE V. CA [165 SCRA 536]
Facts: Malayan Insurance on March 29, 1967 issued in favor of Sio Choy, a Private Car
Comprehensive Policy effective from April 18, 1967 to April 18, 1968 covering a Willys jeep.
The insurance coverage for third-party liability was P20,000. During the effectivity of the said
policy, the insured jeep while being driven by one Juan Campollo, an employee of San Leon
Rice Mill, collided with a passenger bus owned by Pangasinan Transportation Co. (Pantranco)
causing damage to the insured vehicle and injuries to the driver and Martin Vallejos who was
riding in an ill-fated jeep. Vallejos sued for damages against Sio Choy, Malayan Insurance and
Pantranco. However the trial court only ordered Sio Choy, Malayan and San Leon to pay
Vallejos a total of P29,103 (jointly and severally liable) but Malayan will be liable only up to
P20,000, the consideration in the policy. CA affirmed the judgment of the trial court that Sio
Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally
liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San
Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance
company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice
Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance
company.
Issue: Whether or not Malayan Insurance is solidarily liable with Sio Choy and San Leon Rice
Mill to Vallejos.
Held: NO. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to
the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages
awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-
fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former,
who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is
disputably presumed that a driver was negligent, if he had been found guilty of reckless driving
or violating traffic regulations at least twice within the next preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to
plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the
motor vehicle mishap, is Article 2180 of the Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or
omissions, but also for those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged ill any
business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein mentioned proved
that they observed all the diligence of a good father of a family to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal
tortfeasors who are primarily liable to respondent Vallejos. The law states that the
responsibility of two or more persons who are liable for a quasi-delict is solidarily.
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio
Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than
P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third
party liability clause included in the private car comprehensive policy existing between petitioner
and respondent Sio Choy at the time of the complained vehicular accident.
While it is true that where the insurance contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, however, the direct liability of the insurer
under indemnity contracts against third party liability does not mean that the insurer can be held
solidarily liable with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot,
as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors
namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were
solidarily liable with said two (2) respondents by reason of the indemnity contract against third
party liability-under which an insurer can be directly sued by a third party — this will result in a
violation of the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
debtors. On the other hand, insurance is defined as "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown or
contingent event."
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San
Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00,
with the qualification that petitioner's liability is only up to P20,000.00. In the context of a
solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire
obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount stated in its insurance
policy with respondent Sio Choy for indemnity against third party liability is only
P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that
petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is
made solidary, is an evident breach of the concept of a solidary obligation. Thus, we hold that the
trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with
respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.
Discussion on Reimbursement in solidary liability.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled
that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the
ground that said respondent is not privy to the contract of insurance existing between petitioner
and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus —
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs.
Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the insured may
have against the third person whose negligence or wrongful act caused the loss
(44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is
that of the insured but after reimbursement or compensation, it becomes the loss
of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins.
Co., 22 Ohio St. 382).
Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the
equitable right of subrogation as the legal effect of payment inures to the insurer
without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company
pays for the loss, such payment operates as an equitable assignment to the insurer
of the property and all remedies which the insured may have for the recovery
thereof. That right is not dependent upon , nor does it grow out of any privity of
contract (emphasis supplied) or upon written assignment of claim, and payment to
the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley
Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot
exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as
such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill,
Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation
the right to be reimbursed by his co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period may
be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby
becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from
respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are
solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may
enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor
is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is
compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee
of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of
P14,551.50 (which is 1/2 of P29,103.00 )
Article 1212. Each one of the solidary creditors may do whatever may be useful to the others,
but not anything which may be prejudicial to the latter.
Acts beneficial: each solidary debtor may,
 interrupt prescription,
 constitute a debtor in default,
 bring suit so that OBLIGATION may produce interest
Acts prejudicial: Solidary creditor cannot do anything prejudicial to the others, like remission,
novation, compensation, merger or confusion  but such provision in Article 1212 conflicts with
Article 1215;
Tolentino: What will be done then? Harmonize Articles 1212 & 1215 by  such acts of
extinguishment, which is prejudicial to co-creditors, will be valid so as to extinguish the claim
against the debtors, but not with respect to the rights of co-creditors which subsists and may
be enforced against such creditor who performed the act alone.
Balane:
There is an apparent conflict between Article 1212 & 1215.
Article 1212 states that the agency extends only to things which will benefit all co-creditors. But
not anything which is prejudicial to the latter. In Article 1215, he can do an acts prejudicial to the
other creditors, like remission for instance.
Article 1213. A solidary creditor cannot assign his rights without the consent of the others.
Article 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial
or extrajudicial, has been made by one of them, payment should be made to him.
Tolentino: This is in line with the concept of Mutual agency which is the essence of active
solidarity, implies mutual confidence, thus one creditor cannot assign/transfer his rights to another
without consent of the others.
Effects of Unauthorized Transfer: No effect, no rights transferred; assignee does not become
solidary creditor, co-creditors and debtor/s not bound by such transfer;
 Payment made by this assignee will not extinguish OBLIGATION; suit filed by him may
not interrupt the rights.
 EXCEPT, if the assignee is also one of the co-creditors, because mutual confidence is
incumbent.
Justice JBL REYES: Article 1213 places unjustifiable and unnecessary burden on the rights of
solidary creditors upon his own share. The article should have read as:
 A solidary creditor who assigns his rights without the consent of his co-creditors shall
answer subsidiarily for any prejudice caused by the assignee in connection with d credit
assigned.
 Liability was compared to agent & principal.
Balane:
General Rule  A debtor may pay any of the solidary creditors.
Exception  If demand is made by one creditor upon the debtor, in which case the latter must
pay the demanding creditor only.
Tolentino:
Judicial Demand  when such is made by one of solidary creditors, tacit mutual representation
is deemed revoked.
 Defendant-debtor should pay to the plaintiff-creditor to effect extinguishment; payment to

any of other creditors who did not sue would be deemed payment to a 3rd person.
 Plaintiff-creditor merely consolidates in himself the representation of all the others, but the
essence of solidarity of creditors should not be nullified;
Extra-judicial Demand  same as above; demand by several creditors separately, debtor should
pay the one who notified him 1st ; if they demand at d same time, or collectively, debtor may
choose to whom to pay.
Other Instances:
Debtor upon whom demand was made pays to a creditor other than the one who made the
demand in violation of Article 1214  This is considered payment to a third person (Article
1241, par. 2) & the debtor can still be made to pay the debt. The only concession given to the
debtor is that he is allowed to deduct the share of the receiving creditor from the total amount
due even if he paid the entire amount due to that creditor.
Creditor A makes demand on debtor Y  Does it mean that he cannot pay the share pertaining
to creditor B?
A: According to commentators he can. But this is dangerous because there may already be an
agreement on the part of the creditors.
-Tolentino warns that to make the debtors pay for the whole amount to the demanding creditor
even if partial payment has already been made to another creditor might amount to unjust
enrichment. This rule/restriction has already been scrapped in some modern civil codes
allowing freedom of choice to the debtor even after demand.
Q: There are three creditors A, B & C & there are three debtors X, Y & Z. A makes a demand
on Y. X pays B.
A: This is not covered by Article 1214.
Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall
be liable to the others for the share in the obligation corresponding to them.
Article 1219. The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case the debt
had been totally paid by anyone of them before the remission was effected.
Article 1915. If two or more persons have appointed an agent for a common transaction or
undertaking, they shall be solidarily liable to the agent for all the consequences of the agency.
Tolentino:
Novation  A solidary debtor binds himself alone, assumes the debt, releases the other debtors.
But this debtor cannot bind himself to a new debt without the consent of others.
-If creditor makes the novation without the debtor and does not secure consent of other debtors, the
latter is released. The new contract binds only the debtor who secured the novation.
-Mere extension of time given by creditor to a solidary debtor does not release others from the
OBLIGATION  no novation here.
Dation in payment by one debtor extinguishes as in payment if made immediately, otherwise if

promised only, this is a novation.
When merger & compensation, there is total extinguishment of the OBLIGATIONS; only
reimbursements remain; if partial, then application of payments should govern;
A surety who is bound in solidum will be released by any material alteration in the principal
contract made without knowledge & consent of surety, e.g. extension of time, unless surety’s
liability is varied, as in installment payments.
When 1 creditor makes a remission, the extent of that particular OBLIGATION is extinguished,
this creditor is liable to co-creditors for their shares.
When remission favors only one debtor, in full share, this debtor is released fr solidary
OBLIGATION, if partial, he retains the solidary OBLIGATION & becomes a surety of the whole
OBLIGATION;
Factors to consider in effects of acts under Article 1215:
1. the relation between Creditors and that of debtors;
2. the relation among co-debtors themselves.
Baviera:
 Principals are always liable solidarily;
 Agents are not liable solidarily unless expressly stipulated (res inter alios acta)
b. Passive Solidarity
Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long as the debt has not been fully
collected.
Q: If a judgment made in an action brought by a solidary creditor against a solidary debtor will it
be res judicata against the co-debtors?
A: A favorable judgment that inures to the benefit of the co-creditors will be res judicata as to the
latter;
An adverse judgment would have the same effect if the action of the plaintiff-creditor is not
founded on a cause personal to him, but actually consolidates in him all the rights as well of his co-
creditors. (Tolentino)  similarly translated as to co-debtors;
 Since in solidarity, there is unity of legal tie, notwithstanding plurality of subjects;

 A judgment that declares the OBLIGATION does not exist extinguished the
OBLIGATION the defendant-debtor, and such decision inures to the benefit of co-debtors,
unless the cause is personal to the def-debtor.
PASSIVE SURETY
SOLIDARITY
Solidary solidary guaranty

debtors
Extent of whole only to the extent of contract

Liability OBLIGATION stipulations/as expressed
Liability Primary Subsidiary
Effects of solidary releases the surety

Extension of OBLIGATION
time granted by remains
creditor
CASE: If one of the alleged solidary debtor dies during the pendency of the collection case, the
court where said case is pending retains jurisdiction to continue hearing the charge as against
the surviving defendants. (1216)
PNB V. INDEPENDENT PLANTERS [122 SCRA 113]
Facts: Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of
First Instance of Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint
against several solidary debtors for the collection of a sum of money on the ground that one of
the defendants (Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff
had presented its evidence) and therefore the complaint, being a money claim based on contract,
should be prosecuted in the testate or intestate proceeding for the settlement of the estate of the
deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads:
SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another
debtor, the claim shall be filed against the decedent as if he were the only debtor, without
prejudice to the right of the estate to recover contribution from the other debtor. In a joint
obligation of the decedent, the claim shall be confined to the portion belonging to him.
The appellant assails the order of dismissal, invoking its right of recourse against one, some or
all of its solidary debtors under Article 1216 of the Civil Code —
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
collected.
Issue: Whether in an action for collection of a sum of money based on contract against all the
solidary debtors, the death of one of the defendants deprives the court of jurisdiction to proceed
with the case against the surviving defendants.
Held: It is now settled that the quoted Article 1216 grants the creditor the substantive right to
seek satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or
convenient for the protection of his interests; and if, after instituting a collection suit based on
contract against some or all of them and, during its pendency, one of the defendants dies, the
court retains jurisdiction to continue the proceedings and decide the case in respect of the
surviving defendants.
Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court
ruled:
Construing Section 698 of the Code of Civil Procedure from whence the aforequoted
provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are bound
in solidum for the same debt and one of them dies, the whole indebtedness can be proved
against the estate of the latter, the decedent's liability being absolute and primary; and if
the claim is not presented within the time provided by the rules, the same will be barred
as against the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule
86) provides the procedure should the creditor desire to go against the deceased debtor,
but there is certainly nothing in the said provision making compliance with such
procedure a condition precedent before an ordinary action against the surviving solidary
debtors, should the creditor choose to demand payment from the latter, could be
entertained to the extent that failure to observe the same would deprive the court
jurisdiction to take cognizance of the action against the surviving debtors. Upon the other
hand, the Civil Code expressly allows the creditor to proceed against any one of the
solidary debtors or some or all of them simultaneously. There is, therefore, nothing
improper in the creditor's filing of an action against the surviving solidary debtors alone,
instead of instituting a proceeding for the settlement of the estate of the deceased debtor
wherein his claim could be filed.
Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice
Makasiar, reiterated the doctrine.
A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing
therein prevents a creditor from proceeding against the surviving solidary debtors. Said
provision merely sets up the procedure in enforcing collection in case a creditor chooses
to pursue his claim against the estate of the deceased solidary, debtor.
It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in
this matter. Said provision gives the creditor the right to 'proceed against anyone of the
solidary debtors or some or all of them simultaneously.' The choice is undoubtedly left to
the solidary, creditor to determine against whom he will enforce collection. In case of the
death of one of the solidary debtors, he (the creditor) may, if he so chooses, proceed
against the surviving solidary debtors without necessity of filing a claim in the estate of
the deceased debtors. It is not mandatory for him to have the case dismissed against the
surviving debtors and file its claim in the estate of the deceased solidary debtor . . .
As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were
applied literally, Article 1216 of the New Civil Code would, in effect, be repealed since
under the Rules of Court, petitioner has no choice but to proceed against the estate of
Manuel Barredo only. Obviously, this provision diminishes the Bank's right under the
New Civil, Code to proceed against any one, some or all of the solidary debtors. Such a
construction is not sanctioned by the principle, which is too well settled to require
citation, that a substantive law cannot be amended by a procedural rule. Otherwise
stared, Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over
Article 1216 of the New Civil Code, the former being merely procedural, while the latter,
substantive.
WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is
hereby set aside in respect of the surviving defendants; and the case is remanded to the
corresponding Regional Trial Court for proceedings.
Tolentino: Passive Solidarity vs. Suretyship
Similarity:
(1) both stands for some other person;
(2) both may require reimbursement
 If surety binds itself in solidum, creditor may go against anyone of them.
Distinctions Passive Suretyship

Solidarity
Solidary debtor liable only as to his own

is liable for his OBLIGATION
own
OBLIGATION
& that of his
co-debtors’
Primary Subsidiary liability

liability
Extension of does not release releases a solidary guarantor

Time given by a solidary or surety (extinguishment)
creditor debtor
(novation)
Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made. If the payment is made before the debt is
due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the
debt of each.
Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-
debtors if such payment is made after the obligation has prescribed or become illegal.
has been totally paid by anyone of them before the remission was effected.
Tolentino: Payment by one solidary debtor in whole – extinguishes the OBLIGATION and
releases the credit  gives rise to a new OBLIGATION for reimbursement by the other debtors to
this one debtor who paid (JOINT OBLIGATION); plaintiff creditor may be properly substituted by
the debtor who paid;
EXCEPT: If payment was made after the OBLIGATION prescribed or become illegal (mistake
or not). (Article 1218)
 After the OBLIGATION has prescribed or becomes illegal, it is no longer due &
demandable. None of the solidary debtors can be compelled by the creditors to pay.
 Thus, if one debtor pays, he cannot reimburse from his co-debtors because his action will
not revive the inexistent OBLIGATION;
 Generally, neither could he recover from the creditor to whom he paid (Article 1424);
except perhaps under solutio indebiti.
Balane:
Effect of Remission.
Problem: Solidary debtors W, X, Y & Z are indebted to A for P12,000. A remits the share of Y
(P3,000).
Q: Can Y be sued?
A: Yes, for the P9,000 (P12,000 less P3,000 share of Y) his share was remitted but not the solidary
OBLIGATION.
Q: Supposing X is insolvent?
A: Y can still be made to contribute. Remission will benefit Y only in so far as his share is
concerned. His liability in case of insolvency of one co-creditor is not affected.
Q: Can A demand the P9,000 from Y?
A: Yes. But he can recover the same from W, X & Z.
Q: If W paid the whole debt before A remits Y’s share, may W still demand reimbursement of Y’s
share?
A: Yes, Article 1219, Y will not be released from his solidary OBLIGATION. Upon W’s full
payment the entire OBLIGATION was extinguished, there’s nothing more to remit in Y’s favor.
Q: After A remits share of Y, W pays in full the remaining 12,000. X then becomes insolvent.
May Y be compelled to contribute to the share of X?
A: Yes (Manresa and Tolentino), gratuitous acts should be construed restrictively as to permit
the least transmission of rights (Article1378). Thus, if W paid 9,000 and X and Z were suppose
to reimburse him 3000 each, Y could be compelled to contribute 1000 as to the insolvency of X.
Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors,
does not entitle him to reimbursement from his co-debtors.
Article 1221. If the thing has been lost or if the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the creditor, for the
price & the payment of damages & interest, without prejudice to their action against the guilty
or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become impossible after
one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand
upon him by the creditor, the provisions of the preceding paragraph shall apply.
Article 1895. If solidarity has been agreed upon, each of the agents is responsible for the non-
fulfillment of the agency, & for the fault or negligence of his fellow agents, except in the latter
case when the fellow agents acted beyond the scope of their authority.
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation & of those which are personal to him, or
pertain to his own share. With respect to those which personally belong to the others, he may
avail himself thereof only as regards that part of the debt for which the latter are responsible.
Effects of Article 1221 is limited to non-performance because of loss of the thing or impossibility
of prestation that is due  if such is anchored with a fortuitous event, without fault or delay on any
debtor, then OBLIGATION is extinguished; no debtor is liable.
 If debtor is at fault on the loss/impossibility; Or if in delay even before the

loss/impossibility  the OBLIGATION is converted to indemnification (of the price,
damages & interests).
 If guilty debtor is made to pay by demand of creditor, he cannot recover from his co-
debtors (if there was loss/imp), he will shoulder the whole amount of the loss thing +
indemnity;
 If another co-debtor pays the whole amount he could recover fr his co-debtors;
 In case of non-performance without loss of the thing/has not become impossible: but
there is delay, fraud, fault or negligence, or some other breach of OBLIGATION, creditor
may also recover damages; here, if guilty debtor pays, he will not shoulder the whole
amount, his co-debtors will pay him their equivalent share in the original OBLIGATION.
Guilty debtor shoulders the amount of damages though.
Balane:
Three Defenses of Solidary Debtor:
1. Those derived from the nature of the obligation is a total defense;
e.g., prescription, illegality of obligation (illicit object); vitiated consent; unenforceability

under the Statute of Frauds; non-happening of condition; arrival of resolutory period;
extinguished OBLIGATION d/t payment, remission;
2. Those defenses personal to the debtor-defendant;
e.g., insanity  If it involves vitiation of consent, total defense. If it involves a special term
or a condition, a partial defense.
3. Those defenses personal to other co-debtors;
e.g., defense as to the share corresponding to other debtors is a partial defense, i.e.
suspensive condition or period as to the OBLIGATION of one co-debtor.
CASES:
1. ERNESTO V. RONQUILLO, petitioner, vs. HONORABLE COURT OF APPEALS

AND ANTONIO P. SO, respondents.
Facts: Ernesto Ronquillo was one of the 4 defendants in a Civil Case filed by Antonio So for the
collection of the sum of P117,498.98 which represents the value of the checks issued by the
defendants in payment of foodstuffs. The RTC rendered a decision based on a compromise
agreement submitted by the parties:
Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree
to acknowledge the validity of such claim and further bind themselves to initially pay out of the
total indebtedness of P110,000.00 the amount of P55,000.00 on or before December 24, 1979, the
balance of P55,000.00, defendants individually and jointly agree to pay within a period of six
months from January 1980, or before June 30, 1980; (Italics supplied)
x x x x x x x x x
That both parties agree that failure on the part of either party to comply with the foregoing terms
and conditions, the innocent party will be entitled to an execution of the decision based on this
compromise agreement and the defaulting party agrees and hold themselves to reimburse the
innocent party for attorney’s fees, execution fees and other fees related with the execution.
For failure to make an initial payment, So filed a motion for execution against teh respondents. It
was opposed by Ronqullo contending that his inability to make the payment was due to
respondent’s own act. During the hearing of the Motion for Execution, Ronquillo tendered the
amount of P13,750 as his prorata share in the P55,000 initial payment. The other respondent also
offered to pay the same amount/
The lower court ordered the issuance of a writ of execution for the balance of the initial amount
payable against the other respondents who did not pay their shares. So moved for the modidication
of the order of the court and prayed for the execution of the decision in its entirety against all
defendants jointly and severally. Ronquillo opposed the said motion arguing that their liability is
not solidary. The lower court issued a writ of execution for the satisfaction of the sum of P82,500
as against the properties of the defendants singly and jointly liable. The Special Sheriff issued a
notice of sheriff’s sale for the sale of certain furnitures and appliances found in the petitioner’s
residence to satifsfy the amount of P82,500.00.
Issue: Whether or not there was solidary laibility.
Held: Yes. In this regard, Article 1207 and 1208 of the Civil Code provides—
“Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply
that each one of the former has a right to demand, or that each one of the latter is bound to render,
entire compliance with the prestation. There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the obligation to which the preceding
article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors and debtors, the credits or debts being considered distinct
from one another, subject to the Rules of Court governing the multiplicity of suits.”
The decision of the lower court based on the parties’ compromise agreement, provides:
“1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants
agree to acknowledge the validity of such claim and further bind themselves to initially pay out of
the total indebtedness of P110,000.00, the amount of P55,000.00 on or before December 24, 1979,
the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six
months from January 1980 or before June 30, 1980.” (Italics supplied)
Clearly then, by the express term of the compromise agreement and the decision based upon it, the
defendants obligated themselves to pay their obligation “individually and jointly”.
The term “individually” has the same meaning as “collectively”, “separately”, “distinctively”,
respectively or “severally”. An agreement to be “individually liable” undoubtedly creates a several
obligation,14 and a “several obligation” is one by which one individual binds himself to perform the
whole obligation.15
In the case of Parot vs. Gemora16 We therein ruled that “the phrase juntos or separadamente used
in the promissory note is an express statement making each of the persons who signed it
individually liable for the payment of the full amount of the obligation contained therein.”
Likewise in Un Pak Leung vs. Negorra17 We held that “in the absence of a finding of facts that the
defendants made themselves individually liable for the debt incurred they are each liable only for
one-half of said amount.”
The obligation in the case at bar being described as “individually and jointly”, the same is therefore
enforceable against one of the numerous obligors.
2. MALAYAN INSURANCE CO., INC., petitioner, vs. THE HON. COURT OF

APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON
RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC.,
respondents.
Facts: Malayan Insurance issued a Private Car Comprehensice Policy in favor of Sio Choy Private
Car covering a Willys Jeep. During the effectivity of the insurance policy, the insured jeep, while
being driven by Juan Campollo, an employee of San Leon Rice Mill, Inc. collided with a passenger
bus belonging to Pantranco causing damage to the insured vehicle and injuries to Camplollo and
Martin Vallejos, who was riding the ill-fated jeep.
Vallejos filed an action for damages against Sio Choy, Malayan Insurance and Pantranco. He
prayed that the defendants be ordered to pay him jointly and severally the amount of damages.
Sio Choy filed a separate answer and cross claim against Malayan Insurance and a third-party
complaint against San leon Rice Mill, as the employer of Campollo.
The RTC rendered a decision holding Malayan Insurance, Sio Choy and San Leon Rice Mill joinly
and severally liable.
Issue: Whether or not Malayan Insurance is solidarily liable with San Leon and Sio Choy.
Held: No. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to
the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages
awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-
fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:
“Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former,
who was in the vehicle, could have, by the use of due diligence, prevented the misfortune. it is
disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or
violating traffic regulations at least twice within the next preceding two months.
“If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.”
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to
plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the
motor vehicle mishap, is Article 2180 of the Civil Code which reads:
“Art. 2180. The obligation imposed by article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.
x x x x x x x x x
“Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business or industry.
x x x x x x x x x
“The responsibility treated in this article shall cease when the persons herein mentioned proved
that they observed all the diligence of a good father of a family to prevent damage.”
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors
who are primarily liable to respondent Vallejos. The law states that the responsibility of two or
more persons who are liable for a quasi-delict is solidary.4
On the other hand, the basis of petitioner’s liability is its insurance contract with respondent Sio
Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than
P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party
liability clause included in the private car comprehensive policy existing between petitioner and
respondent Sio Choy at the time of the complained vehicular accident.
While it is true that where the insurance contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer
under indemnity contracts against third party liability does not mean that the insurer can be held
solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer
is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot,
as incorrectly held by the trial court, be made “solidarily” liable with the two principal tortfeasors,
namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily
liable with said two (2) respondents by reason of the indemnity contract against third party liability
—under which an insurer can be directly sued by a third party—this will result in a violation of the
principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
debtors.7 On the other hand, insurance is defined as “a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown or
contingent event.”
Case: PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. INDEPENDENT

PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO,
CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO
VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and
BONIFACIO LAUREANA, defendants-appellees.
Facts: The CFI of Manila dismissed PNB’s complaint against several solidary debtors for the
collection of sum of money on the ground that one of the defendants (Ceferion Valencia) died
during the pendeny of the case, and therefore the complaint, being a money claim based on
contract, should be prosecuted in the testate or intestate proceeding for the settlement of the estate
of the deceased pursuant to R. 86 of the ROC.
Issue: Whether the action for collection of sum of money based on contract against all the solidary
debtors, the death of one of the defendant deprives the court of jurisidiction to proceed the case
against the surviving defendants
Held: No. It is now settled that the quoted Article 1216 grants the creditor the substantive right to
seek satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or
convenient for the protection of his interests; and if, after instituting a collection suit based on
contract against some or all of them and, during its pendency, one of the defendants dies, the court
retains jurisdiction to continue the proceedings and decide the case in respect of the surviving
defendants. Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897,
this Court ruled:
“Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision
(Sec. 6, Rule 86) was taken, this Court held that where two persons are bound in solidum for the
same debt and one of them dies, the whole indebtedness can be proved against the estate of the
latter, the decedent’s liability being absolute and primary; and if the claim is not presented within
the time provided by the rules, the same will be barred as against the estate. It is evident from the
foregoing that Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor
desire to go against the deceased debtor, but there is certainly nothing in the said provision making
compliance with such procedure a condition precedent before an ordinary action against the
surviving solidary debtors, should the creditor choose to demand payment from the latter, could be
entertained to the extent that failure to observe the same would deprive the court jurisdiction to
take cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code
expressly allows the creditor to proceed against any one of the solidary debtors or some or all of
them simultaneously. There is, therefore, nothing improper in the creditor’s filing of an action
against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of
the estate of the deceased debtor wherein his claim could be filed.”
Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice
Makasiar, reiterated the doctrine.
“A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein
prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely
sets up the procedure in enforcing collection in case a creditor chooses to pursue his claim against
the estate of the deceased solidary debtor.
“It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this
matter. Said provision gives the creditor the right to ‘proceed against anyone of the solidary
debtors or some or all of them simultaneously.’ The choice is undoubtedly left to the solidary
creditor to determine against whom he will enforce collection. In case of the death of one of the
solidary debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary
debtors without necessity of filing a claim in the estate of the deceased debtors. It is not mandatory
for him to have the case dismissed against the surviving debtors and file its claim in the estate of
the deceased solidary debtor . . .
“As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were
applied literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the
Rules of Court, petitioner has no choice but to proceed against the estate of Manuel Barredo only.
Obviously, this provision diminishes the Bank’s right under the New Civil Code to proceed against
any one, some or all of the solidary debtors. Such a construction is not sanctioned by the principle,
which is too well settled to require citation, that a substantive law cannot be amended by a
procedural rule. Otherwise stated, Section 6, Rule 86 of the Revised Rules of Court cannot be
made to prevail over Article 1216 of the New Civil Code, the former being merely procedural,
while the latter, substantive.”
ROLITO CALANG and PHILTRANCO SERVICE ENTERPRISES, INC., petitioners, vs.

PEOPLE OF THE PHILIPPINES, respondent.
Facts: As a result of the collision of Philtranco Bus driven by one Rolito Calang to the left portion
of a jeep coming from the opposite direction, Cresencio Pinohermoso, the driver of the jeep, lost
control of the vehicle and bumped and killed Jose Mabansag, a bystander. The jeep turned turtle
three times and two of the passengers thereof, Armando Nablo and an unidentified woman, were
instantly killed, while the other passengers sustained serious physical injuries.
Calang was charged with multiple homicide, multiple serious physical injuries and damage to
property through reckless imprudence and was found guilty. The RTC ordered Calang and
Philtranco, jointly and severally to pay P50,000 as death indemnity to the heirs of Armando,
P50,000 death indemnity to the heirs of Mabansag and P90,083.93 as actual damages to private
complainants. On appeal, the CA affirmed the RTC in toto. The CA found that the RTC correctly
held Philtranco jointly and severally liable with petitioner Calang, for failing to prove that it had
exercised the diligence of a good father of the family to prevent the accident. The petitioners filed
with this Court a petition for review on certiorari. In our Resolution dated February 17, 2010, we
denied the petition for failure to sufficiently show any reversible error in the assailed decision to
warrant the exercise of this Court’s discretionary appellate jurisdiction.
ISSUE: WON Philtranco can be held jointly and severally liable with Calang even if it was not a
party to the criminal case?
HELD: No.
Liability of Calang
We see no reason to overturn the lower courts’ finding on Calang’s culpability. The finding of
negligence on his part by the trial court, affirmed by the CA, is a question of fact that we cannot
pass upon without going into factual matters touching on the finding of negligence. In petitions for
review on certiorari under Rule 45 of the Revised Rules of Court, this Court is limited to reviewing
only errors of law, not of fact, unless the factual findings complained of are devoid of support by
the evidence on record, or the assailed judgment is based on a misapprehension of facts.
Liability of Philtranco
We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and severally
liable with Calang. We emphasize that Calang was charged criminally before the RTC.
Undisputedly, Philtranco was not a direct party in this case. Since the cause of action against
Calang was based on delict, both the RTC and the CA erred in holding Philtranco jointly and
severally liable with Calang, based on quasi-delict under Articles 2176 and 2180 of the Civil Code.
Articles 2176 and 2180 of the Civil Code pertain to the vicarious liability of an employer for quasi-
delicts that an employee has committed. Such provision of law does not apply to civil liability
arising from delict. If at all, Philtranco’s liability may only be subsidiary. Article 102 of the
Revised Penal Code states the subsidiary civil liabilities of innkeepers, tavernkeepers and
proprietors of establishments, as follows: In default of the persons criminally liable, innkeepers,
tavernkeepers, and any other persons or corporations shall be civilly liable for crimes committed in
their establishments, in all cases where a violation of municipal ordinances or some general or
special police regulations shall have been committed by them or their employees. Innkeepers are
also subsidiary liable for the restitution of goods taken by robbery or theft within their houses from
guests lodging therein, or for the payment of the value thereof, provided that such guests shall have
notified in advance the innkeeper himself, or the person representing him, of the deposit of such
goods within the inn; and shall furthermore have followed the directions which such innkeeper or
his representative may have given them with respect to the care of and vigilance over such goods.
No liability shall attach in case of robbery with violence against or intimidation of persons unless
committed by the innkeeper’s employees. The foregoing subsidiary liability applies to employers,
according to Article 103 of the Revised Penal Code, which reads: The subsidiary liability
established in the next preceding article shall also apply to employers, teachers, persons, and
corporations engaged in any kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of their duties.
The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are
deemed written into the judgments in cases to which they are applicable. Thus, in the dispositive
portion of its decision, the trial court need not expressly pronounce the subsidiary liability of the
employer. Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence
must exist establishing that (1) they are indeed the employers of the convicted employees; (2) they
are engaged in some kind of industry; (3) the crime was committed by the employees in the
discharge of their duties; and (4) the execution against the latter has not been satisfied due to
insolvency. The determination of these conditions may be done in the same criminal action in
which the employee’s liability, criminal and civil, has been pronounced, in a hearing set for that
precise purpose, with due notice to the employer, as part of the proceedings for the execution of the
CASE: RUKS KONSULT AND CONSTRUCTION, petitioner, vs. ADWORLD SIGN AND
ADVERTISING CORPORATION** and TRANSWORLD MEDIA ADS, INC., respondents.
Facts: Adworld filed a complaint for damages against Transworld when its billboard structure was
misaligned and foundation impaired when an adjacent structire owned by Transworld and used by
Comark collapsed and crashed against it.
In its Answer with Counterclaim, Transworld averred that the collapse of its billboard structure
was due to extraordinarily strong winds that occurred instantly and unexpectedly, and maintained
that the damage caused to Adworld’s billboard structure was hardly noticeable. Transworld
likewise filed a Third-Party Complaint against Ruks, the company which built the collapsed
billboard structure in the former’s favor. Ruks admitted that it entered into a contract with
Transworld for the construction of the latter’s billboard structure, but denied liability for the
damages caused by its collapse. It contended that when Transworld hired its services, there was
already an existing foundation for the billboard and that it merely finished the structure according
to the terms and conditions of its contract with the latter.
RTC ultimately ruled in Adworld’s favor, and accordingly, declared, inter alia, Transworld and
Ruks jointly and severally liable to Adworld. The CA affirmed the decision of the RTC.
Issue: Whether or not the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and
severally liable for damages sustained by Adworld?
Held: Yes. Ruks and Transworld were solidarily liable against Adworld.
After a judicious perusal of the records, the Court sees no cogent reason to deviate from the
findings of the RTC and the CA and their uniform conclusion that both Transworld and Ruks
committed acts resulting in the collapse of the former’s billboard, which in turn, caused damage to
the adjacent billboard of Adworld.
Jurisprudence defines negligence as the omission to do something which a reasonable man, guided
by those considerations which ordinarily regulate the conduct of human affairs, would do, or the
doing of something which a prudent and reasonable man would not do.27 It is the failure to observe
for the protection of the interest of another person that degree of care, precaution, and vigilance
which the circumstances justly demand, whereby such other person suffers injury.
In this case, the CA correctly affirmed the RTC’s finding that Transworld’s initial construction of
its billboard’s lower structure without the proper foundation, and that of Ruks’s finishing its upper
structure and just merely assuming that Transworld would reinforce the weak foundation are the
two (2) successive acts which were the direct and proximate cause of the damages sustained by
Adworld. Worse, both Transworld and Ruks were fully aware that the foundation for the former’s
billboard was weak; yet, neither of them took any positive step to reinforce the same. They merely
relied on each other’s word that repairs would be done to such foundation, but none was done at
all. Clearly, the foregoing circumstances show that both Transworld and Ruks are guilty of
negligence in the construction of the former’s billboard, and perforce, should be held liable for its
collapse and the resulting damage to Adworld’s billboard structure. As joint tortfeasors, therefore,
they are solidarily liable to Adworld. Verily, “[j]oint tortfeasors are those who command, instigate,
promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or
approve of it after it is done, if done for their benefit. They are also referred to as those who act
together in committing wrong or whose acts, if independent of each other, unite in causing a single
injury. Under Article 219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting
damage. In other words, joint tortfeasors are each liable as principals, to the same extent and in the
same manner as if they had performed the wrongful act themselves.”30 The Court’s pronouncement
in People v. Velasco31 is instructive on this matter, to wit:
Where several causes producing an injury are concurrent and each is an efficient cause
without which the injury would not have happened, the injury may be attributed to all or
any of the causes and recovery may be had against any or all of the responsible persons
although under the circumstances of the case, it may appear that one of them was more culpable,
and that the duty owed by them to the injured person was not same. No actor’s negligence ceases
to be a proximate cause merely because it does not exceed the negligence of other actors. Each
wrongdoer is responsible for the entire result and is liable as though his acts were the sole cause of
the injury.
There is no contribution between joint [tortfeasors] whose liability is solidary since both of them
are liable for the total damage. Where the concurrent or successive negligent acts or omissions
of two or more persons, although acting independently, are in combination the direct and
proximate cause of a single injury to a third person, it is impossible to determine in what
proportion each contributed to the injury and either of them is responsible for the whole
injury. x x x. (Emphases and underscoring supplied)
TORRES-MADRID BROKERAGE, INC., petitioner, vs. FEB MITSUI MARINE

INSURANCE CO., INC. and BENJAMIN P. MANALASTAS, doing business under the
name of BMT TRUCKING SERVICES, respondents.
Facts: A shipment of various electrical goods from Thailand to Manila for Sony. Sony engaged the
services of TMBI to facilitate, process, withdraw and deliver from the port to its warehouse in
Laguna. TMBI subcontracted the services of BMT to transport the shipment from the port to Binan
warehouse. Out of the 4 trucks, only 3 trucks arrived at Sony’s Binan warehouse. At around 12:00
noon, the truck driven by Rufo Reynaldo Lapesura (NSF 391) was found abandoned along the
Diversion Road in Filinvest, Alabang, Muntinlupa City. Both the driver and the shipment were
missing.
TMBI notified Sony of the loss through a letter dated October 10, 2000. It also sent BMT a letter
dated March 29, 2001, demanding payment for the lost shipment. BMT refused to pay, insisting
that the goods were “hijacked.”
Sony filed an insurance claim with the Mitsui, the insurer of the goods. After evaluating the merits
of the claim, Mitsui paid Sony Php7,293,386.23 corresponding to the value of the lost goods.
After being subrogated to Sony’s rights, Mitsui sent TMBI a demand letter dated August 30, 2001
for payment of the lost goods. TMBI refused to pay Mitsui’s claim. As a result, Mitsui filed a
complaint against TMBI on November 6, 2001.
TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third party defendant.
TMBI alleged that BMT’s driver, Lapesura, was responsible for the theft/hijacking of the lost
cargo and claimed BMT’s negligence as the proximate cause of the loss. TMBI prayed that in the
event it is held liable to Mitsui for the loss, it should be reimbursed by BMT.
RTC found TMBI and Benjamin Manalastas jointly and solidarily liable to pay Mitsui
Php7,293,386.23 holding that TMBI and Manalastas were common carriers and had acted
negligently.
Issue: Whether or not TMBI and BMT are solidarily liable to Mitsui.
Held: No. TMBI and BMT are not solidarily liable to Mitsui. Notably, TMBI’s liability to Mitsui
does not stem from a quasi-delict (culpa aquiliana) but from its breach of contract (culpa
contractual). The tie that binds TMBI with Mitsui is contractual, albeit one that passed on to
Mitsui as a result of TMBI’s contract of carriage with Sony to which Mitsui had been subrogated
as an insurer who had paid Sony’s insurance claim. The legal reality that results from this
contractual tie precludes the application of quasi-delict based Article 2194.
We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of the
cargo. While it is undisputed that the cargo was lost under the actual custody of BMT (whose
employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual
relationship existed between Sony/Mitsui and BMT. If at all, Sony/Mitsui’s cause of action against
BMT could only arise from quasi-delict, as a third party suffering damage from the action of
another due to the latter’s fault or negligence, pursuant to Article 2176 of the Civil Code.
A third party may recover from a common carrier for quasi-delict but must prove actual
negligence
We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of the
cargo. While it is undisputed that the cargo was lost under the actual custody of BMT (whose
employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual
relationship existed between Sony/Mitsui and BMT. If at all, Sony/Mitsui’s cause of action against
BMT could only arise from quasi-delict, as a third party suffering damage from the action of
another due to the latter’s fault or negligence, pursuant to Article 2176 of the Civil Code.51
We have repeatedly distinguished between an action for breach of contract (culpa contractual) and
an action for quasi-delict (culpa aquiliana).
In culpa contractual, the plaintiff only needs to establish the existence of the contract and the
obligor’s failure to perform his obligation. It is not necessary for the plaintiff to prove or even
allege that the obligor’s noncompliance was due to fault or negligence because Article 1735
already presumes that the common carrier is negligent. The common carrier can only free itself
from liability by proving that it observed extraordinary diligence. It cannot discharge this liability
by shifting the blame on its agents or servants.52
On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant’s fault or
negligence because this is the very basis of the action. 53 Moreover, if the injury to the plaintiff
resulted from the act or omission of the defendant’s employee or servant, the defendant may
absolve himself by proving that he observed the diligence of a good father of a family to prevent
the damage.54
In the present case, Mitsui’s action is solely premised on TMBl’s breach of contract. Mitsui did not
even sue BMT, much less prove any negligence on its part. If BMT has entered the picture at all, it
is because TMBI sued it for reimbursement for the liability that TMBI might incur from its
contract of carriage with Sony/Mitsui. Accordingly, there is no basis to directly hold BMT liable to
Mitsui for quasi-delict.
BMT is liable to TMBI for breach of their contract of carriage
We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to
BMT, TMBI entered into its own contract of carriage with a fellow common carrier.
The cargo was lost after its transfer to BMT’s custody based on its contract of carriage with TMBI.
Following Article 1735, BMT is presumed to be at fault. Since BMT failed to prove that it
observed extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI
for breach of their contract of carriage.
In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of
carriage. In turn, TMBI is entitled to reimbursement from BMT due to the latter’s own breach of
its contract of carriage with TMBI. The proverbial buck stops with BMT who may either: (a)
absorb the loss, or (b) proceed after its missing driver, the suspected culprit, pursuant to Article
2181.
Issue: Whether or not TMBI and BMT should be solidarily liable to Mistui.
Held: No. The basis of TMBI’s liability to Sony/Mitsui is culpa contractual or contract of
carriage.
The right of TMBI against BMT for breach of contract of carriage.
JOSE SANICO and VICENTE CASTRO, petitioners, vs. WERHERLINA P. COLIPANO,

respondent.
Facts: Colapicano and her daughter were paying passengers in the jeepney operated by Sanico.
Due to an accident, Colipano’s leg was badly injured and was eventually amputated. 9 Colipano
prayed for actual damages, loss of income, moral damages, exemplary damages, and attorney’s
fees. Thus, Calpicano filed a complaint for breach of contract of carriage and damages against
sanico and Castro.
After trial, the RTC found that Sanico and Castro breached the contract of carriage between them
and Colipano but only awarded actual and compensatory damages in favor of Colipano.\
Issue: Whether or not the RTC was correct in holding that Sanico and Castro are solidarily liable.
Held: No. Only Sanico breached the contract of carriage.Since the cause of action is based on a
breach of a contract of carriage, the liability of Sanico is direct as the contract is between him and
Colipano. Castro, being merely the driver of Sanico’s jeepney, cannot be made liable as he is not a
party to the contract of carriage.
Since Castro was not a party to the contract of carriage, Colipano had no cause of action against
him and the complaint against him should be dismissed. Although he was driving the jeepney, he
was a mere employee of Sanico, who was the operator and owner of the jeepney. The obligation to
carry Colipano safely to her destination was with Sanico. In fact, the elements of a contract of
carriage existed between Colipano and Sanico: consent, as shown when Castro, as employee of
Sanico, accepted Colipano as a passenger when he allowed Colipano to board the jeepney, and as
to Colipano, when she boarded the jeepney; cause or consideration, when Colipano, for her part,
paid her fare; and, object, the transportation of Colipano from the place of departure to the place of
destination.
Having established that the contract of carriage was only between Sanico and Colipano and that
therefore Colipano had no cause of action against Castro, the Court next determines whether
Sanico breached his obligations to Colipano under the contract.Being an operator and owner of a
common carrier, Sanico was required to observe extraordinary diligence in safely transporting
Colipano. When Colipano’s leg was injured while she was a passenger in Sanico’s jeepney, the
presumption of fault or negligence on Sanico’s part arose and he had the burden to prove that he
exercised the extraordinary diligence required of him. He failed to do this
.The only defenses available to common carriers are (1) proof that they observed extraordinary
diligence as prescribed in Article 1756,31 and (2) following Article 1174 of the Civil Code, proof
that the injury or death was brought about by an event which “could not be foreseen, or which,
though foreseen, were inevitable,” or a fortuitous event.
The Court finds that neither of these defenses obtain. Thus, Sanico is liable for damages to
Colipano because of the injury that Colipano suffered as a passenger of Sanico’s jeepney.
Whether or not Sanico and Castro breached the contract of carriage?
No. Since the cause of action is based on breach contract of carriage, the liability of Sanico is
direct as the contract is between him and Colipano. Castro, being merely a driver is not privy to the
contract.
4. AS TO PERFORMANCE OF PRESTATION
a. Divisible OBLIGATIONS
Article 1223. The divisibility or indivisibility of the things that are the object of OBLIGATIONS
in which there is only one debtor & only one creditor does not alter or modify the provisions of
Chapter 2 of this Title (Nature & Effect of OBLIGATIONS).
Balane:
 This kind of OBLIGATIONS has something to do with the performance of the prestation,
& not to the thing.
 The thing may be divisible but the OBLIGATION may still be indivisible, e.g.
OBLIGATION to deliver 100 sacks of jasmine rice found in Warehouse of specific address
on a fixed date (determinate OBLIGATION);
 Or thing is indivisible but performance is divisible, i.e. stage-by-stage construction of a

public road where obligor may deliver every 15% of work done and collect its
proportionate cost from government agency concerned, performance bonds here may also
be termed as such.
Divisible obligation is one susceptible of partial performance.
An indivisible obligation is one that must be performed in one act.
Test of Divisibility: Whether or not it is susceptible of partial performance.
General rule: Obligation is indivisible which means that it has to be performed in one act
singly.
Why? Because the law provides so: 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. xxx (Article 1248, par. 1.)
Tolentino:
 When division would diminish the value of the whole
 QUALITATIVE, when the thing is not really homogeneous, i.e. inheritance;
 QUANTITATIVE, when the thing divided is homogeneous and may be separated into
parts if movable, or limits may be set if immovable;
 IDEAL, when parts are not separated materially, but assigned to several persons, as in
pro-indiviso co-owners;
Three Exceptions to the Rule on Indivisibility:
1. When the parties so provide. (Article 1248, par. 1.)
2. When the nature of the obligation necessarily entails performance in parts.

3. Where the law provides otherwise.
Divisibility of Obligation distinguished from divisibility of object:
 Divisibility of obligation or prestation does not necessarily mean a divisible obligation.
 Divisibility of object is not the same as divisibility of obligation.
 But the reverse is not the same. Indivisibility of object means an indivisible obligation.
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. The debtors who may have been
ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding
portion of the piece of the thing or of the value of the service in which the obligation consists.
Article 1225. For the purposes of the preceding articles, OBLIGATIONS to give definite things
& those which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties.
In OBLIGATIONS not to do, divisibility or indivisibility shall be determined by the character of

the prestation in each particular case.
TOLENTINO: To enforce a Joint Indivisible OBLIGATION, Article 1209 has established

the necessity of COLLECTIVE FULFILLMENT and the action must be against all the debtors.
 In case of non-performance by any of the debtors, the OBLIGATION is converted into

liability for losses & damages = DIVISIBLE.
 THUS, if one debtor is insolvent, or fails to pay his share, the other debtors will no
longer be liable for his share. The entire liability for all damages is shouldered by the
defaulting debtor.
Solidarity vs. Indivisibility
Solidarity Indivisibility
Refers to vinculum, and refers to the prestation or the object

principally to the of the OBLIGATION
subjects of
OBLIGATION
Requires plurality of plurality not required

subjects
Solidarity remains even when OBLIGATION is converted to

in case of breach of one, liability for damages, the
they all remain liable for indivisibility ceases to exist, each
indemnity debtor becomes liable for his part of
indemnity
Death of debtor indivisibility affects the heirs of a

terminates solidarity decedent debtor, they remain to be
bound to perform the same
prestation
Factors to Determine Whether OBLIGATION is Divisible or not
1. will or intention of the parties, which may be expressed or presumed;
2. objective or purpose of stipulated prestation;
3. nature of the thing;
4. provisions of law affecting the prestation
 In OBLIGATIONS to give, indivisibility is presumed; except:
1. when work is agreed to be by units of time or measure;
2. or otherwise susceptible of partial performance = divisible
 In indivisible OBLIGATION, partial performance is equal to non-performance. Thus,

partial payment based on quantum meruit is not availed. (Articles 1233 and 1248 forbids
partial fulfillment) “Work half done is worst than work undone!”
Exceptions:
(1) OBLIGATION has been substantially performed in good faith  debtor may recover as
if there had been complete performance, minus the damages suffered by creditor;
(2) Creditor accepts, despite partial performance, with knowledge of incompleteness,

without protest  OBLIGATION is deemed fully performed.
ENTIRE SEVERABLE contract

contract
Consideration single apportioned

(expressly/implied)
Prestation/s several, distinct, separate

items
When a part is whole contract partly enforceable

illegal unenforceable
One void void contract if not illegal, then valid

undertaking covenants may be enforced
Viz. Statute of must be in if separate chattels may be

Frauds writing sold below limits set by
Statute of Frauds, even when
the sum total exceeds,
contract not affected
b. Indivisible OBLIGATIONS
their collective acts, & the debt can be enforced only by proceeding against all the debtors. If one
of the latter should be insolvent, the others shall not be liable for his share.
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility.
Examples of Indivisible OBLIGATIONS:
(1) By virtue of its object
Article 618. Easements are indivisible. If the servient estate is divided between two or more
persons, the easement is not modified, & each of them must bear it on the part which
corresponds to him.
If it is the dominant estate that is divided between two or more persons, each of them may use
the easement in its entirety, without changing the place of its use, or making it more
burdensome in any other way.
(2) Express provision of law
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions, it is expected the case in which, there being several things given in mort-
gage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as
the portion of the debt for which each thing is specially answerable is satisfied.
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable.
Article 1612. If several persons, jointly & in the same contract, should sell an undivided
immovable with a right of repurchase, none of them may exercise this right for more than his
respective share.
The same rule shall apply if the person who sold an immovable alone has left several heirs, in
which case each of the latter may only redeem the part which he may have acquired.
Article 1613. In the case of the preceding article, the vendee may demand of all the vendors or
co-heirs that they come to an agreement upon the repurchase of the whole thing sold; and
should they fail to do so, the vendee cannot be compelled to consent to a partial redemption.
Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither may the
debtor be required to make partial payments.
However, when the debt is in part liquidated & in part unliquidated, the creditor may demand &
the debtor may effect the payment of the former without waiting for the liquidation of the latter.
Article 1583. Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof
by installments.
Where there is a contract of sale of goods to be delivered by stated installments, which are to be
separately paid for, & the seller makes defective deliveries in respect of one or more
installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one
or more installments, it depends in each case on the terms of the contract & the circumstances
of the case, whether the breach of contract is so material as to justify the injured party in
refusing to proceed further & suing for damages for breach of the entire contract, or whether
the breach is severable, giving rise to a claim for compensation but not to a right to treat the
whole contract as broken.
(3) Express agreement
Article 1714. If the contractor agrees to produce the work from material furnished by him, he
shall deliver the thing produced to the employer & transfer dominion over the thing. This
contract shall be governed by the following articles as well as by the pertinent provisions on
warranty of title & against hidden defects & the payment of price in a contract of sale.
Illustrations:
1. Obligations involving different parties; in other words, in a problem involving two or

more debtors and or two or more creditors. Usual scenario: There are two or more
debtors but only one creditor but lately there would be scenarios 2 or more creditors
even only one debtor (consider this possibility) The usual question: how much can one
of the debtor compelled to pay if this is an obligation to pay a sum of money? Or how
much can a creditor validly demand from the debtors? Clearly the question pertains to
whether it is joint or solidary because if this is joint each debtor can only be compelled to
pay his share and each creditor entitled to demand also as to his share. Basis: There are
as many debts as there are debtors and as many credits as there are creditors. That is
why in an example if there are 3 debtors and 2 creditors, in a joint obligation, there are
how many debts? Other authors say, 3 debts, this is WRONG because this three debtors,
each of them would have two debtors. These debts are separate and distinct from each
other. In other words, we would divide the entire obligation into three debtors, as each
debtor has two creditors. Effectively there are six debts.
2. Ex. (BAR EXAM QUESTION) Foreign medical students rented an apartment unit from
Thelma. In the contract it was stipulated that the students would be responsible for the
payment involving the bills in utilities. Now after one semester, three of the students went
back home to their country. And only one was left and in fact, this foreign student
transferred to another apartment unit that is smaller in size. But the lessor Thelma
actually discovered that there is an unpaid telephone bill in the amount of P80,000.00. So
Thelma demanded payment of the entire 80k from the foreign student who was left in the
country. The student said that I can only be compelled to pay 1/4 of the 80k. Who is
correct? The foreign student is correct. Common reason that is wrong: That there is no
stipulation that the obligation is solidary so therefore it is joint. This is wrong argument;
inaccurate. Wrong because the implication of the answer is solidarity would only arise if
it is so stipulated. This is wrong, because under 1207 there are three exceptional
circumstances when an obligation would be considered solidary:
a. If so stipulated.
b. The law on the matter requires solidarity.
c. Because the nature of the obligation requires solidarity.
3. That’s why if you are confronted with a problem whether an obligation is joint or
solidary, do not just base it on the stipulations. It may not be stipulated but the law
may provide for such. But the more fundamental matter is that I have to emphasize, just
because the problem pertains to a contract of lease doesn’t mean that the answer could be
found at the provisions of lease. Bear in mind that the general principles in obligations-
contracts are applicable to these contracts. Thus, the correct answer is the student is
correct because the obligation is a Joint Obligation. Because there was no stipulation
for solidarity, the law on the matter does not require solidarity and the third, the nature
of the obligation does not require solidarity. Common wrong: because the law presumes
that the obligation is joint. First, the law did not so provide, you didn’t see any word
“presume” in relation to that. If there is really a presumption, it is not a conclusive

presumption. Do not stop and claim that it is presumed. Read the facts in relation with the
applicability of laws.
4. Example: the problem pertains to succession and after the death of X, the heirs found out
that in the will a certain car was given to grandchild A. But B and C took possession of
the car after the death of X and they took the car out for a joy ride. So while driving, the
driver, B cause the total destruction of the car. C on the other hand was only a passenger.
B died while C got injured. Can C be held liable for the incident? Probably with
damages? Answer: YES. Even if it was not C’s fault. Because the nature of the
obligation requires solidarity this is base on an express provision of the law – Article
927. Under this provision, if two or more heirs take possession of a property which is
given to another heir and it was lost or destroyed because of one of them, they will be
held solidarily liable.
5. Before going into the law, how will you know if the party so stipulated that it is solidary?
what if the word “solidary” was not use, does it mean that it is not solidary? No. “jointly
and collectively”- Ronquillo vs CA ; “jointly and severally”- used in banking section;
“in solidum”; “individually and jointly”; “distinctively”; “separately”; “collectively”.
6. Ex. I promise to pay X followed by two or more signatures of the debtors, this is
considered to be solidary. “WE” – does not connote that it is JOINT, it may be solidary.
Should read the whole contract or PN, maybe it is in the end that there is a stipulation that
it is solidary.
7. Article 2194 – joint tortfeasors. Two or more persons liable under quasi-delict will be
held solidarily liable.
8. Ex. In agency, if you will be asked as to who will be liable. Do not just say agent and
principal. It is not all the time that the agent and principal are solidarily liable. But you
should complete the scenario, like: If the agents acted in excess of his authority and the
principal contributed in making the person believe that the agent had full power, the
principal and the agent would be held solidarily liable this is under 1911. But also
expressly provided two or more principals, in relation to a transaction involving an agent
they are held solidarily liable by law.
9. In relation to partners, ordinarily for partners obligations arising from contracts, JOINT
only. Unlike in code of commerce or commercial transactions, it is SOLIDARY. Ex: if
the obligation arising from quasi-delict, maybe one of the partners was in the
performance of his obligations, another suffered damage because of the wrongful act by
his partner. The law provides under Article 1824 in relation to Article 1822, that the
partners will be held solidarily liable among themselves and with the partnership. Ex:
in the course of the partnership, one of the partners misappropriated the sum of money
received from a client for the partnership. Under the law, all the partners are held
solidarily liable among themselves and with the partnership.
10. Even in Solutio Indebiti – if two or more persons received a thing which they don’t have
the right to demand and which was delivered to them by mistake, they can be held
solidarily liable. As you read the provisions of the law, bear in mind that some of this
provisions, two or more persons may be held solidarily liable. Ex. In the Family
Code, are there provisions where the spouses will be held solidarily liable? YES. As to
those obligations where conjugal properties will be charged with expenses.
11. So what if the obligation, aside from their particular rights and obligations as to their
shares, take note again if the obligation is 150k there 3 creditors, in a joint obligation,
each one is entitled to 50k if there is no designation as to respective shares. This claim
is very wrong: The share is equal because it is joint. As if the debtors will always share
equally because it is joint or the creditors will receive equally because it is joint. Not true.
Rather in Article 1208, if there is no designation as to the respective shares, they will
share equally. That’s why even if it is joint, they can talk about it and have an agreement
as to the shares each of them will receive it may be differently or the same. What if one
of the debtors became insolvent, will that result to an increase in liability of the other
debtors? Will that prejudice other debtors? Answer: again, it will depend on whether
the obligation is joint or solidary.
a. If it is a solidary obligation, e.g. A, B, C debtors and C became insolvent. How

much can A be held liable if the debt is 100k? If C became insolvent, how much
will A be liable? B will be liable for the entire amount because the obligation is
solidary. This is not a proper answer because you just repeated the facts. The
question there is, why would A be held liable for the whole 100k if one of them is
insolvent? Reason here is, this debtor can still be compelled to pay despite one of
the debtors is insolvent because in solidary obligations the share of the insolvent
will have to be shouldered by the other debtors who are not insolvent, because
“each one of them” as the law says which is wrong, because it should be “any
one of them” may be held liable for the entire amount. So A may still be held
liable despite the insolvency of one of the debtors.
b. If the obligation is joint, if one of them is insolvent would that result in the
increase of liability of the others? NEVER. Because a very important principle in
joint obligations, these debts are separate and distinct from each other. That’s
why even if one of the debtors is insolvent it will not affect/ prejudice the other
debtors. On the other hand, if one of the debt was condoned, can there be partial
condonation? YES. Can there be even partial condonation even in solidary
obligation? YES. The word “condone” does not mean the obligation is
extinguished. In joint, if one of the debts of the debtor was condoned, would that
benefit the other debtors? No, again their debts are separate and distinct from each
other. If the creditor demanded from A and condoned the share of B. A cannot
invoke the condonation in favour of B to benefit him.
c. In a solidary obligation, if the creditor condoned one of the share of the debtors,
can the condonation benefit the other debtors? In a way, because the other debtor
can only be compelled to pay less than the share of the debtor whose share was
condoned. In other words, if A, B, and C = 300k. A’s share was condoned. But
this is a solidary obligation, how much can B be compelled to pay? Only 200k
because he can raise the condonation of A as a partial defense. If C was

insolvent, it doesn’t matter, it is still 200k because it is a solidary obligation,
the share of C will have to be shouldered by the other debtors who are not
insolvent that is why B can still be compelled to pay 50k. Why? B can still be
compelled or be held liable as he is still not exempt from his obligation to his co-
debtors.
12. Distribution of share in insolvency: proportion to the share of the debtors.
13. I forgot to mention the nature of obligation in solidary: nature, insofar as SC had ruled in
this case xxx: that the obligations of two or more employers under the worker’s
compensation act on the premise that there are two or more employers. Their obligation
to the employee is solidary, not because it is stipulated in the contract, not because the
law the workers compensation act provides, but the court said but because of the
NATURE of the obligation, it is solidary.
14. But in this one last scenario, in Gutierrez vs. Gutierrez, 3 persons were held liable, 1.
father of the minor driver, 2. driver of the passenger truck/bus and 3. the owner of the
passenger truck. If you remember, the driver of the truck and the owner were held liable
under contract of carriage. The father was held liable, because the minor was negligent,
and the one injured is a passenger of the bus, the father can be held in vicarious case and
be held liable under quasi-delict, nonetheless the three of them were held SOLIDARILY
liable, was there a stipulation? NO. Is there a law? NO. If I have to support this ruling, it
may only be supported on this ground: by the nature of the obligation requires
solidarity. Not a good ruling but because of the nature, it can now be considered as a
good one.
15. MALAYAN INSURANCE vs. CA – similar facts in the sense that, 3 persons were held
liable, 1. Owner of the jeepney who was not even present when the accident happened, 2.
Insurance company, 3. Ricemill owner. The rice mill owner was correctly held liable
because it was his driver who caused the injury through his negligence, vicarious
liability. Malayan is really liable in insurance contract, because the jeepney was insured.
The owner of the jeepney was held liable but he was not held liable in the SC. As owner
of the jeepney he can only be held liable only if he was present there during the mishap
and if he didn’t exercise due diligence where by the exercise of due diligence he could
have prevented the mishap. He also cannot be held liable because he is not the employer
of the driver. Malayan said they cannot be held solidarily liable because the other two is
under quasi-delict and their liability is under contract. xxxx If we apply this ruling, in
Gutierrez, although there’s a substantial distinction as they are held liable under
different causes. That’s why I can accept a ruling in regular mishaps even if they are held
under different causes of action they may validly held solidarily liable on the ground
that the nature of the obligation requires solidarity.
16. Into the rights and obligations: favorite in the bar.
a. In relation to this: Defenses: We have already discussed the insolvency as a

defense. INSOLVENCY whether it is in a joint obligation or in solidary
obligation, in joint, the insolvency of one cannot be invoke by the others because
their obligation is distinct and individual. In solidary, it also cannot be invoked
because it will be shouldered by the other debtors. Personal defense of
MINORITY: if one of the debtors was a minor at the time the contract was
entered into. This is an obligation arising from a contract. Is minority a defense?
If it is a defense, who can invoke such? If he can invoke the defense, is it a total
or partial defense? As to the minor himself, it is always a defense, it doesn’t
matter if the obligation is joint or solidary, it is always a TOTAL defense.
Contract is voidable. If the minor wants the contract to be annulled, he must
return whatever he has received from the other party- Mutual restitution. He
wants to annul then he must return what he has received. If the one invoking
minority is not the minor himself, can he invoke? It DEPENDS. If it is JOINT,
cannot invoke because it is separate and distinct. If it is Solidary, YES but is it a
total or partial defense? Only PARTIAL. Example: 5 debtors – one of them is a
minor. 50k – debt. Creditor demanded payment to the other creditors like to B,
how much can B be compelled to pay despite one of them is a minor? Only 40k
because he can only invoke minority as to the share of the minor.
b. There can be a defense: Total Defense in any kind of obligation that you can
invoke in whether joint or solidary and can be invoked by anyone. That defense
goes into the NATURE OF THE OBLIGATION. E.g. if an action was filed
against one of the debtors, but the action was dismissed but thereafter the creditor
filed another action against another debtor, is it possible that the action will not
prosper, that it will be dismissed? YES. If the ground for the dismissal of the first
action is because the contract is void, then yes cause there’s no obligation to
speak of.
17. PNB CASE: During the pendency of the action for the recovery of sum of money, one of
the debtors died may this action still be prosecuted despite the death of one of the
debtors? The effect of this rather would the debt of one of the debtors result in the court
losing jurisdiction of the case? Others claim in this case that the claim should be filed
with the estate of the deceased, is that correct? Regardless if joint or solidary, xxx if
joint, one of the debtors died, the share would be null and void only with regard to the
share of the debtor who died but as to the other joint debtors they would still be held
liable because it is a separate and distinct obligation. But if this is a solidary obligation,
one of them died, would that result in the court losing jurisdiction over the case? No,
because in solidary obligation, the creditor can demand to any of the debtors for the
fulfilment of the obligation. The trial court can continue with the proceeding of this case.
18. But a very good case is the CALANG CASE: Negligent act of the driver. The driver and
the owner were held liable. Can they be held solidarily liable? Yes, they can be held
solidarily liable if the source of the obligation is quasi-delict. In quasi-delict xxxx
liability of the employer is also a direct and primary liability. And persons held liable
under quasi-delict can be held solidarily liable. In this case, this is a criminal complaint
filed against the driver because he injured and killed someone and he was convicted. And
in the conviction there is a civil liability. If someone died as a result of a crime or quasi-
delict, Article 2206 there’s a so-called indemnity and there is also what you call actual
damage. Even without proof, the minimum that should be given is P25,000.00 by
way of temperate damages. In addition to indemnity. BUT in this case, by way of
damages the driver and Philtranco was held solidarily liable. BUT the SC said this is
wrong, these two persons cannot be held solidarily liable. Why? Because in death, the
liability involved is only a subsidiary liability. In other words, the employer cannot be
held liable until the properties of the convict have been exhausted. Solidary is direct, that
you do not need to exhaust the properties of another. That is why it can never be solidary.
I think this is a good ruling.
OTHER KINDS OF OBLIGATIONS
19. An obligation to pay 1M, can the debtor compel the creditor to accept a 100k? What if
the creditor refuses to accept does it mean that he can be considered in delay in relation to
100k? As a rule, NO. A creditor cannot be compelled to accept a partial
performance. As a rule, partial performance is none performance. He cannot be
compelled to accept therefore he cannot be considered in delay. Debtor will be the one
who will be in delay. But of course there are exceptions to this rule: INSTALLMENT.
Why would the creditor accept the partial payment? Because it has been agreed by both
the creditor and the debtor. In other words, such obligation is called a DIVISIBLE
OBLIGATION.
20. The obligation is partially unliquidated. The portion demandable is only the liquidated
portion of the debt.
21. Are there obligations which are in a way are divisible even they are not stipulated by the
parties? YES. As provided by law these are obligations that requires the performance
for a number of days or in metric units. On the other hand, are there obligations which
by their nature are indivisible? Not even the parties would stipulate for solidarity? The
law would also tell us YES. A good example would be an obligation to deliver a definite
thing. Obligation to deliver a horse. It cannot be that the obligation is divisible. By its
very nature it is indivisible. Example, if A, B and C obliged themselves to deliver to X a
specific horse, the value of the horse is 90k. However before the obligation became due,
the horse died due to the fault of A. if X creditor, filed an action against C. May the
action prosper? Decide the case. First, there are those who would say that the action
would not prosper because not all the debtors were impleaded in this case. This is wrong.
First, if the question is “may” the action prosper, you should first see who is the
aggrieved party or the injured party. It doesn’t mean that X is the plaintiff he is the
injured party. But if he is really the injured party and this is clear under the law, he has a
remedy or remedies available to him. Next question would be: what was the remedy
invoked? If the remedy invoked is wrong then the case would be dismissed. In the
problem, that would have been correct that the all debtors should have been impleaded
only if the action is for specific performance. But under the circumstances, if you are the
lawyer, would you file an action for specific performance? NO. Because the horse
already died. If you are the creditor’s lawyer, you would advice your client to ask for an
amount of money which is equivalent to the value of the horse. Will the action prosper
against C? To answer the question, you should know the nature of the problem. The
problem here pertains to joint indivisible obligation (JIO). Why joint? Because there
is no stipulation, law on the matter does not require solidarity, and the nature of the
obligation does not require solidarity. It is also indivisible because it involved the
delivery of a determinate thing, a definite thing. Knowing that this is JIO, and cannot be
fulfilled due to the fault of one of the debtors, law says this obligation would be
converted into a monetary obligation with each debtor only be held liable to each of his
share and only the debtor at fault be the only one liable for damages. In other words,
how much can C be held liable in the problem? Only 30k. But if this is a Solidary
Indivisible Obligation? How much will C be held liable? 90k plus damages. But of
course C can seek reimbursement to B for 30k only. But only to A can C seek
reimbursement for the damages as A is the one who was at fault.
22. Maybe for midterms: In a problem, A obliged himself, promise to pay X or Y. when the
obligation was already due, X demanded the payment from A but thereafter Y also
demanded payment from A. A then paid Y instead of X even though X demanded first.
May X have a cause of action against A? Does A still have a liability to X? First, start
with what kind of obligation is involved. This is neither joint nor solidary because of the
word “OR” had this been “and” then maybe it can be a joint or solidary obligation.
Second, conjunctive or alternative, this is also wrong because there is only one prestation
involve, in those kinds of obligations, there should be two or more prestations involved.
In other words, what kind of obligation is involved here? DISJUNCTIVE
OBLIGATION. The problem with this, in this scenario, there is no express provision or
article which would provide us with this rule in relation to this problem as to whether X
would still have a cause of action against A. But the answer to the question would be if
the intention of the parties is clear as to who has the right to choose to whom payment
should be made. If A has the right to choose, does it matter if X demanded the payment
first, no it doesn’t matter. If X and Y has the right to choose and it was clear that X has
the right to receive or recover the amount, A should have paid X instead of Y so X
would still have a cause of action against A. So the problem here would be: That the
intentions of the parties were not clear as to whom payment should be made. Then who
has the right to choose, since no express provision we have to apply other provisions by
analogy. Tolentino would want us to apply rules in SOLIDARY obligations. So would X
have a cause of action against A? YES, because is solidary obligations, if there are two or
more creditors, the debtor should pay the creditor who has first made the demand. Atty
Uribe cannot agree with Tolentino. Why? Because the three exceptional rules are not
present in the case. Rather I would support the answer that we should apply the rules on
Alternative Obligations. There is a semblance as there is an alternative subjects. If in
alternative obligations, would X still have a cause of action against A? No more because
in alternative, the law provides that the debtor has the right to choose unless otherwise
expressly granted to the creditor.
5. AS TO THE PRESENCE OF AN ACCESSORY UNDERTAKING IN CASE OF

BREACH
a. OBLIGATIONS with a Penal Clause
Article 1226. In OBLIGATIONS with a penal clause, the penalty shall substitute the indemnity
for damages & the payment of interests in case of non-compliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of
this Code.
Balane: Articles 1226 to 1230 on obligation with a penal clause is the same as liquidated
damages found in Articles 2226 to 2228 by authority of Lambert v. Fox, 26 Phil. 588.
(Tolentino) Penal Clause- A penal clause is an accessory undertaking to assume greater liability
in case of breach. The purpose is to strengthen the coercive force of the obligation. When a penal
clause is present, damages do not have to be proved.
Thus, DUAL FUNCTION OF PENAL CLAUSE:
(1) To provide for liquidated damages
(2) To strengthen the coercive force of the OBLIGATION by threat of greater responsibility in
case of breach.
Characteristics of Penal Clause:
1. Subsidiary (also called alternative)  upon non-performance, only the penalty may be
demanded.
Exception: Where penalty is joint (cumulative), where both the principal undertaking & penalty
may be demanded under Article 1227, second sentence: "xxx unless this right has been clearly
granted him."
Notice the word clearly (not explicitly) which means that the right can be clearly granted by
implication.
2. Exclusive  penal clause is for reparation. It takes the place of damages.
Exception: When it is for punishment  in which case both penalty & damages may be
demanded, namely--
 If there is a stipulation that both penalty & damages are recoverable in case of breach
 If the obligor refuses to pay the penalty
 If the obligor is guilty of fraud in the fulfillment of his obligation.
Balane: The SC considered the 4% interest as not a penal clause because it does not strengthen
the coercive force of the obligation.
ROBES-FRANCISCO V. CFI [86 SCRA 59]

Facts: In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner,
agreed to sell to private respondent Lolita Millan for and in consideration of the sum of
P3,864.00, payable in installments, a parcel of land containing an area of approximately 276
square meters, situated in Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of
its Franville Subdivision. 2
Millan complied with her obligation under the contract and paid the installments stipulated
therein, the final payment having been made on December 22, 1971. The vendee made a total
payment of P5,193.63 including interests and expenses for registration of title. 3
Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the
final deed of sale and the issuance to her of the transfer certificate of title over the lot. On March
2, 1973, the parties executed a deed of absolute sale of the aforementioned parcel of land. The
deed of absolute sale contained, among others, this particular provision:
That the VENDOR further warrants that the transfer certificate of title of the above-
described parcel of land shall be transferred in the name of the VENDEE within the
period of six (6) months from the date of full payment and in case the VENDOR fails to
issue said transfer certificate of title, it shall bear the obligation to refund to the
VENDEE the total amount already paid for, plus an interest at the rate of 4% per annum.
(record on appeal, p. 9)
Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the
corporation failed to cause the issuance of the corresponding transfer certificate of title over the
lot sold to Millan, hence, the latter filed on August 14, 1974 a complaint for specific
performance and damages against Robes-Francisco Realty & Development Corporation.
Issue: Whether or not the petitioner is correct in invoking Article 1226 of the Civil Code which
provides that in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary.
Held: NO. We would agree with petitioner if the clause in question were to be considered as a
penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty,
for even without it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to
recover the amount paid by her with legal rate of interest which is even more than the 4%
provided for in the clause.
It is therefore inconceivable that the afore-cited provision in the deed of sale is a penal clause
which will preclude an award of damages to the vendee Millan. In fact the clause is so worded as
to work to the advantage of petitioner corporation.
CASE DOCTRINES: The theory that penal and liquidated damages are the same cannot be
sustained where obligor is guilty of fraud in fulfillment of OBLIGATION;
 The penalty clause does not partake of the nature of liquidated damages.
 Party to a contract which was breached by the other, may be given the right to recover
actual damages instead of stipulated liquidated damages.
 A creditor, in case of fraud by the obligor is entitled to stipulated penalty plus the
difference between the proven damages & such stipulated penalty.
PAMINTUAN V. CA [94 SCRA 556]
FACTS: This is a case for Recovery of compensatory damages for breach of contract of sale in
addition to liquidated damages.
In 1960, MARIANO C. PAMINTUAN, with his barter license, was authorized to export to Japan
1000 metric tons of white flint corn valued at USD 47K, in exchange for collateral importation of
plastic sheetings of equal value. As such he entered into contract with TOKYO MENKA
KAISHA, LTD. of OSAKA, JAPAN. He also entered into a contract TO SELL the plastic
sheetings to YU PING KUN, CO., INC. for Php 265K, thus the latter undertook to open an
irrevocable domestic letter of credit in favor of Pamintuan.
It was further agreed that Pamintuan would deliver the plastic sheetings to bodegas of Yu Ping in
Manila and suburbs “within one month upon arrival of carrying vessels”; & that upon breach,
aggrieved party may collect liquidated damages of Php 10K.
Pamintuan made incomplete deliveries, and then asked the President of the Co. for cash payment
and adjustments in price, which the company agreed to. When Pamintuan refused to complete his
deliveries, he invoked that the contract was novated and Co. failed to comply thereto.
Co. filed for damages against Pamintuan. The lower court awarded actual damages, liquidated
damages as stipulated, and moral damages.
Pamintuan appealed and assert that Yu Ping is only entitled to recover liquidated damages. CA
found Pamintuan guilty of fraud, and sustained the Lower court.
ISSUE: Whether or not the Co. is entitled only to liquidated damages as appearing in the contract
of sale.
HELD: We hold that appellant's contention cannot be sustained because the second sentence of
Article 1226 itself provides that "nevertheless, damages shall be paid if the obligor xxx is
guilty of fraud in the fulfillment of the obligation." xxx The trial court & the CA found that
Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheeting
& he overpriced the same. Xxx There is no justification for the Civil Code to make an apparent
distinction between penalty and liquidated damages because the settled rule is that there is no
difference between penalty and liquidated damages insofar as legal results are concerned and that
either may be recovered without the necessity of proving actual damages and both may be reduced
when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes,
cited in 4 Tolentino's Civil Code, p. 251). The penalty clause is strictly penal or cumulative in
character and does not partake of the nature of liquidated damages (pena sustitutiva) when
the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la
obligacion principal, ademas de la pena, los danos y perjuicios. Se habla en este caso de pena
cumulativa, a differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion

ordinaria." (Ibid, Castan Tobenas, p. 130).
After a conscientious consideration of the facts of the case, as found by Court of Appeals and the
trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true
nature of which is not easy to categorize, we further hold that justice would be adequately done in
this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to
award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract.
The proven damages supersede the stipulated liquidated damages.
This view finds support in the opinion of Manresa (whose comments were the bases of the new
matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud
the difference between the proven damages and the stipulated penalty may be recovered (Vol. 8,
part. 1, Codigo Civil, 5th Ed., 1950, p. 483).
Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-
nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing
of the complaint.
Penalty & Liquidated damages:
 There is no justification for the NCC to make an apparent distinction between penalty &
liquidated damages because the settled rule is that there is no difference between penalty &
liquidated damages insofar as legal results are concerned & either may be recovered
without the necessity of proving actual damages & both may be reduced when proper. Xxx
 We further hold that justice would be adequately done in this case by allowing Yu Ping
Kun Co., Inc. to recover only the actual damages proven, & not to award to it the stipulated
liquidated damages of P10,000 for any breach of the contract. The proven damages
supersede the stipulated liquidated damages.
 This view finds support in the opinion of Manresa that in cases of fraud the difference
between the proven damages & the stipulated penalty may be recovered.
Legality of Penal clause: not contrary lo law, morals, public order
(e.g. usurious, immoral, unjust, merciless)
How construed: strictly construed, in accord with stipulation. (effecting minimal rights)
When there could be damages aside from Penalty:
(1) Express provision: ex. “legal interest of 12% p.a. aside from penalty may be had, plus
attorney’s fees of 20%”
(2) Debtor refused to pay penalty
(3) There’s fraud in debtor’s non-performance

 Non-performance gives rise to presumption of fault, debtor has burden of proof:

defenses may be force majeure, or act of creditor himself;
CASE:
BACHRACH V. ESPIRITU [52 Phil. 346]
RE: Chattel Mortgage with PENAL CLAUSE
FACTS: Faustino Espiritu purchased from Bachrach Motor in JULY 1925 a two-ton White truck
on installment basis. This truck was mortgaged, including two other white trucks owned by
defendant which are fully paid for, to secure the loan.
In FEBRUARY 1925 defendant also purchased another one-ton white truck from same plaintiff
corp. with down-payment balance on installment basis also, placing this truck on mortgage for
security and including the 2 above mortgaged trucks also. Again, defendant failed to pay this debt.
In both sales, a 12% annual interest was agreed upon the unpaid portion of the contracts, and upon
maturity, when due, non-payment of total remaining debt would give rise to 25% penalty; aside
from mortgage deed, there was a Promissory Note, co-signed by defendant brother Rosario
Espiritu solidarily. Thus, Rosario appeared as intervenor in the collection suits alleging to be the
sole owner of the two other trucks mortgaged. He alleged that he did not sign the mortgage and
did not consent to the inclusion of his two trucks therein.
While the cases were pending in lower court, the trucks were sold by virtue of the mortgage and
brought in a net sum not enough to settle the debts due. The Lower court directed payments of all
the sums due and in both two cases ordered the payment of 12% interest p.a. until fully paid and a
penalty of 25% in addition as appearing in the contracts. To these matters the defendants alleged
that these amounts to usury.
ISSUE: Whether or not the 12% interest p.a. plus additional penalty of 25% makes the contract
usurious?
HELD: NO. Article 1152 of the Old Civil Code permits the agreement upon a penalty apart from
the interest. Should there be such an agreement, the penalty xxx does not include the interest, & as
such the two are different & distinct things which may be demanded separately. The penalty is
not to be added to the interest for the determination of whether the interest exceeds the rate fixed
by law, since said rate was fixed only for the interest.
BUT, considering partial performance, SC reduced penalty to 10% in accord with Article
1154. (Article 1229, NCC)
Article 1227. The debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for him. Neither
can the creditor demand the fulfillment of the obligation & the satisfaction of the penalty at the
same time, unless this right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced.
 General Rule: Debtor cannot avoid performance by paying the penalty; except when
expressly granted to debtor.
 General Rule as to creditor: may not demand both fulfillment and payment of penalty at the
same time; except if such right is granted clearly.
 As to the last sentence, when it becomes impossible without creditor’s fault  it will happen
only if through debtor’s fault or delay, for penalty to become enforceable; because if through
fortuitous event without creditor’s nor debtor’s fault, principal OBLIGATION would be
extinguished and so will the penal clause.
Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded.
Baviera: Courts can enforce contracts according to their terms.
Article 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the court if it is iniquitous or unconscionable.
Article 1230. The nullity of the penal clause does not carry with it that of the principal
obligation.
The nullity of the principal obligation carries with it that of the penal clause.
Partial Performance  refers to extent or quantity of fulfillment
Irregular Performance  refers to the form
 Doctrine of Strict Construction will apply as against the enforcement of the penalty in its
entirety, when the clause is clearly punitive, not when it is impliedly intended as liquidated
damages;
 Thus penalty is mitigated in:
1. partial or irregular performance
2. iniquitous or unconscionable penalty
1. Distinguished from OBLIGATION with suspensive condition:
 Happening of the condition gives rise to the OBLIGATION; in penal there is already a
principal OBLIGATION
 The principal OBLIGATION itself is dependent upon a future and uncertain event; in
penal, only the accessory OBLIGATION (the penalty) depends upon non-performance or
breach.
2. Distinguished from alternative OBLIGATIONS
paying the penalty, save in the case where his right has been expressly reserved for him. Neither
Article 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful or
which could not have been the object of the obligation.
ALTERNATIVE OBLIGATION WITHPENAL

OBLIGATION CLAUSE
2 or more there’s only 1 principal OBLIGATION,

OBLIGATIONS are due only in case of non-performance shall the
but performance of 1 is penal clause be enforceable
enough
Impossibility of one of impossibility of principal OBLIGATION,

OBLIGATIONS, the penal clause extinguished
other/s subsists
Debtor can choose which debtor cannot choose to pay penalty to

prestation to fulfill avoid performance, unless expressed
X obliged to deliver a X obliged to deliver a horse to Y. if he

horse to Y or pay him fails he will pay him P500
P500
2. Distinguished from Facultative OBLIGATIONS
Article 1206. When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the negligence of the
obligor does not render him liable. But once the substitution has been made, the obligor is liable
for the loss of the substitute on account of his delay, negligence or fraud.
paying the penalty, save in the case where this right has been expressly reserved for him. Neither
FACULTATIVE OBLIGATION with PENAL CLAUSE

OBLIGATION
Debtor has power to General Rule, none; except when

make substitution expressed
Creditor cannot demand such right to demand both may be given

both prestations
GUARANTY OBLIGATION with PENAL CLAUSE
Is a contract by which OBLIGATION to pay penalty is different

virtue, a 3rd person from the principal OBLIGATION, but
(guarantor) obliged also paid in lieu of debtor’s non-
himself to fulfill performance
prestation in lieu of
debtor’s non-
performance
Intended to insure Intended to insure performance of

performance of principal principal OBLIGATION
OBLIGATION
Accessory & subsidiary Accessory & subsidiary OBLIGATION

OBLIGATION
Principal debtor cannot both OBLIGATIONS can be assumed by

be guarantor one person
Subsists even when penalty is extinguished in such case,

principal OBLIGATION unless assumed by 3rd person
is voidable or
unenforceable
Q: When does delay set in?
A: Delay sets-in in the following manner:
1. For Reciprocal simultaneous OBLIGATIONS

 By the readiness of one of the parties to perform & his letting the other party know; & the other
party is not ready to comply in a proper manner with what is incumbent upon him.
2. For Reciprocal OBLIGATIONS which are not simultaneous
 General Rule: Demand is necessary (Article 1169, par.
(1) This is called mora solvendi ex persona.
Exception: When demand is not necessary (the exceptions are found in Article 1169, par. 2.) This
is called mora solvendi ex re.
Q: What kind of demand is necessary?
A: Judicial or extra-judicial
Exceptions:
When the obligation or the law expressly so declare. When the contract says that without the
necessity of demand, default sets in upon the failure of the obligor to perform on due date.
There must be something in the contract which explicitly states that the demand is not
necessary in order that delay may set in.
When from the nature & the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract.
Illustration: Bong Baylon is getting married in Valentines '96. Inno Sotto was supposed to make
Ella's (the bride) wedding gown. Feb. 14 comes, no gown was delivered. Ella gets married in blue
jeans & T-shirt. Finally, on Feb. 15, Inno delivers the gown. xxx Ella sues Inno for breach. Inno
says there was no demand. In this case, demand is not necessary in order that delay may exist.
When demand would be useless, as when the obligor has rendered it beyond his power to
perform. Example is the case of Chavez v. Gonzales, infra.
5. As to the presence of an accessory undertaking in case of breach
1. Bachrach v. Espiritu, 52 Phil 346
Facts: Espiritu purchased from Bachrach a two-ton white truck for P11,938.50. She payed the
downpayment of P1,000.00. To secure payment, Espiritu mortgaged the said truck along with three
other trucks.
It was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the
execution of the contracts and in case of non-payment of the total debt upon maturity, 25 per cent
thereon, as penalty. The trial court ordered the Espiritu to pay the sum of P7,732.09 with interest
rate of 12% per annum and 25% as penalty. The second case, the defendant and the intervenor to
pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1, 1925
until fully paid, and 25 per cent thereon as penalty.
Issue: Whether or not the payment of penalty together with interest was proper.
Held: Yes.It is finally contended that the 25 per cent penalty upon the debt, in addition to the
interest of 12 per cent per annum makes the contract usurious. Such a contention is not well
founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart from the
interest. Should there be such an agreement, the penalty, as was held in the case of Lopez vs.
Hernaez (32 Phil., 631), does not include the interest, and as such the two are different and distinct
things which may be demanded separately. According to this, the penalty is not to be added to the
interest for the determination of whether the interest exceeds the rate fixed by the law, since said
rate was fixed only for the interest. But considering that the obligation was partly performed, and
making use of the power given to the court by article 1154 of the Civil Code, this penalty is
reduced to 10 per cent of the unpaid debt.
With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay
only 10 per cent thereon as penalty, the judgment appealed from is affirmed in all other respects
without special pronouncement as to costs. So ordered.
2. Robes-Francisco v. CFI, 86 SCRA 59
Facts: Robles-Francsico agreed to sell to Millen in consideration of the sum of P3,864.00, payable
in installments, a parcelrof land in Franville Subdivision. After completing the payment of the
installments, she made repeated demands upon the corporation and the issuance to her of the
transfer of certificate of tile. The parties eventually executed a deed of absolute sale. However, the
corporation failed to cause the issuance of the corresponding transfer certificate of title over the lot.
This prompted her to file a complaint for specific performance and damages. The corporation
prayed that the complaint be dismissed alleging that the deed of sale was voluntarily executed
between the parties and the plaintiff was amply protected by the provision for payment of interest
of 4% per annum of the total amount paid for the delay in the issuance of the title.
Finding that the realty corporation failed to cause the issuance of the corresponding transfer
certificate of title because the parcel of land conveyed to Millan was included among other
properties of the corporation mortgaged to the GSIS to secure an obligation of P10 million and that
the owner’s duplicate certificate of title of the subdivision was in the possession of the Government
Service Insurance System (GSIS), the trial court rendered judgement against Robes-Francisco.
Robes-Francisco was sentenced to cause the registration of the transfer of title or pay to the
plaintiff the sum of P5,193.63 with interest at 4% annum. In either case, defendant is sentenced to
pay nominal damages in the amount of P20,000.00 plus attorney’s fees in the amount of P5,000.00
Petitioner contends that the deed of absolute sale executed between the parties stipulates that
should the vendor fail to issue the transfer certificate of title within six months from the date of full
payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per
annum, hence, the vendee is bound by the terms of the provision and cannot recover more than
what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which
provides that in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary.
Issue: Whether or not the 4% per annum indicated in the contract was a penal clause.
Held: No. The foregoing argument of petitioner is totally devoid of merit. We would agree with
petitioner if the clause in question were to be considered as a penal clause. Nevertheless, for very
obvious reasons, said clause does not convey any penalty, foreven without it, pursuant to Article
2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal
rate of interest which is even more than the 4% provided for in the clause.7-a
It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which
will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work
to the advantage of petitioner corporation.
Unfortunately, the vendee, now private respondent, submitted her case below without presenting
evidence on the actual damages suffered by her as a result of the nonperformance of petitioner’s
obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to
acquire title to the lot bought by her was violated by petitioner and this entitles her at the very least
to nominal damages.
As to entitlement of nominal damages: We are of the view that the amount of P20,000,00 is
excessive. The admitted fact that petitioner corporation failed to convey a transfer certificate of title
to respondent Millan because the subdivision property was mortgaged to the GSIS does not in
itself show that there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was
the expectation of the vendor that arrangements were possible for the GSIS to make partial releases
of the subdivision lots from the overall real estate mortgage. It was simply unfortunate that
petitioner did not succeed in that regard.
For that reason We cannot agree with respondent Millan that the P20,000.00 award may be
considered in the nature of exemplary damages.
In case of breach of contract, exemplary damages may be awarded if the guilty party acted in
wanton, fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or
corrective damages are to be imposed by way of example or correction for the public good, only if
the injured party has shown that he is entitled to recover moral, temperate or compensatory
damages.14
Here, respondent Millan did not submit below any evidence to prove that she suffered actual or
compensatory damages.
To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal
damages is fair and just under the following circumstances, viz: respondent Millan bought the lot
from petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was
only on March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding
the lapse of almost three years since she made her last payment, petitioner still failed to convey the
corresponding transfer certificate of title to Millan who accordingly was compelled to file the
instant complaint in August of 1974.
3. Pamintuan v. CA – general rule was not complied. There was fraud.
Facts: Pamintuan was the holder of a barter license wherein he was authorized to export to Japan
1k metric tones of white flint corn in the amount of $47,000.
He entered into an agreement to ship his corn to Tokyo Menka Kaisha Ltd of Osaka, Japan in
exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping Kun Co for
265,000 pesos. The company undertook to open an irrevocable domestic letter of credit for that
amount in favor of Pamintuan.It was further agreed that Pamintuan would deliver the plastic
sheetings to the company at its bodegas in Manila or suburbs directly from the piers "within one
month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitle the
aggreived party to collect from the offending party liquidated damages in the sum of ten thousand
pesos.
Issue: Whether or not the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated
damages.
Held: No. Pamintuan relies on the rule that a penalty and liquidated damages are the same
(Lambert vs. Fox 26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no
such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by
the parties to a contract, to be paid in case of breach thereof" (Art. 2226, Civil Code).
We hold that appellant's contention cannot be sustained because the second sentence of article
1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in
the fulfillment of the obligation". "Responsibility arising from fraud is demandable in all
obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for an damages which may be reasonably attributed to the non-
performance of the obligation" (Ibid, art. 2201).
The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did
not make a complete delivery of the plastic sheetings and he overpriced the same. That factual
finding is conclusive upon this Court.
There is no justification for the Civil Code to make an apparent distinction between penalty and
liquidated damages because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be recovered without
the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216
and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code,
p. 251).
Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una funcion
coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion
principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del daño, o sea la
de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o
cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en
sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole
consecuencias mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion
contractual. " (3 Derecho Civil Espanol, 9th Ed., p. 128).
The penalty clause is strictly penal or cumulative in character and does not partake of the nature of
liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el
supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y
perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en
que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).
After a conscientious consideration of the facts of the case, as found by Court of Appeals and the
trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true
nature of which is not easy to categorize, we further hold that justice would be adequately done in
this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to
award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract.
The proven damages supersede the stipulated liquidated damages.
This view finds support in the opinion of Manresa (whose comments were the bases of the new
matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud
the difference between the proven damages and the stipulated penalty may be recovered (Vol. 8,
part. 1, Codigo Civil, 5th Ed., 1950, p. 483).
Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-
nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing
of the complaint.
With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in
this instance.
4. Castillo v. Security Bank, et. al., G.R. No. 196118, July 30, 2014
Facts: The petitioners Castillo et al were doing business under the name of JRC Poultry Farms. The
Spouses Castillo obtained a loan from SBC in the amount of P45M secured by real estate mortgage
over 11 parcels of land belonging to different members of the Castillo family. They also procured a
second loan amounting to P2.5M which was secured by a mortgage by a land in pasay city. SBC
proceeded to foreclose the properties upon failure to pay their obligations.
SBC was then adjudged as the winning bidder in the foreclosure sale held on July 29, 1999.
Thereafter, they were able to redeem the foreclosed properties, with the exception of the lots
covered by Torrens Certificate of Title (TCT) Nos. T-28302 and 28297.On January 30, 2002,
Leonardo filed a complaint for the partial annulment of the real estate mortgage. He alleged that he
owns the property covered by TCT No. T-28297 and that the Spouses Castillo used it as one of the
collaterals for a loan without his consent. On the other hand, the Spouses Castillo insisted on the
validity of Leonardo’s SPA. They alleged that they incurred the loan not only for themselves, but
also for the other members of the Castillo family who needed money at that time. Upon receipt of
the proceeds of the loan, they distributed the same to their family members, as agreed upon.
However, when the loan became due, their relatives failed to pay their respective shares such that
Leon was forced to use his own money until SBC had to finally foreclose the mortgage over the
lots.
The RTC ruled in favor of Leonardo declaring the real estate mortgage as null and void. Likewise,
defendants spouses Leon C. Castillo, Jr. and Teresita Flores-Castillo are hereby ordered to pay
plaintiff moral damages in the total amount of P500,000.00 and exemplary damages of P20,000.00.
All other claims for damages and attorney’s fees are DENIED for insufficiency of evidence.
The CA denied Leonardo’s appeal and granted that of Spouses Castillo and SBC.
Issue: Whether or not the real estate mortgage constituted over the property under TCT No. T-
28297 is valid and binding.
Held: Yes. The SC ruled that the real estate mortgage is valid considering that Leonardo
failed to prove that his signature to the instrument was a forgery.
Verily, the redemption price comprises not only the total amount due under the mortgage deed, but
also with interest at the rate specified in the mortgage, and all the foreclosure expenses incurred by
the mortgagee bank. To sustain Leonardo’s claim that their payment of P45,000,000.00 had
already extinguished their entire obligation with SBC would mean that no interest ever accrued
from 1994, when the loan was availed, up to the time the payment of P45,000,000.00 was made in
2000-2001.
SBC’s 16% rate of interest is not computed per month, but rather per annum or only 1.33% per
month. In Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch,
[29] the Court held that the interest rate of 24% per annum on a loan of P244,000.00 is not
considered as unconscionable and excessive. As such, the Court ruled that the debtors cannot
renege on their obligation to comply with whatis incumbent upon them under the contract of loan
as they are bound by its stipulations. Also, the 24% per annum rate or 2% per month for the
penalty charges imposed on account of default cannot be considered as skyrocketing. The
enforcement of penalty can be demanded by the creditor in case of nonperformance due to the
debtor’s fault or fraud. The nonperformance gives rise to the presumption of fault and in order to
avoid the penalty, the debtor has the burden of proving that the failure of the performance was due
to either force majeure or the creditor’s own acts.[30] In the instant case, petitioner failed to
discharge said burden and thus cannot avoid the payment of the penalty charge agreed upon.
5. Sps.Poon v. PRIME SAVINGS BANK, G.R. No. 183794, June 13, 2016
Facts: The Spouses Poon owned a commercial building which they used for their bakery business.
They executed a 10 year contract of lease over the building. paragraph 24 of the Contract provides:
24. Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR
shall have the right to terminate the lease without the necessity of serving a court order and to
immediately repossess the leased premises. Thereafter the LESSOR shall open and enter the
leased premises in the presence of a representative of the LESSEE (or of the proper authorities)
for the purpose of taking a complete inventory of all furniture, fixtures, equipment and/or other
materials or property found within the leased premises.
The LESSOR shall thereupon have the right to enter into a new contract with another party.
All advanced rentals shall be forfeited in favor of the LESSOR.6
3 years later, the BSP placed Prime Savings under receivership and ordered its eventual
liquidation. PSB vacated the leased premises and surrendered the same to the petitioners.
Subsequently, PDIC issued a demand letter asking for the return of the unused advance rental
amounting to P3,480,000.00 on the ground that par. 24 of the lease agreement has become
inoperative because the closure constituted as force majure. respondent sued petitioners before the
RTC of Naga City for a partial rescission of contract and/or recovery of a sum of money.
The RTC ordered the partial rescission of the contract particularly the second paragraph of par. 24
thereof and directing the defendant-spouses Jaime and Matilde Poon to return or refund to the
Plaintiff the sum of One Million Seven Hundred Forty Thousand Pesos (P1,740,000) representing
one-half of the unused portion of the advance rentals and riled that par. 24 of the contract was
penal in nature and that the clause was a valid agreement. Citing Provident Savings Bank v. CA15 as
legal precedent, it ruled that the premature termination of the lease due to the BSP’s closure of
respondent’s business was actually involuntary. Consequently, it would be iniquitous for
petitioners to forfeit the entire amount of P3,480,000.16 Invoking its equity jurisdiction under
Article 1229 of the Civil Code,17 the trial court limited the forfeiture to only one-half of that
amount to answer for respondent’s unpaid utility bills and E-VAT, as well as petitioner’s lost
business opportunity from its former bakery business.
Issue: Whether or not the proviso in the parties contract allowing the forfeiture of advance rentals
was a penal clause.
Held: Yes. The forfeiture clause in the Contract is penal in nature.

Petitioners claim that paragraph 24 was not intended as a penal clause. They add that respondent
has not even presented any proof of that intent. It was, therefore, a reversible error on the part of
the CA to construe its forfeiture provision of the Contract as penal in nature.
It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining deposit
still in the possession of the lessor, without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement by reason of the lessee’s violation of any
of the terms and conditions thereof. This kind of agreement may be validly entered into by the
parties. The clause is an accessory obligation meant to ensure the performance of the principal
obligation by imposing on the debtor a special prestation in case of nonperformance or inadequate
performance of the principal obligation.45
It is evident from the above quoted testimony of Jaime Poon that the stipulation on the forfeiture of
advance rentals under paragraph 24 is a penal clause in the sense that it provides for liquidated
damages.
In effect, the penalty for the premature termination of the Contract works both ways. As the CA
correctly found, the penalty was to compel respondent to complete the 10-year term of the lease.
Petitioners, too, were similarly obliged to ensure the peaceful use of their building by respondent
for the entire duration of the lease under pain of losing the remaining advance rentals paid by the
latter.
The forfeiture clauses of the Contract, therefore, served the two functions of a penal clause, i.e., (1)
to provide for liquidated damages and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in case of breach.47 As the CA correctly found, the prestation
secured by those clauses was the parties’ mutual obligation to observe the fixed term of the lease.
For this reason, We sustain the lower courts’ finding that the forfeiture clause in paragraph 24 is a
penal clause, even if it is not expressly labelled as such.
A reduction of the penalty agreed upon by the parties is warranted under Article 1129 of the
Civil Code.
We have no reason to doubt that the forfeiture provisions of the Contract were deliberately and
intelligently crafted. Under Article 1196 of the Civil Code,48 the period of the lease contract is
deemed to have been set for the benefit of both parties. Its continuance, effectivity or fulfillment
cannot be made to depend exclusively upon the free and uncontrolledchoice of just one party. 49
Petitioners and respondent freely and knowingly committed themselves to respecting the lease
period, such that a breach by either party would result in the forfeiture of the remaining advance
rentals in favor of the aggrieved party.
If this were an ordinary contest of rights of private contracting parties, respondent lessee would be
obligated to abide by its commitment to petitioners. The general rule is that courts have no power
to ease the burden of obligations voluntarily assumed by parties, just because things did not turn
out as expected at the inception of the contract.50
The reasonableness of a penalty depends on the circumstances in each case, because what is
iniquitous and unconscionable in one may be totally just and equitable in another.53 In resolving
this issue, courts may consider factors including but not limited to the type, extent and purpose of
the penalty; the nature of the obligation; the mode of the breach and its consequences; the
supervening realities; and the standing and relationship of the parties.54
Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of
what could be their last chance to recoup whatever bank assets or receivables the PDIC can still
legally recover. Besides, nothing has prevented petitioners from putting their building to other
profitable uses, since respondent surrendered the premises immediately after the closure of its
business. Strict adherence to the doctrine of freedom of contracts, at the expense of the rights of
innocent creditors and investors, will only work injustice rather than promote justice in this case.55
Such adherence may even be misconstrued as condoning profligate bank operations. We cannot
allow this to happen. We are a Court of both law and equity; We cannot sanction grossly unfair
results without doing violence to Our solemn obligation to administer justice fairly and equally to
all who might be affected by our decisions.56
Neither do We find any error in the trial court’s denial of the damages and attorney’s fees claimed
by petitioners. No proof of the supposed expenses they have incurred for the improvement of the
leased premises and the payment of respondent’s unpaid utility bills can be found in the records.
Actual and compensatory damages must be duly proven with a reasonable degree of certainty.57
To recover moral and exemplary damages where there is a breach of contract, the breach must be
palpably wanton, reckless, malicious, in bad faith, oppressive, or abusive. Attorney’s fees are not
awarded even if a claimant is compelled to litigate or to incur expenses where no sufficient
showing of bad faith exists.58 None of these circumstances have been shown in this case.
Illustrations:
1. ROBLES-FRANCISCO vs. CFI CASE: This case would tell you the nature of a penal
clause. Spouses bought a parcel of land payable in instalment and in the contract it was
stipulated that if despite full payment Robles-Francisco the (developer) would not be able
to give to the partners the certificate of title over the land the seller is obliged to return all
the amounts paid plus four percent interest. Now when the spouses were already paid of
the entire amount of the purchase price, Robles-Francisco could not deliver the
certificate of title over such parcel of land because the mother title was being mortgaged
with the GSIS, hence, the condition cannot be satisfied, and that’s why the spouses filed
this case to recover all the amounts paid plus 4% interest plus damages. Actual amount
paid + 4% + nominal damages. But Robles-Francisco would question this decision
claiming that, the 4% interest stipulation is a penal clause and under the law the clause
shall substitute the indemnity for damages and the payment of interest. In other words,
the court should have not awarded the nominal damages in addition to the penalty. Is the
ruling in Robles-Francisco correct? WRONG. Because the 4% interest stipulation said
the court cannot be considered as a penal clause; because a penal clause by its nature
should provide for a greater liability in case of non-performance and even under the
law at that time, if a person fails to pay a sum of money it is already in delay, he will be
liable for interest, if you have any agreement as to the rate it would have to be 6% at that
time, now 12%, if by law you will be liable for 6% and by stipulation only 4%, how
could that be considered a penal clause? When again a penal clause should provide for a
greater liability. So what happened? The trial court then ruled that Robles-Francisco
should return all the amount received plus 4% penalty plus nominal damages. However, I
said as a rule that penalty shall substitute as indemnity for damages and payment of
interest as this admits exceptions. In other words, aside from the penalty agreed upon,
the debtor may be held liable for other amounts. 3 reasons:
a. Because it is so stipulated. E.g. Credit card agreement. In other words here,

penalty shall not be a substitute for indemnity for damages and the payment of
interest. May interest ka na, may penalty ka pa. Which was in the ruling in the
case of Bachrach vs. Espiritu – stipulated penalty of 25% there is still an interest
of 12% although if you read the case, ordinarily are courts bound to the penalty
agreed upon by the parties? YES because it is so stipulated. But of course there
are exceptions, there are instances when the court would have the power to
reduce the penalty agreed upon:
i. there was irregular in the performance (Bachrach vs. Espiritu; Macalinao

vs. BPI);
ii. when the penalty is unconscionable. When will it be unconscionable? A

25% penalty would have been unconscionable? Not necessarily, it would
depend on the principal amount involved.
b. Fraud. Instead of just penalty the person liable of fraud can be held liable of other
amounts for damages suffered by the other party. Problem: Spouses BK ordered
from a furniture company set of furniture and it was so agreed upon that these sets
of furniture would be made of Narra and this furniture company delivered
furniture sets not made of Narra to spouses BK. In that contract it was stipulated
that in case of non-performance, will be liable for penalty of 100k. Spouses BK
filed an action claiming for the 100k by way of stipulated penalty plus 300k for
actual damage suffered by them. Is he correct in claiming such? He would have
been correct if Betty’s furniture xxxx with qualification, in a way partially
correct, in that the furniture company committed fraud in delivering the sets of
furniture not made of Narra, but did the company commit fraud already when they
delivered the furniture? No. Just because that the furniture delivered were not
made of Narra it is already fraud, it could have been that it was made by mistake.
Fraud is not presumed. Good faith is presumed. Unless the circumstance
warrants that fraud was committed by making it appear that the furniture was
made of Narra when it was not. Then fraud is committed. Why did I say only
partially correct lang si Mr. BK? Because in Pamintuan case, there was fraud
that is why creditor was able to recover an amount greater than the amount they
have agreed upon. Back to the problem, assuming there was fraud, is Mr. BK
right in claiming both the penalty and the actual amount? NO. If he would have
recovered already the penalty the actual amount will be minus to the penalty.
Hindi pwede penalty + actual amount, because if ganito, Mr. BK would enrich
himself.
2. Refuses to pay penalty this is consistent with Delay, therefore he will be liable for other
amounts like by way of interest. If there’s compliance, like an obligation to deliver a
horse, with the penalty of 300k in case of non-compliance and on the day that the
obligation is due, the debtor failed to deliver the horse. Would specific performance be
the proper remedy? YES. As long as the debtor is still in the position to deliver the horse
he can still be compelled to deliver such. But can the creditor recover both the horse and
the penalty? Ordinarily, NO, it is either the demand for the horse or just the recovery of
the penalty because that is the rule. Except: unless the recovery of both is CLEARLY
GRANTED TO HIM. “clearly granted to him” under the law it says, it need not be
stipulated as long as it can be shown that it is clearly the right of the creditor to have
both or recover both penalty and the horse then the creditor can do so.
3. E.g. in a real estate contract, if the obligation to build a building is for the period of 365
days, and if after the period has already expired, and the project would not have been
completed, the contractor would be liable to developer for 50k per every date of delay.
The period of 365 days have already lapsed or expired, can the creditor still compel the
debtor to perform? Of course if he refuses he cannot, the demand will be a valid
demand, but he cannot be compelled to continue because it is an obligation to do. Plus is
he entitled to the penalty? Yes even if it was not stipulated as it is clear here that he has
a right to recover. He has the right to demand the performance of both.
4. E.g. With that example of the horse with a penalty of 300k. The debtor said here is the
300k which we agreed as the penalty, I would not deliver the horse anymore, I will just
pay you the penalty instead. Can the creditor be compelled to accept? NO, unless this
time the debtor reserves such right to himself. If it is clear that instead of performing the
obligation he can just pay the penalty then such it is possible. Otherwise, he would still be
compelled to deliver the horse.
5. LAST, if the principal obligation is void, can the debtor be compelled to pay penalty?
NEVER. Penal clause is just an accessory clause. The payment of the penalty is just an
accessory therefore if the principal obligation is void then the penalty will also be void.
But if the penal clause is void would that affect the obligation? NO. E.g. A promise to
deliver B his horse, if he fails to do so he would have to give B 3 kilos of shabu. Void is
the penal clause, but the principal obligation still subsists.
6. If the principal obligation is void, may that give rise to the enforcement of the penal
clause? YES. If it is clear in the agreement that if it is a void obligation then one of the
parties will be liable to pay a sum of money the other parties. This can easily be
understood in relation to contracts entered into by a Filipino and a foreigner. Because if
the negotiation of the contract would be made in the Philippines, and if the project would
have to be performed here in the Philippines, that’s why the foreigner would always
demand that if this contract or there would be a stipulation that if the contract would be
declared void or the contract in general declared void by our courts, the other party, the
Filipino would be liable for 10M. Can the Filipino be held liable? Yes if it was declared
void and it is reasonable because in the negotiation the foreigners has already incurred
expenses like the plane fare and for hotel accommodations.
E. BREACH OF OBLIGATIONS (ARTICLE 1170)
Article 1170. Those who in the performance of their obligation are guilty of fraud, negligence
or delay, & those who in any manner contravene the tenor thereof, are liable for damages.
Case: Ricardo Honarado vs. GMA Network Films, Inc. G.R. No. 204702, January 14, 2015
Facts: GMA Network entered into a “TV Rights” Agreement with Honrado as a licensor of 36
films for a fee, the exclusive right to telecast the 36 films for a period of 3 years. The parties agree
to submit the films for review by the MTRCB and stipulated the remedies in the event the MTRCB
bands the telecasting of the films (paragraph 4):
LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with
another title which is mutually acceptable to both parties or, failure to do such, a
proportionate reduction from the total price shall either be deducted or refunded
whichever is the case by the LICENSOR OR LICENSEE [GMA Films].
Two of the films covered by the Agreement were Evangeline Katorse and Bubot. GMA Films sued
Honrado to collect the P1,6 M it paid for Evangeline Katorse (1.5) and ta portion it paid for Bubot
(350,000.00) alleging that it rejected the former because “its running time was too short for telecast
and the petitioner only remitted P900,000 to the owner of Bubot. Honrado Denied liability alleging
that he replaced Evangeline Katorse with another film, “Winasak na Pangarap”, which GMA
Accepted. Alternatively, petitioner alleged that GMA Films, being a stranger o the contract he
entered into with the owners of the films in question, has no personality to question his compliance
with the terms.
The RTC dismissed GMA’s complaint. The CA reversed the RTC decision. Brushing aside the
trial court’s appreciation of the evidence, the CA found (1) GMA films was authorized under Par.
4 to reject Evangeline Katorse and (2) GMA Films never accepted Winasak na Pangarap
replacement because it was a “bold” film.
Issue: Whether or not the Honrado was liable for GMA films?
Held: No. Honrado committed no breach of Contract or Trust. MTRCB Disapproval the Stipulated
basis for film replacement.
Under this stipulation, what triggers the rejection and replacement of any film listed in the
Agreement is the “disapproval” of its telecasting by MTRCB.
Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was
disapproved by MTRCB but because the film’s total running time was too short for telecast
(undertime). Instead of rejecting GMA Films’ demand for falling outside of the terms of
paragraph 4, petitioner voluntarily acceded to it and replaced such film with Winasak na
Pangarap. What is disputed is whether Petitioner maintains that the Film Certification issued by
GMA Network attesting to the “good broadcast quality” of Winasak na Pangarap amounted to
GMA Films’ acceptance of such film. On the other hand, GMA Films insists that such clearance
pertained only to the technical quality of the film but not to its content which it rejected because
it found the film as “bomba” (bold).12 The CA, working under the assumption that the ground
GMA Films invoked to reject Winasak na Pangarap was sanctioned under the Agreement, found
merit in the latter’s claim. We hold that regardless of the import of the Film Certification, GMA
Films’ rejection of Winasak na Pangarap finds no basis in the Agreement.
In terms devoid of any ambiguity, paragraph 4 of the Agreement requires the intervention of
MTRCB, the state censor, before GMA Films can reject a film and require its replacement.
Specifically, paragraph 4 requires that MTRCB, after reviewing a film listed in the Agreement,
disapprove or X-rate it for telecasting. GMA Films does not allege, and we find no proof on
record indicating, that MTRCB reviewed Winasak na Pangarap and X-rated it. Indeed, GMA
Films’ own witness, Jose Marie Abacan (Abacan), then Vice President for Program Management
of GMA Network, testified during trial that it was GMA Network which rejected Winasakna
Pangarap because the latter considered the film “bomba.”13 In doing so, GMA Network went
beyond its assigned role under the Agreement of screening films to test their broadcast quality
and assumed the function of MTRCB to evaluate the films for the propriety of their content. This
runs counter to the clear terms of paragraphs 3 and 4 of the Agreement.
GMA Films accepted the replacement film offered by petitioner.
Meanwhile, the disposal of the Fees paid to Petitioner Outside of the Terms of the Agreement
The TV Rights Agreement, is a licensing contract, the essence of which is the transfer of the
licensor to the licensee, for a fee, the exclusive right to telecast the films listed in the agreement.
Stipulations for payment of “commission” to the licensor is incongruous to the nature of
such contracts unless the licensor merely acted as agent of the film owners. Nowhere in the
Agreement, however, did the parties stipulate that petitioner signed the contract in such
capacity. On the contrary, the Agreement repeatedly refers to petitioner as “licensor” and
GMA Films as “licensee.” Nor did the parties stipulate that the fees paid by GMA Films for
the films listed in the Agreement will be turned over by petitioner to the film owners.
Instead, the Agreement merely provided that the total fees will be paid in three
installments (paragraph 3).
We entertain no doubt that petitioner forged separate contractual arrangements with the
owners of the films listed in the Agreement, spelling out the terms of payment to the latter.
Whether or not petitioner complied with these terms, however, is a matter to which GMA
Films holds absolutely no interest. Being a stranger to such arrangements, GMA Films is
no more entitled to complain of any breach by petitioner of his contracts with the film
owners than the film owners are or any breach by GMA Films of its Agreement with
petitioner.
Irregularity of Performance [Articles 1169 - 1174]
Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
When the obligation or the law expressly so declare;
When from the nature & the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract;
When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal OBLIGATIONS, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins.
Balane: Two Classes of Irregularity of Performance:
1. Attributable to the debtor
A. Fraud
B. Negligence
C. Delay
2. Not attributable to the debtor
A. Fortuitous event
Illustrations:
23. If there is an obligation, does it mean that one of the parties would be liable for the
damages? Common answer: YES and this is VERY WRONG. Just because there’s an
obligation one will be liable for damages because the best scenario is both parties did not
comply with their respective obligations if this is reciprocal obligation. Who would be
liable? No one. But if one of the parties failed to perform therefore liable for damages?
Not necessarily because there are EXCUSES to non-performance. Fail to perform –
easiest reason: because it was the fault of the creditor. But this scenario is not usual.
24. Usual defense in real life and in bar exam: FORTUITOUS EVENT. I fail to perform
my obligation because of this Fortuitous event (FE). Under the law, FE could not have
been foreseen or though foreseen it is inevitable.
a. Robbery is it unforeseen? If your business is pawnshop, robbery is not a FE

(Sicam vs. Jorge).
b. Typhoon is FE, though foreseen it is inevitable.
c. Asian Financial Crisis in the case of Filinvest: Spouses bought a condo unit in a
pre-selling stage, but even after the full payment of the price still there was no
condo. So the spouses sued Filinvest, Filinvest in its defense was FE. They were
not able to complete the project because of FE that’s why we cannot be held
liable. Was Filinvest’s contention is correct? NO, because the Asian financial
crisis is not a fortuitous event. This is because it is man-made. There is a
financial crisis because of the greed of the people, so this is man-made. But even
if the reason was due to Fortuitous event can it be possible that the debtor will still
be liable? YES. In other words there are exceptions as to the general rule that in
case of fortuitous event the debtor may not be held liable. These are:
i. Because it is so stipulated. – e.g. depositarium

ii. Because the law so provides – e.g. 1165. The obligation to give a
determinate thing, if the loss due to the debtors fault can still be held liable
to thing lost if at that time of the lost he was already in delay. Or before
the lost he promised to deliver such thing to two or more persons and after
it was lost xxxxx, liable because the law so provides. e.g. commodatum
MANNER OF BREACH
(1) Fraud
Article 1171. Responsibility arising from fraud is demandable in all OBLIGATIONS. Any
waiver of an action for future fraud is void.
Article 1338. There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to.
Article 1344. In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
Balane: Is it correct to say that fraud in Article 1170 means deceit or insidious machinations? No.
LEGASPI OIL VS. CA [224 SCRA 213] - Definition of Fraud.--
 In general, fraud may be defined as the voluntary execution of a wrongful act, or willful
omission, knowing & intending the effects which naturally & necessarily arise from
such act or omission;
 The fraud referred to in Article 1170 is the deliberate & intentional evasion of the normal
fulfillment of obligation;
 It is distinguished from negligence by the presence of deliberate intent, which is lacking in

the latter.
Fraud as used in Article 1170 is different from fraud as a cause for vitiation of consent in
contracts (more properly called deceit which prevents the contract from arising; this is found in
Article 1380, et seq.)
 Fraud as referred here is the deliberate and intentional evasion of normal fulfillment of
OBLIGATIONS; thus, as ground for damages from this article, implies some kind of malice or
dishonesty, which does not cover mistake, errors of judgment made in good faith.
 Evasion of a legitimate OBLIGATION for benefits admittedly received constitutes unjust

enrichment.
Q: What is a synonym for fraud as used in Article 1170?

A: Malice.
Effects of Fraud:
1. Creditor may insist on performance, specific or substitute (Article 1233.)
2. Creditor may resolve/ rescind (Article 1191.)
3. Damages in either case (Article 1170.)
(2) Negligence
Article 1171. Responsibility arising from fraud is demandable in all OBLIGATIONS. Any
waiver of an action for future fraud is void.
Article 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability shall may be regulated by the courts, according
to the circumstances.
Article 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation & corresponds with the circumstances of the
persons, of the time & of the place. When negligence shows bad faith, the provisions of articles
1171 & 2201, paragraph 2, shall apply.
 Negligence is the absence of something that should be there  due diligence.
Measure of Due Diligence
There are two guides:
1. Diligence demanded by circumstances of person, place & time
2. Care required of a good father of a family (fictional bonus pater familias who was the
embodiment of care, caution & protection in Roman law.)
In common law, the degree of care required is the diligence of a prudent businessman. This is
actually the same as the diligence of a good father of a family.
Effects of Negligence:
1. Creditor may insist on performance, specific or substitute (Article 1233.)
2. Creditor may resolve/ rescind (Article 1191.)
3. Damages in either case (Article 1170.)
 From 1173 = culpa contractual
 from 2176 = culpa aquiliana or extra-contractual

** In both cases, for liability to attach, such negligence must be the proximate cause of the
injury to plaintiff.
(3) Delay
 See Article 1169.
Art. 1169 Those obliged to deliver or to do something incur delay from the time the oblige
(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract; or,
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other party begins.
= default / mora, in the fulfillment of OBLIGATIONS;
Note: There can only be delay in positive obligations (to do or to give); but there can never be
delay in negative obligations (not to do and not to give)
REQUISITES to be in Default:
1. OBLIGATION is demandable and liquidated
2. debtor delays performance
3. creditor requires performance, judicial or extrajudicial demand
Article 1165. xxx. If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible for any fortuitous event
until he has effected the delivery.
Article 1786. Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same cases
and in the same manner as the vendor is bound with respect to the vendee. He shall also
be liable for the fruits thereof from the time they should have been delivered, without the
need of any demand.
Article 1788. A partner who has undertaken to contribute a sum of money and fails to do
so becomes a debtor for the interest and damages from the time he should have complied
with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and
his liability shall begin from the time he converted the amount to his own use.
Article 1896. The agent owes interest on the sums he has applied to his own use from the day on
which he did so, and on those which he still owes after the extinguishment of the agency.
Article 1942. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use
for which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of his household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.
(OBLIGATIONS OF THE BAILEE)
Delay is the non-fulfillment of the obligation with respect to time.
Kinds of Delay:
1. Mora Solvendi- delay in the performance (on the part of the debtor);
2. Mora Accipiendi- delay in the acceptance (on the part of the creditor);
3. Compensation Morae- mutual delay
Article 2201. xxx
(2) In contracts & quasi-contracts, the damages for which the obligor who acted in good faith is
liable shall be those that are the natural & probable consequences of the breach of the
obligation, & which the parties have foreseen or could have reasonably foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.
(4) ANY OTHER MANNER OF CONTRAVENTION:
 Includes any illicit acts which impair the strict and faithful fulfillment of OBLIGATION, or
every kind of defective performance;
CASE: “in any manner contravene the tenor of contract”
AGCAOILI VS. GSIS [165 SCRA 1]
FACTS: GSIS approved application of Marcelo Agcaoili for purchase of House and Lot in
Marikina, subject to the condition that latter should forthwith occupy the house.
“If you fail to occupy the same within 3 days from receipt of this notice, your application will be
considered automatically disapproved & said House & Lot will be awarded to another.”
Agcaoili could not stay in the house which was only a shell. It did not have a ceiling, stairs, double
walling, lights, water, CR, drainage. He asked a homeless friend instead to stay and watch over the
property. After paying 1st installment & other fees, he refused to make further payments until GSIS
would make d house habitable. Instead of heeding to Agcaoli’s condition, GSIS cancelled the
contract and demanded Agcaoili to vacate.
Agcaoili filed a case for specific performance and won. Thus GSIS’ appeal must fail.
xxx
Since GSIS did not fulfill that obligation, & was not willing to put the house in habitable state, it
cannot invoke Agcaoili's suspension of payment of amortization as cause to cancel the contract
between them. It is axiomatic that "In reciprocal OBLIGATIONS, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him.”
ISSUE: Whether or not Agcaoili breached the contract by failing to occupy the house within 3
days as stipulated?
HELD: NO, argument of GSIS is devoid of merit. There being a perfected contract of sale, it
was the duty of GSIS as seller to deliver the thing sold in a condition suitable for enjoyment by
the buyer for the purpose contemplated. There was then a perfected contract of sale between the
parties; there had been a meeting of the minds upon the purchase by Agcaoili of a determinate
house & lot in the GSIS Housing Project at Nangka, Marikina, Rizal, at a definite price payable in
amortizations at P31.56 per mo., & from the moment the parties acquired the right to reciprocally
demand performance. It was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in
a condition suitable for its enjoyment by the buyer for the purpose contemplated, in other words, to
deliver the house subject of the contract in a reasonably livable state. This it failed to do.
CASE DOCTRINE: One who assumes a contractual obligation & fails to perform the same on
account of his inability to meet certain bank requirements which inability he knew & was
aware of when he entered into the contract, should be held liable in damages for breach of
contract.
ARRIETA VS. NARIC [10 SCRA 79] (PAZ ARRIETA AND VITALIADO ARRIETA VS.
NATIONAL RICE & CORN CORP.)
FACTS: On May 1952, Arrieta took part in public bidding called by NARIC to supply 20K metric
tons of Burmese rice, being the lowest bidder she was awarded the contract. In the contract of sale,
Arrieta’s OBLIGATION was to deliver the rice at the price of her bid, while NARIC’s
OBLIGATION was to pay her in letter of credit, irrevocable, confirmed and assignable, in USD in
favor of Arrieta and/or supplier in Burma, “immediately.”
NARIC knew that it did not have enough deposit in PNB to cover the OBLIGATION, thus it wrote
a letter of request to accommodate the application for Letter of Credit despite such fact in lieu of
this contract with Arrieta. This application was made by PNB on July 30, 1952, a month after it
entered in the contract with Arrieta and promised to open the Letter Of Credit “immediately.” By
this time Arrieta has made a 5% tender to her supplier in Burma, which will be confiscated if the
required Letter Of Credit will not be received before August 4, 1952. Such fact was apprised by
Arrieta to NARIC in a letter through counsel.
PNB required NARIC to make a marginal deposit of 50% of the amount of Letter Of Credit before
such will be released in favor of Arrieta’s supplier in Burma. Such condition NARIC is not in any
financial position to meet. PNB consequently approved & released the LOC 2-months in delay.
The Burmese supplier had cancelled the order on Aug. 20, 1952, and forfeited the 5% tender of
Arrieta amounting to P200K. NARIC and PNB did not even make the 15-day grace period given
by the supplier. Arrieta endeavored to restore to no avail. It offered to substitute with Thailand
rice, but NARIC rejected. Thus, Arrieta demanded for payment of damages of USD 286K
representing unrealized profits. Again rejected. Thus, this case.
ISSUE: WON NARIC was in breach of contract?
HELD: YES. NARIC’s culpability arises from its willful and deliberate assumption of
contractual OBLIGATIONS even as it was well aware of its own financial incapacity to
undertake the prestation.
Under Article 1170, not only debtors guilty of fraud, negligence or default but also every
debtor, in general, who fails the performance of his obligation is bound to indemnify for the
losses & damages caused thereby.
Meaning of phrase "in any manner contravene the tenor" of the obligation in Article 1170 
The phrase includes any illicit task which impairs the strict & faithful fulfillment of the obligation,
or every kind of defective performance.
Balane: This phrase is a catch-all provision. At worst, it is a superfluity. At best, there is a

safety net just in case there is a culpable irregularity of performance which is not covered by fraud,
negligence or delay. In this case, the SC was apparently not sure as to what category the breach
fell. This phrase is not really an independent ground.
“TIME IS OF THE ESSENCE”

TELEFAST Communications/Phil. Wireless, Inc. VS. IGNACIO CASTRO [158 SCRA 445]
FACTS: Consolacion Bravo-Castro, the wife of herein respondent Ignacio died in Lingayen,
Pangasinan. Thus, that same day, her daughter Sofia sent a telegram to her father in the USA via
TELEFAST. Her mother was interred without her father nor siblings in attendance. When Sofia
went back to the USA she learned that her telegram never reached her father. She sued
TELEFAST for damages due to breach of contract. While TELEFAST’s defense was technical and
atmospheric factor beyond its control.
ISSUE: Whether or not TELEFAST is liable only for P31.92 (fee) and not for damages.
HELD: No, Article 1170, and also under Article 2176 applied. This liability is not limited to
actual or quantified damages. To sustain petitioner’s contention and award actual damages only
would be iniquitous such that he would be liable only for the cost of that telegram paid for 30 yrs
ago. Also, Article 2217 is applicable since Petitioner’s act or omission amounted to gross
negligence which was precisely the cause of the suffering of herein private respondents.
Petitioner & private respondent Sofia C. Crouch entered into a contract whereby, for a fee,
petitioner undertook to send said private respondent's message overseas by telegram. This,
petitioner did not do, despite performance by said private respondent of her obligation by paying
the required charges. Petitioner was therefore guilty of contravening its obligation to said private
respondent & is thus liable for damages.
EXCUSE FOR NON-PERFORMANCE
1. Loss due to Fortuitous Events
Article 1174. Except in cases expressly specified by law, or when it otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or which , though foreseen, were
inevitable.
To constitute a caso fortuito that will exempt a person from responsibility, it is necessary that:
[Austria vs. Abad, June 10, 1971]
1. the event must be independent of human will;
2. the occurrence must render it impossible for the debtor to fulfill the obligation in a normal
manner;
3. that the obligor must be free of participation in, or aggravation of, the injury to the
creditor.
Balane:
General Rule: The happening of a fortuitous event exonerates the debtor from liability.
EXEMPTIONS FROM APPLICATION OF General Rule ON Fortuitous Event:

1. When the law so specifies. E.g., if the debtor is already in delay (Article 1165, par. 3.)
2. When the parties so agree
3. When the nature of the obligation requires the assumption of risk, e.g., an insurance
contract.
EXAMPLES OF By Express Provision of Law:
 IN Depositary
Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the
same.
Q: What if a depositor was in the premises of the bank & was robbed of his money which he was
about to deposit?
A: Bank cannot be held liable for fortuitous event (robbery) especially in case where the money
has not yet been actually deposited.
Article 1979 provides for instances wherein depositary is still liable even in cases of fortuitous
event.
Q: What kind of diligence is required of a depositary?
A: Ordinary Diligence.
*Safety Deposit Box: If the jewelry inside a Safety Deposit Box was stolen, rules on deposit will
not apply because the contract governing the transaction is LEASE of safety deposit box.
Bailee in Commodatum
fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for
which the commodatum has been constituted;
If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
If he lends or leases the thing to a third person, who is not a member of his household;
(5) If, being able to save either the thing borrowed or his own thing, he chooses to save the
latter.
In Negotiorum Gestio
Article 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith.
Article 2148. Except when the management was assumed to save the property or business from
imminent danger, the officious manager shall be liable for fortuitous events:
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent person from taking up the
management.
Payee in Solutio Indebiti
Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum
of money is involved, or shall be liable for fruits received or which should have been received if
the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause, &
for damages to the person who delivered the thing, until it is recovered.
Lessee
Article 1648. Every lease of real estate may be recorded in the Registry of Property. Unless a
lease is recorded, it shall not be binding upon third persons.
Article 1671. If the lessee continues enjoying the thing after the expiration of the contract, over
the lessor's objection, the former shall be subject to the responsibilities of a possessor in bad
faith.
Article 552. xxx.

A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a
fortuitous event.
Independent Contractor
Article 1727. The contractor is responsible for the work done by persons employed by him.
Article 1728. The contractor is liable for all the claims of laborers & others employed by him, &
of third persons for death or physical injuries during the construction.
Common Carrier
Article 1763. A common carrier is responsible for injuries suffered by a passenger on account
of the willful acts or negligence of other passengers or of strangers, if the common carrier's
employees through the exercise of the diligence of a good father of a family could have
prevented or stopped the act or omission.
(2) “when it is otherwise declared by stipulation” (Article 1174)
Express agreement
Article 1306. The contracting parties may establish such stipulations, clauses, terms &
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. (principle of autonomy of contracts)
(3) “when the nature of the OBLIGATION requires the assumption of risks”
Aleatory Contract – ex: Insurance Contracts
Article 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to
give or to do something in consideration of what the other shall give or do upon the happening
of an event which is uncertain, or which is to occur at an indeterminate time.
Article 1175. Usurious transactions shall be governed by special laws.
Tolentino:
Usury is the contracting for or receiving something in excess of the amount allowed by law for the
loan or forbearance or money, goods or chattels.
Special law on usury
-The Usury Law was Act No. 2655. This law was repealed during the period of martial law,
leaving parties free to stipulate higher rates.
CASES:
Balane: Some of the elements were present in this case. What was absent was the last element.
National Power Corporation vs. CA and Engineering Construction Inc. [161 SCRA 334]
NPC cannot escape liability because its negligence was the proximate cause of the loss &
damage even though the typhoon was an act of God.
FACTS:
Typhoon “Welming”
Plaintiff ECI entered contract with NAWASA on Aug.1964, to construct Ipo-Bicti Tunnel, Intake
and Outlet Structures at Norzagaray, Bulacan within 800 days from receipt of notice to proceed. It
has finished 1st stage of the excavation works and was already on the Ipo site phase when typhoon
“Welming” came in November 4, 1967 and hit Central Luzon passing through Angat Dam.
Consequent to the heavy downpour, the dam reached danger height of 212 m. above sea level
causing the NPC to decide to open spillway gates at that point. Thus, the extraordinary large
volume of water rushed out of the gates and hit the installations and construction work of ECI at
Ipo Site with terrific impact washing away and/or destroying supplies and equipment of ECI.
ECI then sued NPC for damages.
ISSUE: Whether or not NPC is liable for damages.
HELD: It is clear from the appellate court's decision that based on its findings of fact & that of the
trial court's, petitioner NPC was undoubtedly negligent because it opened the spillway gates of the
Angat Dam only at the height of typhoon "Welming" when it knew very well that it was safer to
have opened the same gradually & earlier, as it was also undeniable that NPC knew of the coming
of the typhoon at least 4 days before it actually struck. And even though the typhoon was an act of
God or what we may call force majeure, NPC cannot escape liability because its negligence was
the proximate cause of the loss & damage. As we have said in Juan Nakpil & Sons vs. CA, 144
SCRA 596,
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170, which results in a loss or damage, the obligor
cannot escape liability. The principle embodied in the act of God doctrine strictly requires that
the act must be one occasioned exclusively by the violence of nature & human agencies are to be
excluded from creating or entering into the cause of the mischief. When the effect, the cause of
which is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as
it was, & removed from the rules applicable to the acts of God. Thus, it has been held that when
the negligence of a person concurs with an act of God in producing a loss, such person is not
exempt from liability by showing that the immediate cause of the damage was the act of God. To
be exempt from liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which the loss or damage may have been occasioned.
(2) ACT OF CREDITOR

CASE: City of Manila failed to exercise the diligence of a good father of a family which is
a defense in quasi-delict.
BERNARDINO JIMENEZ vs. CITY OF MANILA [150 SCRA 510]
FACTS: Bernardino Jimenez went to Sta. Ana Public market to buy “bagoong” when his left foot
fell in an open hole that was hidden by muddy rainwater in the flooded market when the latter was
flooded with ankle-deep rainwater. His left leg was stuck by a rusty 4-inch nail. His leg later on
swelled and he was brought for treatment to Veteran’s Memorial Hospital. He walked around with
crutches for 15 days, unable to work, forced to hire a temporary driver for his school bus he is
operating. Thus, he sued the City of Manila for damages, and the Asiatic Integrated Corp. (AIC)
who had the managing and operating contract to that market. Lower court dismissed his complaint
for insufficiency of evidence. The appellate court found in his favor and placed sole liability on
AIC.
ISSUE: WON the City of Manila should be held solidarily liable with Asiatic Integrated Corp. for
injuries suffered by petitioner.
HELD: YES. As a defense against liability on the basis of quasi-delict, one must have exercised
the diligence of a good father of a family. (Article 1173, NCC)
There is no argument that it is the duty of the City of Manila to exercise reasonable care to keep the
public market reasonably safe for people frequenting the place for their marketing needs. While it
may be conceded that the fulfillment of such duties is extremely difficult during storms & floods, it
must, however, be admitted that ordinary precautions could have been taken during good weather
to minimize the dangers to life & limb under those difficult circumstances. For instance, the
drainage hole could have been placed under the stalls instead of on the passage ways. Even
more important is the fact, that the City should have seen to it that the openings were covered.
Sadly, the evidence indicates that long before petitioner fell into the opening, it was already
uncovered, & 5 mos. after the incident happened, the opening was still uncovered. Moreover,
while there are findings that during floods the vendors remove the iron grills to hasten the flow
of water, there is no showing that such practice has ever been prohibited, much less penalized by
the City of Manila. Neither was it shown that any sign had been placed thereabouts to warn
passers-by of the impending danger.
For liability under Article 2189 NCC to attach, it is not necessary that the defective public works
belong to the LGU concerned. What is required is “control or supervision.”
CASE: Requisites for exemption from liability due to an "act of God."
Juan F. NAKPIL & SONS vs. CA [144 SCRA 596]- October 3, 1986
To exempt the obligor from liability under Article 1174, for a breach of an obligation due to an
"act of God," the following must concur:
1. the cause of the breach of the obligation must be independent of the will of the debtor;
2. the event must be either unforeseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; &
3. the debtor must be fee from any participation in, or aggravation of the injury to the creditor.
FACTS: Construction of the office building of Plaintiff Phil. Bar Assoc. (PBA) in Intramuros,
Manila was undertaken by United Construction Inc. on an “administration” basis on suggestion of
United President Juan Carlos. Such was approved by PBA Board, & Pres. Roman Ozaeta. Plans
and specifications were done by Juan Nakpil & Sons. The Bldg. was completed on June 1966.
On August 2, 1968 an unusually strong earthquake hit Manila. The PBA bldg. sustained major
damage, in which tenants had to vacate. The building was shored up by UCI at the cost of
P13,661.28.
Hence, PBA filed action to recover damages against UCI while the latter sued Nakpil for damages
due to defects on the plans and specifications.
ISSUE: WON AN ACT OF GOD WHICH CAUSED DAMAGE TO THIS BLDG, EXEMPTS
FROM LIABILITY, PARTIES WHO ARE OTHERWISE LIABLE BECAUSE OF
NEGLIGENCE?
HELD:
ARTICLE 1723
To exempt obligor from liability under Article 1174, fortuitous events; or for a breach of
OBLIGATION due to an act of God, the following: must concur:
1. cause of the breach of OBLIGATION must be independent of the will of the debtor;
2. the event must be either unforeseeable or unavoidable
3. the event must be such as to render it impossible for debtor to fulfill OBLIGATION in
normal manner;
4. debtor must be free from any participation in, or aggravation of the injury to the creditor.
Thus, if upon the happening of a fortuitous event or an Acts Of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the
OBLIGATION as provided in Article 1170, which results in loss or damage, the obligor cannot
escape liability.
To be an Act Of God, the event must be occasioned exclusively by violence of nature and all
human agencies are excluded from creating or entering into the cause of mischief. With
participation of man, whether active or neglect or failure to act, the occurrence is humanized, and
removed from the doctrine’s application.
Findings of lower court and IAC were both beyond dispute that United and Juan F. Nakpil & Sons
were both liable. The defects in the plans & specifications were proximate cause, the deviations of
United for the specs and failure to observe required workmanship & degree of supervision on both
makes them liable.
CASE DOCTRINE: "One who negligently creates a dangerous condition cannot escape
liability for the natural & probable consequences thereof, although the act of a third person, or
an act of God for which he is not responsible, intervenes to precipitate the loss." (Citing Tucker
v. Milan, 49 OG 4379, 4380.)
NAKPIL & SONS VS. CA [160 SCRA 334] - APRIL 15, 1988
FACTS: UCI filed a Motion for Reconsideration on the decision previously disposed of the SC on
Oct. 3, 1986 pointing out that it was PBA’s legal duty to provide full-time and active supervision
in the construction of the subject building. Also, UCI points out that bad faith was not established.
ISSUES RAISED ON THIS MR:
(1) That the building did not collapse on the earthquake of 4/2/68, thus the premise of the LC
findings is negated, Article 1173 cannot apply
HELD: It is not the fact of collapse that was the premise on applying Article 1173 but on who
should be responsible for the extreme damage to the bldg. which inevitably led to its
collapse, or demolition. Trial court correctly found defendants liable;
(2) That court failed to impute liability on PBA or on Ozaeta for failure to provide legal duty to
supervise, as owner.
HELD: There is no legal nor contractual basis. PBA sought technical expertise of both United &
JFN & sons for such costs on this purpose. It was even JFN who suggested administration
basis.
(3) That findings of bad faith had no factual anchor.
HELD: Wanton negligence of both United & JFN & sons in effecting plans, specs, &
constructions designs is equivalent to Bad Faith in performance of their respective duties;
(4) Award of 5M had no basis, Commissioner’s report estimated only 1.1M.
HELD: Such initial report was based on the partial collapse only, after the 4/2/68 earth quake, for
repairs; but after total collapse almost 20 yrs later, unrealized rentals and major
reconstructions makes even 5M a very conservative estimate.
(5) As to award of atty.’s fees & damages.
HELD: It was court discretion.

(6) 12% interest p.a. according to CB Circular 416 (PD 116) applies only to (1) loans; (2)
forbearance of money, goods or credit; (3) rate allowed in JFO’s involving 1 & 2.
HELD: True, but, 12% is imposable only when there is delay in payment of judgment after its
finality. (penalty not really interest)
NPC VS. CA [222 S 415]  Petitioners cannot be heard to invoke the act of God or force
majeure to escape liability for the loss or damage sustained by the private respondents since they,
the petitioners, were guilty of negligence. The event then was not occasioned exclusively by an act
of God or force majeure; a human factor-- negligence or imprudence-- had intervened. The effect
then of the force majeure in question may be deemed to have, even if only partly, resulted from the
participation of man. Thus, the whole occurrence was thereby humanized, as it were, & removed
from the rules applicable to acts of God.
NPC VS. CA [223 S 649]  Petitioners have raised the same issues & defenses as in the 2 other
decided cases therein mentioned. Predictably therefore, this petition must perforce be dismissed
because the losses & damages sustained by the private respondent's had been proximately caused
by the negligence of the petitioners, although the typhoon which preceded the flooding could be
considered as a force majeure.
Gilat Satellite Networks, Ltd., , Vs. United Coconut Planters Bank General Insurance Co.,
Inc., G.R. No. 189563, April 7, 2014
Facts: One Virtual placed with GILAT a purchase order for various telecommunications
equipment, etc at a total purchase price of USD 2,128,250.00. To ensure prompt payment of the
obligation, it obtained defendant UCPB General Insurance Co, Inc’s surety bond in favor of
GILAT. One Virtual failed to pay GILAT the amount of USD 400,000 on the due date in
accordance with the payment schedule prompting GILAT to write a demand letter to defendant
UCPB on June 5, 2000.
Gilat filed a complaint against UCPB to recover the amounts covered by the surety bond. The
RTC rendered judgement in favor of Gilat.
The CA ordered the parties to submit to arbitration pursuant to their arbitration agreement.
Issues:
1: Whether or not the CA was correct in holding that the parties must first submit to arbitration.
2: Whether or not the petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.
Held:
1. The CA was incorrect. The SC held that the existence of a surety agreement does not give
the surety the right to intervene in the principal contract, nor can an arbitration clause
between the buyer and the seller be invoked by a non-party such as a surety.
2. Yes. Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred
by a debtor in the payment of the latter’s obligation, provided that the delay is
inexcusable. Article 2209 of the Civil Code is clear: “[i]f an obligation consists in the
payment of a sum of money, and the debtor incurs a delay, the indemnity for damages,
there being nostipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest.”
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfillment of obligations. It is the
non-fulfillment of an obligation with respect to time. In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.
Having held that a surety upon demand fails to pay, it can be held liable for interest, even if
in thus paying, its liability becomes more than the principal obligation. The increased
liability is not because of the contract, but because of the default and the necessity of
judicial collection. However, for delay to merit interest, it must be inexcusable in nature.
We agree with petitioner that records are bereft of proof to show that respondent’s delay was
indeed justified by the circumstances — that is, One Virtual’s advice regarding petitioner’s
alleged breach of obligations. The lower court’s Decision itself belied this contention when it
said that “plaintiff is not disputing that it did not complete commissioning work on one of the
two systems because One Virtual at that time is already in default and has not paid GILAT.”
Assuming arguendo that the commissioning work was not completed, respondent has no one to
blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner would
not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice
president of Gilat, repeatedly stated that petitioner had delivered all equipment, including the
licensed software; and that the equipment had been installed and in fact, gone into operation.
Notwithstanding these compliances, respondent still failed to pay.
Issue: When does must the interest accrue?
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues
from the time judicial or extrajudicial demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that
where there has been an extrajudicial demand before an action for performance was filed,
interest on the amount due begins to run, not from the date of the filing of the complaint, but
from the date of that extrajudicial demand. Considering that respondent failed to pay its
obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the
extrajudicial demand of petitioner was sent on 5 June 2000, we agree with the latter that interest
must start to run from the time petitioner sent its first demand letter (5 June 2000), because the
obligation was already due and demandable at that time.
Applying the above-discussed concepts and in the absence of an agreement as to interests, we are
hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June
2000, its first date of extrajudicial demand, until the satisfaction of the debt in accordance with
the revised guidelines enunciated in Nacar.
Case: Rivera vs. Chua, G.R. No. 184458, January 14, 2015
Facts: Rivera obtained a loan from the Spouses Chua evidenced by a promissory note in the
amount of P120,000.00. Almost 3 years from the date of the payment stipulated in the
promissory note, Rivera as partial payment of the loan, issued and delivered a check in the
amount of P25,000.00. On 21 December 1998, the Spouses Chua received another check
presumably issued by Rivera, likewise drawn against Rivera’s PCIB current account, numbered
013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as per
understanding by the parties, PCIB Check No. 013224 was issued in the amount of P133,454.00
with “cash” as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in
the principal amount of P120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason “account closed.”
As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the
principal of P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31
May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit
before the MeTC, Branch 30, Manila.
The MeTC ruled in favor of Spouses Chua and required him to pay P120,000.00 plus stipulated
interest rate of 5% per month from 1 January 1996, and legal inetrest at the rate of 12% per
annum. The RTC affirmed the decision of the MeTC but deleted the award for attorney’s fees.
The CA affirmed the decisions of the lower courts reduced the imposition of interest on the loan
from 60% to 12% per annum and reinstated the award for attorney’s fees.
Issue: Whether or not the CA erred in holding that demand is no longer necessary.
2. Whether the Court of Appeals erred when it reduced the amount of interest rate from 60% per
annum to 12% per annum despite that the petitioner did not raise the same in his answer.
Held: 1. The CA was correct that demand was no longer necessary in this case in order for
Rivero’s obligation to be due and demandable. The Promissory Note is unequivocal about the
date when the obligation falls due and becomes demandable — 31 December 1995. As of 1
January 1996, Rivera had already incurred in delay when he failed to pay the amount of
P120,000.00 due tothe Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
(1) When the obligation or the law expressly so declare; or xxxx
There are four instances when demand is not necessary to constitute the debtor in default: (1)
when there is an express stipulation to that effect; (2) where the law so provides; (3) when the
period is the controlling motive or the principal inducement for the creation of the obligation;
and (4) where demand would be useless. In the first two paragraphs, it is not sufficient that
the law or obligation fixes a date for performance; it must further state expressly that after
the period lapses, default will commence. We refer to the clause in the Promissory Note
containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of

(P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995.
(sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly
from the date of default until the entire obligation is fully paid for.
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date
of default” until the entire obligation is fully paid for. The parties evidently agreed that the
maturity of the obligation at a date certain, 31 December 1995, will give rise to the
obligation to pay interest. The Promissory Note expressly provided that after 31 December
1995, default commences and the stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31
December 1995, the due date of the obligation. On that date, Rivera became liable for the
stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until 31
December 1995, demand was not necessary before Rivera could be held liable for the principal
amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to
pay the Spouses Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are guilty of delay, in the
performance of their obligations is laid down on Article 1170 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity
for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six percent per annum.
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of
money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December
1995; and (3) the Promissory Note provides for an indemnity for damages upon default of Rivera
which is the payment of a 5% monthly interest from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal clause
although Rivera, as obligor, assumed to pay additional 5% monthly interest on the
principal amount of P120,000.00 upon default.
At the time interest accrued from 1 January 1996, the date of default under the Promissory Note,
the then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular
No. 416 in cases involving the loan or forbearance of money. 29 Thus, the legal interest accruing
from the Promissory Note is 12% per annum from the date of default on 1 January 1996.
However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before
the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013
reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the
applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted, to date
when this Decision becomes final and executor is divided into two periods reflecting two rates of
legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum
FROM 1 July 2013 to date when this Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the
date when this Decision becomes final and executory, such is likewise divided into two periods:
(1) 12% per annum from 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6%
per annum from 1 July 2013 to date when this Decision becomes final and executory. 31 We base
this imposition of interest on interest due earning legal interest on Article 2212 of the Civil
Code which provides that “interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.”
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the
Spouses Chua could already be determined with reasonable certainty given the wording of the
Promissory Note.
Case: Roberto Sicam and Agencia de R.C. Sicam Inc. Vs. Lulu Jorge and Cesar Jorge,
August 8, 2007.
Facts: On October 19, 1987, two armed men entered the pawnshop and took away whatever
cash and jewelry were found inside the pawnshop unit. Such incident was entered in police
blotter in Paranaque. Sicam then sent letter to Lulu informing the latter of the loss of her jewelry
due to the robbery. However, Lulu wrote a letter expressing her disbelief and asking the return of
her jewelry instead. But Sicam failed to return the same. Hence, Lulu and husband filed a
complaint seeking indemnification for the loss of pawned jewelry. RTC dismissed the complaint
since Sicam cannot be made personally liable for an incident which is in relation to corporate
transaction and so as the corporation because the loss was occasioned by a fortuitous event. CA
reversed the RTC and held Sicam liable together with the corporation.
Issue: Whether or not the robbery in pawnshop resulting to the loss of pawned jewelry can be
considered as fortuitous event thereby excusing liability of Sicam and Corporation.
Held: NO. Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events which could not be foreseen or
which, though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is

therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to comply with
obligations must be independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and, (d) the obligor must be free from any participation in
the aggravation of the injury or loss. 23
The burden of proving that the loss was due to a fortuitous event rests on him who invokes
it.24 And, in order for a fortuitous event to exempt one from liability, it is necessary that one
has committed no negligence or misconduct that may have occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person who has failed to take
steps to forestall the possible adverse consequences of such a loss. One's negligence may have
concurred with an act of God in producing damage and injury to another; nonetheless, showing
that the immediate or proximate cause of the damage or injury was a fortuitous event would not
exempt one from liability. When the effect is found to be partly the result of a person's
participation -- whether by active intervention, neglect or failure to act -- the whole occurrence is
humanized and removed from the rules applicable to acts of God. 26
Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the
robbery. He likewise testified that when he started the pawnshop business in 1983, he thought of
opening a vault with the nearby bank for the purpose of safekeeping the valuables but was
discouraged by the Central Bank since pawned articles should only be stored in a vault inside the
pawnshop. The very measures which petitioners had allegedly adopted show that to them the
possibility of robbery was not only foreseeable, but actually foreseen and anticipated. Petitioner
Sicam’s testimony, in effect, contradicts petitioners’ defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any negligence by which the loss
of the pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the
possibility of negligence on the part of herein petitioners. In Co v. Court of Appeals,27 the
Court held:
It is not a defense for a repair shop of motor vehicles to escape liability simply because
the damage or loss of a thing lawfully placed in its possession was due to carnapping.
Carnapping per se cannot be considered as a fortuitous event. The fact that a thing was
unlawfully and forcefully taken from another's rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous event. To be considered
as such, carnapping entails more than the mere forceful taking of another's
property. It must be proved and established that the event was an act of God or was
done solely by third parties and that neither the claimant nor the person alleged to
be negligent has any participation. In accordance with the Rules of Evidence, the
burden of proving that the loss was due to a fortuitous event rests on him who
invokes it — which in this case is the private respondent. However, other than the
police report of the alleged carnapping incident, no other evidence was presented by
private respondent to the effect that the incident was not due to its fault. A police report
of an alleged crime, to which only private respondent is privy, does not suffice to
establish the carnapping. Neither does it prove that there was no fault on the part of
private respondent notwithstanding the parties' agreement at the pre-trial that the car was
carnapped. Carnapping does not foreclose the possibility of fault or negligence on the
part of private respondent.28
Just like in Co, petitioners merely presented the police report of the Parañaque Police Station on
the robbery committed based on the report of petitioners' employees which is not sufficient to
establish robbery. Such report also does not prove that petitioners were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners
are guilty of concurrent or contributory negligence as provided in Article 1170 of the Civil Code,
to wit:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.29
Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments
which are engaged in making loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions on pledge, mortgage and
antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor
shall take care of the thing pledged with the diligence of a good father of a family. This means
that petitioners must take care of the pawns the way a prudent person would as to his own
property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances
of the persons, of time and of the place. When negligence shows bad faith, the provisions
of Articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a

reasonable man, guided by those considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and reasonable man would not
do.31 It is want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and
caution that an ordinarily prudent person would have used in the same situation.
Case: Manila Electric Company vs. Matilde Ramoy, March 4, 2008
Facts: In 1987, NPC filed with MTC of Quezon City a case for ejectment against several
persons allegedly illegally occupying its properties in Baesa, QC. Among the defendants were
the Ramoys. The MTC ordered the demolition of the buildings and structures. On June 20, 1990,
NPC wrote Meralco requesting the latter to immediately disconnect electric power supply to all
residential and commercial establishments in the subject land. Hence, Meralco comply with the
same. In due time, the electric service connection of the plaintiffs was disconnected. Upon the
conduct of disconnection, respondents herein were contesting that the property were not under
NPC properties. The same lead the respondents to vacate the premises. However, during ocular
inspection ordered by the court, it was found out that the residence of the Ramoy’s were outside
NPC’s properties. RTC dismiss complaint for damages against Meralco but instead ordered the
latter to restore electric power supply to respondents. Hence, respondents appealed to CA. CA
held Meralco liable for damages.
Issue: Whether Meralco is held liable for damages to the Respondents.
Held: YES. MERALCO admits that respondents are its customers under a Service Contract
whereby it is obliged to supply respondents with electricity. Nevertheless, upon request of the
NPC, MERALCO disconnected its power supply to respondents on the ground that they were
illegally occupying the NPC's right of way. Under the Service Contract, "[a] customer of electric
service must show his right or proper interest over the property in order that he will be provided
with and assured a continuous electric service."7 MERALCO argues that since there is a Decision
of the Metropolitan Trial Court (MTC) of Quezon City ruling that herein respondents were
among the illegal occupants of the NPC's right of way, MERALCO was justified in cutting off
service to respondents.
Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or

breach of contract for the latter's discontinuance of its service to respondents under Article 1170
of the Civil Code which provides:
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature
of culpa contractual, thus:
"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering that which may
have been lost or suffered. The remedy serves to preserve the interests of the promissee that may
include his "expectation interest," which is his interest in having the benefit of his bargain by
being put in as good a position as he would have been in had the contract been performed, or his
"reliance interest," which is his interest in being reimbursed for loss caused by reliance on the
contract by being put in as good a position as he would have been in had the contract not been
made; or his "restitution interest," which is his interest in having restored to him any benefit that
he has conferred on the other party. Indeed, agreements can accomplish little, either for their
makers or for society, unless they are made the basis for action. The effect of every infraction is
to create a new duty, that is, to make recompense to the one who has been injured by the failure
of another to observe his contractual obligation unless he can show extenuating circumstances,
like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse
him from his ensuing liability.9 (Emphasis supplied)
Article 1173 also provides that the fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. The Court emphasized in Ridjo Tape
& Chemical Corporation v. Court of Appeals 10 that "as a public utility, MERALCO has the
obligation to discharge its functions with utmost care and diligence."11
The Court agrees with the CA that under the factual milieu of the present case,
MERALCO failed to exercise the utmost degree of care and diligence required of it. To
repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC
without ascertaining whether it had become final and executory. Verily, only upon finality
of said Decision can it be said with conclusiveness that respondents have no right or proper
interest over the subject property, thus, are not entitled to the services of MERALCO.
Case: Solar Harvest, Inc. vs. Davao Corrugated Carton Corporation, July 26, 2010.
Facts: In the first quarter of 1998, Petitioner entered into an agreement with Davao Corp. for the
purchase of corrugated carton boxes specifically designed for petitioner’s business of exporting
fresh bananas at US1.10 each. The agreement was not reduced into writing. To get the
production underway, the petitioner deposited to respondent’s dollar account with Westmont
Bank, as full payment. However, despite payment, petitioner did not receive any boxes.
Petitioner wrote demand letter for reimbursement from respondent. On February 19, 2001,
respondent replied that the boxes had been completed as early as April 3, 1998 and that
petitioner failed to pick them up from the former’s warehouse 30 days from completion, as
agreed upon. Respondent mentioned that petitioner even placed an additional order of 24,000
boxes, out of which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay
the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee. On August
17, 2001, petitioner filed a Complaint for sum of money and damages against respondent. RTC
ruled that respondents did not commit any breach of faith that would justify rescission of the
contract and the consequent reimbursement. CA denied the appeal of petitioner.
Issue: Whether or not the respondent is liable for reimbursement of the payment made by
petitioner.
Held: NO. Petitioner’s claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The right to rescind a contract arises once the other party defaults in the performance of his
obligation. In determining when default occurs, Art. 1191 should be taken in conjunction with
Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.
In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the
parties’ respective obligations should be simultaneous. Hence, no demand is generally necessary
because, once a party fulfills his obligation and the other party does not fulfill his, the latter
automatically incurs in delay. But when different dates for performance of the obligations are
fixed, the default for each obligation must be determined by the rules given in the first paragraph
of the present article,19 that is, the other party would incur in delay only from the moment the
other party demands fulfillment of the former’s obligation. Thus, even in reciprocal obligations,
if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still
necessary before the obligor can be considered in default and before a cause of action for
rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack of
demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver
the boxes. The Complaint only alleged that petitioner made a "follow-up" upon
respondent, which, however, would not qualify as a demand for the fulfillment of the
obligation. Petitioner’s witness also testified that they made a follow-up of the boxes, but
not a demand. Note is taken of the fact that, with respect to their claim for reimbursement,
the Complaint alleged and the witness testified that a demand letter was sent to respondent.
Without a previous demand for the fulfillment of the obligation, petitioner would not have
a cause of action for rescission against respondent as the latter would not yet be considered
in breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present case,
petitioner’s claim for reimbursement would still fail, as the circumstances would show that
respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a petition for
review under Rule 45.20 The Court, in petitions for review, limits its inquiry only to questions of
law. After all, it is not a trier of facts, and findings of fact made by the trial court, especially
when reiterated by the CA, must be given great respect if not considered as final. 21 In dealing
with this petition, we will not veer away from this doctrine and will thus sustain the factual
findings of the CA, which we find to be adequately supported by the evidence on record.
As correctly observed by the CA, aside from the pictures of the finished boxes and the
production report thereof, there is ample showing that the boxes had already been manufactured
by respondent.
Case: Mindanao Terminal and Brokerage Service, Inc. vs. Phoenix Assurance Company of
New York/MCGEE & Co., Inc., May 8, 2009
Facts: Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao Terminal and
Brokerage Service, Inc. (Mindanao Terminal), a stevedoring company, to load and stow a
shipment of 146,288 cartons of fresh green Philippine bananas and 15,202 cartons of fresh
pineapples belonging to Del Monte Fresh Produce International, Inc. (Del Monte Produce) into
the cargo hold of the vessel M/V Mistrau. The vessel was docked at the port of Davao City and
the goods were to be transported by it to the port of Inchon, Korea in favor of consignee Taegu
Industries, Inc. Del Monte Produce insured the shipment under an "open cargo policy" with
private respondent Phoenix Assurance Company of New York (Phoenix), a non-life insurance
company, and private respondent McGee & Co. Inc. (McGee), the underwriting manager/agent
of Phoenix. Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The
vessel set sail from the port of Davao City and arrived at the port of Inchon, Korea. It was then
discovered upon discharge that some of the cargo was in bad condition. Del Monte Produce filed
a claim under the open cargo policy for the damages to its shipment. RTC dismissed the
complaint. CA reversed. The same court ordered Mindanao Terminal to pay Phoenix and McGee
"the total amount of $210,265.45 plus legal interest from the filing of the complaint until fully
paid and attorney’s fees of 20% of the claim." 11 It sustained Phoenix’s and McGee’s argument
that the damage in the cargoes was the result of improper stowage by Mindanao Terminal. It
imposed on Mindanao Terminal, as the stevedore of the cargo, the duty to exercise
extraordinary diligence in loading and stowing the cargoes. It further held that even with the
absence of a contractual relationship between Mindanao Terminal and Del Monte Produce, the
cause of action of Phoenix and McGee could be based on quasi-delict under Article 2176 of the
Civil Code.
Issue: Whether or not Mindanao Terminal is liable for damages for its failure to exercise
extraordinary diligence in loading and stowing the cargoes.
Held: NO. We adopt the findings of the RTC, which are not disputed by Phoenix and McGee.
The only participation of Mindanao Terminal was to load the cargoes on board M/V Mistrau. It
was not disputed by Phoenix and McGee that the materials, such as ropes, pallets, and
cardboards, used in lashing and rigging the cargoes were all provided by M/V Mistrau and these
materials meets industry standard.
The resolution of the two remaining issues is determinative of the ultimate result of this
case.
Article 1173 of the Civil Code is very clear that if the law or contract does not state the
degree of diligence which is to be observed in the performance of an obligation then that
which is expected of a good father of a family or ordinary diligence shall be required.
Mindanao Terminal, a stevedoring company which was charged with the loading and stowing the
cargoes of Del Monte Produce aboard M/V Mistrau, had acted merely as a labor provider in the
case at bar. There is no specific provision of law that imposes a higher degree of diligence than
ordinary diligence for a stevedoring company or one who is charged only with the loading and
stowing of cargoes. It was neither alleged nor proven by Phoenix and McGee that Mindanao
Terminal was bound by contractual stipulation to observe a higher degree of diligence than that
required of a good father of a family. We therefore conclude that following Article 1173,
Mindanao Terminal was required to observe ordinary diligence only in loading and stowing the
cargoes of Del Monte Produce aboard M/V Mistrau. The case of Summa Insurance Corporation
v. CA, which involved the issue of whether an arrastre operator is legally liable for the loss of a
shipment in its custody and the extent of its liability, is inapplicable to the factual circumstances
of the case at bar. Therein, a vessel owned by the National Galleon Shipping Corporation
(NGSC) arrived at Pier 3, South Harbor, Manila, carrying a shipment consigned to the order of
Caterpillar Far East Ltd. with Semirara Coal Corporation (Semirara) as "notify party." The
shipment, including a bundle of PC 8 U blades, was discharged from the vessel to the custody of
the private respondent, the exclusive arrastre operator at the South Harbor. Accordingly, three
good-order cargo receipts were issued by NGSC, duly signed by the ship's checker and a
representative of private respondent. When Semirara inspected the shipment at house, it
discovered that the bundle of PC8U blades was missing. From those facts, the Court observed:
x x x The relationship therefore between the consignee and the arrastre operator must be

examined. This relationship is much akin to that existing between the consignee or owner of
shipped goods and the common carrier, or that between a depositor and a warehouseman [22 ]. In
the performance of its obligations, an arrastre operator should observe the same degree of
diligence as that required of a common carrier and a warehouseman as enunciated under
Article 1733 of the Civil Code and Section 3(b) of the Warehouse Receipts Law,
respectively. Being the custodian of the goods discharged from a vessel, an arrastre
operator's duty is to take good care of the goods and to turn them over to the party entitled
to their possession. (Emphasis supplied)
There is a distinction between an arrastre and a stevedore. Arrastre, a Spanish word which refers
to hauling of cargo, comprehends the handling of cargo on the wharf or between the
establishment of the consignee or shipper and the ship's tackle. The responsibility of the arrastre
operator lasts until the delivery of the cargo to the consignee. The service is usually performed
by longshoremen. On the other hand, stevedoring refers to the handling of the cargo in the holds
of the vessel or between the ship's tackle and the holds of the vessel. The responsibility of the
stevedore ends upon the loading and stowing of the cargo in the vessel.
It is not disputed that Mindanao Terminal was performing purely stevedoring function while the
private respondent in the Summa case was performing arrastre function. In the present case,
Mindanao Terminal, as a stevedore, was only charged with the loading and stowing of the
cargoes from the pier to the ship’s cargo hold; it was never the custodian of the shipment of Del
Monte Produce. A stevedore is not a common carrier for it does not transport goods or
passengers; it is not akin to a warehouseman for it does not store goods for profit. The loading
and stowing of cargoes would not have a far reaching public ramification as that of a common
carrier and a warehouseman; the public is adequately protected by our laws on contract and on
quasi-delict. The public policy considerations in legally imposing upon a common carrier or a
warehouseman a higher degree of diligence is not present in a stevedoring outfit which mainly
provides labor in loading and stowing of cargoes for its clients.
In the third issue, Phoenix and McGee failed to prove by preponderance of evidence 25 that
Mindanao Terminal had acted negligently. Where the evidence on an issue of fact is in equipoise
or there is any doubt on which side the evidence preponderates the party having the burden of
proof fails upon that issue. That is to say, if the evidence touching a disputed fact is equally
balanced, or if it does not produce a just, rational belief of its existence, or if it leaves the mind in
a state of perplexity, the party holding the affirmative as to such fact must fail.26
It was further established that Mindanao Terminal loaded and stowed the cargoes of Del Monte
Produce aboard the M/V Mistrau in accordance with the stowage plan, a guide for the area
assignments of the goods in the vessel’s hold, prepared by Del Monte Produce and the officers
of M/V Mistrau.
Bank Of The Philippine Islands Vs. Spouses Quiaoit, G.R. No. 199562, January 16, 2019
FACTS: Fernando Quiaoit through Merlyn Lambayong encashed a BPI Check for USD
20,000.00. Lambayong did not count the money that was received because the money was placed
in a large Manila envelope. They also alleged that BPI did not inform Lambayong that the dollar
bills were marked with its “chapa” and the bank did not issue any receipt containing the serial
number of the bills. They used the money for their travel to Jerusalem and Europe.
Nora (the spouse) purchased plane tickets worth USD 13,100 and hand carried the remaining
money. They alleged that they were placed in a shameful and embarrassing situation when
several banks refused to exchange the bills because they were counterfeit.
When the spouses returned, they personally complained to Gonzalez (branch manager). The
Bank representative informed them that an investigation would be conducted but they were not
furnished with the report, Gonzalez. Informed Fernande that the absence of the identification
mark (chapa) meant that the dollar bills came from other sources and not from BPI. The spouses
Quiaoit alleged that Nora Cayetano, area manager of BPI San Juan, called up Fernando and
promised to do something about the refund of the US$4,400 they surrendered to Gonzales. On
January 17, 2000, the spouses Quiaoit demanded in writing for the refund of the US$4,400 from
Gonzales. On February 9, 2000, BPI sent its written refusal to refund or reimburse the US$4,400.
The RTC decided in favor of spouses Quiaout. The CA affirmed the RTC’s decision and ruled
that BPI did not follow the normal banking procedure of listing the serial numbers of the dollar
bills considering the reasonable length of time Fernando advised them of the withdrawal until
Lambayong’s actual encashment of the check.
Issue: Whether or not BPI exercised due diligence in handling the withdrawal of the US
dollar bills.
Held: No. In Spouses Carbonell v. Metropolitan Bank and Trust Company, the Court
emphasized that the General Banking Act of 2000 demands of banks the highest standards of
integrity and performance. The Court ruled that banks are under obligation to treat the accounts
of their depositors with meticulous care.10 The Court ruled that the bank’s compliance with this
degree of diligence has to be determined in accordance with the particular circumstances of each
case.
In this case, BPI failed to exercise the highest degree of diligence that is not only expected
but required of a banking institution.
It was established that on April 15, 1999, Fernando informed BPI to prepare US$20,000 that he
would withdraw from his account. The withdrawal, through encashment of BPI Greenhills Check
No. 003434, was done five days later, or on 20 April 1999. BPI had ample opportunity to prepare
the dollar bills. Since the dollar bills were handed to Lambayong inside an envelope and in
bundles, Lambayong did not check them. However, as pointed out by the Court of Appeals, BPI
could have listed down the serial numbers of the dollar bills and erased any doubt as to whether
the counterfeit bills came from it. While BPI Greenhills marked the dollar bills with “chapa” to
identify that they came from that branch, Lambayong was not informed of the markings and
hence, she could not have checked if all the bills were marked.
BPI insists that there is no law requiring it to list down the serial numbers of the dollar bills.
However, it is well-settled that the diligence required of banks is more than that of a good father
of a family. Banks are required to exercise the highest degree of diligence in its banking
transactions. In releasing the dollar bills without listing down their serial numbers, BPI failed to
exercise the highest degree of care and diligence required of it. BPI exposed not only its client
but also itself to the situation that led to this case. Had BPI listed down the serial numbers, BPI’s
presentation of a copy of such listed serial numbers would establish whether the returned 44
dollar bills came from BPI or not.
We agree with the Court of Appeals that the action of BPI is the proximate cause of the loss
suffered by the spouses Quiaoit. Proximate cause is defined as the cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces injury and without
which the result would not have occurred. 14 Granting that Lambayong counted the two bundles
of the US$100 bills she received from the bank, there was no way for her, or for the spouses
Quiaoit, to determine whether the dollar bills were genuine or counterfeit. They did not have the
expertise to verify the genuineness of the bills, and they were not informed about the “chapa” on
the bills so that they could have checked the same. BPI cannot pass the burden on the spouses
Quiaoit to verify the genuineness of the bills, even if they did not check or count the dollar bills
in their possession while they were abroad.
Issue: Whether or not BPI is liable for moral and exemplary damages?
Held: Only moral damages but not exemplary damages. In this case, it was established that the
spouses Quiaoit suffered serious anxiety, embarrassment, humiliation, and even threats of being
taken to police authorities for using counterfeit bills. Hence, they are entitled to the moral
damages awarded by the trial court and the Court of Appeals.
Nevertheless, we delete the award of exemplary damages since it does not appear that BPI’s
negligence was attended with malice and bad faith. We sustain the award of attorney’s fees
because the spouses Quiaoit were forced to litigate to protect their rights.
Illustrations:
1. Why would a party to an obligation be liable? If there was FRAUD, NEGLIGENCE,

DELAY or ANY OTHER MATTER OF CONTRAVENTION.
a. ARRIETA vs. NARIC: As long as there is contravention of the tenor even

there was no fraud, negligence or delay there is liability. But is it correct to say
that only debtors may be held liable for damages? No, even creditors may be held
liable. In Article 1170, the law says that those who are guilty of fraud. It did not
say that debtors who are guilty of fraud. In fact, in the past bar exams, there was
a problem where the creditor was in delay and this is known as mora accipiende.
How could the creditor be in delay? He is not the one to perform the obligation?
Because if he refuses to accept without just cause – this can be considered in
delay. So what would the damages be suffered by the debtor? Plenty of reasons.
In keeping the thing, in preserving the thing, in the transport of the thing if it
needs to be delivered.
b. FRAUD – A sold to B bottles of liquor which appears to be Fundador but in

reality it is originally a Matador Brandy inside the bottle of Fundador. Was there
fraud? YES. But is this fraud under under Article 1171? NO. This is not, because
the fraud here speaks of in the performance of the obligation. In the contract
there is no fraud, but in the performance of the obligation there is fraud. In this
problem, this is what you call CAUSAL FRAUD. Dolo Causante under Article
1338. Article 1344 – incidental fraud. As to the nature of this fraud- Article
1170, I would not use dolo here, because DOLO is fraud in on obtaining
consent, that pertains to deceit. Article 1170 – bad faith/ malice.
i. The EFFECT OF FRAUD:
1. Article 1170 – would result in liability for damages.

2. Article 1338 – would result in the contract being considered to be

VOIDABLE because there’s vitiation of consent but the injured
party may be entitle to damages as well.
3. Article 1334 – would not result into a voidable contract but would
only result in the entitlement of the injured party to damages.
ii. Another example for fraud:
4. If A filed an action against B for damages, claiming that B

committed fraud upon him causing damaged upon him, however, if
B was able to prove to the court that A executed this document
where he basically would say that “I will not hold B liable for
whatever damage may be cause to me by B” – waiver. If there is
such a waiver proven. Will the action still prosper? It depends. If
the waiver was executed before the fraudulent act, that’s a waiver
as to future frauds and such waiver is a void waiver and can still
recover. But if the waiver was executed after the fraudulent act
was committed with knowledge of the fraudulent act, this of course
would amount to condonation. How would you know if this is a
waiver as to future frauds? See the dates as to the date of the
commission of the fraud and the date when the waiver was
executed.
c. NEGLIGENCE- another name “fault” which is really wrong. Article 2176-

quasi-delict is fault or negligence. So fault is different from negligence.
Negligence is by omission. Fault may have intention.
i. “CULPA ACQUILIANA or Quasi-delict” = CULPA is a broad term

covering broad term including fault and negligence.
ii. CULPA = is not intentional. There are four kinds of culpa. It can be
intentional or non-intentional.
iii. How would we know if an act is a negligent act or not? Negligence –

Article 1173. Parameters are there as to whether the act is negligent or not.
The degree of diligence which should be observed in the performance of
the obligation.
iv. If a person is invoking fortuitous event, for it to be a valid defense, there

must not be a concurrent negligence on his part.
v. Telefast vs. Castro Case – This involves negligence because the heirs are
claiming moral damages, but this is a contract, the sending of the telegram
which was not received by the heirs, but for moral damages to be awarded
resulting from a contract; breach of contract, the law requires for one to
disregard the obligations. Telefast: we are not negligent because the
failure of sending the telegram was not due to our fault but due to a
fortuitous event, it was due to atmospheric pressure and its beyond are
control. SC: Telefast failed to notify Sophia, the one who sent the
telegram. The failure to do so was a gross negligence act. And in our
jurisprudence, gross negligence act amounts to bad faith. Hence, there is
already a ground for the award of moral damages. You have to determine
the degree of negligence whether it is only a simple negligence or a
grossly negligent act in relation to liabilities.
vi. Negligence in torts and damages is still the same in Article 1173. In the
case of Philippine Bank of Commerce vs. CA: This plaintiff company
authorize a secretary to deposit a sum of money to its account in a branch
of the PBC. Now, the secretary is not an executive secretary just an
ordinary one, however, instead of depositing the money to the account of
the company, the secretary deposited the sum of money to her husband’s
account in the same branch in the PBC. How did she do it? She filled up
the original copy but the duplicate original has no account name, but the
account number of the husbands’’ was there. Original was fully filled up
with her husband’s account name and number. So the bank would accept
the amount of money for the account of the husband and give back the
duplicate original copy to the secretary. Then the secretary allegedly
would now fill up the original duplicate and fill the account name with the
name of the company to make it appear that it was deposited in the
account of the company. This happened several times not only once. Until
the company discovered that their account was empty and so they sued the
bank. Obviously it was the negligence of the bank officers that’s why the
company suffered damages. Negligence in not insuring that the deposit
slips were not fully filled up. Whose negligence is the proximate cause,
whether it was the negligence if the officer of the bank in accepting slips
which are not fully filled up? In this case there was a defense raised
among other defenses, that the company had the last clear chance in
preventing this injury have they only exercised the diligence. Why? The
banks would give us monthly statement of accounts. The bank said that if
they only bothered to open their statement if accounts they would have
notice that the money was not deposited to their account therefore there
would be no subsequent acts that followed causing them further injury.
SC: The majority held the bank liable holding that it was the bank’s
negligence through its officers which is the direct and proximate cause
except of one justice who supported the doctrine of the last clear chance. I
agree with the majority only for one reason = because the banks are
required to exercise the highest degree of diligence in the performance of
their obligations.
vii. Who else are required to exercise not the ordinary diligence or the
diligence of a good father of a family? Anyone if it is so stipulated. If not
under the law, aside from banks, are common carriers. Doctors, public
utilities like Meralco. In one case it was held that: Public utilities should
exercise or are required to exercise the highest degree of diligence. But
the recent rulings on realty companies: are now required to exercise

highest degree of diligence.
viii. Degree of diligence corresponding to the circumstances of the

person’s time and of the place. MUST REMEMEBER!! The best case:
Cangco vs. MRR. Alighting from the moving vehicle was not a negligent
act according to the SC. Majority ruled it was not a negligent act. I agree
with the majority considering the circumstances as to the person, the time,
and the place. Why? SC ruled that Cangco because he was at his prime, he
was just around 20’s, it is okay for him to jump from the train even when
the train is still running. And not only that, he was every much familiar
with the train and train station for he was riding it every day for years.
Here the time mattered, as to the negligence f the employees because it
turned out that it was the negligence of the employees of the MRR is the
approximate and direct cause. Why? Because they placed sacks of melon
in the platform of the station near the doors where the trains are stopping
for the passengers to alight that is why Cangco slipped and one of his hand
went under the train. Cangco wasn’t able to see the sacks of melon
because the station was not well lit. But there was proof here presented by
Cangco that, (On its face the dissenting opinion seems to be correct that
alighting from a moving train per se is a negligent act, because the
argument, had he not alighted while the train was moving and waited
for the train to go to a full stop then he would not have been injured,
parang tamang argument dba? But I think this argument is wrong. It was
not a scenario that the train was at a full stop, the scenario is that the
train was still moving so given the scenario, was the act a negligent act?
No. Why? Another passenger alighted the train ahead of Cangco, the
train was still moving faster even when the train was moving fast, was this
passenger injured? No. So that was not the reason, alighting form the
moving vehicle per se. It was the negligence of the employees of the
MRR who put the sacks of melon in the platform which resulted from
injury. Cangco was also a male, has he been a female then that would be a
negligent act because of the clothes the women wear at that time are
kimonos.
ix. Stevedoring company, is it required to exercise? Only Ordinary

Diligence. (Mindanao Terminal vs. Phoenix Assurance)
d. DELAY – is also called mora, default. Delay on the part of both parties,
AGCAOILI CASE – even assuming in delay na si Agcaolli because he refused
to accept, GSIS was also in delay because it failed to deliver habitable house. He
was asked to deliver a house, but instead he delivered a structure with a roof. The
court did not agree even in the agreement it was said “a house”, it should be a
habitable house. Even assuming that Agcaoilli was in delay, in contemplation of
the law no one was in delay, so was the GSIS correct in cancelling the contract?
No, because Agcaoilli was not in delay.
x. When would there be delay? As a rule when there is already DEMAND.

NO DEMAND NO DELAY. But there are Exceptions: (Art. 1169, NCC)
5. If so stipulated. (Case: Rivera vs. Spouses Chua – demand was no

longer necessary by the terms of the Promissory Note) E.g. credit
card agreement. Without need of demand. For a demand to be
valid the demand must be made when the obligation is already due.
If you demand when the obligation is not yet due – not a proper
demand because the obligation is not yet due and demandable.
No particular form as to how to make a demand. But lawyers will
never make a demand verbally because of evidentiary purposes.
Follow-up – is it a valid demand? (Solar Harvest vs. Davao) NO.
Demand is where you require the performance not just a follow-up.
Request – not a demand as well.
6. The law so provides. E.g. Agency. Like if the agent

misappropriated a sum of money, will he be liable already for
interest? From the time he misappropriated or from the time the
demand was made? From the time he misappropriated because
the law so provides. Even there was not yet any demand.
7. Demand will be useless due to the fault of the debtor. Due to the
fault of the debtor, in order for the demand not necessary so that
delay will not set in.
8. In reciprocal obligations, the last paragraph Article 1169, “one of

the parties had already complied and the other had not complied,
and the one who had not complied will already be considered in
delay even if there was no demand” having said that, do not read it
literally. SC has held that, this is subject to the stipulation of
the parties.
a. Like in a sale, obligations of the parties are reciprocal, the

seller has already delivered and the buyer has not yet paid,
does it mean that the buyer is already in delay? Not
necessarily, they may have agreed that the buyer will only
pay after the period of one year. So before that, you cannot
be considered in delay. This is one of the exceptions in the
rule to demand under Article 1169.
F. REMEDIES FOR BREACH OF OBLIGATIONS:
Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to
the right granted him by article 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at
the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons who do
not have the same interest, he shall be responsible for any fortuitous event until he has
effected the delivery.
Article 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned.
Article 1167. If a person obliged to do something fails to do it, the same shall be executed at
his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone.
Article 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.
Article 1170. Those who in the performance of their OBLIGATIONS are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
Article 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the acts
which the debtor may have done to defraud them.
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
Article 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Article 1192. In case both parties have committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the court. If it cannot be determined which of
the parties first violated the contract, the same shall be deemed extinguished, and each shall
bear his own damages.
Article 2236. The debtor is liable with all his property, present and future, for the fulfillment
of his OBLIGATIONS, subject to the exemptions provided by law. (Concurrence and
Preference of Credits)
Article 302. Neither the right to receive legal support nor any money or property obtained as
such support or any pension or gratuity from the government is subject to attachment or
execution. (Support)
Article 1708. The laborer's wages shall not be subject to execution or attachment, except for
debts incurred for food, shelter, clothing and medical attendance. (Contract Labor)
FAMILY CODE:
Article 153. The family home is deemed constituted on a house and lot from the time it is
occupied as a family residence. From the time of its constitution and so long as any of its
beneficiaries actually resides therein, the family home continues to be such and is exempt
from execution, forced sale or attachment except as hereinafter provided and to the extent of
the value allowed by law.
Article 155. The family home shall be exempt from execution, forced sale or attachment
except:
(4) For nonpayment of taxes;
(5) For debts incurred prior to the constitution of the family home;
(6) For debts secured by mortgages on the premises before or after such
constitution; and
(7) For debts due to laborers, mechanics, architects, builders, materialmen and
others who have rendered service or furnished material for the
construction of the building.
Rules of Court- RULE 39, SEC. 13:
Section 13. Property exempt from execution.
Except as otherwise expressly provided by law, the following property, and no other, shall be
exempt from execution:
FOCAUPLBELASE
The judgment obligor's Family home as provided by law, or the homestead in which he
resides, and land necessarily used in connection therewith;
Ordinary tools and implements personally used by him in his trade, employment, or
livelihood;
Three horses, or three cows, or three Carabaos, or other beasts of burden, such as the
judgment obligor may select necessarily used by him in his ordinary occupation;
His necessary clothing and Articles for ordinary personal use, excluding jewelry;
Household furniture and Utensils necessary for housekeeping, and used for that purpose
by the judgment obligor and his family, such as the judgment obligor may select, of a
value not exceeding one hundred thousand pesos;
Provisions for individual or family use sufficient for four months;
The professional Libraries and equipment of judges, lawyers, physicians, pharmacists,

dentists, engineers, surveyors, clergymen, teachers, and other professionals, not
exceeding three hundred thousand pesos in value;
One fishing Boat and accessories not exceeding the total value of one hundred thousand
pesos owned by a fisherman and by the lawful use of which he earns his livelihood;
So much of the salaries, wages, or Earnings of the judgment obligor for his personal
services within the four months preceding the levy as are necessary for the support of his
family;
Lettered gravestones;
Monies, benefits, privileges, or Annuities accruing or in any manner growing out of any
life insurance;
The right to receive legal Support, or money or property obtained as such support, or any
pension or gratuity from the Government;
Properties specially Exempted by law.
But no article or species of property mentioned in this section shall be exempt from execution
issued upon a judgment recovered for its price or upon a judgment of foreclosure of a
mortgage thereon.
Tolentino:
Remedy under Article 1165  REMEDIES OF CREDITOR: For failure of debtor to comply,
1. SPECIFIC PERFORMANCE, to obtain compliance of the prestations, whether

determinate or generic; this action implies a contractual relation;
2. TO RESCIND OR RESOLVE THE OBLIGATION
3. AN ACTION FOR DAMAGES exclusively or in addition to 1 and 2.
 Constitutional prohibition vs. imprisonment for debt applies, except in subsidiary

imprisonment when civil liability arising from crime is not paid; or in contempt;
 Exception to exception on the General rule under Fortuitous Event: Debtor in default
may still prove that he is not liable for fortuitous event because even if he had not performed, the
loss would still have occurred in the same manner.
Remedy under Article 1167  Performance of OBLIGATION by another at creditor’s

choice and at debtor’s cost – court may not by discretion merely award damages to creditor
when the OBLIGATION may be done in spite of debtor’s refusal to do so;
But, law may not compel or force debtor to comply with OBLIGATION, if to do so, would
amount to involuntary servitude, and since worthy is the rule that if there is debt, then there is no
imprisonment. If OBLIGATION can only be done by debtor, then the only remedy is to ask for
damages.
Remedy under Article 1168 OBLIGATION NOT TO DO was done  may compel debtor to
UNDO what he has done; but if impossible to undo so, the remedy is to ask for damages.
Remedy under Article 1170  RECOVERABLE DAMAGES = when the OBLIGATION is to

do something other than the payment of money;
If OBLIGATION is payment of money, Article 2209 is the rule in relation to damages  when
debtors incurs in delay, there is payment of interest if without stipulation to the contrary, as
agreed upon, or if no agreement, the legal interest will do.
Remedy under Article 1177  RIGHTS OF CREDITORS:
1. To levy by attachment and execution upon all the property of debtor except if exempt by
law;
2. To exercise all the rights and actions of the debtor, except those inherently personal to
him; accion subrogatoria; prior court approval is not required.
This should concur with the following: requisites:
a. Creditor has interest in the right or action not only because of his credit but that of
the insolvency of debtor;
b. Malicious or negligent inaction of debtor at level which endanger the claim of

Creditor;
c. Debtor’s right against 3rd person must be patrimonial, or susceptible of being

transformed to patrimonial value.
3. Ask for rescission of contracts made by debtor in fraud of Creditor’s rights.
Balane:
Q: Against what can the obligee demand performance?
A: Against non-exempt properties of the debtor. -- The debtor is liable with all his property,
present and future, for the fulfillment of his OBLIGATIONS, subject to the exemptions provided
by law. (Article 2236)
If number one is not enough, the creditor goes to any claims which the debtor may have against
third persons. This is called accion subrogatoria, wherein the creditor is subrogated in the
rights of the debtor.
Personal rights of the debtor:
1. Right to subsistence, support he receives are exempt
2. Public rights;
3. Rights pertaining to honor
4. Right to use remaining powers available to him, e.g. SPA of agency or deposit;
administrator; to accept a contract
5. Non-patrimonial rights – establish status, legitimate or illegitimate child; annulment of

marriage, legal separation, those arising from Persons and Family Relations;
6. Personal rights arising from patrimonial source, e.g. to revoke a donation due to
ingratitude, to demand exclusion of an unworthy heir;
Accion pauliana (Articles 1380-89) -- This is the right of creditors to set aside fraudulent transfers
which the debtor made so much of it as is necessary to pay the debts.
 pertains to acts which debtor may have done in fraud of creditor E.g. alienation of property,
renunciation of inheritance or right of usufruct, assignment of credit, remission of debts.
(1) EXTRAJUDICIAL REMEDIES:
(a) EXPRESSLY GRANTED BY LAW
(b) STIPULATED BY THE PARTIES
(a) EXPRESSLY GRANTED BY LAW, extrajudicial remedies
(In OBLIGATIONS of the Partners)
Article 1786. Every partner is a debtor of the partnership for whatever he may have promised
to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate
things which he may have contributed to the partnership, in the same cases and in the same
manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits
thereof from the time they should have been delivered, without the need of any demand.
Article 1788. A partner who has undertaken to contribute a sum of money and fails to do so
becomes a debtor for the interest and damages from the time he should have complied with
his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and his
liability shall begin from the time he converted the amount to his own use.
(In Delivery of the Thing Sold)
Article 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the
goods may have passed to the buyer, the unpaid seller of goods, as such, has:
(1) A lien on the goods or right to retain them for the price while he is in possession of
them;
(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he
has parted with the possession of them;
(3) A right of resale as limited by this Title;
(4) A right to rescind the sale as likewise limited by this Title.
Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies a right of withholding delivery similar to and coextensive with
his rights of lien and stoppage in transitu where the ownership has passed to the buyer.
(2) JUDICIAL REMEDIES:
(a) PRINCIPAL REMEDY  Article 1191 or Article 1170
(b) SUBSIDIARY REM  Articles 1380 /1177
(c) ANCILLARY REM  Rules of Court
(a) PRINCIPAL REMEDY  1191 / 1170
Article 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
of a period.
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Notes:
Two remedies are alternative and not cumulative, subject to the exception in par. 2 where he may
also seek rescission even after he has chosen fulfillment if the latter should become impossible
Article 1170. Those who in the performance of their obligation are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.
(b) SUBSIDIARY REM  Articles 1380 /1177
Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law.
(Rescissible Contracts)
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the acts
which the debtor may have done to defraud them.
Note:
Rescission in reciprocal OBLIGATION in Article 1191 is not identical to Rescission of contracts

in Article 1380 and the succeeding provisions thereto.
Requisites of Rescission of a contract under Article 1380:
A rescissible contract provided for under Article 1381 and 1382;
No other legal means to obtain reparation for damages (Article 1383);
The person demanding rescission must be able to return whatever he may be obliged to restore if
rescission be granted (Article 1385);
The objects of contract must not have passed legally to the possession of a of 3 rd person in good
faith (Article 1385);
Actions for rescission must be brought within 4 years (Article 1389).
 Rescindable contracts are valid until voided and can’t be attacked collaterally as in a land
registration proceeding. Direct proceeding is therefore necessary.
 Rescission only for legal cause, as those in Article 1381 and 1382.
“Lesion” under Article 1381 par. 1 and 2, for those to give rise to rescission, must be known or
could have been known at the time of making the contract, and not due to circumstances
subsequent thereto or unknown to the parties.
Accion Pauliana: Actions to set aside contracts in fraud of Creditors (Article 1381 par. 3)
Requisites for Accion Pauliana:
1. Plaintiff: Asking for rescission has a credit prior to alienation, though demandable later;
2. Debtor has made a subsequent contract conveying a patrimonial benefit to 3rd person;
3. Creditor-Plaintiff has no other legal remedy to satisfy his claim;
4. Act being impugned is fraudulent;
5. The 3rd person who received property, if by onerous title, is accomplice in the fraud.
Rescission is a subsidiary action, which presupposes that the Creditor has exhausted the
properties of the debtor. And that fraudulent conveyance must be shown.
Test: WON conveyance by debtor a bona fide transmission.
Badges/ Signs of Fraud:
1. consideration of conveyance is inadequate
2. transfer made by Debtor after suit has begun and while pending action against him
3. a sale upon credit by insolvent Debtor
4. evidence of large indebtedness or complete insolvency
5. transfer of all or nearly all of property of Debtor who is insolvent or greatly embarrassed
financially
6. transfer is made between father and son
7. failure of vendee to take exclusive possession of property
8. If alienation is gratuitous, good faith of transferee does NOT protect him over the owner;
otherwise that amounts to Unjust enrichment
9. If alienation is by onerous title, transferee must be a party to the fraud, to have rescission
As a rule, Rescission benefits only Creditor who obtained Rescission. And the extent of revocation
is only to the amount of prejudice suffered by Creditor. As to the excess, the alienation is
maintained.
Actions for Rescission may be brought by:
(1) the person injured by the rescission of the contract;
(2) heirs of this person, and
(3) their Creditors by virtue of right granted under Article 1177.
Notes:
 Right of transferee to retain property depends upon the nature of the transfer and upon
the complicity of the former in the fraud.
 When contract can’t be rescinded because 3rd person who is in good faith, the party who
caused the loss is liable for the damages.
 Badges of fraud, and Article 1387: Presumptions. May be rebutted by satisfactory and
convincing evidence.
 Article 1388: Creditor with action only against subsequent transferees only when an action
lies against the 1st transferee. If 1st Transferee is in Good Faith, there is no liability. But if
the 1st Transferee is in Bad Faith, the rescissible character of 2 nd alienation depends upon
how 2nd Transferee acquired the thing.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with
The creditor shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
thing, in accordance with Articles. 1385 and 1388 and the Mortgage Law.
Article 1192. In case both parties have committed a breach of the obligation, the liability of the
1st infractor shall be equally tempered bye the creditors. If it cannot be determined which of the
parties 1st violated the contract, the same shall be deemed extinguished, and each shall bear his
own damages.
According to Tolentino:
Similarities between Rescission under Article 1191 and Article 1380 include the following:
(1) both presuppose contracts validly entered into and existing, and
(2) both require mutual restitution when declared proper.
Differences:
(1) Rescission under Article 1191 may be demanded only by party to the contract, while under
Article 1380 by 3rd person prejudiced by the contract;
(2) Rescission under Article 1191 may be denied when there is sufficient reason to justify
extension of time to perform, while under Article 1380 such reason does NOT affect right to ask
for rescission;
(3) Non-performance is the only ground for rescission under Article 1191 while there are various
reasons of equity as grounds under Article 1191 applies only to reciprocal obligations where one
party has not performed, while under Article 1380, OBLIGATION may be unilateral or reciprocal
and even when contract has been fulfilled.
CASES
Case: Universal Food Corporation vs. CA and Magdalo Francisco Sr. and Victoriano
Francisco, (1970), J. Castro.
FACTS: Magdalo V. Francisco, Sr. PATENTEE or owner and author of the formula for
MAFRAN SAUCE, manufactured and distributed by UFC, filed with the CFI-Manila, an action
for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to
adjudge the defendant as without any right to the use of the Mafran trademark and formula, and
order the latter to restore to them the said right of user; to order UFC to pay Magdalo his unpaid
salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of
suit.
Petitioner UFC contends that the CA erred in granting above prayers of plaintiff, holding that
right to specific performance is not conjunctive with the right to rescind a reciprocal contract;
that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents
both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and
also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of
law.
Certain provisions of the Bill of Assignment would seem to support the petitioner's position that
the respondent patentee ceded and transferred to the petitioner the formula for Mafran sauce.
However, a perceptive analysis of the entire instrument and the language employed therein would
lead one to the conclusion that what was actually ceded and transferred was only the use of the
Mafran sauce formula. This was the precise intention of the parties: (1) 2% ROYALTY;
provisions to preserve utmost secrecy and monopoly of the formula by the patentee; etc.
ISSUE: WON the rescission of the Bill of Assignment by the CA is proper.
In this connection, we quote for ready reference the following articles of the new Civil Code
governing rescission of contracts:
ARTICLE 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.
with the payment of damages in either case. He may also seek rescission even after he
has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 of the Mortgage Law.
ARTICLE 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the
same.
ARTICLE 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
HELD: YES. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and rescission of the obligation, with payment
of damages in either case.
In this case before us, there is no controversy that the provisions of the Bill of Assignment are
reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically
paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V.
Francisco, Sr., without lawful and justifiable cause.
The general rule is that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. The question of whether a breach of a contract
is substantial depends upon the attendant circumstances. The petitioner contends that rescission
of the Bill of Assignment should be denied, because under article 1383, rescission is a
subsidiary remedy which cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.
However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the
permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of
Assignment. He was dismissed without any fault or negligence on his part Thus, apart from the
legal principle that the option to demand performance or ask for rescission of a contract
belongs to the injured party, the fact remains that the respondents-appellees had no alternative
but to file the present action for rescission and damages. It is to be emphasized that the
respondent patentee would not have agreed to the other terms of the Bill of Assignment were it
not for the basic commitment of the petitioner corporation to appoint him as its Second Vice-
President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and
other food products he would have "absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safeguarding of said products;" and that only by
all these measures could the respondent patentee preserve effectively the secrecy of the formula,
prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a
lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the
transfer to the corporation of only the use of the formula; the appointment of the respondent
patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the
said respondent patentee to continue research on the patent to improve the quality of the products
of the corporation; the need of absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the
preparation of said product  all these provisions of the Bill of Assignment are so
interdependent that violation of one would result in virtual nullification of the rest.
In the Separate Opinion: REYES, J.B.L., J., concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that
the argument of petitioner, that the rescission demanded by the respondent-appellee,
Magdalo Francisco, should be denied because under Article 1383, NCC rescission can not be
demanded except when the party suffering damage has no other legal means to obtain reparation,
is predicated on a failure to distinguish between a rescission for breach of contract under Article
1191 of the Civil Code and a rescission by reason of lesion or economic prejudice, under Article
1381, et seq.
(Rescission for breach of contract under Article 1191)  The rescission on account of breach
of stipulations is not predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action
for rescission thereunder is subordinated to anything other than the culpable breach of his
OBLIGATIONS by the defendant. This rescission is in principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his promises when the other
violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the breach is purely secondary.
(Rescission by reason of lesion or economic prejudice, under Article 1381, et seq.)  On the
contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison d'etre as well as the
measure of the right to rescind. Hence, where the defendant makes good the damages caused, the
action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But
the operation of these two articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article
1191.
It is probable that the petitioner's confusion arose from the defective technique of the new Code
that terms both instances as rescission without distinctions between them; unlike the previous
Spanish Civil Code of 1889, that differentiated "resolution" for breach of stipulations from
"rescission" by reason of lesion or damage. But the terminological vagueness does not justify
confusing one case with the other, considering the patent difference in causes and results of
either action.
Case : Magdalena Estate, Inc. Vs. Louis Myrick, March 14, 1941, J. Laurel.
FACTS: Magdalena Estate, Inc. sold to Louis J. Myrick parcel of lots in San Juan Subdivision,
San Juan Rizal, with contract of sale providing for the price which shall be payable in 120 equal
monthly installments of each on the 2nd day of each month from the date of execution of the
agreement. Simultaneously, the vendee executed and delivered to the vendor a Promissory Note
for the whole purchase price. Myrick made several installment payments the last being Oct.
1930, but was in default as to May payment.
Thus, vendor notified the vendee that, in view of his inability to comply with the terms of their
contract, said agreement had been cancelled as of that date, thereby relieving him of any
further obligation thereunder, and that all amounts paid by him had been forfeited in favor of the
vendor, who assumes the absolute right over the lots in question. To this communication, the
vendee did not reply, and it appears likewise that the vendor thereafter did not require him to
make any further disbursements on account of the purchase price.
Myrick, respondent herein, commenced the present action in CFI-Albay, against MEI for the
sum of P2,596.08 with legal interest thereon from the filing of the complaint until its payment,
and for costs of the suit. Lower court granted, CA affirmed with modification that legal interest
should be computed from the date of the cancellation of the contract. Thus this petition.
ISSUE: WON petitioner’s contention is correct, that a bilateral contract may be resolved or
cancelled only by the prior mutual agreement of the parties, which is approved by the judgment
of the proper court; and that the letter of MEI was not assented to by the respondent, and
therefore, cannot be deemed to have produced a cancellation, even if it ever was intended.
HELD: Where the terms of writing are clear, positive and unambiguous, the intention of the
parties should be gleaned from the language therein employed, which is conclusive in the
absence of mistake. The letter said “cancelled” and it was unequivocal.
The fact that the contracting parties herein did not provide for resolution is now of no moment,
for the reason that the OBLIGATIONS arising from the contract of sale being reciprocal, such
OBLIGATIONS are governed by article 1124 of the Civil Code which declares that the power
to resolve, in the event that one of the obligors should not perform his part, is implied.
Upon the other hand, where, as in this case, the petitioner cancelled the contract, advised the
respondent that he has been relieved of his OBLIGATIONS thereunder, and lead said respondent
to believe it so and act upon such belief, the petitioner may not be allowed, in the language of
section 333 of the Code of Civil Procedure (now section 68 (a) of Rule 123 of the New Rules
of Court), in any litigation the course of litigation or in dealings in nais, be permitted to
repudiate his representations, or occupy inconsistent positions, or, in the letter of the
Scotch law, to "approbate and reprobate."
The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event
of failure of the vendee to continue in the payment of the stipulated monthly installments, to
retain the amounts paid to him on account of the purchase price. The claim, therefore, of the
petitioner that it has the right to forfeit said sums in its favor is untenable. Under article 1124 of
the Civil Code, however, he may choose between demanding the fulfillment of the contract or its
resolution. These remedies are alternative and not cumulative, and the petitioner in this case,
having to cancel the contract, cannot avail himself of the other remedy of exacting performance.
(Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua
Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as
practicable, to their original situation (Po Pauco vs. Siguenza, supra) which can be approximated
only by ordering, as we do now, the return of the things which were the object of the contract,
with their fruits and of the price, with its interest (article 1295, Civil Code), computed from the
date of the institution of the action. (Verceluz vs. Edaño, 46 Phil. 801.)
Case: University of the Philippines vs. Walfrido Delos Angeles (Judge of CFI in Quezon City),
September 29, 1970, JBL Reyes.
Facts: In the provinces of Laguna and Quezon, Land Grants were segregated from the public
domain and given as an endowment to UP, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608.
In 1960, UP and ALUMCO (Associated Lumber Manufacturing Co.) entered into a logging
agreement under which the latter was granted exclusive authority, for a period starting from the
date of the agreement to 31 December 1965, extendible for a further period of five (5) years by
mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of
payment to UP of royalties, forest fees, etc.; ALUMCO cut and removed timber therefrom but,
as of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite
repeated demands, it had failed to pay. After it had received notice that UP would rescind or
terminate the logging agreement, ALUMCO executed an instrument, entitled
"Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964,
which was approved by the President of UP, and which stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not
sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied shall be
paid by the DEBTOR in full no later than June 30, 1965;
5. In the event that the DEBTOR fails to comply with any of its promises or undertakings
in this document, the DEBTOR agrees without reservation that the CREDITOR shall
have the right and the power to consider the Logging Agreement dated December 2,
1960 as rescinded without the necessity of any judicial suit, and the CREDITOR
shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of
and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period
from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the
indebtedness that it had previously acknowledged.
Thus, UP informed ALUMCO that it had, as of that date, considered as rescinded and of no
further legal effect the logging agreement that they had entered in 1960; and UP filed a
complaint against ALUMCO at CFI-Rizal, for the collection or payment of sums of money with
prayer for injunction. But before preliminary injunction may be issued, UP had taken steps to
have another concessionaire to take over the logging operation, by advertising an invitation to
bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber
Company, Inc.; the logging contract was signed on 16 February 1966. ALUMCO had filed
several motions to discharge the writs of attachment and preliminary injunction but were denied
by the court. Thus, ALUMCO filed a petition to enjoin petitioner University from conducting the
bidding and for preliminary injunction. Respondent judge issued the first of the questioned
orders, enjoining UP from awarding logging rights over the concession to any other party.
UP received the TRO after it had concluded its contract with Sta. Clara, and said company had
started logging operations. On motion, ALUMCO and one Jose Rico, the court, declared
petitioner UP in contempt of court and Sta. Clara Lumber to refrain from exercising logging
rights or conducting logging operations in the concession.
UP’s MR was denied.
ISSUE: Whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may
disregard the same before any judicial pronouncement to that effect.
HELD: YES. In the first place, UP and ALUMCO had expressly stipulated that, upon default by
the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging
Agreement as rescinded without the necessity of any judicial suit." As to such special
stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan
vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper court. If
the other party denies that rescission is justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court. Then, should the court, after due hearing, decide
that the resolution of the contract was not warranted, the responsible party will be sentenced
to damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured
by the other's breach will have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation,
since in every case where the extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether the resolution was proper or not.
It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution
will remain contestable and subject to judicial invalidation, unless attack thereon should
become barred by acquiescence, estoppel or prescription.
CASE: JOSE ZULUETA VS. HON. MARIANO AND LAMBERTO AVELLANA,

JANUARY 30, 1982, J. MELENCIO-HERRERA.
FACTS: Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated
within the Antonio Subdivision, Pasig, Rizal. On November 6, 1964, petitioner Zulueta and
private respondent Lamberto Avellana, a movie director, entered into a "Contract to Sell" the
aforementioned property for P75,000.00 payable in twenty years with respondent buyer
assuming to pay a down payment of P5,000.00 and a monthly installment of P630.00 payable in
advance before the 5th day of the corresponding month, starting with December, 1964 – WITH
FURTHER SPECIFIC STIPULATIONS IN CASE OF BREACH OF SUCH contract.
Avellana occupied the property but title remained with petitioner Zulueta. Upon the allegation
that respondent had failed to comply with the monthly amortizations stipulated in the contract,
despite demands to pay and to vacate the premises, and that thereby the contract was
converted into one of lease, petitioner, commenced an ejectment suit against respondent before
the MTC-Pasig. Respondent controverted by contending that the Municipal Court had no
jurisdiction over the nature of the action as it involved the interpretation and/or rescission of the
contract; and made some affirmative defenses and counterclaim. Lower court found in favor of
plaintiff, and asked defendant to vacate and pay back rentals, etc. CA reversed and ruled against
the Justice of the Municipal Court finding the case as one of interpretation and rescission of
contract because the contract to sell was converted to contract of lease. MR denied.
ISSUE: WON the original contract to sell was rescinded due to the automatic rescission clause
in the contract, thus the case was unlawful detainer cognizable by the MTC or one of judicial
rescission of contract cognizable by then CFI.
HELD: Thus, the basic issue is not possession but one of rescission or annulment of a contract,
which is beyond the jurisdiction of the Municipal Court to hear and determine.
A violation by a party of any of the stipulations of a contract on agreement to sell real

property would entitle the other party to resolved or rescind it. An allegation of such
violation in a detainer suit may be proved by competent evidence. And if proved a justice
of the peace court might make a finding to that effect, but it certainly cannot declare and
hold that the contract is resolved or rescinded. It is beyond its power so to do. And as the
illegality of the possession of realty by a party to a contract to sell is premised upon the
resolution of the contract, it follows that an allegation and proof of such violation, a
condition precedent to such resolution or rescission, to render unlawful the possession of
the land or building erected thereon by the party who has violated the contract, cannot be
taken cognizance of by a justice of the peace court xxx
True, the contract between the parties provided for extrajudicial rescission. This has legal
effect, however, where the other party does not oppose it. Where it is objected to, a judicial
determination of the issue is still necessary.
A stipulation entitling one party to take possession of the land and building if the other
party violates the contract does not ex proprio vigore confer upon the former the right to
take possession thereof if objected to without judicial intervention and' determination.
But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the
case and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of
the objection interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this
point:
Section 11. Lack of jurisdiction. A case tried by an inferior court without jurisdiction over
the subject matter shall be dismiss on appeal by the Court of First Instance. But instead of
dismissing the case, the Court of First Instance may try the case on the merits, if the
parties therein file their pleadings and go to trial without any objection to such
jurisdiction.
There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.
If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the
only authority of the CFI is to declare the inferior court to have acted without jurisdiction
and dismiss the case, unless the parties agree to the exercise by the CFI of its original
jurisdiction to try the case on the merits.
The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment
of the Municipal Court of Pasig must perforce to be denied.
Case: Palay, Inc. and Albert Onstott vs, Jacobo Clave (Presidential Executive Assistant
National Housing Authority) and Nazario Dumpit, Sept. 21, 1983, J. Melencio-Herrera.
FACTS: Petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private
respondent, Nazario Dumpit, a Contract to Sell a parcel of Land of the Crestview Heights Subd.
in Antipolo, Rizal, owned by said corporation. The sale price was P23,300.00 with 9% interest
p.a., payable with a down-payment of P4,660.00 and monthly installments of P246.42 until fully
paid. Contract provided for automatic extrajudicial rescission upon default in payment of any
monthly installment after the lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all installments paid. Respondent Dumpit
paid the downpayment and several installments amounting to P13,722.50. The last payment was
made on December 5, 1967 for installments up to September 1967. Almost six (6) years later,
private respondent wrote petitioner offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. Replying
petitioners informed respondent that his Contract to Sell had long been rescinded and the lot
had already been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with
the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund.
NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered
Palay, Inc. and Alberto Onstott, jointly and severally, to refund immediately to Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint. Petitioners' MR was
denied. Appeal to the OP was also denied.
ISSUE: Whether the rescission of the contract is proper.
HELD: NO. Well settled is the rule, as held in previous jurisprudence, that judicial action for
the rescission of a contract is not necessary where the contract provides that it may be
revoked and cancelled for violation of any of its terms and conditions.
However, even in the cited cases, there was at least a written notice sent to the defaulter
informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los
Angeles the act of a party in treating a contract as cancelled should be made known to the
other.
In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioners was
warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against
private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to
rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it
should be noted that even in that case notice in writing was made to the vendee of the
cancellation and annulment of the contract although the contract entitled the seller to immediate
repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored in

Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on
Installment Payments." which took effect on September 14, 1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days
from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer. (Emphasis supplied).
The contention that private respondent had waived his right to be notified under
paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a
standard form of petitioner corporation, and private respondent had no freedom to

stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver
follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public
policy to protect buyers of real estate on installment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real
estate on installment payments.
CASE: BUENAVENTURA ANGELES, ET AL. VS. URSULA TORRES CALASANZ, ET

AL., MARCH 18, 1985, J. GUTIERREZ, JR.
FACTS: Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura
Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal
for the amount of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract.
They promised to pay the balance in monthly installments of P 41.20 until fully paid, the
installments being due and payable on the 19th day of each month. The plaintiffs-appellees paid
the monthly installments until July 1966, when their aggregate payment already amounted to
P4,533.38. On numerous occasions, the defendants-appellants accepted and received
delayed installment payments from the plaintiffs-appellees. On December 7, 1966, the
defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due
accounts. On January 28, 1967, the defendants-appellants cancelled the said contract
because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter
with their plea for reconsideration of the said cancellation was denied by the defendants-
appellants.
The plaintiffs-appellees filed with CFI-Rizal to compel the defendants-appellants to execute in

their favor the final deed of sale alleging inter alia that after computing all subsequent payments
for the land in question, they found out that they have already paid the total amount of P4,533.38
including interests, realty taxes and incidental expenses for the registration and transfer of the
land.
The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed
and refused to pay and/or offer to pay the monthly installments corresponding to the
month of August, 1966 for more than five (5) months, thereby constraining the defendants-
appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. MR denied.
ISSUE: WON the contract to sell has been automatically and validly cancelled by the
defendants-appellants.
HELD: NO. The right to rescind the contract for non-performance of one of its stipulations,
therefore, is not absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court
stated that;
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat the
very object of the parties in making the agreement. (Song Fo and Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances.
The breach of the contract adverted to by the defendants-appellants is so slight and casual
when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees
had already paid the monthly installments for a period of almost nine (9) years. In other words,
in only a short time, the entire obligation would have been paid.
Article 1234  If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered by the
obligee.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low
income group people of realizing their dream of a little parcel of land which they can
really call their own.
The contract to sell entered into by the parties has some characteristics of a contract of
adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees,
eager to acquire a lot upon which they could build a home, affixed their signatures and assented
to the terms and conditions of the contract. They had no opportunity to question nor change any
of the terms of the agreement. It was offered to them on a "take it or leave it" basis.
The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a
contract must be interpreted against the party who drafted the same, especially where such
interpretation will help effect justice to buyers who, after having invested a big amount of
money, are now sought to be deprived of the same through the prayed application of a contract
clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in
essence, and in its entirety is most unfair to the buyers."
Case: Solomon Boysaw and Alfredo Yulo, Jr. vs. Interphil Promotions, Inc., Lope Sarreal
and Manuel Nieto, March 20, 1987, J. Fernan.
FACTS: Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil
Promotions, Inc. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde
in a boxing contest for the junior lightweight championship of the world. It was stipulated that
the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not
later than thirty [30] days thereafter should a postponement be mutually agreed upon, and that
Boysaw would not, prior to the date of the boxing contest, engage in any other such contest
without the written consent of Interphil Promotions, Inc.
Ketchum on his own behalf assigned to J. Amado Araneta the managerial rights over Solomon
Boysaw, presumably in preparation for his engagement with Elorde. Then, Araneta assigned to
Alfredo J. Yulo, Jr. the managerial rights over Boysaw. The next day, Boysaw wrote Lope
Sarreal, Sr. informing him of his arrival and presence in the Philippines.
Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over
Boysaw and indicating his and Boysaw's readiness to comply with the boxing contract of May
1, 1961. On the same date, on behalf of Interphil, Sarreal wrote a letter to the Games and
Amusement Board [GAB] expressing concern over reports that there had been a switch of
managers in the case of Boysaw, of which he had not been formally notified, and requesting that
Boysaw be called to an inquiry to clarify the situation.
The GAB called a series of conferences and changed the schedule the Elorde-Boysaw fight. The
USA National Boxing Association which has supervisory control of all world title fights
approved the date set by the GAB. Yulo, Jr. refused to accept the change in the fight date.
The fight never materialized. Thus, Boysaw and Yulo, Jr. sued Interphil, Sarreal, and Nieto
in CFI-Rizal for damages.
ISSUE: Whether or not Boysaw can compel the fulfillment of the contract.
HELD: NO. The power to rescind OBLIGATIONS is implied, in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him. [Part 1, Article
1191, Civil Code].
There is no doubt that the contract in question gave rise to reciprocal OBLIGATIONS.
"Reciprocal OBLIGATIONS are those which arise from the same cause, and in which each
party is a debtor and a creditor of the other, such that the obligation of one is dependent
upon the obligation of the other. They are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of the other"
[Tolentino]
The power to rescind is given to the injured party. "Where the plaintiff is the party
who did not perform the undertaking which he was bound by the terms of the agreement to
perform for he is not entitled to insist upon the performance of the contract by the defendant, or
recover damages by reason of his own breach” [Seva vs. Alfredo Berwin 48 Phil. 581].
Another violation of the contract in question was the assignment and transfer, first to J.
Amado Araneta, and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw
without the knowledge or consent of Interphil. The assignments, from Ketchum to Araneta, and
from Araneta to Yulo, were in fact novations of the original contract which, to be valid, should
have been consented to by Interphil.
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. [Article 1293]
Creditor not bound to deal with unilaterally substituted debtor - Under the law when a contract
is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the
aggrieved creditor is not bound to deal with the substitute.
The consent of the creditor to the change of debtors, whether in expromision or

delegacion is an, indispensable requirement . . . Substitution of one debtor for another may delay
or prevent the fulfillment of the obligation by reason of the inability or insolvency of the new
debtor, hence, the creditor should agree to accept the substitution in order that it may be binding
on him.
Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract
with z, under which he transfers to z all his rights under the first contract, together with the
OBLIGATIONS thereunder, but such transfer is not consented to or approved by x, there is no
novation. X can still bring his action against y for performance of their contract or damages in
case of breach. [Tolentino]
From the evidence, it is clear that the appellees, instead of availing themselves of the
options given to them by law of rescission or refusal to recognize the substitute obligor Yulo,
really wanted to postpone the fight date owing to an injury that Elorde sustained in a recent
bout. That the appellees had the justification to renegotiate the original contract, particularly
the fight date is undeniable from the facts aforestated. Under the circumstances, the appellees'
desire to postpone the fight date could neither be unlawful nor unreasonable.
We uphold the appellees' contention that since all the rights on the matter rested with the
appellees, and appellants' claims, if any, to the enforcement of the contract hung entirely upon
the former's pleasure and sufferance, the GAB did not act arbitrarily in acceding to the
appellee's request to reset the fight date to November 4, 1961. It must be noted that
appellant Yulo had earlier agreed to abide by the GAB ruling.
CASE: PILIPINAS BANK VS. IAC AND JOSE DIOKNO AND CARMEN DIOKNO,
JUNE 30, 1987, J. PARAS.
FACTS: Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private

respondents, Jose W. Diokno and Carmen I. Diokno, as vendees executed a Contract to Sell
over a parcel of land in Victoria Valley Subdivision in Antipolo, Rizal, subject to terms and
conditions as stipulated. At vendees’ failure to pay, vendor sent several demands for the former
to settle arrearages, requests for extensions were give, further demand was again given several
times, until a Notice of rescission was given to Carmen Diokno after she informed the Corp.
that she wanted an audience with the Pres. because she had a prospective buyer of the
property.
Thus, private respondents filed Complaint for Specific Performance with Damages to compel
petitioner to execute a deed of sale in their favor, and to deliver to them the title of the lot in
question. Petitioner filed an Answer with counterclaim for damages in the form of attorney's
fees, claiming that Contract to Sell has been automatically rescinded or cancelled by virtue
of private respondents' failure to pay the installments due in the contract under the
automatic rescission clause. After trial, the lower court rendered a decision in private
respondents' favor, holding that petitioner could not rescind the contract to sell, because: (a)
petitioner waived the automatic rescission clause by accepting payment on September 1967, and
by sending letters advising private respondents of the balances due, thus, looking forward to
receiving payments thereon; (b) in any event, until May 18, 1977 (when petitioner made
arrangements for the acquisition of additional 870 square meters) petitioner could not have
delivered the entire area contracted for, so, neither could private respondents be liable in default,
citing Article 1189, NCC. CA affirmed.
ISSUE: WON the Contract to Sell was rescinded or cancelled, under the automatic rescission
clause contained therein.
HELD: NO. We find the petition meritless. While it is true that a contractual provision
allowing "automatic rescission" (without prior need of judicial rescission, resolution or
cancellation) is VALID, the remedy of one who feels aggrieved being to go to Court for the
cancellation of the rescission itself, in case the rescission is found unjustified under the
circumstances, still in the instant case there is a clear WAIVER of the stipulated right of
"automatic rescission," as evidenced by the many extensions granted private respondents by
the petitioner. In all these extensions, the petitioner never called attention to the proviso on
"automatic rescission."
Case: Central Bank of the Philippines and Acting Director Antonio Castro, Jr. of the
Department of Commercial and Savings Bank (In his capacity as statutory receiver of Island
Savings Bank) vs. CA and Sulpicio Tolentino, October 3, 1985, C.J. Makasiar.
Facts: Islands Savings Bank approved the loan application of Tolentino for P80,000. To secure the
loan, Tolentino executed a real estate mortgage on his 100-hectare land. Only P17,000 was
released by the Bank, for which Tolentino executed a promissory note payable within 3 years. The
balance was not released. In 1965, the Monetary Board of the Central Bank issued Resolution No.
1049 prohibiting the Bank from doing business in the Philippines. The Bank filed an application
for extrajudicial foreclosure of the real estate mortgage of Tolentino for non-payment of the
promissory note for P17,000. In turn, Tolentino filed an action for injunction, specific
performance or rescission, alleging that the Bank failed to fulfill its obligation to lend the
balance of P63,000.
Issues:Whether or not Tolentino can compel specific performance.
Held: NO. When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00
loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of the other
(Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and
when one party has performed or is ready and willing to perform his part of the contract, the
other party who has not performed or is not ready and willing to perform incurs in delay (Art.
1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for
the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.
Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay
the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the
P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April
28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing
further business. Such prohibition made it legally impossible for Island Savings Bank to furnish
the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did
it prohibit island Savings Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree of specific performance
(Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
Since both parties were in default in the performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. We rule that the liability of Island Savings Bank for damages in not furnishing the entire
loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino
for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just
that he should account for the interest thereon.
We hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.
Case: UNLAD Resources Dev. Co., UNLAD Rural Bank of Noveleta, Inc., UNLAD
Commodities, Inc., Helena Benitez and Conrado Benitez II vs. Renato Dragon, et al., July 28,
2008, J. Nachura.
Facts: Herein respondents and petitioner entered into a Memorandum of Agreement wherein it is
provided that respondents, as controlling stockholders of Rural Bank shall allow Unlad Resources
to invest P4.8 Million in the Rural Bank in a form of additional equity. Likewise, Unlad Resources,
upon signing, it was agreed that the former shall subscribe to a minimum of 480,000 common or
preferred non-voting share of stock and pay immediately 1,200,000 for said subscription, and that
upon signing, said agreement shall transfer control and management over Rural Bank to Unlad.
According to respondents, immediately after signing, they complied with their obligation and
transferred control of Rural Bank to Unlad, thereby renaming the Bank into Unlad Rural Bank of
Noveleta. However, despite repeated demands, Unlad has failed and refused to comply with their
obligations as agreed upon. On August 10, 1984, the Board of Directors of [petitioner] Unlad
Resources passed Resolution No. 84-041 authorizing the President and the General Manager to
lease a mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the Bank as
[lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor]. The
management of the mango plantation was undertaken by Unlad Commodities, Inc., a subsidiary
of Unlad Resources[,] under a Management Contract Agreement. The Management Contract
provides that Unlad Commodities, Inc. would receive eighty percent (80%) of the net profits
generated by the operation of the mango plantation while the Bank’s share is twenty percent
(20%). It was further agreed that at the end of the lease period, the Rural Bank shall turn over to
the lessor all permanent improvements introduced by it on the plantation.
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central
Bank’s approval to retire its [Development Bank of the Philippines] preferred shares in the
amount of P219,000.00 and giving notice for subscription to proportionate shares. The
[respondents] objected on the grounds that there is already a sinking fund for the retirement of
the said DEBTORP-held preferred shares provided for annually and that it could deprive the
Rural Bank of a cheap source of fund. (sic)
[Respondents] alleged compliance with all of their obligations under the Memorandum of
Agreement in that they have transferred control and management over the Rural bank to the
[petitioners] and are ready, willing and able to allow [petitioners] to subscribe to a minimum of
four hundred eighty thousand (P480,000.00) (sic) common or preferred non-voting shares of
stocks with a total par value of four million eight hundred thousand pesos (P4,800,000.00) in the
Rural Bank. However, [petitioners] have failed and refused to subscribe to the said shares of
stock and to pay the initial amount of one million two hundred thousand pesos (P1,200,000.00)
for said subscription.
On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City,
Branch 61 a Complaint4 for rescission of the agreement and the return of control and
management of the Rural Bank from petitioners to respondents, plus damages. RTC ruled in
favor of the respondents. Hence, petitioners appeal. But CA affirmed the RTC decision.
Issues:
a. Whether or not the action for rescission had already prescribed.
b. Whether or not the action for rescission is proper.
Held:
(1) NO. Article 1389. The action to claim rescission must be commenced within four years x x x.
This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts as,
clearly, this provision is under the chapter entitled "Rescissible Contracts."
In a previous case, this Court has held that Article 1389: applies to rescissible contracts, as
enumerated and defined in Articles 1380 and 1381. We must stress however, that the "rescission"
in Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592. In Articles
1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of
the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for
lesion as enumerated in said article.
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article
1144, which provides that the action upon a written contract should be brought within ten years
from the time the right of action accrues.
Article 1381 sets out what are rescissible contracts, to wit:
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object
thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated
in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be subject to rescission.
The Memorandum of Agreement subject of this controversy does not fall under the above
enumeration. Accordingly, the prescriptive period that should apply to this case is that
provided for in Article 1144, to wit:
Article 1144. The following actions must be brought within ten years from the time the right of
action accrues:
(1) Upon a written contract;
xxxx
Based on the records of this case, the action was commenced on July 3, 1987, while the
Memorandum of Agreement was entered into on December 29, 1981. Article 1144 specifically
provides that the 10-year period is counted from "the time the right of action accrues." The right
of action accrues from the moment the breach of right or duty occurs. 13 Thus, the original
Complaint was filed well within the prescriptive period.
(2) YES.
There is no question that petitioners herein failed to fulfill their obligation under the
Memorandum of Agreement. Even they admit the same, albeit laying the blame on respondents.
It is true that respondents increased the Rural Bank’s authorized capital stock to only P5 million,
which was not enough to accommodate the P4.8 million worth of stocks that petitioners were to
subscribe to and pay for. However, respondents’ failure to fulfill their undertaking in the
agreement would have given rise to the scenario contemplated by Article 1191 of the Civil Code,
which reads:
Article 1191. The power to rescind reciprocal obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
of a period.
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission
of the contract instead of simply not performing their part of the Agreement. But in the course of
things, it was the respondents who availed of the remedy under Article 1191, opting for the
rescission of the Agreement in order to regain control of the Rural Bank.
Having determined that the rescission of the subject Memorandum of Agreement was in order,
the trial court ordered petitioner Unlad Resources to return to respondents the management and
control of the Rural Bank and for the latter to return the sum of P1,003,070.00 to petitioners.
Mutual restitution is required in cases involving rescission under Article 1191. This means
bringing the parties back to their original status prior to the inception of the contract. Article
1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are legally
in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits,
and the price with its interest," the Court finds no justification to sustain petitioners’ position that
said Article 1385 does not apply to rescission under Article 1191.
Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not
merely its termination."16 Hence, rescission creates the obligation to return the object of the
contract. It can be carried out only when the one who demands rescission can return whatever
he may be obliged to restore. To rescind is to declare a contract void at its inception and to put
an end to it as though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and restore the parties
to their relative positions as if no contract has been made.
Accordingly, when a decree for rescission is handed down, it is the duty of the court to require
both parties to surrender that which they have respectively received and to place each other as
far as practicable in his original situation. The rescission has the effect of abrogating the
contract in all parts.
Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was just
cause for rescission. With the contract thus rescinded, the parties must be restored to the
status quo ante, that is, before they entered into the Memorandum of Agreement.
Case: Swire Realty Development Corp. vs. Jayne Yu, G.R. No. 207133, March 9, 2015, Third
Division: Peralta, J.
Facts: Jayne Yu and Swire Realty Development Corp. entered into a Contract to Sell covering one
residential unit of the Palace of Makati and a parking slot of the same condominium. Yu paid the
full purchase price but Swire failed to complete and deliver the subject unit on time. This prompted
Yu to file a complaint for Rescission of Contract with damages before the HLURB. It rendered a
decision dismissing the complaint and ruled that rescission is not permitted for slight or casual
breach. The HLURB Board of Commissioners reversed and set aside the ruling and ordered the
rescission.
The CA affirmed the decision of the HLURB Board of Commissioners and the Office of the
President.
Issue: Whether or not rescission of the contract was proper.
Held: Yes. Article 1191 of the NCC sanctions the right to rescind obligation in the event that
specific performance becomes impossible.
Basic is the rule that the right of rescission of a party to an obligation under Art. 1191 of the Civil
Code is predicated on a breach of faith by the other party who violates the reciprocity between
them. The breach contemplated in the said provision is the obligor’s failure to comply with an
existing obligation. When the obligor cannot comply with what is incumbent upon it, the oblige
may seek rescission and, in the absence of just cause for the court to determine period of
compliance, the court shall decree rescission.
In the instant case, the CA aptly found that the completion date of the condominium unit was
November 1998 but was extended to December 1999. However, at the time of the ocular
inspection conducted by HLURB ENCRFO, the unit was not yet completely finished as the
kitchen cabinets and fixtures were not yet installed and the agreed amenities were not yet available.
FROM THE FOREGOING, IT IS EVIDENT THAT THE REPORT ON THE OCULAR

INSPECTION CONDUCTED ON THE SUBJECT CONDOMINIUM PROJECT AND
SUBJECT UNIT SHOWS THAT THE AMENITIES UNDER THE APPROVED PLAN
HAVE NOT YET BEEN PROVIDED AS OF MAY 3, 2002, AND THAT THE SUBJECT
UNIT HAS NOT BEEN DELIVERED TO RESPONDENT AS OF AUGUST 28, 2002,
WHICH IS BEYOND THE PERIOD OF DEVELOPMENT OF DECEMBER 1999 UNDER
THE LICENSE TO SELL. INCONTROVERTIBLY, PETITIONER HAD INCURRED
DELAY IN THE PERFORMANCE OF ITS OBLIGATION AMOUNTING TO BREACH
OF CONTRACT AS IT FAILED TO FINISH AND DELIVER THE UNIT TO
RESPONDENT WITHIN THE STIPULATED PERIOD. THE DELAY IN THE
COMPLETION OF THE PROJECT AS WELL AS OF THE DELAY IN THE DELIVERY
OF THE UNIT ARE BREACHES OF STATUTORY AND CONTRACTUAL
OBLIGATIONS WHICH ENTITLE RESPONDENT TO RESCIND THE CONTRACT,
DEMAND A REFUND AND PAYMENT OF DAMAGES.
CASE: OLIVAREZ REALTY VS. CASTILLO, G.R. NO. 196251, JULY 9, 2014, LEONEN,
J.
FACTS: CASTILLO WAS THE REGISTERED OWNER OF A 346,918 SQUARE-METER

PARCEL OF LAND LOCATED IN LAUREL, BATANGAS. THE PHILIPPINE TOURISM
AUTHORITY ALLEGEDLY CLAIMED OWNERSHIP OVER THE SAME PARCEL OF
LAND. CASTILLO AND OLIVAREZ REALTY CORP. ENTERED INTO A CONTRACT OF
CONDITIONAL SALE OVER THE PROPERTY. UNDER THE DEED, CASTILLO AGREED
TO SELL HIS PROPERTY FOR P19,080,490.00. OLIVAREZ PAID A DOWNPAYMENT OF
P5M. AS TO THE BALANCE, OLIVAREZ AGREED TO PAY IN 30 EQUAL MONTHLY
INSTALLMENTS EVERY 8TH DAY OF THE MONTH BEGINNING IN THE MONTH THAT
THE PARTIES WOULD RECEIVING A DECISION VOIDING THE PTA’S TITLE OVER
THE PARTY.
Should the action against the PTA be denied, Castillo agreed to reimburse all the amounts paid
by Olivarez. As to the “legitimate tenants” occupying the property, Olivarez undertook to pay
them disturbance compensation while Castillo undertook to clear the land within 6 months from
the signing of the deed of conditional sale. Should he fail to do so, Olivarez may suspend its
monthly down payments until the tenants vacate the property.
Castillo filed a complaint against Olivarez with the RTC alleging that he was convinced by the
latter to sell the property on the representation that the corporation shall be responsible in
clearing the property of the tenants and paying them disturbance compensation. Arguing that
Olivarez committed substantial breach of contract, Castillo prayed that the contract be rescinded
under Art. 1191 of the NCC. Castillo filed a motion for summary judgement and/or judgement
on the pleadings. The RTC granted the motion holding that the answer substantially admits the
material allegations in the complaint. It ruled that Olivarez breached its contract of conditional
sale. The Trial court ordered the rescission of deed of conditional sale and forfeited in favor of
Castillo, the P2,500,000 as damages under Art. 1191. The CA affirmed the decision of the RTC
in toto. Olivarez filed an MR arguing that the trial court exceeded its authority in forfeiting the
P2,500,000.00 down payment and awarding P500,000 as moral damages.
Issue: Whether or not Castillo is entitled to cancel the contract of conditional sale
Held: Yes. Since Olivarez withheld payments of the purchase price, Castillo is entitled to cancel
his contract with petitioner corporation. However, we properly characterize the parties’ contract
as a contract sell, not a contract of conditional sale. In a contract of conditional sale, the buyer
automatically acquires title to the property upon full payment of the purchase price. This transfer
of title is “by operation of law without any further act having to be performed by the seller.” In a
contract to sell, transfer of title to the prospective buyer is not automatic. “The prospective seller
[must] convey title to the property [through] a deed of conditional sale.”
The distinction is important to determine the applicable laws and remedies in case a party does
not fulfill his or her obligations under the contract. In contracts of conditional sale, our laws on
sales under the Civil Code of the Philippines apply. On the other hand, contracts to sell are not
governed by our law on sales but by the Civil Code provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations
does not apply to contracts to sell.
As this court explained in Ong v. Court of Appeals, failure to fully pay the purchase price in
contracts to sell is not the breach of contract under Article 1191. Failure to fully pay the purchase
price is “merely an event which prevents the [seller’s] obligation to convey title from acquiring
binding force.” This is because “there can be no rescission of an obligation that is still
nonexistent, the suspensive condition not having [happened].”
In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute
sale upon Olivarez Realty Corporation’s full payment of the purchase price. Since Castillo still
has to execute a deed of absolute sale to Olivarez Realty Corporation upon full payment of the
purchase price, the transfer of title is not automatic. The contract in this case is a contract to sell.
As this case involves a contract to sell, Article 1191 of the Civil Code of the Philippines does
not apply. The contract to sell is instead cancelled, and the parties shall stand as if the
obligation to sell never existed.
Olivarez Realty Corporation shall return the possession of the property to Castillo. Any
improvement that Olivarez Realty Corporation may have introduced on the property shall be
forfeited in favor of Castillo per paragraph I of the deed of conditional sale
As for prospective sellers, this court generally orders the reimbursement of the installments
paid for the property when setting aside contracts to sell. This is true especially if the
property’s possession has not been delivered to the prospective buyer prior to the transfer
of title.
In this case, however, Castillo delivered the possession of the property to Olivarez Realty
Corporation prior to the transfer of title. We cannot order the reimbursement of the installments
paid.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It
only paid P2,500,000.00 out of the P19,080,490.00 agreed purchase price. Worse, petitioner
corporation has been in possession of Castillo’s property for 14 years since May 5, 2000 and has
not paid for its use of the property. Similar to the ruling in Gomez, we order the
P2,500,000.00 forfeited in favor of Castillo as reasonable compensation for Olivarez Realty
Corporation’s use of the property.
Case: NCLPI vs. LICA and PROTON, G.R. No. 176986, January 13, 2016, Jardaleza, J.
Facts: LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati
City. It entered into a contract with NCLPI to lease the property for a term of 10 years with a
monthly rental of P308,000.00 and an annual escalation rare of 10%. Sometime in 19934,
NCLPI, with LMI’s consent, allowed NISSAN to use the leased premises.
NCLPI became delinquent in paying the rent. Nissan and LMI agreed to covert the arrearages
into a debt to be covered by a promissory note and 12 postdated checks. NCPLI was able to
deliver the checks but failed to sign the promissory note and pay the checks for June and October
1996.
Thus, LMI sent a letter to NCPLI that it was termination their Contract of Lease due to arrears in
the payment of rentals. In the meantime, Proton sent NCLPI an undated request to use the
premises as a temporary display for Audi brand cars for a period ten days. In entered into a MOA
whereby NCPLI agreed to allow Proton to immediately commence renovation work even prior to
the execution of the sublease.
LMI filed a complaint for sum of money and damages against NCPLI to recover the balance of
the unpaid rentals. NCPLI demanded Proton to vacate the leased premises. However, Proton
replied that it was occupying the same on the basis of a Lease contract with LMI. NCPLI
asserted that its failure to pay rent does not automatically result in the termination of the Contract
of Lease nor does it give LMI the right to terminate the same.
The RTC ruled in favor of LMI and found that LMI purposely violated the terms of its contract
when it failed to pay the required rentals and contracted to sublease the premises without the
consent of LMI. Citing Art. 1191 of the NCC, LMI was therefore entitled to rescind the contract.
The CA affirmed the RTC decision.
Issue: Whether or not a contract may be rescinded extrajudicially despite the absence of a
special contractual stipulation therefore?
Held: Yes. It is clear from the records that NCLPI committed substantial breaches of Contract of
Lease with LMI.
Under paragraph 2, NCLPI bound itself to pay monthly rental of P308,000 not later than the first
day of every month to which the rent corresponds. NCPLI, however, defaulted on its obligation
to timely and properly pay its rent.
Aside from nonpayment of rentals, it appears that NCLPI also breached its obligations under Par.
4 and 5 of the Contract of Lease which prohibit from subleasing the premises or introducing
improvements or alterations thereon without the written prior consent of LMI.
NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its property,
such right must be exercised in accordance with law: NCLPI’s reliance on Section 2, Rule 70 67 in
this case is misplaced.
Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for forcible
entry and unlawful detainer. The action filed by LMI against NCLPI, however, is one for the
recovery of a sum of money. Clearly, Section 2 of Rule 70 is not applicable.
In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased
premises. NCLPI had already vacated the same as early as October 11, 1996 when it surrendered
possession of the premises to Proton, by virtue of their Memorandum of Agreement, so that the
latter can commence renovations.68
NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract
of Lease in the absence of an express provision in their Contract to that effect.
It is true that NCLPI and LMI’s Contract of Lease does not contain a provision expressly
authorizing extrajudicial rescission. LMI can nevertheless rescind the contract, without prior
court approval, pursuant to Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases
where one of the obligors should fail to comply with what is incumbent upon him. Otherwise
stated, an aggrieved party is not prevented from extrajudicially rescinding a contract to protect its
interests, even in the absence of any provision expressly providing for such right.72 The rationale
for this rule was explained in the case of University of the Philippines v. De los
Angeles73 wherein this Court held:
[T]he law definitely does not require that the contracting party who believes itself injured must
first file suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other’s breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence to
minimize its own damages. (Civil Code, Article 2203) (Emphasis and underscoring supplied)
We are aware of this Court’s previous rulings in Tan v. Court of Appeals,74 Iringan v. Court of
Appeals,75 and EDS Manufacturing, Inc. v. Healthcheck International, Inc.,76 for example,
wherein we held that extrajudicial rescission of a contract is not possible without an express
stipulation to that effect.77
The seeming “conflict” between this and our previous rulings, however, is more apparent than
real.
Whether a contract provides for it or not, the remedy of rescission is always available as a
remedy against a defaulting party. When done without prior judicial imprimatur, however, it
may still be subject to a possible court review.
The only practical effect of a contractual stipulation allowing extrajudicial rescission is

“merely to transfer to the defaulter the initiative of instituting suit, instead of the
rescinder.”
In fact, the rule is the same even if the parties’ contract expressly allows extrajudicial rescission.
The other party denying the rescission may still seek judicial intervention to determine whether
or not the rescission was proper.80
Having established that LMI can extrajudicially rescind its contract with NCLPI even absent an
express contractual stipulation to that effect, the question now to be resolved is whether this
extrajudicial rescission was proper under the circumstances.
As earlier discussed, NCLPI’s nonpayment of rentals and unauthorized sublease of the

leased premises were both clearly proven by the records. We thus confirm LMI’s rescission
of its contract with NCLPI on account of the latter’s breach of its obligations.
Case: Spouses Batalla vs. Prudential Bank, G.R. No. 200676, March 25, 2019, J. Reyes, Jr.,
J.
Facts: Spouses Batalla purchased a brand new Honda Civic from Honda Cars. Rantael, acting
manager of the Bank brokered the deal. To finance the purchase of the vehicle, the spouses
applied for a loan with Prudential. They executed a promissory note for the sum of P292,200
payable for 36 months. The Spouses received the car after Rantael informed them that it was
parked near prudential. After 3 days, the rear right door broke down. The spouses consulted a
certain Jojo Sanchez who informed them that the same was defective and that the car was not
brand new. The manager of Prudential offered to repair the car but the Spouses refused because
they wanted a brand new car without any hidden defects.
Spouses Batalla filed a complaint for rescission of Contracts and damages against Prudential and
Honda. The RTC dismissed the complaint finding that the Spouses failed to prove that the
defects of the car door were due to the fault of Honda and that the car was repainted to make it
appear that it was brand new. The CA affirmed the RTC ruling with modifications. The CA ruled
that the spouses cannot rescind the promissory note and car loan agreement on the account of the
car’s alleged defects because they are distinct from the contract of sale that they entered with
Honda.
Issue: Whether Spouses Batalla may rescind the contract of sale, loan agreement and
promissory note due to the defects of the motor vehicle sold?
Held: No. The Loan agreement was independent of the contract of sale. Other than
rescission of the contract of sale, the Spouses also sought for the rescission of the car loan
agreement and promissory note with prudential. They believed that they had ground to rescind
the car loan agreement and promissory note. Batalla surmised that the object of these documents
was the delivery of a brand new car without hidden defects, and because of the alleged defects of
the vehicle, there was no valid object for the contract.
A contract of loan is one where one of the parties delivers money or other consumable thing
upon the condition that the same amount of the same kind and quality shall be paid. 25 It is
perfected upon delivery of the object of the contract. 26 On the other hand, a contract of sale is a
special contract whereby the seller obligates himself to deliver a determinate thing and to transfer
its ownership to the buyer.27 The same is perfected by mere consent of the parties.28
Thus, it is readily apparent that a contract of loan is distinct and separate from a contract of sale.
In a loan, the object certain is the money or consumable thing borrowed by the obligor, while in
a sale the object is a determinate thing to be sold to the vendee for a consideration. In addition, a
loan agreement is perfected only upon the delivery of the object i.e., money or another
consumable thing, while a contract of sale is perfected by mere consent of the parties.
Under this premise, it is not hard to see the absurdity in the position of Spouses Batalla that they
could rescind the car loan agreement and promissory note with Prudential on the ground
of alleged defects of the car delivered to them by Honda. The transactions of Spouses Batalla
with Prudential and Honda are distinct and separate from each other. From the time Spouses
Batalla accepted the loan proceeds from Prudential, the loan agreement had been perfected. As
such, they were bound to comply with their obligations under the loan agreement regardless of
the outcome of the contract of sale with Honda. Even assuming that the car that Spouses Batalla
received was not brand new or had hidden defects, they could not renege on their obligation of
paying Prudential the loan amount.
Spouses Batalla erroneously relies on Supercars Management & Development Corporation v.

Flores29 as basis to rescind the loan agreement with Prudential on account of the perceived
defects of the car delivered to them. In the said case, only the contract of sale with the car dealer
was rescinded on account of breach of contract for delivering a defective vehicle. While therein
lendee-bank was originally impleaded for rescission of contract, the trial court dropped it as
party-defendant because the breach of contract pertained to the contract of sale and not to the car
loan agreement. In the same vein, Spouses Batalla’s recourse in case of defects in the motor
vehicle delivered to them was limited against Honda and does not extend to Prudential as it
merely lent the money to purchase the car.
Issue: Whether or not Honda was liable for warranty for hidden defects?
Held: No. Article 1561 of the Civil Code provides for an implied warranty against hidden
defects in that the vendor shall be responsible for any hidden defects which render the thing sold
unfit for the use for which it is intended, or should they diminish its fitness for such use to such
an extent that, had the vendee been aware thereof, he would not have acquired it or would have
given a lower price. In an implied warranty against hidden defects, vendors cannot raise the
defense of ignorance as they are responsible to the vendee for any hidden defects even if they
were not aware of its existence. In case of a breach of an implied warranty against hidden
defects, the buyer may either elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. 22 Here, Spouses Batalla opted
to withdraw from the contract of sale after their demand for a replacement car was not granted.
As can be seen, the redhibitory action pursued by Spouses Batalla was without basis. For one,
it was not sufficiently proven that the defects of the car door were important or serious. The
hidden defect contemplated under Article 1561 of the Civil Code is an imperfection or defect of
such nature as to engender a certain degree of importance and not merely one of little
consequence.23 Spouses Batalla failed to prove that such defect had severely diminished the
roadworthiness of the motor vehicle. In fact, they admitted that they had no problem as to the
roadworthiness of the car.24
In addition, it cannot be ascertained whether the defects existed at the time of the sale. As
previously mentioned, a remote control door mechanism was immediately installed after the car
was delivered to Spouses Batalla.
Case: Saddul vs. Losloso, G.R. No. 205093, January 30, 2019
Re: Requisites of Accion Pauliana
Facts: The Spouses Dela Cruz obtained a loan from Zenaida Saddul in the amount of P5,680,000
upon the assurance that they are of sound and stable financial status. The loan was secured by a
chattel mortgage covering certain motor vehicles as well as post-dated checks. However, the first
check was dishonored for being drawn against closed account.
Saddul learned that the spouses were able to transfer, by sale, two parcels of land in favor of their
son, Harold Dela Cruz, his wife and siblings. Since she was unable to make extrajudicial
demands against the spouses Dela Cruz, she decided to institute an accion pauliana against
Spouses Dela Cruz by seeking the rescission of the deeds of absolute sale and the certificates of
title. In their answer, the Spouses denied the allegations and moved for the dismissal of the same
for failure to state a cause of action considering that accion pauliana is a subsidiary remedy.
They failed to show that she exhausted all other available legal remedies to satisfy their claim
before instituting the complaint. The RTC ruled on the affirmative defense that the allegation of
Sadddul that she is unable to collect despite having filed a separate civil case for collection of
sum of money sufficiently stated her cause of action. The CA reversed the decision of the RTC.
Issue: Whether or not Saddul’s complaint for accion pauliana states a cause of action.
Held: No. The SC adopted the finding of the CA that:
At the onset, petitioner filed a complaint for accion pauliana pursuant to Article 1381 of the Civil
Code claiming that the conveyance of properties made by the Spouses immediately after
incurring a loan is a classic example of conveyance entered in fraud of creditors considering that
the latter did not reserve adequate properties to pay off the debts contracted before the disposal.
These are the essential requisites of accion pauliana:
a. That the plaintiff asking for rescission has a credit prior to

the alienation, although demandable later;
b. The debtor has made a subsequent contract conveying a
patrimonial benefit to a third person;
c. The creditor has no other legal remedy to satisfy his appeal;
d. The act being impugned is fraudulent;
e. The third person who received the property conveyed if it is

by onerous title, has been an accomplice of fraud.
For [petitioner's] suit to prosper, it must allege and contain the above enumerated elements.
There is no question with regard to the first two elements considering that the same have
remained undisputed. The pith of the present controversy lies on the third element that an
accion pauliana can be availed of only when there is no other available legal remedy for the
creditor to satisfy his claim.
In a string of cases, the Supreme Court held that an accion pauliana is a remedy of last resort.
This means that this action only accrues when the creditor has no other legal remedies to satisfy
his claim against the plaintiff. The disquisition by the Court of Appeals stamped with the
Supreme Court's imprimatur in the case of Keh Hong Cheng vs. Court of Appeals, et al. is
particularly instructive, thus:
Xxxx
An accion pauliana accrues only when the creditor discovers that he has no other legal
remedy for the satisfaction of his claim against the debtor other than an accion pauliana.
The accion pauliana is an action of a last resort. For as long as the creditor still has a
remedy at law for the enforcement of his claim against the debtor, the creditor will not
have any cause of action against the [debtor) for rescission of the contracts entered into
by and between the debtor and another person or persons. Indeed, an accion pauliana
presupposes a judgment and the issuance by the trial court of a writ of execution for the
satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the
judgment of the court. It presupposes that the creditor has exhausted the property of the
debtor. The date of the decision of the trial court against the debtor is immaterial. What is
important is that the credit of the plaintiff antedates that of the fraudulent alienation by
the debtor of his property. After all, the decision of the trial court against the debtor will
retroact to the time when the debtor became indebted to the creditor. (Emphasis in the
original; citation omitted.)
The foregoing finds backing in a much recent consolidated cases of Metropolitan Bank, et al. vs.
International Exchange Bank and Chuayuco Steel Manufacturing vs. International Exchange
Bank, viz:
Under Article 1381 of the Civil Code, an accion pauliana is an action to rescind contracts in
fraud of creditors. However, jurisprudence is clear that the following successive measures
must be taken by a creditor before he may bring an action for rescission of an allegedly
fraudulent contract: (1) exhaust the properties of the debtor through levying by
attachment and execution upon all the property of the debtor, except such as are exempt by
law from execution; (2) exercise all the rights and actions of the debtor, save those personal
to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor
in fraud of their rights (accion pauliana). It is thus apparent that an action to rescind, or an
accion pauliana, must be of last resort, availed of only after the creditor has exhausted all the
properties of the debtor not exempt from execution or after all other legal remedies have been
exhausted and have been proven futile. (Emphasis in the original; citation omitted.)
Here, it was not shown that [petitioner] has exhausted other legal remedies to obtain relief
other than the institution of an accion pauliana. In fact, what appears is that the loan was
secured by a chattel mortgage, thus, giving [petitioner] another option in law to satisfy [her]
claim against the Spouses Dela Cruz thereby precluding them from directly filing a complaint for
accion pauliana. Her claim that the properties subject of the chattel mortgage [has] been attached
by [other] creditors becomes of no moment in light of the fact that she did not exhaust other
available remedies before resorting to accion pauliana. Worse, there is still no judgment or order
of execution for the satisfaction of her claim against the Spouses Dela Cruz upon which
[petitioner's] complaint was grounded. Hence, her accion pauliana case has clearly no leg to
stand on. Besides, the filing of accion pauliana cannot be justified based solely on her sweeping
conclusion that her credit cannot be fully satisfied with. [Petitioner's] suit clearly lacks a cause of
action if not prematurely filed. xx xx It also appears that [petitioner's] complaint, aside from
being prematurely filed, failed to show either that the Spouses Dela Cruz have no other
properties to satisfy a judgment award should her collection case be decided in her favor.
Clearly, she has no material interest in the rescission of the contract between the Spouses Dela
Cruz and [respondents]. Besides, her allegations of fraud are just mere presumptions sans
concrete evidence or even pronouncement by the competent court that said spouses have the
intention of defrauding her. Based on the foregoing, there is merit in [respondents'] contention
that the court a quo arbitrarily exercised its discretion in denying their motion not because of the
discretionary nature of a preliminary hearing but due to the fact that there is basically no cause of
action against them for accion pauliana.
We find that the refusal to have a preliminary·hearing notwithstanding the patent want of cause
of action is really a capricious exercise of discretion brushing aside fundamental legal tenets
consistently applied in many Supreme Court decisions having similar facts obtaining in the
present case. In sum, We are convinced of the merits of [respondents'] case that the court a quo
erred in denying to hear their affirmative defenses despite the obvious feeble cause of
[petitioner's] complaint. For [risk] of being repetitive, just to accentuate Our point, accion
pauliana applies only when a creditor cannot recover what is due him, in which case, the
creditor, armed with a favorable judgment, x x x must prove that she earnestly sought other
properties to satisfy her judgment award but to no avail. Otherwise, such disposition cannot just
be simply declared to have been disposed in [fraud] of the creditors. Such is wanting in the
present case, hence, the dismissal of the complaint is in order. Indeed, we have held that, before
an action can properly be commenced, all the essential elements of the cause of action must be in
existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the
parties, or implied by law, must be performed or complied with before commencing the action,
unless the conduct of the adverse party has been such as to prevent or waive performance or
excuse non-performance of the condition. Further, the rules of procedure require that the
complaint must contain a concise statement of the ultimate or essential facts constituting the
plaintiffs cause of action. The test of the sufficiency of the facts alleged in the complaint is
whether or not, admitting the acts alleged, the court can render a valid judgment upon the same
in accordance with the prayer of plaintiff. The focus is on the sufficiency, not the veracity, of the
material allegations. Failure to make a sufficient allegation of a cause of action in the complaint
warrants its dismissal. Here, petitioner filed an amended complaint for accion pauliana, an action
for rescission, which is subsidiary in nature, and which may only be filed when the party
suffering damage has no other legal means to obtain reparation for the same. However, the
amended complaint failed to allege the ultimate facts constituting its cause of action and the
prerequisites that must be complied with before the action may be instituted. Petitioner alleged
that she filed a case for collection of a sum of money against the spouses Dela Cruz before
Branch 30, RTC ofBambang, Nueva Vizcaya, which allegedly had already been decided on
July 16, 2009 and which judgment remained unsatisfied as properties owned by the spouses
Dela Cruz are yet to be found and attached. Nonetheless, petitioner did not attach in the
amended complaint proof of failure to execute the decision. Moreover, the spouses Dela
Cruz's loan was secured by a Memorandum of Chattel Mortgage covering five motor vehicles.
Petitioner alleged in the amended complaint that these vehicles became the subject of a writ of
preliminary attachment and notice of attachment issued by the RTC of Cauayan City, and a writ
of attachment and notice of attachment issued by the RTC of Ilagan City in other civil cases for
sum of money filed against the spouses Dela Cruz. Further, these vehicles are now in the
possession of the sheriffs of the said courts. However, the writs and notices attached to the
petition do not indicate which personal properties of spouses Dela Cruz have been attached. In a
notice of levy of personal properties and real estate attached to the petition, two vehicles were
ordered to be attached by the RTC of Ilagan City, which vehicles were also mortgaged to
petitioner. Even then, the amended complaint did not indicate any effort on the part of petitioner
to pursue her rights over these and the other motor vehicles subject of the Memorandum of
Chattel Mortgage. The only conclusion that may be made in light of the circumstances is
that petitioner failed to exhaust all possible remedies before instituting a complaint for
accion pauliana, which consequently makes the amended complaint dismissible. All told,
the Court finds the allegations in petitioner's amended complaint insufficient to establish her
cause of action against respondents. Hence, the CA correctly dismissed it for being premature.
Illustrations:
1. In a problem which involves remedies, the question in that problem would be what? The
Premise of a case has already been filed and a remedy has already been prayed for. The
GENERAL QUESTION would be: WILL THE ACTION PROSPER? If that is the
question, what do you CONSIDER FIRST? In remedies what is the steps for the action to
prosper:
a. Whether or not the plaintiff is the aggrieved party? The remedies are only
provided to the injured property. When someone files a case, it doesn’t mean that
he is the aggrieved party, it’s just that he was the one who filed the case to make it
appear that he is the injured party.
b. To know the nature of the obligation.
i. intention of the parties
ii. to know the manner of the breach in relation to the prayer
Ex. Specific performance will not be proper in what obligation? In obligations to do

it will not be a proper remedy.
c. Whether or not the remedy applied for is the appropriate remedy

2. Can you give me an example of a remedy which is a principal remedy and that can also
be extra-judicially demanded and also is expressly demanded by law? Warranty against
eviction in Sales. Rescissible contracts may also involve reciprocal obligations. E.g.
SALE – may it not involve reciprocal obligations? Yes, but a sale may also be rescissible
as a contract.
3. Kinds of rescission:
a. Article 1380 – RESCISSION of Contracts – SUBSIDIARY REMEDY = can

only be invoked if that is the ONLY remedy. There should first be exhaustion
other remedies to be able to invoke Rescission.
b. Article 1191 – (Rescission) RESOLUTION of Obligations – PRINCIPAL

REMEDY = can be invoked anytime even when other remedies are available.
4. Can 2 Principal Remedies be sought for at the same time? YES. Give me an example
where an injured party can invoke 2 principal remedies at the same time. Example:
When you filed a suit, civil action and another suit for damages.
5. The remedy under 1191, is it extrajudicial remedy? YES. Basis: UP vs. DE LOS
ANGELES CASE. QUESTION: In an extrajudicial rescission, when would the rescission
act take effect? From the time when the party claims rescission as remedy? Agree? NO!
It is at the time the other party was given NOTICE or NOTICE WAS ISSUED to the
other party. Why would it be from the time? It is the time the other party was informed.
BASIS: Due Process. So that he can also take appropriate action. If he thinks the
rescissory act is wrong, he can go to court to question such act.
6. X filed an action for rescission against Y. Y filed a motion to dismiss on the ground that
the action has already prescribed because the action was filed 4 years after the date of the
contract of the parties. Rule on the case. Answer: It will depend on the nature of the
action. There are 2 kinds of rescission, so you should first determine the cause of action if
it is under 1191 or 1381.
7. CASE: UFC CASE – what was the nature of the action? Action for rescission. Why
would the plaintiff Magdalo file an action if he can just extra-judicially rescind? Why not
just like what UP did, just gave a notice to the other party? Because he wanted to claim
the unpaid wages, the unpaid salary. What if he did not want to recover that? In other
words, in general, why would an action for rescission be necessary? Because as stated in
the case, even if the rescission is not ordered to the court, there’s blade hanging in the
neck of the person. IN OTHER WORDS, it is not necessary but it may be advisable
because at any time the other party may file an action to question the validity of the
rescissory act. This is so because if the rescissory act is a valid act then it should still be
sustained by the court. When would it be necessary? Are there good reasons why
someone would not file a case? Because a party cannot be left to take matters into their
own hands OR because he wants to recover something form the other party and cannot
compel the other party. UFC CASE AGAIN: This is also an action for rescission. What
were the defences raised by the UFC?
a. Plaintiff did not exhaust the remedies
SC: This defense is the result of the confusion as to the two kinds of rescission
between 1191 and 1381. This defense is of the premise that the contract entered into
is a rescissible contract. And in that kind of contract the remedy of rescission is a
subsidiary remedy and therefore the other party must exhaust all other legal remedies
before he can invoke rescission as a remedy. But in this case, clearly it was not filed
under Article 1383, the cause of action here is because there was a breach.
- A and B entered into a sale of molasses, the parties stipulated to the date of
payment. Buyer failed to pay on the due date and asked that he’ll be given an
extension of 20 days and that he’ll pay on the 20th day but 20 days after the due
date A, creditor said that he already rescinded the contract. Was the rescission
valid? Was the rescission proper? In other words, one of the requirements for
rescission to be proper under 1191 is? NO, it was not proper because breach
must be substantial or fundamental. If it is just a casual or slight breach, the
other party has the remedy of Payment for Damages. Always remember that
NOT every breach gives the injured party a reason to rescind.
b. Breach is not SUBSTANTIAL or FUNDAMENTAL
c. More fundamental issue: Whether or not under the Bill of Assignment,

Plaintiff Magdalo has the obligation to transfer ownership.
d. Main issue in this case: W/N rescission was proper?
- The defense of UFC that Plaintiff Magdalo did not comply with his obligation
to transfer ownership over the formula of the sauce to UFC got to do with the
issue as to w/n the rescission was proper? It has something to do with the
breach.
 Rescission cannot be a remedy if the plaintiff had not complied with his
obligation or at least not in the position to comply with the obligation, the
premise behind this is that he is not the injured party. He who is not the
injured party, then there is no remedy under the law.
8. Remember that the EFFECT OF RESCISSION: MUTUAL RESCISSION.
9. UP CASE: How come or why was the extra-judicial rescission was sufficient? Because
UP doesn’t want to recover anything from the concessioner at that point and also to be
free from the agreement with the concessioner. To be able to award to the other party.
Rescind first to be free from any other acts to be sought for.
10. Both parties are in delay. What is the effect? In contemplation of the law, it is as if there
is NO DELAY. Therefore there is no cause of action against the other party.
11. In Article 1191, how many remedies are mentioned in that article? Only two:
a. Fulfilment of obligation w/damages

b. Rescission of obligation w/ damages
If one of the parties in Reciprocal Obligation had already invoked the fulfilment as the
remedy, may he thereafter invoke the remedy of rescission?
 Yes, if the obligation became impossible rescission could be a remedy.
What must have been the reason that the obligation has become impossible? Does it
mean that every time fulfilment is impossible, and then rescission would be a remedy?
A and B, A already invoked fulfilment, but every time this remedy of fulfilment
becomes impossible then this remedy of rescission can be resorted to? Is it Yes?
 No. Despite the wording of the law, there is a premise.
What must be the cause? Why the performance becomes impossible?
 It must be on the cause not imputable to A. This is only half accurate. If it is not
imputable to A then what if it was due to a fortuitous event? The answer must
be: Rather due to the fault of B. Whether it is FE or fault of A do you think he
would have the remedy of rescission? No. because he could not claim that he is
the injured party at least in a fortuitous event as a rule. That’s why the premise
of the law to the injured, the impossibility must be due to the fault of the other
party.
An injured party, invoked rescission, it was a valid rescission, and under the law the
premise is that this is a valid rescission, thereafter may he be allowed to invoke
fulfilment as a remedy?
 NO. Why not?
 He can no longer demand for fulfilment because with rescission, obligation has
already been extinguished as rescission is a mode of extinguishment, since the
obligation has already been extinguished therefore no more obligation to be
fulfilled.
12. This was discuss in the MAGDALENA ESTATE CASE: Magdalena rescinded. Despite
the fact that Magdalena rescinded, she still wanted or she still asked for the payment.
When Myrick was only asking for was to get back what he paid for. Was Magdalena
correct in forfeiting the accounts paid? NO, because there was no forfeiture clause in the
contract. Had there been a forfeiture clause, which would have been a valid forfeiture.
Again the effect of rescission is Mutual Restitution. That’s why Magdalena should
return the money. She was ordered to return the money.
13. A obliged himself to give to B a refrigerator with motor #12345 which was in his sala, he
also obliged himself to give to B a 49” Sony Bravia, but he also obliged himself to repair
the Mercedes Benz of B. He did not do any of this. Can the court compel A to perform
his obligations? If not, what is the remedy available to B, if any?
a. Refrigerator – Specific performance
b. TV – substitute performance – somebody else would perform at the expense of

the debtor
c. Obligation to give a Generic Thing – Debtor may be asked to comply with the
obligation at the expense of the debtor or to have the thing delivered to him at the
expense of the debtor.
d. Car – also substitute performance; other person would fulfil the obligation
14. Do you agree that in all performance to do, substitute performance is the remedy if the
debtor refuses to perform the obligation? No, if the performance is purely or strictly
personal in nature. Only the debtor can perform such obligation because in the
constitution of the obligation the skills of the debtor are considered. He alone can
perform. The remedy because indemnity for damages.
15. I forgot to mention: Even if A is the aggrieved party, and an action was filed against B,
the case may not prosper because it may not be the proper remedy, but any other reason
why this case may not prosper aside from prescription, any other? Even if the remedy
invoked is the proper remedy. Why? Neither, because he is not the injured party nor
because the remedy invoked was wrong but? Because B is not the one who cause the
damage to A.
16. If A the debtor, can B validly cause the levy of all the properties of A? Not all. Because
there are properties that are exempted. Under the FC, Art 155, the Family Home is
exempted from levy. So it is correct to say that family home may not be levied upon? No,
there are exceptions that family home are exempt from levy and execution. If the debtor
has 3 carabaos, and these carabaos would be exempt from execution, correct? No because
it was not stated that the debtor is not a farmer or is essential to his occupation.
17. Future properties of the debtor may be levied upon by his creditors? YES. “FUTURE
PROPERTY” – properties he may acquire after the execution sale or levy subject to the
exceptions mentioned. However, if the debtor’s properties were not sufficient to cover the
debts of 10M, which were worth only of 3M, there is a deficiency of 7M. If you are the
counsel of the debtor, then the debtor wanted to start anew, what advice would you give?
FILE FOR INSOLVENCY PROCEEDING. Does this extinguished obligation? NO
because after he may acquire properties thus these newly acquired property may be
levied by his creditors. What would really extinguish his obligation? Court discharges
him of his obligation, which is allowed by law which would result to the extinguishment
of his obligation.
18. Aside from rescission in 1383, is there any other subsidiary remedy expressly recognized
by Civil Code of the Philippines? YES. Accion Pauliana – But this is covered under
1383. But this is covered under contracts. An action to set aside or to impugn in fraud of
creditors. ACCION SUBROGATORIA – can only be invoked by the injured party if
there are no other remedies. How many persons are involved?
a. 3 persons:
i. 1. Creditor,
ii. 2. Debtor and
iii. 3. Debtor of the Debtor.
19. The action is AGAINST the DEBTOR of the DEBTOR by the creditor. The law would
give the creditor a right of action against the debtor of the debtor in accion subrogatoria
and in every right of a debtor as against his debtor can be the subject of accion
subrogatoria? NO, the law said: Rights inherent in the person or purely personal rights.
What rights can be a subject matter of a subrogatory action? Gen Rule: Property Rights.
Exception: Personal in nature.
20. Debtor is the agent to the third person, who is the third person as to the debtor? The
PRINCIPAL.
21. If the creditor files a subrogatory action against this principal, will the action prosper? It
may prosper. When? What may be the nature of the action filed by the creditor? Maybe
the principal owes him a sum of money by way of a commission. This is obviously not an
inherent right in the person.
G. MODES OF EXTINGUISHMENT OF OBLIGATIONS
Article 1231. Obligations are extinguished BY:
(1) Payment or Performance;
(2) Loss of the thing due;
(3) Condonation or Remission of the debt;
(4) Confusion or Merger of the rights of creditor and debtor;
(5) Compensation;
(6) Novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription are governed elsewhere in this Code.
Balane:
Article 1231 gives us ten modes of extinguishing an obligation. One of the modes mentioned is
rescission. But it does not tell us whether this is rescission under Article 1191 (resolution) or
rescission under
Article 1380, et. seq. If it means both, then we have eleven modes of extinguishing an obligation
under Article 1231. (Similar to Tolentino’s)
 This enumeration is not exclusive.
Other modes of extinguishing an obligation are the following:
1. Death  particularly where the obligation is purely personal, e.g., death of one partner
dissolves the partnership/agency;
2. Renunciation by the creditor
3. Compromise
4. Arrival of Resolutory Term / fulfillment of resolutory condition
5. Mutual Desistance or mutuo disenso (Saura v. DEBTORP)
6. In some cases, Unilateral Withdrawal, e.g., in partnership, any partner can withdraw any
time from the partnership.
7. In some cases, change of civil status, e.g., if marriage is annulled, it extinguishes

obligations like the obligation to give support, among others.
8. Unforeseen Events  (rebus sic stantibus) (Article 1267.)
9. Want of Interest  GR: No, but there are certain cases:
 If it is equitable to deem the OBLIGATION extinguished due to want of interest of creditor

in the fulfillment of such OBLIGATION.
10. Abandonment of the thing  as in Article 662, party wall; or abandonment of a vessel
under Code of Comm.
11. Insolvency of debtor judicially declared and discharged.
Illustration: Carale owns a restaurant. He hires Molina as a chef. In the contract of employment,
there was a stipulation that if Molina resigns from Carale's restaurant, he cannot seek employment
from another restaurant for a period of five years. Subsequently, Molina resigns from Carale's
restaurant and wants to apply to Mildo's House of Chicken. In this case, Molina cannot work with
Mildo's because of the stipulation in the contract he signed with Carale. Suppose, however, Carale,
closes down his restaurant and engages in a totally different business, a construction business, for
example, Molina can apply for work at Mildo's even before the lapse of the five year prohibitive
period. In this case, Molina can make out a case of extinguishment of obligation on the ground
of want of interest. The obvious purpose of the stipulation is to prevent unfair competition.
SAURA IMPORT and EXPORT BANK VS. DEBTORP [44 S 445]
FACTS: Plaintiff Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its
conversion into DEBTORP, for an industrial loan of P500,000.00, to be used as follows:
P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment;
and P9,100.00 as additional working capital. The jute mill machinery had already been
purchased by Saura on the strength of a LOC by PBTC. RFC approved the loan secured by a first
mortgage on the factory building to be constructed, the land site thereof, and the machinery and
equipment to be installed, and the loan to be released at the discretion of RFC, subject to
availability of funds, andas the construction of the factory buildings progresses, to be certified to
by an appraiser of RFC. China Engineers, Ltd. had again agreed to act as co-signer for the loan.
When the RFC Board later decided to decrease the loan from 500K to 300K, China Eng signified
to withdraw as co-maker. Thus, when Saura requested for the release of the 500K loan, RFC
signified that the Loan Agreement has been cancelled.
Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of
bags from local raw materials, a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of 100% local raw materials. When negotiations came to a
standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the
mortgage which RFC did. It appears that the cancellation was requested to make way for the
registration of a mortgage contract, executed over the same property in favor of PBTC, under
which contract Saura, Inc. had up to December 31 of the same year within which to pay its
obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the
said obligation PBTC sued Saura.
NINE YEARS LATER, Saura commenced the present suit for damages, alleging failure of
RFC /DEBTORP to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it
had entered into, in connection with its jute mill project. The trial court rendered judgment for
the plaintiff.
ISSUE: WON the OBLIGATION of RFC to Saura in the perfected loan contract subsists.
HELD: When RFC turned down the request of Saura, the negotiations which had been going on
for the implementation of the loan agreement reached an impasse. Saura, Inc. obviously was in
no position to comply with RFC's conditions. So instead of doing so and insisting that the loan
be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done by
RFC. The action thus taken by both parties was in the nature of mutual desistance - what
Manresa terms as "mutuo disenso" - which is a mode of extinguishing obligations. It is a concept
that derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
Extinguishment of OBLIGATIONS by mutual desistance  Where after approval of his loan,

the borrower, instead of insisting for its release, asked that the mortgage given as security be
cancelled and the creditor acceded thereto, the action taken by both parties was in the nature of
mutual desistance - what Manresa terms "mutuo disenso" - which is a mode of extinguishing
obligations. It is a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment.
Case: Land Bank of the Philippines vs. Alfredo Ong, Nov. 24, 2010, J. Velasco Jr.
Facts: On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank
Legazpi City in the amount of PhP 16 million. The loan was secured by three (3) residential lots,
five (5) cargo trucks, and a warehouse. Under the loan agreement, PhP 6 million of the loan
would be short-term and would mature on February 28, 1997, while the balance of PhP 10
million would be payable in seven (7) years. The Notice of Loan Approval dated February 22,
1996 contained an acceleration clause wherein any default in payment of amortizations or other
charges would accelerate the maturity of the loan.
Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December
9, 1996, they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina
Gloria Ong, Evangeline’s mother, under a Deed of Sale with Assumption of Mortgage.
Evangeline’s father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale
and assumption of mortgage. Atty. Edna Hingco, the Legazpi City Land Bank Branch Head,
told Alfredo and his counsel Atty. Ireneo de Lumen that there was nothing wrong with the
agreement with the Spouses Sy but provided them with requirements for the assumption of
mortgage. They were also told that Alfredo should pay part of the principal which was computed
at PhP 750,000 and to update due or accrued interests on the promissory notes so that Atty.
Hingco could easily approve the assumption of mortgage. Two weeks later, Alfredo issued a
check for PhP 750,000 and personally gave it to Atty. Hingco. A receipt was issued for his
payment. He also submitted the other documents required by Land Bank, such as financial
statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the certificate of title of
the Spouses Sy would be transferred in his name but this never materialized. No notice of
transfer was sent to him.
Alfredo later found out that his application for assumption of mortgage was not approved by
Land Bank.
Issue:
(1) Whether or not Article 1236 applies to the case at bar.
(2) Whether or not there is novation in the contract.
Held:
(1) Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should
have sought recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides:
The creditor is not bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land
Bank was not bound to accept Alfredo’s payment, since as far as the former was concerned, he
did not have an interest in the payment of the loan of the Spouses Sy. However, in the context of
the second part of said paragraph, Alfredo was not making payment to fulfill the obligation of
the Spouses Sy. Alfredo made a conditional payment so that the properties subject of the Deed of
Sale with Assumption of Mortgage would be titled in his name. It is clear from the records that
Land Bank required Alfredo to make payment before his assumption of mortgage would be
approved. He was informed that the certificate of title would be transferred accordingly. He,
thus, made payment not as a debtor but as a prospective mortgagor.
(2) Land Bank also faults the CA for finding that novation applies to the instant case. It reasons
that a substitution of debtors was made without its consent; thus, it was not bound to recognize
the substitution under the rules on novation.
On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance
Corporation14 provides the following discussion:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new obligation that takes the place of the former;
it is merely modificatory when the old obligation subsists to the extent it remains compatible
with the amendatory agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor or subrogating
a third person in the rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions ─ one to extinguish an existing obligation, the other to substitute a
new one in its place ─ requiring a conflux of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation. x x x
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. The test of incompatibility is whether or not the
two obligations can stand together, each one having its independent existence. x x x (Emphasis
supplied.)
Furthermore, Art. 1293 of the Civil Code states:
Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.
We do not agree, then, with the CA in holding that there was a novation in the contract between
the parties. Not all the elements of novation were present. Novation must be expressly consented
to. Moreover, the conflicting intention and acts of the parties underscore the absence of any
express disclosure or circumstances with which to deduce a clear and unequivocal intent by the
parties to novate the old agreement.15 Land Bank is thus correct when it argues that there was no
novation in the following:
[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the
knowledge or consent of Spouses Sy, he may still pay the obligation for the reason that even
before he paid the amount of P750,000.00 on January 31, 1997, the substitution of debtors was
already perfected by and between Spouses Sy and Spouses Ong as evidenced by a Deed of Sale
with Assumption of Mortgage executed by them on December 9, 1996. And since the
substitution of debtors was made without the consent of Land Bank – a requirement which is
indispensable in order to effect a novation of the obligation, it is therefore not bound to recognize
the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and
Spouses Ong and did not expressly give its consent to this substitution.
A. Payment or Performance
PERTINENT PROVISIONS/ reading matters:
Article 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation.
Article 1233. A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case may be.
Article 1234. If the obligation has been substantially performed in good faith, the obligor may
obligee.
Article 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
Article 1236. The creditor is not bound to accept payment or performance by a third person who
has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of
the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a
mortgage, guaranty, or penalty.
Article 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in
any case valid as to the creditor who has accepted it.
Article 1239. In obligations to give, payment made by one who does not have the free disposal of
the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of
article 1427 under the Title on "Natural Obligations."
Article 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.
Article 1241. Payment to a person who is incapacitated to administer his property shall be valid
if he has kept the thing delivered, or insofar as the payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to the benefit of
the creditor. Such benefit to the creditor need not be proved in the following cases:
If after the payment, the third persons acquires the creditor's rights;
If the creditor ratifies the payment to the third person;
If by the creditor's conduct, the debtor has been led to believe that the third person had authority
to receive the payment.
Article 1242. Payment made in good faith to any person in possession of the credit shall release
the debtor.
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will.
Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into consideration.
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court
shall govern.
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.
Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be
the basis of payment, unless there is an agreement to the contrary.
Article 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be at the moment the obligation was
constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Article 1302. It is presumed that there is legal subrogation:
1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
3) When, even without the knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the latter's
share
Republic Act No. 529, as amended by R.A. No. 4100, provides:
SECTION 1. Every provision contained in, or made with respect to, any domestic obligation
to wit, any obligation contracted in the Philippines which provision purports to give the
obligee the right to require payment in gold or in a particular kind of coin or currency other
than Philippine currency or in an amount of money of the Philippines measured thereby, be as

it is hereby declared against public policy, and null, void, and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation hereafter incurred.
The above prohibition shall not apply to
(a) transactions where the funds involved are the proceeds of loans or investments made
directly or indirectly, through bona fide intermediaries or agents, by foreign governments,
their agencies and instrumentalities, and international financial banking institutions so
long as the funds are identifiable, as having emanated from the sources enumerated
above;
(b) transactions affecting high-priority economic projects for agricultural, industrial and
power development as may be determined by the National Economic Council which are
financed by or through foreign funds;
(c) forward exchange transactions entered into between banks or between banks and
individuals or juridical persons;
(d) import-export and other international banking, financial investment and industrial
transactions.
With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing
provision, in which cases the terms of the parties’ agreement shall apply, every other domestic
obligation heretofore or hereafter incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon payment in any coin
or currency which at the time of payment is legal tender for public and private debts.
Provided, That if the obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine currency, it shall be
discharged in Philippine currency, measured at the prevailing rates of exchange at the time the
obligation was incurred, except in case of a loan made in a foreign currency stipulated to be
payable in the same currency in which case the rate of exchange prevailing at the time of the
stipulated date of payment shall prevail. All coin and currency, including Central Bank notes,
heretofore or hereafter issued and declared by the Government of the Philippines shall be
legal tender for all debts, public and private.
Pertinent portion of Republic Act No. 8183 states:
SECTION 1. All monetary obligations shall be settled in the Philippine currency which is
legal tender in the Philippines. However, the parties may agree that the obligation or
transaction shall be settled in any other currency at the time of payment.
SEC. 2. R.A. No. 529, as amended, entitled "An Act to Assure the Uniform Value of
Philippine Coin and Currency" is hereby repealed. (Approved on June 11, 1996)
 The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the
prohibition on the stipulation of currency other than Philippine currency, such that
obligations or transactions may now be paid in the currency agreed upon by the
parties.
 Just like R.A. No. 529, however, the new law does not provide for the applicable rate
of exchange for the conversion of foreign currency  incurred obligations in their
peso equivalent.
 It follows, therefore, that the jurisprudence established in R.A. No. 529 regarding the rate
of conversion remains applicable. Thus, in Asia World Recruitment, Inc. v. National
Labor Relations Commission, the Court, applying R.A. No. 8183, sustained the ruling of
the NLRC that obligations in foreign currency may be discharged in Philippine
currency based on the prevailing rate at the time of payment.
CONCEPT OF PAYMENT
Article 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation.
It is the fulfillment of the prestation due which extinguishes the OBLIGATION by the
realization of the purposes for which it was constituted.
It is a juridical act which is voluntary, licit and made with the intent to extinguish the
OBLIGATION;
It is made not only by 1 who owes money but also by 1 bound to do something or to refrain
from doing
 Thus, Payment is identical with Fulfillment.
Requisites of Payment or Performance:
[TOLENTINO]
1. the person who pays  must have requisite capacity
2. the person to whom payment is made
3. the thing to be paid  in accordance with the OBLIGATION
4. the manner, time and place of payment, etc.
 payment should be made by the debtor to the creditor at the right time and place.
KINDS:
1. NORMAL  when Debtor voluntarily performs
2. ABNORMAL  when Debtor is forced by judicial proceeding

Balane:
Payment or Performance is used interchangeably.
But technically,
Payment  in obligations to give,
Performance  in obligations to do.
Payment/ performance is the paradigmatic mode of extinguishment of an obligation.
 It is the only normal way of extinguishing an obligation.
Article 1233. A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case may be.
Tolentino: This Article States two requisites for Payment:
(1) Identity, of the prestation, and  the very thing or service due must be delivered or released;
(2) Its integrity  prestation must be fulfilled completely.
For BALANE: Article 1233 states these requisites of payment:
I. Re: The prestation
1. Identity
2. Integrity
3. Indivisibility
II. Re: The parties
1. Payor/ obligor/ debtor
2. Payee/ obligee/ creditor
III. Re: Time and place
Discussions:
I. With respect to prestation:
1. Identity
 If specific prestation, this requisite means that the very thing or service must be delivered.
(Article 1244.)
 If generic, the requisite requires the delivery of something of neither inferior nor superior
quality (Article 1246). It must be something in the middle. In case of money, there are
special rules:
Governing rule: RA 529 as amended by RA 4100
 In case of money debts, you will have to pay in legal tender in the Philippines. This
law supersedes Article 1249.
 If the parties stipulate that payment will be made in foreign currency, the obligation
to pay is valid but the obligation to pay in foreign currency is void. Payment will
be made in Phil. currency.
LEGAL TENDER – means such currency which in a given jurisdiction can be used for payment
of debts public and private, and which cannot be refused by Creditor.
In the Republic of the Philippines, the ff. are legal tender: (Sec. 54, RA 265)
1. RP silver peso and half peso for debts of any amount, RP subsidiary silver coins 20 ¢and 10
¢ for up to P20 debts, and RP minor nickel and copper coins for up to P2.00 debts;
2. RP Treasury certificates, new Victory series (EO 25, s. 1944, already withdrawn from
circulation)
3. All notes and coins issued by CB.
Q: How do you convert?
A: In case of an obligation which is not a loan in foreign currency, if incurred before RA 529,
conversion must be as of the time the obligation was incurred. If incurred after RA 529 became
effective, the conversion must be as of the time the obligation was incurred (Kalalo v. Luz) If the
loan is in foreign currency, the conversion is as of the time of payment. (RA 529)
Payment in negotiable paper  This may be refused by the creditor. Payment in manager's
check or certified check is not payment in legal tender. The ruling in Seneris has been reversed
in the case of Bishop of Malolos. The Malolos ruling is better. I found it hard to accept that
manager's check or certified check is good as legal tender. There are always risks to which
cashier's checks are subject. What if after having issued a cashier's check, the drawee-bank
closes, what happens to your cashier's check?
 In any event, payment by check can be refused by the creditor. And even if payment by check is
accepted by the creditor, the acceptance is only a provisional payment until the check is
(a) encashed or
(b) when through the fault of the creditor they have been impaired.
The case of Namarco v. Federation, 49 SCRA 238, interprets the phrase "when through the fault
of the creditor, they have been impaired" as to apply only to a check used in payment if issued
by a person other than the debtor.
Why? It is because if the check was issued by the debtor himself, all that the debtor have to do is
to issue another check.
Revaluation in case of extraordinary inflation or deflation (Article 1250)
 This rule has never been used. It was only during the Japanese occupation that there was a
recognition of extraordinary inflation in this country.
Exceptions to the requirement of identity
(i) Dacion en pago (Article 1245)
(ii) Novation
In both cases, there is a voluntary change in the object.
2. Integrity  There must be delivery of the entire prestation due. (Article 1233) or completely
fulfilled;
The exceptions to the requirement of integrity are:
1. In case of substantial performance in good faith (Article 1234.) This is an equity rule.
2. In case of waiver of obligee/ creditor (Article 1235.)
3. In case of application of payments if several debts are equally onerous (Article 1254, par.
2.)
3. Indivisibility  This means that the obligor must perform the prestation in one act and not in
parts. (Article 1248)
There are several exceptions to this requirement:
1. In case or express stipulation. (Article 1248.)
2. In case of prestations which necessarily entail partial performance. (Article 1225, par. 2)
3. If the debt is liquidated in part and unliquidated in part (Article 1248.)
4. In case of joint divisible obligations (Article 1208.)
5. In solidary obligations when the debtors are bound under different terms and conditions.
(Article 1211.)
6. In compensation when a balance is left. (Article 1290.)
7. If the work is to be delivered partially, the price or compensation for each part having been
fixed. (Article 1720.)
8. In case of several guarantors who demand the right of division. (Article 2065.)
9. In case of impossibility or extreme difficulty of single performance.
II. With respect to the parties
There are two parties involved:
1. Payor/ obligor/ debtor
2. Payee/ obligee/ creditor
Requirements:
1. Article 1226 - 1238. Who should the payor be:
a. Without need of the creditor's consent
1. The debtor himself
2. His heirs or assigns
3. His agent
4. Anyone interested in the fulfillment of the obligation, e.g., a guarantor
b. With the creditor's consent -- Anyone.
 This is a departure from the rule in the Old Civil Code which did not require consent on
the part of the creditor.
c. Effect of payment by a third person:
1. If the payment was with the debtor's consent, he becomes the agent of the debtor. The
effect is subrogation (Articles 1236-1237)
(1) Exception: If the person paying intended it to be a donation. (Article 1238.)
2. If payment was without the debtor's consent, the third person may demand repayment
to the extent that the debtor has been benefited. (Article 1236, par. 2.)
2. Who may be the payee?
1. The obligee proper (Articles 1240, 1626.)

2. His successor or transferee (Article 1240.)
3. His agent (ibid.)
4. Any third person subject to the following qualifications:
a. Provided it redounded to the obligee's benefit and only to the extent of such benefit.
b. If it falls under Article 1241, par. 2 nos. 1, 2 and 3, benefit is deemed to be total.
5. Anyone in possession of the credit. (Article 1242.)
 In all these five (5) cases, it is required that the debt should not have been garnished. (Article
1243)
III. With respect to the time and place of payment:
1. When payment to be made: When due
2. Place (Article 1251.)
Primary rule: As stipulated.
Secondary rule: Place where the thing was at the time the obligation was constituted if the
obligation is to deliver a determinate thing.
Tertiary rule: At the debtor's domicile.
Balane:
** Payment and Performance are used interchangeably.
 But technically, payment is used in obligations to give whereas performance is used in

obligations to do. Payment/ performance is the paradigmatic mode of extinguishment of an
obligation. It is the only normal way of extinguishing an obligation.
Article 1234. If the obligation has been substantially performed in good faith, the obligor may
obligee.
Substantial Performance:
1. an attempt in GF to perform, without any willful or intentional departure from it;
2. deviation from performance of OBLIGATION must be slight, and omission or defect must
be so technical and unimportant, and must not pervade the whole, must not be so material
to the achievement of the very purpose of the parties;
3. party claiming substantial performance must show attempt in good faith.
CASES on Payment:
J.M. TUASON V. LEGAYA JAVIER [31 SCRA 829] - In the interest of justice and equity,
court may grant the vendee a new term where he substantially performed in good faith
according to Article 1234, regardless of Article 1592 of the same Code.
FACTS: Contract to Sell between Plaintiff JM Tuazon and defendant Ligaya Javier on a parcel of
land in Sta. Mesa Heights Subd. on installment with down and interest of 10% p.a. Defendant took
possession of property after payment of 1st installment on execution of contract in Sept. 1954 and
paid monthlu installments until Jan. 1962. After subsequent months, default by defendant of
monthly installments. Plaintiff informed her that contract has been rescinded. But defendant
refused to vacate. Thus, plaintiff filed case with CFI-Rizal for judicial rescission of contract and
payment of arrears.
Based on Article 1592, CFI found in favor of defendant but made the latter pay arrears within 60
days, plus interests, attorney’s fees, and that title should be transferred after such payment with
costs at the expense of defendant.
Article 1592. In the sale of immovable property, even though it may have been stipulated
that upon failure to pay the price at the time agreed upon the rescission of the contract
shall of right take place, the vendee may pay, even after the expiration of the period, as
long as no demand for rescission of the contract has been made upon him either judicially
or by a notarial act. After the demand, the court may not grant him a new term.
Thus, plaintiff appealed for erroneous application of Article 1592 because this is a contract to sell
and not of contract of sale.
ISSUE: WON CFI erred in NOT declaring herewith contract rescinded.
HELD: NO. What applies here is Article 1234: If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. In this connection, it should be noted that,
apart from the initial installment of P396.12, paid upon the execution of the contract, on
September 7, 1954, the defendant religiously satisfied the monthly installments accruing
thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although the
principal obligation under the contract was P3,691.20, the total payments made by the defendant
up to January 5, 1962, including stipulated interest, aggregated P4,134.08; that the defendant has
offered to pay all of the installments overdue including the stipulated interest, apart from
reasonable attorney’s fees and the costs; and that, accordingly, the trial court sentenced the
defendant to pay all such installments, interest, fees and costs. Thus, plaintiff will thereby
recover everything due thereto, pursuant to its contract with the defendant, including such
damages as the former may have suffered in consequence of the latter’s default. Under these
circumstances, we feel that, in the interest of justice and equity, the decision appealed from may
be upheld upon the authority of Art. 1234 of the Civil Code.1
LEGARDA HERMANOS and JOSE LEGARDA VS. FELIPE SALDAÑA [55 SCRA 324]
The Court's doctrine in J.M. Tuason vs. Javier is fully applicable to the present case, RE
Substantial performance of contract OBLIGATION in GF, Article 1234.
FACTS: Contract to Sell between Plaintiff vendee, Felipe Saldaña and Defendant vendor, Legarda
Hermanos, a subdivision-owner, on 2 written contracts, payable for 10 yrs, 120 equal monthly
installments with 10% interest p.a., from May 1948. Respondent Saldaña faithfully paid for 8-yrs
about 95-mos. installments out of 120; he stopped paying from filing of this case with CFI-Manila
in 1961; after his 1st 5 years of paying, respondent called attention of vendors that he wanted to
build a house on his lot but they have to start improvements on the subdivision, e.g. roads. Instead,
he was informed of cancellation of contract for failure to pay as stipulated, the 120 installments
and his payments were to be treated as rents.
The Lower Court dismissed respondent’s complaint, upheld the cancellation of the contract.
Appellate court reversed, and ordered the conveyance of one of the 2 lots to defendants. At the
latter’s choice. It was found that the lots could not be delivered because they were still submerged
in water and there were no roads in the subdivision. (for equity and justice)
ISSUE: WON cancellation of contract here was proper?
HELD: NO. The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier is
fully applicable to the present case, with the respondent at bar being granted lesser benefits,
since no rescission of contract was therein permitted. There, where the therein buyer-appellee
identically situated as herein respondent buyer had likewise defaulted in completing the
payments after having religiously paid the stipulated monthly installments for almost eight years
and notwithstanding that the seller-appellant had duly notified the buyer of the rescission of the
contract to sell, the Court upheld the lower court's judgment denying judicial confirmation of the
rescission and instead granting the buyer an additional grace period of sixty days from notice of
judgment to pay all the installment payments in arrears together with the stipulated 10% interest
per annum from the date of default, apart from reasonable attorney's fees and costs, which
payments, the Court observed, would have the plaintiff-seller "recover everything due thereto,
pursuant to its contract with the defendant, including such damages as the former may have
suffered in consequence of the latter's default."
In affirming, the Court held that "Regardless, however, of the propriety of applying said Art.
1592 thereto, we find that plaintiff herein has not been denied substantial justice, for, according
to Art. 1234 of said Code: 'If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee,'" and "that in the interest of justice and equity, the decision appealed
from may be upheld upon the authority of Article 1234 of the Civil Code."
GUILLERMO AZCONA VS. JOSE JAMANDRE (Administrator of the Intestate Estate of

Cirilo Jamandre) [151 SCRA 317]
FACTS: GUILLERMO AZCONA leased 80 Ha. out of his 150 Ha pro-indiviso share in hacienda
Sta. Fe in Escalante, Negros Occidental to CIRILO JAMANDRE, decedent represented by
Administrator to his Estate; that the Yearly rental agreed: P7,200 for 3-agricultural years from
1960, extendible to 1965 at lessee’s option. 1st annual rental due on Mar. 1960; but respondent did
not pay for failure of petitioner to deliver possession of the property to him until he paid in Oct.
1960 of P7000; that in April 1961, petitioner notified respondent that contract is deemed cancelled
for failure to comply with the conditions therein; that the respondent filed complaint, defendant
filed counterclaim; both were dismissed by Trial Court for pari de licto.
ISSUE: WON the payment of P7000, lacking of 200 from the agreed annual rental of 7200,
amounts to delay and ground for rescission.
HELD: NO. The receipt showed full payment as per contract; no mention of the short of 200;
which means that rental was reduced, perhaps because of the reduction of the 80 Ha. by 16 Ha.
used by Petitioner as grazing land. But the rest of the contract subsists.
xxx If the petitioner is fussy enough to invoke it now, it stands to reason that he would have fussed
it too in the receipt he willingly signed after accepting, without reservation and apparently without
protest only P7,000. Article 1235 is applicable.
Petitioner says that he could not demand payment of the balance of P200 on 10/26/60, date of
receipt because the rental for the crop year 1961-1962 was due on or before 1/30/61. But this
would not have prevented him from reserving in the receipt his right to collect the balance when it
fell due. Moreover, there is evidence in the record that when the due date arrived, he made any
demand, written or verbal, for the payment of that amount.
Article 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
1. To whom payment should be made
Article 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.
ARAÑAS V. TUTAAN [127 SCRA 828]
Payment by judgment debtor to the wrong party does not extinguish judgment debt.
FACTS: CFI-Rizal, Quezon declared petitioner-plaintiff spouses Arañas as owner of 400 shares of
stocks in Universal Textile Mills, Inc. UTEX, which the Corp-defendant issued to co-defendant
Gene Manuel and BR Castaneda, including stock dividends which accrued to said shares. This
court a quo rendered decision in August 1971. UTEX made a motion for clarification and such was
answered in 1972 clearly directing UTEX to pay spouses petitioners as rightful owners of all
accruing dividends from their stocks from after the judgment by the court, and for the transfer of
the disputed shares of stocks to the names of petitioner-spouses. In lieu of the appeal filed by
Manuel and Castaneda, UTEX failed to transfer the names of the shares and pay the dividends to
petitioners. Thus, spouses-petitioner asked for a writ of execution from court a quo for payment of
cash dividends from1972-1979 with interest and to effect the transfer of the shares to them. Lower
court granted such order but absolved UTEX of payment of cash dividends which they have
already paid to Manuel and Castaneda on the ground of equity.
ISSUE: WON UTEX should be made to pay spouses Arañas the cash dividends from 1972-1979
with interests, after it has already paid the same to Manuel and Castañeda, despite knowledge of
the court’s decision otherwise.
HELD: The burden of recovering the supposed payments of the cash dividends made by UTEX to
the wrong parties Castaneda and Manuel squarely falls upon itself by its own action and cannot be
passed by it to petitioners as innocent parties.
*** It is elementary that payment made by a judgment debtor to a wrong party cannot
extinguish the judgment obligation of such debtor to its creditor. xxx
A payment in order to be effective to discharge an obligation must be made to the proper

parties.--
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.
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.
xxx The theory is where a 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. xxx
Unless authorized 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 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. Consequently,
unless authorized 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. [PAL V. CA (181 S 557)]
Tolentino:
Authority to receive: LEGAL or CONVENTIONAL
(1) Legal: conferred by law, such as authority of guardian to include creditor (Cr), or the
administrator of estate
(2) Conventional: authority from Creditor himself, as when agent is appointed to collect from
Debtor.
 Payment to wrong party does NOT extinguish obligation to Creditor, if there is no

fault or negligence which can be imputed to the latter, even when Debtor acted in utmost
Good Faith and by mistake as to the person of his Creditor, or through error induced by
fraud of 3rd Person, EXCEPT AS PROVIDED IN ARTICLE 1241.
 Deposit by Debtor in bank, in the name of and to the credit of Cr, without latter’s
authority does NOT constitute payment; but when the Creditor cannot be found in the
place of payment, such deposit may be a valid excuse for not holding the Debtor in default
General Rule: Consignation in court of thing or amount due, when properly made will
Article 1241. Payment to a person who is incapacitated to administer his property shall be valid
if he has kept the thing delivered, or insofar as the payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to the benefit of
the creditor. Such benefit to the creditor need not be proved in the following cases:
1. If after the payment, the third persons acquire the creditor's rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditor's conduct, the debtor has been led to believe that the third person had
authority to receive the payment.
Baviera: Number three is Estoppel in Pais.
Tolentino:
1. When Creditor is incapacitated, payment must be made to his legal representative or deliver
the thing to court for consignation ff. Article 1256.
2. Payment to Incapacitated Creditor shall be valid only insofar as it accrued to his benefit.
Absence of benefit, Debtor may be made to pay again by Creditor when he attains capacity,
or his legal representative during the incapacity.
3. Same principles are applicable to payment made to 3rd Person, but person who paid has right
to recover from 3rd Person.
4. In ff. Cases, payment to 3rd Person releases Debtor:
(a) when without notice to assngment of credit, he pays to original Creditor [Article 1626]
and
(b) when in Good Faith he pays to one in possession of credit [Article 1242]
5. If mistake of Debtor due to fault of Creditor, then Creditor cannot demand anew.
Article 1242. Payment made in good faith to any person in possession of the credit shall release
the debtor.
(Assignment of Credits and Other Incorporeal Rights)
Article 1626. The debtor who, before having knowledge of the assignment, pays his creditor
shall be released from the obligation.
2. Who shall make payment?
mortgage, guaranty, or penalty.
Article 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in
any case valid as to the creditor who has accepted it.
Article 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights
of the former are governed by articles 1236 and 1237. (Other Quasi-Contracts)
Article 1239. In obligations to give, payment made by one who does not have the free disposal of
the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of
article 1427 under the Title on "Natural Obligations."
Article 1427. When a minor between eighteen and twenty-one years of age, who has entered
into a contract without the consent of the parent or guardian, voluntarily pays a sum of money
or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the
same from the obligee who has spent or consumed it in good faith.
 NOTE: Age of majority is now 18.
Tolentino:
 Where the person paying has no capacity to make the payment, the Creditor cannot be
compelled to accept it. Consignation will not be proper.
 In case Creditor accepts, the payment will not be valid, except in the case provided in
Article 1427.
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
Tolentino:
 Payment to Creditor after the credit has been attached or garnished is void as to the party
who obtained the attachment or garnishment, to the extent of the amount of judgment in
his favor;
 Debtor can therefor be made to pay again to the party who secured the attachment or
garnishment, but he can recover the same to the extent of what he has paid to his Creditor.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will.
Tolentino:
Defects of the thing delivered may be waived by the Creditor, if he expressly so declares, or if,
with knowledge thereof, he accepts the thing without protest or disposes of it or consumes it
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.
Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into consideration.
Tolentino:
 Creditor or Debtor may waive the benefit of this Article;
 Creditor may require a thing of inferior quality and Debtor may deliver a thing of superior
quality, unless the price to be pd in the latter case is dependent upon the quality.
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court
shall govern.
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.
BALANE CASE:
Philippines.
In the meantime, the action derived from the original obligation shall be held in abeyance.
NORBERTO TIBAJIA JR. VS. CA AND EDEN TAN (1993)
Facts: In a suit for collection of a sum of money, Eden Tan obtained judgment against
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia. The decision having become final,
Eden Tan filed motion for execution and the garnished funds which by then were on deposit with
the cashier of the RTC-Pasig were levied upon.
Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in
Cashier's Check P262,750.00, and in Cash 135,733.70 = Total P398,483.70. Tan, refused to
accept such payment and instead insisted that the garnished funds deposited with RTC-Pasig be
withdrawn to satisfy the judgment obligation. Defendant spouses (petitioners) filed a motion to
lift the writ of execution on the ground that the judgment debt had already been paid. Trial court
denied on the ground that payment in cashier's check is not payment in legal tender and that
payment was made by a third party other than the defendant. MR was denied. CA affirmed,
holding that payment by cashier's check is not payment in legal tender as required by RA No.
529. MR denied again.
ISSUE: Whether or not payment by means of check (even by cashier's check) is considered
payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central
Bank Act.
HELD: NO.
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Philippines.
In the meantime, the action derived from the original obligation shall be held in abeyance;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec.1. Every provision contained in, or made with respect to, any obligation which purports to
give the obligee the right to require payment in gold or in any particular kind of coin or currency
other than Philippine currency or in an amount of money of the Philippines measured thereby,
shall be as it is hereby declared against public policy null and void, and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every
obligation heretofore and hereafter incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character. Checks representing deposit money do not have legal tender power and
their acceptance in the payment of debts, both public and private, is at the option of the creditor:
Provided, however, that a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
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.
OCTAVIO KALALO VS. ALFREDO LUZ (1970) [34 SCRA 337]
Under RA 529, if the obligation was incurred prior to the enactment in a particular kind of coin
or currency other than the Phil. currency the same shall be discharged in Phil. currency
measured at the prevailing rate of exchange at the time the obligation was incurred. RA 529
does not provide for the rate of exchange for the payment of the obligation incurred after the
enactment of said Act. The logical conclusion is that the rate of exchange should be that
prevailing at the time of payment for such contracts.
FACTS: Octavio KALALO, a licensed civil engineer doing business under the firm name of O.
A. Kalalo and Associates, entered into an agreement with Alfredo LUZ, a licensed architect,
doing business under firm name of A. J. Luz and Associates, whereby the former was to render
engineering design services to the latter for fees, as stipulated in the agreement. The services
included design computation and sketches, contract drawing and technical specifications of all
engineering phases of the project designed by O. A. Kalalo and Associates bill of quantities and
cost estimate, and consultation and advice during construction relative to the work. The fees
agreed upon were percentages of the architect's fee.
Kalalo in his complaint against Luz alleged that for services rendered in connection with the
different projects there was due him fees in US$, excluding interests, of which some were paid,
thus leaving unpaid the balance plus prayer for consequential and moral damages, as well as
moral damages, attorney's fees and expenses of litigation; and actual damages.
Luz admitted that appellee rendered engineering services, as alleged, but averred that some were
not in accordance with the agreement and such claims were not justified by the services actually
rendered, and that the aggregate amount actually due was only P80,336.29, of which P69,475.21
had already been paid, thus leaving a balance of only P10,861.08. Luz denied liability for any
damage claimed by appellee to have suffered, as alleged in the second, third and fourth causes of
action. Appellant also set up affirmative and special defenses, alleging that appellee had no cause
of action, that appellee was in estoppel because of certain acts, representations, admissions
and/or silence, which led appellant to believe certain facts to exist and to act upon said facts, that
appellee's claim regarding the Menzi project was premature because appellant had not yet been
paid for said project, and that appellee's services were not complete or were performed in
violation of the agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim
for actual and moral damages for such amount as the court may deem fair to assess, and for
attorney's fees.
Trial Court authorized the case to be heard before a Commissioner. The Commissioner rendered
a report which, in resume, states that the amount due to appellee was US$28K as his fee in the
IRRI Project, and P51,539.91 for the other projects, less the sum of P69,475.46 which was
already paid by the appellant. The Commissioner also recommended the payment to appellee of
the sum of P5,000.00 as attorney's fees. Both had no objection to the findings of fact of the
Commissioner contained in the Report.
ISSUE: WON the recommendation in the Report that the payment of the amount due to the
plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid
in pesos.
HELD: Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the
amount of $28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars,
even if appellant himself had received his fee for the IRRI project in dollars. This payment in
dollars is prohibited by Republic Act 529 which was enacted on June 16, 1950. Said act
provides as follows:
SECTION 1. Every provision contained in, or made with respect to, any obligation which
provision purports to give the obligee the right to require payment in gold or in a particular kind
of coin or currency other than Philippine currency or in an amount of money of the Philippines
measured thereby, be as it is hereby declared against public policy, and null, void and of no
effect, and no such provision shall be contained in, or made with respect to, any obligation
hereafter incurred. Every obligation heretofore or here after incurred, whether or not any such
provision as to payment is contained therein or made with respect thereto, shall be discharged
upon payment in any coin or currency which at the time of payment is legal tender for public
and private debts: Provided, That, ( a) if the obligation was incurred prior to the enactment of
this Act and required payment in a particular kind of coin or currency other than Philippine
currency, it shall be discharged in Philippine currency measured at the prevailing rate of
exchange at the time the obligation was incurred, (b) except in case of a loan made in a foreign
currency stipulated to be payable in the same currency in which case the rate of exchange
prevailing at the time of the stipulated date of payment shall prevail. All coin and currency,
including Central Bank notes, heretofore or hereafter issued and declared by the Government of
the Philippines shall be legal tender for all debts, public and private.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior
to the enactment of the Act and require payment in a particular kind of coin or currency
other than the Philippine currency the same shall be discharged in Philippine currency
measured at the prevailing rate of exchange at the time the obligation was incurred.
As we have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now
before us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of
$28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows
that the provision of Republic Act 529 which requires payment at the prevailing rate of exchange
when the obligation was incurred cannot be applied.
Republic Act 529 does not provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. The logical conclusion, therefore, is that the rate of
exchange should be that prevailing at the time of payment.
This view finds support in the ruling of this Court in the case of Engel vs. Velasco and Co. where
this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a
sum of money expressed in American currency, the indemnity to be allowed should be expressed
in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of
exchange prevailing on the date of defendant's breach. This is also the ruling of American court
as follows:
The value in domestic money of a payment made in foreign money is fixed with
respect to the rate of exchange at the time of payment.
NELIA PONCE AND VICENTE PONCE VS. CA AND JESUSA AFABLE [90 SCRA 533]
It is to be noted that while an agreement to pay in dollars is declared as null and void and of no
effect, what the law specifically prohibits is payment in currency other than legal tender. It does
not defeat a creditor's claim for payment, as it specifically provides that "every other domestic
obligation xxx whether or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private use." A contrary rule would allow a
person to profit or enrich himself inequitably at another's expense.
FACTS: On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza
and Ma. Aurora C. Diño executed a promissory note in favor of petitioner Nelia G. Ponce in the
sum of P814,868.42, Philippine Currency, payable, without interest, on or before July 31,
1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall
draw interest at 12% per annum, without demand; that should it be necessary to bring suit to
enforce payment of the note, the debtors shall pay a sum equivalent to 10% of the total amount
due for attorney's fees; and, in the event of failure to pay the indebtedness plus interest in
accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over
their properties or of the Carmen Planas Memorial, Inc.
For failure to comply with the OBLIGATION, a Complaint was filed by PONCE at CFI-
Manila for the recovery of the principal sum of P814,868.42, plus interest and damages.
Trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L.
Mendoza and Ma. Aurora C. Diño , to pay petitioners, jointly and severally, the sum of
P814,868.42, plus 12% interest per annum from July 31, 1969 until full payment, and a sum
equivalent to 10% of the total amount due as attorney's fees and costs.
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that
the contract under consideration involved the payment of US dollars and was, therefore,
illegal; and that under the in pari delicto rule, since both parties are guilty of violating the law,
neither one can recover. It is to be noted that said defense was not raised in her Answer. CA
affirmed Trial Court. MR denied. CA’s holding: the agreement is null and void and of no effect
under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can be made in
favor of the plaintiffs for being themselves guilty of violating the law.
ISSUE: WON the subject matter is illegal and against public policy, thus, doctrine of pari
delicto applies.
HELD: WE DISAGREE. It is to be noted that while an agreement to pay in dollars is declared

as null and void and of no effect, what the law specifically prohibits is payment in currency
other than legal tender. It does not defeat a creditor's claim for payment, as it specifically
provides that "every other domestic obligation ... whether or not any such provision as to
payment is contained therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public and private debts." A
contrary rule would allow a person to profit or enrich himself inequitably at another's expense.
Section 1 of Republic Act No. 529, which was enacted on June 16, 1950:
Section1. Every provision contained in, or made with respect to, any domestic obligation to wit,
any obligation contracted in the Philippines which provision purports to give the obligee the
right to require payment in gold or in a particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, be as it is
hereby declared against public policy, and null and void and of no effect and no such
provision shall be contained in, or made with respect to, any obligation hereafter incurred.
The above prohibition shall not apply to (a) transactions were the funds involved are the
proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or
agents, by foreign governments, their agencies and instrumentalities, and international financial
and banking institutions so long as the funds are Identifiable, as having emanated from the
sources enumerated above; (b) transactions affecting high priority economic projects for
agricultural industrial and power development as may be determined by the National Economic
Council which are financed by or through foreign funds; (c) forward exchange transactions
entered into between banks or between banks and individuals or juridical persons; (d) import-
export and other international banking financial investment and industrial transactions. With the
exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in,
which cases the terms of the parties' agreement shall apply, every other domestic obligation
heretofore or hereafter incurred whether or not any such provision as to payment is contained
therein or made with- respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private debts: Provided,
That if the obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine currency, it shall be
discharge in Philippine currency measured at the prevailing rates of exchange at the time
the obligation was incurred, except in case of a loan made in foreign currency stipulated to
be payable in the currency in which case the rate of exchange prevailing at the time of the
stipulated date of payment shall prevail All coin and currency, including Central Bank
notes, heretofore and hereafter issued and d by the Government of the Philippines shall be
legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved
June 19, 1964)
NEW PACIFIC TIMBER AND SUPPLY COMPANY VS. HON. SENERIS AND EX-
OFFICIO SHERIFF HAKIM ABDULWAHID [101 SCRA 686]
FACTS: Upon a compromise judgment against petitioner, and for the latter’s failure to comply,
CFI-Zambo issued a writ of execution. Sheriff levied on personal properties or petitioner. And set
such for auction sale. Prior to which date of auction, petitioner deposited with Clerk of Court, ex-
officio sheriff, the payment of the judgment OBLIGATION consisting of cash and checks. Private
respondent, Ricardo TONG refused to accept and requested the auction to proceed. Tong was the
highest bidder in the auction, for total amount short of the judgment debt.
ISSUE: Whether the Sheriff can validly refuse acceptance of the P50,000 Cashier’s check and
P13,130 in cash as payment of the judgment obligation.
HELD: YES. It is to be emphasized that the check deposited by the petitioner in the amount of
P50,000 is not an ordinary check but a Cashier's check of the Equitable Banking Corp., a bank of
good standing and reputation. It was even a certified crossed check. It is well known and accepted
practice in the business sector that a Cashier's check is deemed as cash.
Moreover, since the said check has been certified by the drawee bank, by the certification, the
funds represented by the check are transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with
rights and duties of one in such situation. Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance. Said certification "implies that the check
is drawn upon sufficient funds in the hands of the drawee, that they have been set apart fort
its satisfaction, and that they shall be so applied whenever the check is presented for
payment. It is an understanding that the check is good then, and shall continue to be good, and
this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable
to the order of the depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties, is to enable the holder to use it as money." When the holder
procures the check to be certified, "the check operates as an assignment of a part of the funds to the
creditors." Hence, the exception to the rule enunciated under Sec. 63 of the CB Act shall apply in
this case:
Sec. 63. Legal Character – Checks representing deposit do not have legal tender power
and their acceptance in payment of debts, both public and private, is at the option of the
Creditor Provided, however that a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor in cash in an
amount equal to the amount credited to his account.
ROMAN CATHOLIC BISHOP OF MALOLOS, INC. VS. IAC AND ROBES-

FRANCISCO REALTY AND DEV. CORP. [191 SCRA 411]
FACTS: Petitioner is vendor of parcels of land in Bulacan to vendee Robes-Francisco Realty

Corp. with down payment of 20K+ and balance of 100K payable within 4yrs with 12% int. p.a.
from execution of contract on July 7, 1975, with forfeiture clause in case vendee fails to pay in
4yrs.
On July 17, 1975, vendee wrote a letter requesting for extension and allowance to pay in
installment within 6mos with interests. Petitioner denied, granted only 5 days grace period.
Request for 30-days grace on the 4th day was also denied by petitioner. Private respondent later
purports tender of payment (in check) on 5th day was refused by petitioner. Trial Court favored
petitioner. IAC reversed after finding that respondent had sufficient funds at the time of tender of
check payment to petitioner. On the 5th day of the grace period, and concluded that there was valid
tender of payment.
ISSUE: WON offer of certified personal check is valid tender of payment of OBLIGATION under
a contract which stipulates that consideration of sale is in Phil. Currency?
HELD: Finding of sufficient available funds by CA does not constitute proof of tender of
payment. (non sequitur)
Tender of Payment involves a positive and unconditional act by the obligor of offering legal
tender currency as payment to oblige for the OBLIGATION and demanding that the latter accept
the same.
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. 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.
Tolentino:
 Legal tender: such currency which in a given jurisdiction can be used for the payments of
debts, public and private, and which cannot be refused by the Creditor.
 Since payment must be in money that is legal tender, payment in check even when good
may be validly refused by Creditor
 Payment by Check: WON Manager’s check or ordinary is NOT a valid tender of payment
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be
the basis of payment, unless there is an agreement to the contrary.
Baviera: This article applies to contracts only. EXTRAORDINARY means unusual or beyond the
common fluctuation, not foreseen.
Tolentino: Does NOT apply where obligation to pay arises from law, independent of contracts,
like the taking of private property by the goverment in the exercise of its power of eminent domain
FILIPINO PIPE AND FOUNDRY CORP. (FPFC) VS. NAWASA [161 SCRA 32]
Facts: In 1961 NAWASA entered contract with FPFC for the supply of cast iron pressure pipes for
the construction of the Waterworks in Msbate and Samar. NWS paid in installments. Leaving a
balance of unpaid interests. Thus, FPFC filed a collection case against NWS in CFI-Manila.
In 1967, CFI ordered NAWASA to pay FPFC the balance unpaid balance NWS negotiable bonds,
redeemable in 10 yrs with 6%p.a. interest. NWS failed to pay, neither delivered bonds. In 1971,
FPFC filed another complaint seeking an adjustment of the unpaid balance due to change in value
of judgment in peso in 1967 to 1971. Trial Court dismissed the complaint holding that the inflation
was a worldwide occurrence and that there was no proof of extraordinary inflation in the sense
contemplated by Article 1250.
Issue: WON there was extraordinary inflation to apply Art 1250.
Held: None. Extraordinary inflation exists when there is a decrease or increase in the purchasing
power of the Phil currency which is unusual or beyond the common fluctuation value of the said
currency, and such decrease or increase could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the establishment of the obligation. The
decline of the purchasing power of the currency cannot be considered extraordinary. It was due to
oil embargo crisis the effect of which was worldwide.
PEDRO VELASCO VS. MERALCO [42 SCRA 556]
FACTS: Velasco’s Motion for Reconsideration; SC decision incorrectly reduced amount of

damages due him based only on his BIR assessed income and not considered his undeclared source
of income which he did not disclose. He now urges that damages awarded him was inadequate
considering the present high cost of living, applying Art 1250.
ISSUE: Whether or not Article 1250 of the New Civil Code is applicable.
HELD: From the employment of the words "extraordinary inflation or deflation of the currency
stipulated" in Article 1250, it can be seen that the same envisages contractual obligations where a
specific currency is selected by the parties as the medium of payment; hence it is inapplicable to
obligations arising from tort and not from contract. Besides, there is no showing that the
factual assumption of said article has come into existence.
COMMISSIONER OF PUBLIC HIGHWAYS V. BURGOS [96 S 831] -
FACTS: Victoria Amigable is the owner of parcel of land in Cebu which the Government took
for road-right-of-way purpose in 1924. The land had since become streets known as Mango
Avenue and Gorordo Avenue. In 1959, Amigable filed in CFI-Cebu a complaint, to recover
ownership and possession of the land, and for damages in the sum of P50,000.00 for the
alleged illegal occupation of the land by the Government, moral damages in the sum of
P25,000.00, and attorney's fees in the sum of P5,000.00, plus costs of suit.
In its answer, the Republic alleged, among others, that the land was either donated or sold by its
owners to the Province of Cebu to enhance its value, and that in any case, the right of the owner,
if any, to recover the value of said property was already barred by estoppel and the statute of
limitations, defendants also invoking the non-suability of the Government.
Plaintiff's complaint was dismissed on the grounds relied upon by the defendants therein. SC
reversed, and the case was remanded to the court of origin for the determination of the
compensation to be paid the plaintiff-appellant as owner of the land, including attorney's fees,
also directed the determination of just compensation on the basis of the price or value thereof at
the time of the taking.
ISSUE: WON Article 1250 applicable in determining JUST compensation payable to Amigable
from the taking in 1924.
HELD: NO. Article 1250 applies only to cases where a contract or agreement is involved. It
does not apply where the obligation to pay arises from law, independent of contracts. The taking
of private property by the government in the exercise of its power of eminent domain does not
give rise to a contractual obligation.
SIMEON DEL ROSARIO VS. SHELL COMPANY OF THE PHIL. LTD. [164 SCRA 556]
FACTS: Del Rosario leased to Shell his land in Ligao, Albay at 250/mo. With stipulation on
currency adjustment according to inflation. An EO (EO 195) was promulgated by Pres Diosdado
Macapagal prompting Del Rosario to demand for increase in rental from Shell which the latter
refused to pay. Thus Del Rosario filed with CFI-Manila which was dismissed.
ISSUE: WON the effect of EO 195 is official devaluation of peso as contemplated in the Lease
Contract
HELD: In the case at bar, while no express reference has been made to metallic content, there
nonetheless is a reduction in par value or in the purchasing power of Phil. currency. Even
assuming there has been no official devaluation as the term is technically understood, the fact is
that there has been a diminution or lessening in the purchasing power of the peso, thus there has
been "depreciation" (opposite of "appreciation.") Moreover, when laymen unskilled in the
semantics of economics use the terms "devaluation" or "depreciation" they certainly mean them in
their ordinary signification--decrease in value. Hence, as contemplated by the parties herein in their
lease agreement, the term "devaluation" may be regarded as synonymous with "depreciation," for
certainly both refer to a decrease in the value of the currency. The rentals should therefore, by their
agreement, be proportionately increased.
Article 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be at the moment the obligation was
constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Four Special Kinds of Payments:
1. Dacion en pago (Article 1245.)

2. Application of payments (Subsection 1.)
3. Payment by cession (Subsection 2.)
4. Consignation (Subsection 3.)
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.
[Tolentino]
Dation in payment is the delivery and transmission of ownership of a thing by the Debtor to the
Creditor as an accepted equivalent of performance of OBLIGATION;
 It may be a thing or a real right (i.e. usufruct), or of a credit against a 3rd Person;
Example: Assignment by an heir-Debtor of his interests in the succession to the Creditor, made
after the death of decedent, extinguishes the OBLIGATION.
Effect on OBLIGATION  extinguished to the extent of the value of thing delivered
 Debtor does not have to be insolvent, agreement only between the parties makes dation
possible.
When personal property is delivered it is PLEDGE, not dation, unless parties clearly stipulate,
but in doubt, the presumption is pledge, with lesser transmission of rights.
Warranties of Debtor  Dation is an onerous transmission or contract of alienation, provision in

Sales Re warranty against eviction and against hidden defects of the thing applies, Debtor is
vendor, Creditor is vendee;
 If Creditor is evicted, original OBLIGATION is not revived, but Creditor is entitled to

recover from breach of warranty in Article 1555.
[Balane]
 Dacion en pago, in Roman law, called "datio in solutum", in French, "dation en

paiement," in Spanish, "dacion en pago.")
 Dation in payment is possible only if there is a debt in money. Instead of money, a

thing is delivered in satisfaction of the debt in money. (Dation en pago is explained in
the case of Filinvest v. Phil Acetylene).
There are two ways at looking at dacion en pago:
1. Classical way  where dacion en pago is treated as a sale.

2. Modern concept  which treats dacion en pago as a novation.
Castan has another view  Both are wrong.
* A dacion en pago is not a sale because there is no intention to enter into a contract of sale.
* It is not also a novation because in novation, the old obligation is extinguished and a new
obligation takes its place.
** But here, the old obligation is extinguished. What takes its place? Nothing. So what is it?
It is a special form of payment which resembles a sale.
There are two more things to remember in the cases of Filinvest v. Phil. Acetylene, supra.
and Lopez v. CA, 114 SCRA 671:
 Dacion en pago can take place only if both parties consent.
Q: To what extent is the obligation extinguished?
Answer: Up to the value of the thing given (the thing must be appraised) unless the parties agree
on a total extinguishment. (Lopez. v. CA, supra.)
FILINVEST CREDIT CORP. V. PHIL. ACETYLENE [111 SCRA 421]
FACTS: Phil. Acetylene Co. purchased from Alexander LIM with Deed of Sale, a Chevrolet 1969
model with downpayment, and balance payable for 34 mos. With 12% int. p.a. reflected in a PN,
with Chattel ortgage as security in Lim’s favor. Lim assigned to Filinvest Finance Corp. his
interests in the PN and Chattel Mortgage. After defaulting in 9 installments, Filinvest sent demand
letter to PAC, to pay or return the vehicle. PAC returned the car but Filinvest cannot sell the car
due to unpaid taxes thereon incurred by PAC. Fil offered to deliver back the car to PAC, the latter
refused. Fil thus filed a complaint for collection of money withdamages in CFI-Manila. PAC
averred that Fil has no cause of action against PAC because when the car was returned after the
demand letter, the OBLIGATION was extinguished.
ISSUE: WON the return of mortgaged vehicle to appellee by voluntary surrender by appellant
totally extinguished the OBLIGATION, as in dacion en pago?
HELD: NO. We find appellant's contention devoid of persuasive force. The mere return of the
mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein
appellee, does not constitute dation in payment in the absence, express or implied of the true
intention of the parties. The demand for return merely showed appellee’s interest to secure the
value of the vehicle and prevent loss, damage, destruction or fraudulent transfer to 3rd person, as
shown in the doc, “Vol. Surrender with SPA To Sell” which never said that such return is in full
satisfaction of the mortgaged debt. The conveyance was as to rights only, ownership never left the
mortgagor, as such burdens on the property should still be shouldered by him.
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.
 In dacion en pago, 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.
Dacion en pago in the nature of sale. The undertaking really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is
to be charged against the debtor's debt.
 As such, the essential elements of a contract of sale, namely, consent, object certain, and
cause or consideration must be present.
Dacion en pago in its modern concept. In its modern concept, what actually takes place in dacion
en pago is an objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of the contract of sale,
while the debt is considered as the purchase price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or
obligation.
CITIZENS SURETY AND INSURANCE COMPANY VS. CA AND PASCUAL PEREZ

[162 SCRA 738]
RATIO: There is no dation in payment when there is no obligation to be extinguished.
FACTS: Petitioner issued 2 surety bonds to Pascual Perez to guarantee his compliance in a
Contract of Sale of Goods he entered with Singer Sawing Machine Co. Perez in turn executed a
deed of assignment of its stock of lumber to petitioner. And a 2nd indemnity agreement to guaranty
reimbursement of whatever liability it will be made to pay in the future on Perez’s liabilities. Perez
failed to comply. Singer made petitioner pay Perez’s OBLIGATION. Pascual failed to reimburse
petitioner. Thus petitioner filed a claim against the estate of Nicasia Sarmiento which was being
administered by Perez. Perez averred that his liability to the surety has been extinguished by the
deed of assignment of the lumber. Trial Court held Perez and the estate of Sarmiento solidarily
liable to Citizens Surety. CA reversed and dismissed Citizens’ claim against the estate of
Sarmiento.
ISSUE: WON CA erred in concluding that there was dation in payment by the execution of the
Deed of Assigment?
HELD: The transaction could not be dation in payment. xxx When the deed of assignment was
executed on 12/4/59, the obligation of the assignor to refund the assignee had not yet arisen. In
other words, there was no obligation yet on the part of the petitioner, Citizens' to pay Singer
Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not
have been a dation in payment.
2ND SPECIAL KIND OF PAYMENT: Application of Payment
[Balane]
Application of payment (Imputacion in Spanish) is the designation of a debt which is being paid
by the debtor who has several obligations of the same kind in favor of the creditor to whom the
payment is made.
Rules where the amount sent by the debtor to the creditor is less than all that is due:
No.1: Apply in accordance with the agreement.
No.2: Debtor may apply the amount (an obvious limitation because of the principles of
indivisibility and integrity) where there would be partial payment.
No.3: Creditor can make the application.
No.4: Apply to the most onerous debt. (Article 1252, par. 1.)
Q; What are the rules to determine which is the most onerous debt?
A: (Article 1252)
1. If one is interest paying and the other is not, the debt which is interest paying is more
onerous.
2. If one is a secured debt and the other is not, the secured debt is more onerous
3. If both are interest free, one is older than the first, the newer one is more onerous because
prescription will take longer with respect to the newer debt.
5th Rule: Proportional application if the debts are equally onerous.
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.
[Tolentino]
 Necessary that OBLIGATION must all be due.
 Only in case of mutual agreement, or upon consent of the party in whose favor the term
was establish, that payments may be applied to OBLIGATION which have not yet
matured.
Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered.
Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to the
debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
[Baviera]
The ff. are the rules for application of payments:
1 - The first choice belongs to the Debtor;
2 - If the Debtor did not choose, the Creditor may choose, which he will manifest in a receipt.
3 - If neither specified the application, payment shall be made to the most onerous debt.
3rd SPECIAL FORM OF Payment – by Cession
[Balane]
 Property is turned over by the debtor to the creditor who acquires the right to sell it and
divide the net proceeds among themselves.
Q: Why is payment by cession a special form of payment?
A: Because there is no completeness of performance (re: integrity.)
In most cases, there will be a balance due.
Q: Difference between dacion en pago and payment by cession:
In dacion en pago, there is a transfer of ownership from the debtor to the creditor.
In payment by cession, there is no transfer of ownership. The creditors simply acquire the right to
sell the properties of the debtor and apply the proceeds of the sale to the satisfaction of their credit.
Q: Does payment by cession terminate all debts due?
A: Generally, NO, only to the extent of the net proceeds. The extinguishment of the obligation is
pro tanto.
 Execution in Legal cession where the extinguishment of the obligation is total. Legal
cession is governed by the Insolvency Law.
Article 1255. The debtor may cede or assign his property to his creditors in payment of his debts.
This cession, unless there is stipulation to the contrary, shall only release the debtor from
responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of
the cession, are made between the debtor and his creditors shall be governed by special laws.
4th SPECIAL FORM OF PAYMENT:
Tender of Payment and Consignation

Article 1256. If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.
Consignation alone shall produce the same effect in the following cases:
When the creditor is absent or unknown, or does not appear at the place of payment;
When he is incapacitated to receive the payment at the time it is due;
When, without just cause, he refuses to give a receipt;
When two or more persons claim the same right to collect;
When the title of the obligation has been lost.
[Balane]
“Subsection 3.-- Tender of Payment and Consignation”
The title of the subsection is wrong. It should have been Consignation only because that is the
special mode of payment and not the tender of payment.
 It is a special mode of payment because payment is made not to the creditor but to the
court.
 Consignation is an option on the part of the debtor because consignation assumes that
the creditor was in mora accipiendi (when the creditor without just cause, refuses to accept
payment.)
Consequence when the creditor without just cause, refuses to accept payment The debtor
may just delay payment. But something still hangs above his head. He is therefore, given the
option to consignation. Distinguish this from BGB (German Civil Code) which states that mora
accipiendi extinguishes the obligation.
[Tolentino]
 Tender of payment before consignation is required by the present Article but only in case
where the Creditor refuses to accept it without just cause.
Effect on INTEREST: When tender is made in a form that Creditor could have immediately
realized payment (cash), followed by a prompt attempt of the Debtor to make consignation, the
accrual of interest will be suspended from the date of such tender.
But when tender is not accompanied by means of pmt, and the Debtor did not take any immediate
step to consign, then interest is not suspended from the time of such tender.
SOLEDAD SOCO VS. HON. MILITANTE AND REGINO FRANCISCO JR. [123 S 160]
Requirements of consignation
FACTS: Disputed here is decision of lower court in an Unlawful Detainer case filed by lessor
SOLEDAD SOCO against private respondent REGINO FRANCISCO JR. lessee of a building
owned by Soco, whose payments of rentals were considered valid and effective, dismissed the
Unlawful Detainer case and made lessor pay moral and exemplary damages, attorney’s fees,
holding there was substantial compliance in the with the requisites of consignation. Francisco and
Soco entered into a Contract of Lease for a monthly rental of P 800.00 for a period of 10 years
renewable for another 10 years at the option of the lessee. Francisco subleased the bldg for a
rental of 3,000/month. Knowing this, Soco apparently stopped accepting rental payments of
Francisco and later demanded him to vacate the bldg. and filed for rescission/annulment of Lease
Contract with CFI-Cebu.
ISSUE: WON the provisions in Arts. 1256-1261, NCC regarding the requisites of consignation
must be complied with fully and strictly, mandatorily and that did the lower court err in ruling
substantial compliance thereto?
HELD: NO. 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.
Consignation Defined:
 Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor (1) cannot accept or (2) refuses to accept payment, and it generally
requires a prior tender of payment.
Requisites of 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 (Article 1176,NCC);
3. that previous notice of the consignation had been given to the person interested in
the performance of the obligation (Article 1177,NCC);
4. that the amount due was placed at the disposal of the court (Article 1178,NCC); and
5. that after the consignation had been made the person interested was notified thereof
(Article 1178,NCC).
 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).
 Without prior notice, a consignation is void as payment. (Limkako vs. Teodoro, 74 Phil
313)
 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).
 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 is 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).
Article 1257. In order that the consignation of the thing due may release the obligor, it must
first be announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions
which regulate payment.
Article 1258. Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and the
announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof.
[Tolentino]
 Notice: The requirement is fulfilled by the service of summons upon the Defendant
together with copy of complaint.
Article 1259. The expenses of consignation, when properly made, shall be charged against the
creditor.
[Tolentino] Proper when 
1. Creditor accepts consignation after deposit without protest though Debtor failed to
comply with requisites or;
2. Court declares consignation as validly made.
Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
[Tolentino]
Effects of Consignation:
1. Debtor is released in the same manner as if he had performed the obligation.
2. Accrual of INTEREST is suspended.
3. Deterioration or loss of thing or amount consigned without fault of Debtor must be borne
by Creditor.
4. Any increment or increase in value of thing inures to the benefit of Creditor.
SC:
 When money is deposited in court under the provisions of the law on consignation, it is in
custodia legis and therefore exempt from Attachment and execution (Manejero v. Lampa)
Article 1261. If, the consignation having been made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing. The co-
debtors, guarantors and sureties shall be released.
[Baviera]
Q: When is there a need to tender payment?
A: (a) upon demand and (b) when debt is due
Q: There are 2 or more claims. What will Debtor do after consignation?
A: File INTERPLEADER.
Q: Why tender first?
A: It is because there is no need to consign if Creditor accepts payment. We can only know this
through tender. (EXHAUSTION OF EXTRAJUDICIAL MEANS)
Q: Before and after consignation, there is a need to notify the Creditor. Why is this?
A: So that the Creditor can get the money from the Clerk of court and avoid costs of litigation.
Q: Debtor consigns. Hearing…Before the court could approve, the City Hall burned +
money. Should Debtor pay again?
A: No. When money is consigned, it is no longer generic. It becomes specific. Creditor bears the
loss because although it was due to a fortuitous event, there was delay on his part when he refused
to accept payment.
Q: In a Contract of Sale with pacto de retro. The vendor tendered payment within the 3-yr
pd but vendee refused to accept. Action for specific performance by Vendor. According to
Vendee, since money was not consigned, Vendor cannot claim right of repurchase. Tenable
argument?
A: No. As long as there was tender, no need to consign.
But in one case of a co-owner wanting to redeem at reasonable price (was exorbitant), the court
held that reasonable price is determined according to the circumstances. So if you want to redeem,
consign the full amount in cout and ask it to fix the reasonable compensation.
LAURO IMMACULATA VS. HON. NAVARRO AND HEIRS OF JUANITO VICTORIA

[160 SCRA 211] We hereby grant said alternative cause of action or prayer. While the sale was
originally executed in Dec. 1969, it was only on Feb. 3, 1974 when, as prayed for by private
respondent, and as ordered by the court a quo, a deed of conveyance was formally executed. Since
the offer to redeem was made on 3/24/75, this was clearly within the 5-yr. period of legal
redemption allowed by the Public Land Act.
FACTS: A previous complaint, for annulment of judgment and deed of sale with reconveyance
of real property alleged that Juanito Victoria, with the cooperation of defendant Juanita Naval
and others succeeded in causing plaintiff Lauro Immaculata, petitioner herein, to execute a Deed
of Absolute Sale in favor of Juanito Victoria, by unduly taking advantage of the mental illness
and/or weakness of petitioner and through deceit and fraudulent means, purportedly disposed of
by way of absolute sale, a 5,000-sq.m.parcel of land with TCT, for P58K, which petitioner
supposedly received, but in truth and in fact did not; Jurisdiction of the court over the person of
the defendant was also questioned but such was upheld through valid service of summons to the
guardian ad litem and also later through voluntary appearance in lieu of pleadings asking for
exercise of jus by the same court. Accordingly, respondent Court directed the respondent Sheriff
to execute the deed of conveyance prayed for by Juanito Victoria, by reason of which, without
the knowledge and consent of petitioner, a new TCT was issued in favor of Juanito Victoria; that
the said TCT is null and void having been based on void proceedings;
*** that, in the alternative, petitioner prays that he be allowed to repurchase the property
within five (5) years from the time judgment is rendered by the respondent court upholding
the validity of the proceedings and the sale since the land in question was originally covered by a
Free Patent title;
Respondent Court dismissed the complaint on the ground of res judicata. In this present MR, the
petitioner merely asks of this Court to consider a point inadvertently missed – the matter of
LEGAL REDEMPTION, which has remained unresolved. The bar of res judicate is as to
questions on the validity of the sale.
An offer to redeem was made clearly within the 5-yr-period allowed by law, Public Land Act.
(Sec. 119, CA No. 141)
ISSUE: WON offer to redeem was insincere in the absence of consignation of such amount in
Court?
HELD: NO. The right to redeem is a RIGHT NOT AN OBLIGATION, thus no consignation is
required.
To preserve the right to redeem, consignation is not required. But to actually redeem, there must
of course be payment or consignation (deposit) itself.
(2nd MODE OF EXTINGUISHEMENT)
LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE
Article 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he has
incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule
applies when the nature of the obligation requires the assumption of risk.
Balane:
Article 1262 is the same as fortuitous event in Article 1174.
The effect is the same:
 The OBLIGATION is extinguished if the OBLIGATION is to deliver a determinate thing. If

the OBLIGATION is to deliver a generic thing, the OBLIGATION is not extinguished.
[General Rule] Genus nunquam perit ("Genus never perishes.")

But what is not covered by this rule is an OBLIGATION to deliver a limited generic – something
in between specific and generic thing,
e.g., "For P3,000, I promise to deliver to you one of my watches." This OBLIGATION does not
really fall under either Article 1262 or Article 1263. But this OBLIGATION really falls under
Article 1262. In this case, the OBLIGATION may be extinguished by the loss of all the thing
through Fortuitous Event.
Article 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation.
Article 1264. The courts shall determine, whether, under the circumstances, the partial loss of
the object of the obligation is so important as to extinguish the obligation.
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that
the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the
provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm,
or other natural calamity.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the
right granted him by article 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at the
not have the same interest, he shall be responsible for any fortuitous event until he has effected
the delivery.
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof are liable for damages.
Article 1266. The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor.
[Balane]
Objective and Subjective Impossibility:
 In objective impossibility, the act cannot be done by anyone. The effect of objective
impossibility is to extinguish the OBLIGATION.
 In subjective impossibility, the OBLIGATION becomes impossible only with respect to the
obligor.
There are 3 views as to the effect of a subjective impossibility:
1. One view holds that the OBLIGATION is not extinguished. The obligor should ask another
to do the OBLIGATION.
2. Another view holds that the OBLIGATION is extinguished.
3. A third view distinguishes one prestation which is very personal and one which are not
personal such that subjective impossibility is a cause for extinguishes a very personal
OBLIGATION, but not an OBLIGATION which is not very personal.
PEOPLE VS. NATIVIDAD FRANKLIN, accused, ASIAN SURETY AND INSURANCE

COMPANY [39 SCRA 363]
FACTS: Appellant, ASIAN SURETY and INSURANCE CO. INC. contends that the CFI-
PAMPANGA erred in forfeiting its bail bond for the provisional release of NATIVIDAD
FRANKLIN, it contends that lower court should have released it from all liability under the bail
bond because its failure to produce and surrender the accused was due to the negligence of the
Phil. Government itself in issuing a passport to said accused, thereby enabling her to leave the
country. In support of this contention, the provisions of Article 1266 are invoked.
ISSUE: WON Surety should be held liable?
HELD: Article 1266, NCC does not apply to a surety upon a bail bond.
Article 1266 does not apply to a surety upon a bail bond, as said Article speaks of a relation
between a debtor and creditor, which does not exist in the case of a surety upon a bail bond, on one
hand, and the State, on the other. For while sureties upon a bail bond (or recognizance) can
discharge themselves from liability by surrendering their principal, sureties on ordinary bonds or
commercial contracts, as a general rule, can only be released by payment of the debt or
performance of the act stipulated.
It is clear, therefore, that in the eyes of the law a surety becomes the legal custodian and jailer of
the accused, thereby assuming the obligation to keep the latter at all times under his surveillance,
and to produce and surrender him to the court upon the latter's demand.
That the accused in this case was able to secure a Philippine passport which enabled her to go to
the United States was, in fact, due to the surety company's fault because it was its duty to do
everything and take all steps necessary to prevent that departure. This could have been
accomplished by seasonably informing the Department of Foreign Affairs and other agencies of
the government of the fact that the accused for whose provisional liberty it had posted a bail
bond was facing a criminal charge in a particular court of the country. Had the surety company
done this, there can be no doubt that no Philippine passport would have been issued to Natividad
Franklin.
NOTES:
 Liability of Sureties on a bail bond is conditioned upon appearance of accused from the
time set for arraignment or trial or any other time as fixed by court, the bondsman being the
jailer of the accused and absolutely responsible for his custody, with duty at all times to
keep him under surveillance.
 Surety will be exonerated where the performance of condition of bail bond is rendered
impossible by act of God (e.g. death of accused), of the obligee (arrested by government),
or the law (law punishing him is repealed) or also under Rule 114, sec. 16.
Article 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
[Baviera]
Ordinarily, on a contract for a piece of work, an increase in prices will not relieve the contractor
because such circumstances was already considered by the parties when they entered into the
contract.
BAR Q: What if the prices rose so high as to be beyond the contemplation of the parties due to the
oil crisis?
Answer: Released.
Balane:
Rebus sic stantibus. Literally means "things as they stand."
It is short for clausula rebus sic stantibus ("agreement of things as they stand.")
This is a principle of international law which holds that when 2 countries enter into a treaty, they
enter taking into account the circumstances at the time it was entered into and should the
circumstances change as to make the fulfillment of the treaty very difficult, one may ask for a
termination of the treaty. This principle of international law has spilled over into Civil law.
This doctrine is also called the doctrine of extreme difficulty and frustration of commercial
object.
It has four (4) requisites:
1. The event or change could not have been foreseen at the time of the execution of the
contract;
2. The event or change makes the performance extremely difficult but not impossible;
3. The event must not be due to an act of either party;
4. The contract is for a future prestation. If the contract is of immediate fulfillment, the gross
inequality of the reciprocal prestation may involve lesion or want of cause.
In the case of Naga, the court did not consider the 4th element as an element.
 The attitude of the courts on this doctrine is very strict. This principle has always been
strictly applied. To give it a liberal application is to undermine the binding force of an
obligation. Every obligation is difficult. The performance must be extremely difficult in
order for rebus sic stantibus to apply.
LAGUNA TAYABAS BUS COMPANY AND BATANGAS TRANSPO COMPANY VS.

FRANCISCO MANABAT, assignee of Biñan Transpo Company, Insolvent [59 SCRA 650]
FACTS: LEASE contract was executed between BTC and LTB, with monthly rental of Php 2500
of Certificate of Public Convenience, provisionally approved by the Public Service Commission.
Later, BTC was declared insolvent and FRANCISCO MANABAT was appointed as assignee.
Rentals were still paid, until strikes by Employees of BTC caused them some further losses. Thus
they asked for permission of PSC to suspend operation of the CPC also in lieu of low passenger
traffic on these lines and high cost of operation. Manabat opposed the jurisdiction of PSC to
suspend the lease contract being an impairment of OBLIGATION. PSC contended that it had the
power to suspend, as it did so, as a consequence of its power to issue the same CPC, and not as an
interpretation of the provision of the Lease contract, which is a function of regular courts.
ISSUE: WON petitioners may ask PSC for reduction of rentals in lieu of such suspension and
declaration of insolvency of the corp. citing Article 1680.
HELD: Article 1680, it will be observed is a special provision for leases of rural lands. No other
legal provision makes it applicable to ordinary leases. xxx
Even if the cited article were a general rule on lease, its provisions nevertheless do not extend to
petitioners. One of the requisites is that the cause of the loss of the fruits of the leased prop.
must be an "extraordinary and unforeseen fortuitous event." The circumstances of the case
fail to satisfy such requisite. xxx [T]he alleged causes for the suspension of operations on the lines
leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar
allocations (by the CB Monetary B), "already existed when the contract of lease was executed."
The cause of petitioners' inability to operate on the lines cannot, therefore, be ascribed to FE or
circumstances beyond their control, but to their own voluntary desistance.
*** Performance is not excused by subsequent inability to perform, by unforeseen

difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by the
breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the
benefits to be had under the contract, by weather conditions, by financial stringency, or by
stagnation of business. Neither is performance excused by the fact that the contract turns out to
be hard and improvident, unprofitable or impracticable, ill-advised or even foolish, or less
profitable, or unexpectedly burdensome.
JESUS OCCENA VS. HON. JABSON AND TROPICAL HOMES INC. [73 SCRA 637]
FACTS: Tropical HOMES INC., filed complaint for modification of Terms and Condi of
subdivision contract with petitioner Occena, landowners of disputed lands in Davao, citing Article
1267, and the worldwide increases in prices.
The NCC authorizes the release of an obligor when the service has become so difficult as to
be manifestly beyond the contemplation of the parties.
ISSUE: WON the above Article gives the court the authority to consequently modify the contents
of the contract.
HELD: Respondent's complaint seeks not release from the subdivision contract but that the court
"render judgment modifying the terms and conditions of the contract... by fixing the proper shares
that should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots
of subject subdivision."
 Article 1267 does not grant the courts this authority to remake, modify, or revise the
contract or to fix the division of shares between the parties as contractually stipulated with the
force of law between the parties, so as to substitute its own terms for those covenanted by the
parties themselves.
Balane: In this case the interpretation of the court is too literal. According to the court, it can
release a debtor from the obligation but it cannot make the obligation lighter. But if you look at
Article 1267, partial release is permitted.
NAGA TELEPHONE V. CA [230 S 351] - The term "service" should be understood as

referring to the "performance" of the obligation.-- 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. In the present
case, the obligation of prvt. resp. consists in allowing petitioners to use its posts in Naga City,
which is the service contemplated in said article. Furthermore, a bare reading of this article reveals
that it is not a requirement thereunder that the contract be for future service with future unusual
change. According. to 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.
Balane: The Court went too far in this case. It even went to the extent of stipulating for the parties
in the name of equity.
Article 1268. When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever may be the
cause for the loss, unless the thing having been offered by him to the person who should receive
it, the latter refused without justification to accept it.
Article 1269. The obligation having been extinguished by the loss of the thing, the creditor shall
have all the rights of action which the debtor may have against third persons by reason of the
loss.
[Tolentino]
When Debtor tenders payment and Creditor refuses to accept without just cause, Debtor has 2
alternatives:
(1) to consign or
(2) to just keep the thing in his possession, with the obligation to use due diligence, subject to the
general rules of OBLIGATION, but no longer to the special liability under Article 1268.
ARTICLE 1189, 1174, 1165, 1268, 1942, 1979, 2159:
Article 1189. When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition.
If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is
understood that the thing is lost when it perishes, or goes out of commerce, or disappears in
such a way that its existence is unknown or it cannot be recovered;
When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor;
If it deteriorates through the fault of the debtor, the creditor may choose between the rescission
of the obligation and its fulfillment, with indemnity for damages in either case:
If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of
the creditor;
If it is improved at the expense of the debtor, he shall have no other right than that granted to
the usufructuary.
[Balane]
There are three requisites in order for Article 1189 to apply:
1. There is loss, deterioration or improvement before the happening of the condition.
2. There is an obligation to deliver a determinate thing (on the part of the debtor)
3. The condition happens.
Article 1174. Except in cases expressly specified by law, or when it otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or which, though foreseen, were
inevitable.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the
right granted him by article 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at the
not have the same interest, he shall be responsible for any fortuitous event until he has effected
the delivery.
Article 1268. When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever may be the
cause for the loss, unless the thing having been offered by him to the person who should receive
it, the latter refused without justification to accept it.
fortuitous event:
If he devotes the thing to any purpose different from that for which it has been loaned;
If he keeps it longer than the period stipulated, or after the accomplishment of the use for which
the commodatum has been constituted;
If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
If he lends or leases the thing to a third person, who is not a member of his household;
If, being able to save either the thing borrowed or his own thing, he chooses to save the latter.
Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the
same.
Q: What if a depositor was in the premises of the bank and was robbed of his money which
he was about to deposit?
A: Bank cannot be held liable for fortuitous event (robbery) especially in the case of a bank where
the money has not yet been actually deposited.
 Article 1979 provides for instances wherein depositary is still liable even in cases of
fortuitous event.
Q: What kind of diligence is required of a depositary?
A: Ordinary Diligence.
*Safety Deposit Box: If the jewelry inside a Safety Deposit Box was stolen, rules on deposit will
not apply because the contract governing the transaction is LEASE of safety deposit box.
In Negotiorum Gestio
Article 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith.
Payee in Solutio Indebiti
Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum
of money is involved, or shall be liable for fruits received or which should have been received if
the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause, and
for damages to the person who delivered the thing, until it is recovered.
3rd MODE OF EXTINGUISHMENT OF OBLIGATION:
CONDONATION OF REMISSION OF THE DEBT

[Balane]
 Condonation or remission is an act of liberality by virtue of which, without receiving

any equivalent, the creditor renounces enforcement of an obligation which is extinguished
in whole or in part.
This has four (4) requisites:
1. Debt that is existing. You can remit a debt even before it is due.
2. Renunciation must be gratuitous. If renunciation is for a consideration, the mode of

extinguishment may be something else. It may be novation, compromise of dacion en
pago.
3. Acceptance by the debtor.
4. Capacity of the parties.
The form of donation must be observed. If the condonation involves movables, apply Article 748.
If it involves immovables, apply Article 749.
But note that the creditor may just refuse to collect (without observing any form.) In this case, the
OBLIGATION will be extinguished not by virtue of condonation but by waiver under Article 6.
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by
the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation.
FORMS of Condonation:
a. By a Will
Article 935. The legacy of a credit against a third person or of the remission or release of a debt
of the legatee shall be effective only as regards that part of the credit or debt existing at the time
of the death of the testator.
In the first case, the estate shall comply with the legacy by assigning to the legatee all rights of
action it may have against the debtor. In the second case, by giving the legatee an acquittance,
should he request one.
In both cases, the legacy shall comprise all interests on the credit or debt which may be due the
testator at the time of his death.
Article 936. The legacy referred to in the preceding article shall lapse if the testator, after
having made it, should bring an action against the debtor for payment of his debt, even if such
payment should not have been effected at the time of his death.
The legacy to the debtor of the thing pledged by him is understood to discharge only the right of
pledge.
b. By Agreement
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by
the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation.
Article 746. Acceptance must be made during the lifetime of the donor and of the donee.
Article 752. The provision of article 750 notwithstanding, no person may give or receive, by way
of donation, more than he may give or receive by will.
The donation shall be inofficious in all that it may exceed this limitation.
Article 750. The donation may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the support
of himself, and of all relatives who, at the time of the acceptance of the donation are by law
entitled to be supported by the donor. Without such reservation, the donation shall be reduced
on petition of any person affected.
Article 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated exceeds five thousand pesos, the donation and the
acceptance shall be made in writing. Otherwise, the donation shall be void.
Article 749. In order that the donation of an immovable may be valid, it must be made in a
public document, specifying therein the property donated and the value of the charges which the
donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public document,
but it shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.
Presumption in Condonation:
Article 1271. The delivery of a private document, evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation of the action which the former had against the
latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs
may uphold it by providing that the delivery of the document was made in virtue of payment of
the debt.
[Balane:] Articles 1271 and 1272 refer to a kind of implied renunciation when the creditor
divests himself of the proof credit. According to De Diego, this provision is absurd and immoral in
that it authorizes the debtor and his heirs to prove that they paid the debt, when the provision itself
assumes that there has been a remission, which is gratuitous. [Tolentino]
This is Limited to Private Document  Article 1271 has no application to public documents
because there is always a copy in the archives which can be used to prove the credit.
 Private document refers to the original in order for Article 1271 to apply. (Trans-Pacific. v. CA,
supra.)
TRANS-PACIFIC V. CA [234 SCRA 494]
HELD: It may not be amiss to add that Article 1271 raises a presumption, not of payment, but of
the renunciation of the credit where more convincing evidence would be required than what
normally would be called for to prove payment.
The rationale for allowing the presumption of renunciation in the delivery of a private
instrument is that, unlike that of a public instrument, there could be just one copy of the
evidence of credit.
Where several originals are made out of a private document, the intendment of the law would thus
be to refer to the delivery only of the original rather than to the original duplicate of which the
debtor would normally retain a copy. It would thus be absurd if Article 1271 were to be applied
differently.
Article 1272. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the
contrary is proved.
Rule 131, Sec. 5 (b), (j), (k), Rules of Court, Disputable presumptions. The following
presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other
evidence:
xxx
(b) That an unlawful act was done with an unlawful intent;
xxx
(j) That a person found in possession of a thing taken in the doing of a wrongful act is the taker
and doer of the whole act; otherwise, that things which a person possesses, or exercises acts of
ownership over, are owned by him;
(k) That a person in possession of an order on himself for the payment of money, or the delivery
of anything, has paid the money or delivered the thing accordingly;
xxx
Under the 1985 Rules of Court, as amended: Rule 131, Sec. 3. Disputable presumptions.-- The
following presumptions are satisfactory if uncontradicted, but may be contradicted and
overcome by other evidence:
xxx
(c) That a person intends the ordinary consequences of his voluntary act;
xxx
(f) That money paid by one to another was due to the latter;
(g) That a thing delivered by one to another belonged to the latter;
(h) That an obligation delivered up to the debtor has been paid;
(i) That prior rents or installments had been paid when a receipt for the later ones is produced;
(k) That a person in possession of an order on himself for the payment of they money, or the
delivery of anything, has paid the money or delivered the thing accordingly;
xxx
VELASCO V. MASA
Facts: Velasco filed a complaint for the recovery of a sum of money he gave to Masa as a loan, as
contained in a private document. V claims that while he was imprisoned during the Jap occupation,
M coerced and tricked V’s wife into surrendering the doc to M. V filed a criminal case before
against M which was dismissed for lack of jurisdiction. M contends that doc was voluntarily
delivered to him through Osmena. TC dismissed the action.
Issue: WON there was condonation.

Held: Yes. No satisfactory proof as to allegation of coercion and trickery on V’s wife. It is an
unquestionable fact that the instrument proving the debt now claimed passed to the possession of
the Debtor. For this reason, unless the contrary is proven, it must be presumed that in accordance
with the provisions of the law, that delivery was voluntarily made. This fact implies a
renunciation of the action which Cr had for the recovery of his credit. It should be noted that the
doc is of a private nature, the only case subject to the provisions of Articles 1187 to 1189 OCC, so
that a tacit renunciation of the debt may be presumed, in the absence of proof that the doc was
delivered for some other reason than the gratuitous waiver of the debt and the complete extinction
of the obligation to pay.
Effect of Partial Remission:
Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force.
Article 2076. The obligation of the guarantor is extinguished at the same time as that of the
debtor, and for the same causes as all other obligations.
Article 2080. The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter.
(Provisions Common to Pledge and Mortgage)
Article 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
xxx
Article 1274. It is presumed that the accessory obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a
third person who owns the thing.
[Balane]
The accesory obligation of pledge is extinguished because pledge is a possessory lien.
 The presumption in this case is that the pledgee has surrendered the thing pledged to the
pledgor. This is not a conclusive presumption according to Article 2110, par. 2.
Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to
constitute the contract of pledge, that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement.
Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a proper case.
4TH MODE OF EXTINGUISHMENT:
Confusion or Merger of Rights
Article 1275. The obligation is extinguished from the time the characters of creditor and debtor
are merged in the same person.
[Balane]
 Confusion is the meeting in one person of the qualities of the creditor and debtor with
respect to the same obligation.
There are two (2) requisites:
1. It must take place between the creditor and the principle debtor (Article 1276.)
2. The very same obligation must be involved.
Rationale  You become your own creditor or you become your own debtor. So how can you sue
yourself?
What may cause a merger or confusion?
(1) Succession, whether compulsory, testamentary or intestate;
(2) Donation;
(3) Negotiation of a negotiable instrument.
 Because of its nature, confusion/ merger may overlap with other causes of extinguishment.
For example, I owe Ms. Olores P100,000. She bequeath to me that credit. And then she died. In
this case, there is extinguishment both by merger. But in this case, merger could overlap with
payment.
Article 1276 (below) is perfectly in consonance with Article 1275.
a. Principal Parties
Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits
the guarantors. Confusion which takes place in the person of any of the latter does not
[Tolentino]
 Extinguishment of the principal obligation through confusion releases the guarantors,

whose obligation is merely accessory.
 When merger takes place in the person of the guarantor, obligation is NOT extinguished.
b. Among guarantors
(Effects of Guaranty as Between Co-Guarantors)
Article 2073. When there are two or more guarantors of the same debtor and for the same debt,
the one among them who has paid may demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, including
the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made in virtue
of a judicial demand or unless the principal debtor is insolvent.
c. Joint Obligations
Article 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
d. Solidary Obligations
Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall
be liable to the others for the share in the obligation corresponding to them.
had been totally paid by anyone of them before the remission was effected.
Article 1216. The creditor may proceed against any of one of the solidary debtors or some or all
of them simultaneously. The demand made against one of them shall not be an obstacle to those
collected.
Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made. If the payment is made before the debt is
due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the
debt of each.
e. Indivisible Obligations
their collective acts, and the debt can be enforced only by proceeding against all the debtors. If
one of the latter should be insolvent, the others shall not be liable for his share.
Article 1224. A joint indivisible gives rise to indemnity for damages from the time anyone of the
debtors does no comply with his undertaking. The debtors who may have been ready to fulfill
their promises shall not contribute to the indemnity beyond the corresponding portion of the
price of the thing or of the value of the service in which the obligation consists.
Compensation
Article 1278. Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.
[Balane]
 Compensation is a mode of extinguishing, to the concurrent amount, the obligations of

those persons who in their own right are reciprocally debtors and creditors of each other.
[Castan]
 Perhaps, next to payment, compensation is the most common mode of extinguishing an

obligation.
Distinguished from Confusion  In compensation, there are 2 parties and 2 debts, whereas in
confusion, there are 2 debts and only 1 party.
CASES:
Case: BPI vs. CA, Annabelle Salazar and Julio Templonuevo, January 25, 2007, J. Azcuna.
Facts: A.A. Salazar Construction and Engineering Services, being substituted by Annabelle
Salazar filed an action for sum of money with damages against BPI for the recovery of the amount
worth P267, 707.70 debited by BPI from her account. BPI, however alleged that one
Templonuevo, third-party defendant demanded from the former payment of the amount worth 267,
692.50 representing the aggregate value of 3 checks allegedly payable to him which were
deposited with BPI to herein respondent Salazar’s account without Templonuevo’s knowledge and
corresponding endorsement. Heeding to this allegation, BPI froze the account purporting to
Salazar.
The bank found Salazar was not entitled to the account for lack of endorsement thereon by her
which prompted it to debit the amount from the former’s account and the sum worth P267, 692.50
was paid to Templonuevo by means of cashier’s check. The difference between the value
represented bank charges in connection with the issuance of a cashier’s check to Templonuevo.
RTC however, ruled in favor of Salazar and was affirmed by the CA saying that there was no
ineffective payment to Salazar which would call for the exercise of petitioner’s right to set off
against the BPI bank deposits. Hence, BPI filed this petition contending thet the CA committed
reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the Civil Code
in favor of BPI regarding COMPENSATION arguing that the deduction of the subject amount
from Salazar’s account, BPI was merely rectifying the undue payment it made upon the checks and
exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its
business.
Issue: Whether or not compensation under the Civil Code is proper in this case.
Held: YES. The right of set-off was explained in Associated Bank v. Tan: A bank generally has
a right of set-off over the deposits therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin
with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple
loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when
all the requisites mentioned in Article 1279 are present," as follows:
(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.
While, however, it is conceded that petitioner had the right of set-off over the amount it
paid to Templonuevo against the deposit of Salazar, the issue of whether it acted
judiciously is an entirely different matter. As businesses affected with public interest, and
because of the nature of their functions, banks are under obligation to treat the accounts of their
depositors with meticulous care, always having in mind the fiduciary nature of their relationship.
In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its
depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious
lack of indorsement thereon, petitioner permitted the encashment of these checks three times on
three separate occasions. This negates petitioner’s claim that it merely made a mistake in
crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the
CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in
paying the same, contrary to ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it,
for the purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field, and the law
thus holds it to a high standard of conduct. The taking and collection of a check without the
proper indorsement amount to a conversion of the check by the bank.
More importantly, however, solely upon the prompting of Templonuevo, and with full
knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the
account held in the name of the sole proprietorship of Salazar without even serving due notice
upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the
account would remain untouched, pending the resolution of the controversy between her and
Templonuevo.
For the above reasons, the Court finds no reason to disturb the award of damages granted by
the CA against petitioner. This whole incident would have been avoided had petitioner adhered
to the standard of diligence expected of one engaged in the banking business. A depositor has the
right to recover reasonable moral damages even if the bank’s negligence may not have been
attended with malice and bad faith, if the former suffered mental anguish, serious anxiety,
embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at the
expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The
award of exemplary damages is justified, on the other hand, when the acts of the bank are
attended by malice, bad faith or gross negligence. The award of reasonable attorney’s fees is
proper where exemplary damages are awarded. It is proper where depositors are compelled to
litigate to protect their interest.
GAN TION vs. CA and ONG WAN SIENG [28 SCRA 235, 1969] – Award of attorney’s fees is
proper subject of legal compensation.
FACTS: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. Gan filed an
ejectment case against Ong in 1961 for non-payment of rentals for 2 months total of P360. Ong
denied and said that agreed rental was not 180 but 160 which he offered but was refused by Gan.
The trial court favored plaintiff-Gan. While the Appellate court reversed and ordered plaintiff-Gan
to pay Attoerney’s fees of P500. This became final.
When Ong obtained writ of execcution, Gan Tion went to the appellate court and pleaded legal
compensation averring that Ong owed him more than P4K in rentals from Aug ’61 to Oct. ’63.
The Appellate Court said that attorney’s fees may not be legally compensated because such
constitute trust fund for benefit of lawyer. And the requisites of Article 1278 not complied with.
ISSUE: WON there was legal compensation between Gan Tion and Ong Wan Sieng.
HELD: YES. The award of attorney’s fees is in favor of litigant not of his counsel, thus litigant is
judgment creditor who may enforce judgment by execution. Such is credit therefore which can be
proper subject of legal compensation.
PNB VS. GLORIA ONG ACERO, ET AL. [148 SCRA 166, 1987]- There is no compensation
where the parties are not creditors and debtors of each other.
FACTS: Savings account of ISABELA Construction and Wood Development Corporation with
the PNB of P2M is subject of 2 conflicting claims – that of the Aceros, as judgment creditor of
ISABELA and of PNB as creditor of the depositor due to a loan or credit agreement by ISABELA
with PNB the deposit being the collateral. IAC decided against PNB.
ISSUE: WON by operation of Article 1278, PNB and ISABELA has become here debtors and
creditors of each other.
HELD: NO. PNB's main thesis is that when it opened a savings account for ISABELA on March
9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. 11 So that
when ISABELA itself subsequently came to be indebted to it on account of ISABELA's breach
of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB
became at the same time creditors and debtors of each other, compensation automatically took
place between them, in accordance with Article 1278 of the Civil Code. The amounts due from
each other were, in its view, applied by operation of law to satisfy and extinguish their respective
credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in
payment and extinguishment of PNB's own credit against ISABELA. This having taken place,
that amount of P2M could no longer be levied on by any other creditor of ISABELA, as the
ACEROS attempted to do in the case at bar, in order to satisfy their judgment against ISABELA.
Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two
persons, in their own right, are creditors and debtors of each other." Also true is that
compensation may transpire by operation of law, as when all the requisites therefor, set out in
Article 1279, are present. Nonetheless, these legal provisions can not apply to PNB's
advantage under the circumstances of the case at bar.
The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC that it has
not proven by competent evidence that it is a creditor of ISABELA. The only evidence presented
by PNB towards this end consists of 2 documents marked in its behalf. But as the IAC has
cogently observed, these documents do not prove any indebtedness of ISABELA to PNB. All they
do prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the
credit was ever availed of [by ISABELA's foreign correspondent (MAN)], or that the goods
thereby covered were in fact shipped, and received by ISABELA.
ENGRACIO FRANCIA VS. IAC, HO FERNANDEZ[162 SCRA 753]- [T]here can be no

off-setting of taxes against the claims that the taxpayer may have against the government.
FACTS: ENGRACIO FRANCIA is the registered owner of a lot and 2-storey house in Pasay
City, a portion of which lot was subject of expropriation by the Republic of the Philippines, with
just compensation computed at its assessed value. From 1963 to 1977, Francia has not paid real
property taxes on the property. Thus, such was sold on public auction by the City Treasurer of
Pasay City pursuant to Sec. 73 PD 464 Real Property Tax Code to satisfy his delinquency. Ho
Fernandez was the highest bidder. In 1979 Francia received notice that Ho wants the TCT
transferred to him after a Final Bill of Sale was issued to him. Francia filed a complaint to annul
the auction sale stating that Francia contends that his tax delinquency of P2,400.00 has been
extinguished by legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-
off by operation of law as of October 15, 1977. He was in Iligan at that time, but such was
dismissed and court ordered Register of Deed to effect the transfer of title, and for him to pay Ho
attorney’s fees. IAC affirmed.
ISSUE: WON Francia’s tax delinquency of P2,400 has been set-off by the government’s
indebtedness to him of P4,116 after a portion of his lot was expropriated.
HELD: NO. There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The
general rule based on grounds of public policy is well-settled that no set-off admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because
he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that:
"... internal revenue taxes can not be the subject of compensation: Reason: government and
taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil
Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off."
Article 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of payment.
A. Different Kinds of Compensation:
Legal Compensation (Articles 1279, 1290) which takes place automatically by operation of law
once all the requisites are present.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
(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;
(5) That over neither of them there by any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
[Balane]
Requisites under Article 1279:
1. Mutual Debtors and Creditors  The parties must be mutually debtors and creditors (1) in
their own right, and (2) as principals. There can be no compensation if 1 party occupies
only a representative capacity. Likewise, there can be no compensation if in one
obligation, a party is a principal obligor and in another obligation, he is a guarantor.
2. Fungible Things Due  The word consumable is wrong. Under Article 418, consumable
things are those which cannot be used in a manner appropriate to their nature without their
being consumed. In a reciprocal obligation to deliver horses, the things due are not
consumable; yet there can be compensation. (Tolentino) The proper terminology is
"fungible" which refers to things of the same kind which in payment can be substituted for
another.
3. Maturity of Debts  Both debts must be due to permit compensation.
4. Demandable and Liquidated Debts  Tolentino: Demandable means that the debts are
enforceable in court, there being no apparent defenses inherent in them. The obligations
must be civil obligations, excluding those that are purely natural. xxx Before a judicial
decree of rescission or annulment, a rescissible or voidable debt is valid and demandable;
hence, it can be compensated.
A debt is liquidated when its existence and amount are determined. xxx And a debt is
considered liquidated, not only when it is expressed already in definite figures which do not require
verification, but also when the determination of the exact amount depends only on a simple
arithmetical operation. xxx
 The debt must not have been garnished. (additional requirement)
Compensation is not prohibited by any provision of law like Articles 1287, 1288 and 1794.
Article 1287. Compensation shall not be proper when one of the debts arises from a depositum
or from the obligations of a depositary or of a bailee in commodatum. (facultative
compensation)
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of article 301.
Article 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense.
Article 1794. Every partner is responsible to the partnership for damages suffered by it through
his fault, and he cannot compensate them with the profits and benefits which he may have
earned for the partnership by his industry. However, the courts may equitably lessen this
responsibility if through the partner's extraordinary efforts in other activities of the partnership,
unusual profits have been realized.
CASES:
REPUBLIC V. DE LOS ANGELES [98 SCRA 103]- Compensation of debts arising even
without proof of liquidation of claim is allowable where the claim is undisputed.
FACTS: Spouses FARIN got a loan from MARCELO STEEL CORP of P600k and did a Real
Estate Mortgage of their lot in Quezon City as security in favor of MARCELO STEEL. A year
later MARCELO STEEL asked sheriff assistant in extrajudicial foreclosure of the real estate
mortgage of such lot. Spouses Farin filed for injunction and succeeded. Thus, MARCELO STEEL
invoked par. 5 in the mortgage contract and asked the court instead to compel the lessees of “Dona
Petra Bldg” situated on the mortgaged lot, including the Rice and Corn Admin (RCA), to direct
their rental payments to MARCELO STEEL. Such an order was issued by the court. RCA filed an
Motion for Reconsideration praying to be excluded from such order because Spouses Farin has a
standing OBLIGATION with RCA which should be set-off with their rental OBLIGATIONS, thus
rents of RCA has been previously assigned by Spouses Farin to Vidal Tan. Spouses Farin also filed
Motion for Reconsideration asking the court to exclude lessees of the bldg from such order as they
are not parties to the case. The trial court denied both MR and granted motion of Spouses Farin for
RCA to release rentals incurred for repair of the bldg. Trial Court ratiocinated that RCA never
presented any proof of Farin’s indebtedness which it wants to offset with its rentals.
ISSUE: WON Respondent Judge erred in denying claim of RCA that compensation of debts has
taken place because records showed no proof of plaintiffs’ indebtedness to RCA.
HELD: YES. Proof of the liquidation of a claim, in order that there be compensation of
debts, is proper if such claim is disputed. But, if the claim is undisputed, as in the case at bar,
the statement is sufficient and no other proof may be required. xxx In the instant case, RCA’s
claim of Petra’s obligation to RCA was raised by RCA in its motion dated Dec. 23, 1967. The
silence of Petra, although the declaration is such as naturally one to call for action or comment if
not true, could be taken as an admission of the existence and validity of such a claim. Since RCA’s
claim is undisputed, proof of its liquidation is not necessary.
LORETO SOLINAP VS. HON. DEL ROSARIO AND SPOUSES JUANITO AND
HARDEVI LUTERO AND THE PROVINCIAL SHERRIF OF ILOILO [123 SCRA 640]-
Compensation cannot take place where one's claim against the other is still the subject of court
litigation. It is a requirement, for compensation to take place, that the amount involved be
certain and liquidated.
FACTS: SPOUSES TIBURCIO LUTERO and ASUNCION MAGALONA, owners of Hacienda

Tambal, leased such to LORETO SOLINAP for 10 years with rental of P50K/year, further agreed
that half of annual rental would be paid by Solinap to PNB as amortization on indebtedness of
Spouses Lutero. When Tiburcio died, testate estate proceedings was instituted at CFI-Iloilo which
authorized the administrator of estate, Judge Nicolas Lutero, the grandson of decedent, to take
from the heirs its obligation with PNB with right of subrogation. After compliance, the heirs who
paid subjugated to the PNBs claim against lessee Solinap for payment of rentals. Solinap instituted
a separate action against Spouses Lutero, the administrator, who allegedly owed Solinap P71K
with Real Estate Mortgage as security. In this case, Spouses Lutero setup a counterclaim of P125K
in unpaid rentals of petitioner on Hacienda Tambal. An order thereafter in the estate proceedings
ordered Solinap to reimburse to Spouses Lutero P25,000 plus interest. Solinap raises the defense of
compensation.
ISSUE: WON the trial court erred in not holding that legal compensation has taken place in these
cases by operation of Article 1278.
HELD: NO. Petitioner contends that respondent judge gravely abused her discretion in not
declaring the mutual obligations of the parties extinguished to the extent of their respective
amounts. He relies on Article 1278 to the effect that compensation shall take place when 2
persons, in their own right, are creditors and debtors of each other. The argument fails to
consider Article 1279 which provides that compensation can take place only if both
obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros
is still pending determination by the court. While it is not for us to pass upon the merits of the
plaintiff's cause of action in that case, it appears that the claim asserted therein is disputed by the
Luteros on both factual and legal grounds. More, the counterclaim interposed by them, if
ultimately found to be meritorious, can defeat petitioner's demand. Upon this premise, his claim in
that case cannot be categorized as liquidated credit which may properly be set-off against his
obligation. Compensation cannot take place where one's claim against the other is still the
subject of court litigation. It is a requirement, for compensation to take place, that the amount
involved be certain and liquidated.
FRANCISCO SYCIP VS. CA AND PEOPLE OF THE PHILIPPINES [134 SCRA 317]-
Compensation cannot take place where, with respect to the money involved in the estafa case,
the complainant was merely acting as agent of another. In set-off the two persons must in their
own right be creditor and debtor of each other
FACTS: JOSE LAPUZ received from ALBERT SMITH 2,000 shares of stock of REPUBLIC
FLOUR MILLS in the name of Dwight Dill who left for Honolulu. Jose was suppose to sell his
shares at market value from which he would get commission. According to Jose, Francisco Sycip
approached him and volunteered to sell the shares. A Special Power of Attorney was granted by
Dill to Lapuz, for the latter to transact with Sycip. Series of their transactions were duly paid for
and transferred. But the later payments were pocketed by Sycip with checks paid by him having
been dishonored for insufficiency of funds. Estafa case was filed against Sycip which the latter was
convicted ordering him to pay Lapuz P8,000. But Sycip contended that there is compensation
because Lapuz owes him more than P5,000.
ISSUE: WON CA erred in not applying Article 1278-79 despite evidence showing Lapuz’
indebtedness to pet. Sycip.
HELD: NO. Petitioner contends that respondent CA erred in not applying the provisions on
compensation or setting-off debts under Article 1278 and 1279, despite evidence showing that Jose
Lapuz still owed him an amount of more than P5,000 and in not dismissing the appeal considering
that the latter is not legally the aggrieved party.
This contention is untenable. Compensation cannot take place in this case since the evidence shows
that Jose Lapuz is only an agent of Albert Smith and/ or Dr. Dwight Dill. Compensation takes
place only when two persons in their own right are creditors and debtors of each other, and that
each one of the obligors is bound principally and is at the same time a principal creditor of the
other. Moreover, xxx Lapuz did not consent to the off-setting of his obligation with
petitioner's obligation to pay for the 500 shares.
COMPANIA MARITIMA vs. CA and PAN ORIENTAL SHIPPING CO. [135 SCRA 593]-
Compensation cannot take place where one of the debts is not liquidated as when there is a
running interest still to be paid thereon.
FACTS: FERNANDO FROILAN purchased from SHIPPING ADMINISTRATION a boat for

200K, and paid downpayment of 50K, while he constituted a mortgage on the vessel for the unpaid
balance. However, Froilan defaulted in payment of the balance and interests as well as insurance
premiums on the vessel which was paid for by the SHIPPING ADMINISTRATION (SA).
Thus, SA took immediate possession of the vessel as well as its cargoes, with claim that the vessel
is not repossessed but its ownership is retransferred to the SA/government.
PAN ORIENTAL offered to charter the same vessel with monthly rental of 3K, which the
government agreed with further stipulation that charterer will pay cost of labor, dry-docking and
repairs, including spare parts needed. Froilan protested to the charter agreement.
Before formal bareboat charter was to be approved by General Manager of SA, a Cabinet
resolution was issued revoking the cancellation of the contract of Sale to Froilan, restored him to
all his rights, on condition he will pay at least 10K to settle partially his outstanding accounts, to
reimburse Pan Oriental of its expenses incurred, and file a bond to cover the rest of his undertaking
with the government. After posting his bond, court ordered to restore Froilan’s possession of the
vessel. Pan Oriental resisted. COMPANIA MARITIMA as purchaser of the vessel from Froilan
was allowed to be intervenor.
ISSUE: WON the Court erred in holding that Froilan, Compania and Government should pay Pan
Oriental reimbursements of its legitimate expenses with legal interest from the time of
disbursement, instead of from the date of dispossession, failing to consider legal compensation
between RP and Pan Oriental.
HELD: NO. More, the legal interest payable from 2/3/51 on the sum of P40,797.54,
representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated since
interest does not stop accruing "until the expenses are fully paid." Thus, we find without basis
REPUBLIC'S allegation that PAN-ORIENTAL'S claim in the amount of P40,797.54 was
extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to
P59,500 while the expenses reach only P40,797.54. Deducting the latter amount from the former,
REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC.
That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the
legal rate of interest "from Feb. 3, 1951 until fully paid."
INTERNATIONAL CORPORATE BANK INC. (ICB) VS. IAC, NATIVIDAD FAJARDO,

SILVINO PASTRANA as Deputy and Special Sheriff [163 S 296]- Requisite of legal
compensation under Article 1279. The requirement that debts must be liquidated and
demandable has not yet been met since the validity of the extrajudicial foreclosure and
petitioner’s claim for deficiency is still in question. Here, the case is still pending for the
annulment of sheriff’s sale on extrajudicial foreclosure of respondent property from which there
is an alleged deficiency.
FACTS: NATIVIDAD PAJARDO secured from Investment Underwiriting and ATRIUM Capital,
predecessors of ICB, a loan of P50M, which she secured with Real Estate Mortgage of her
properties in Quiapo and Bulacan with total market value of 110M. However, only 30M of the loan
was approved for release which same amount went to pay her standing OBLIGATIONS with the
same bank, thus she did not receive the same amount. She also made a money-market placement
with ATRIUM of more than P1M at 17% interest for 32 days. At maturity, proceeds of such was
not released to her but instead allegedly applied to her mortgaged indebtedness which she failed to
pay. Her properties were auctioned and Atrium being the sole bidder, acquired them only at 20M
in all. At the end she is still indebted in the amount of P6.81M.
She thus filed a complaint with the trial court for annulment of the sheriff’s sale of her mortgaged
properties the debt not yet being due and demandable, the release of the balance of her loan of
P30M, and recovery of the proceeds of her money-market investments.
The IAC ordered ICB to pay plaintiff Fajardo the proceeds of her money-market investments. CA
affirmed. On execution, ICB’s 20 motor vehicles were levied upon, and upon motion by plaintiff,
its branches were ordered to pay.
Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as
deficiency the amount of P6.81 million against which it has the right to apply or set off private
respondent's money market claim of P1,062,063.83.
ISSUE: WON there was legal compensation in this case, that after petitioner foreclosed the
mortgage, upon the deficiency amount, it still has the right to setoff plaintiff’s money-market
investments proceeds.
HELD: NO. The argument is without merit. Compensation shall take place when two persons, in
their own right are creditors and debtors of each other. When all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of law, even without the consent or
knowledge of the debtors. (Article 1290.)
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 neither clear nor liquidated;
compensation cannot extend to unliquidated, disputed claim arising from breach of contract.
There can be no doubt that petitioner is indebted to private respondent in the amount of
P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But
whether private respondent is indebted to petitioner in the amount of P6.81 million representing the
deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to
her, is vigorously disputed. This circumstance prevents legal compensation from taking place.
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may owe the principal debtor.
Article 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount thereof.
Effect of Legal Compensation:
Article 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation.
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.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
(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;
(5) That over neither of them there by any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
MINDANAO PORTLAND CEMENT CORPORATION (MPCC) VS. CA, PACWELD

STEEL CORPORATION AND ATTY. CASIANO LAQUIHON [120 SCRA 930]- Automatic
compensation requires present extinguishment of two debts arising from final and executory
judgments due to compensation by operation of law.
FACTS: Atty. Laquihon, in behalf of 3rd party defendant Pacweld Steel Corp. filed a Motion to
direct payment of attorney’s fees to counsel invoking the fact that MPCC was adjudged to pay
Pacweld 10K in attorney’s fees. MPCC opposed this motion stating that such amount is
compensated with an equal amount it is entitled from Pacweld after the latter is also adjudged by
same CFI-Manila in another case to pay to MPCC. The Court issued the motion of Atty. Laquihon
and denied the MR of MPCC.
ISSUE: WON Trial Court erred in not holding the 2 judgment debts of the 2 corporations against
each other mutually compensated.
HELD: YES. It is clear from the record that both corporations, petitioner Mindanao Portland
Cement Corp. (appellant) and respondent Pacweld Steel Corp. (appellee), were creditors and
debtors of each other, their debts to each other consisting in final and executory judgments of the
CFI in 2 separate cases, ordering the payment to each other of the sum of P10K by way of
attorney's fees. The 2 obligations, therefore, respectively offset each other, compensation having
taken effect by operation of law and extinguished both debts to the concurrent amount of P10T,
pursuant to the provisions of Article 1278, 1279 and 1290, since all the requisites provided in
Article 1279 for automatic compensation even though the creditors and debtors are not
aware of the compensation were duly present.
Automatic compensation, requisites of, present  Extinguishment of two debts arising from
final and executory judgments due to compensation by operation of law.
Facultative Compensation which takes place when compensation is claimable by only one of
the parties but not of the other, e.g., Articles 1287, 1288.
Article 1287. Compensation shall not be proper when one of the debts arises from a depositum
or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of article 301.
Article 301. The right to receive support cannot be renounced; nor can it be transmitted to a
third person. Neither can it be compensated with what the recipient owes the obligor.
However, support in arrears may be compensated and renounced, and the right to demand the
same may be transmitted by onerous or gratuitous title.
[Baviera]
Note that Article 301 of the NCC is not found in Family Code.
Future support cannot be compensated.

Thus, a father who paid damages for son’s quasi-delict cannot claim compensation by not giving
support to his son. However under Article 301, support IN ARREARS may be compensated and
renounced and the right to demand the same may be transmitted by onerous or gratuitous title.
[Balane]
 The depositary cannot set up compensation with respect to the things deposited to him.
 But the depositor can set up the compensation.
Article 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense.
[Baviera]
The obligation of the depositary to return a specific thing cannot be compensated or substituted by
delivery of a thing of the same kind.
Q: If there is an obligation of the depositary to the depositor for damages (already liquidated
and demandable) in case of negligence and if the depositor owes the depositary a sum of
money, can there be set-off?
A: No, since it arose out of a deposit. Not allowed by law. But it could be a way of creditor to
collect a bad debt.
Article 1794. Every partner is responsible to the partnership for damaged suffered by it through
his fault, and he cannot compensate them with the profits and benefits which he may have
earned for the partnership by his industry. However, the courts may equitably lessen this
responsibility if through the partner’s extraordinary efforts in other activities of the partnership,
unusual profits have been realized.
Contractual/ Conventional compensation which takes place when parties agree to set-off even if
the requisites of legal compensation are not present, e.g., Article 1282. (Baviera OL: F. Comp 1.
Kinds a. Voluntary)
Article 1282. The parties may agree upon the compensation of debts which are not yet due.
[Tolentino]
1. Voluntary Compensation is not limited to obligations which are not yet due. The parties
may compensate by agreement any obligations, in which the objective requisites provided
for legal compensation are not present. xx
2. Judicial Compensation when decreed by the court in a case where there is a counterclaim,
such as that provided in Article 1283. (Baviera OL: F. Comp 1. Kinds b. Judicial)
Article 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount thereof.
[Baviera] What is the idea behind legal compensation?
It is to facilitate collection of money or for expediency.
Effect of Assignment of Credit:
Article 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the time he
gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation
of all credits prior to the same and also later ones until he had knowledge of the assignment.
[Balane]
There are 3 situations covered in this Article:
1. Assignment with the debtor's consent;
2. Assignment with the debtor's knowledge but without his consent; and
3. Assignment without the debtor's knowledge (and obviously without his consent.)
Rules:
Assignment with the debtor's consent  Debtor cannot set up compensation at all unless the
right is reserved.
Assignment with the debtor's knowledge but without his consent  The debtor can set up
compensation with a credit already existing at the time of the assignment.
Assignment without the debtor's knowledge  Debtor can set up as compensation any credit
existing at the time he acquired knowledge even if it arose after the actual assignment.
Article 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided.
Novation
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
[TOLENTINO]
Novation is the extinguishment of an obligation by the substitution or change of the obligation by

a subsequent one which extinguishes or modifies the first, either by changing the object of
principal conditions, or by substituting the person of the debtor, or by subrogating a third person in
the rights of the creditor. (Manresa)
 Novation is the most unusual mode of extinguishing an obligation.
 It is the only mode whereby an obligation is extinguished and a new obligation is created to take
its place.
The other modes of extinguishing an obligation are absolute in the sense that the extinguishment of
the obligation is total (with the exception of compromise.)
Novation, on the other hand, is a relative mode of extinguishing an obligation.
Classification of Novation:
1. Subjective (Personal) or novation by a change of subject
2. Active subjective or a change of creditor; also known as subrogation.
3. Passive subjective or a change of debtor
4. Objective (Real) or novation by change in the object or in the principal conditions.
 Novation by a change in the principal conditions is the most problematic kind of

novation because you have to determine whether or not the change in the conditions
is principal or merely incidental.
 For example, a change from straight terms to installment terms and a change from
non-interest bearing obligation to an interest bearing one are changes in the
principal conditions.
5. Mixed novation which is a combination of both subjective and objective novation.
Requisites of Novation:
1. There must be a previous valid obligation;
2. Agreement of the parties to create the new obligation;
3. Extinguishment of the old obligation. (I would consider this an effect, rather than a
requisite of novation-- Balane);
4. Validity of the new obligation. (Tiu Siuco v. Habana, 45 P 707.)
5. There must be CONSENT of all the parties to the substitution, resulting in the extinction of
the old obligation and the creation of a valid one.
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.
[TOLENTINO]
 Novation is NEVER presumed.
It must be established that 
1. the old and the new contracts are incompatible in all points,
2. or that the will to novate appear by express agreement of the parties
3. or in acts of equivalent import.
IMPLIED NOVATION  There is no specific form required for an implied novation. All that is
required is INCOMPATIBILITY between the original and the subsequent contracts.
 A mere extension of the term of payment does not result in novation, for the period affects
only the performance, not the creation of the obligation
CASES:
Case: Japan Airlines vs. Jesus Simangan, April 22, 2008, J. R.T. Reyes.
Facts: In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin,
Loreto Simangan, in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon
request of UCLA, respondent undertook a series of laboratory tests at the National Kidney
Institute in Quezon City to verify whether his blood and tissue type are compatible with
Loreto's.6 Fortunately, said tests proved that respondent's blood and tissue type were well-
matched with Loreto's.7
Respondent needed to go to the United States to complete his preliminary work-up and donation
surgery. Hence, to facilitate respondent's travel to the United States, UCLA wrote a letter to the
American Consulate in Manila to arrange for his visa. In due time, respondent was issued an
emergency U.S. visa by the American Embassy in Manila.8
Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from
petitioner JAL for US$1,485.00 and was issued the corresponding boarding pass.9 He was
scheduled to a particular flight bound for Los Angeles, California, U.S.A. via Narita, Japan.10
On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport
in the company of several relatives and friends.11 He was allowed to check-in at JAL's
counter.12 His plane ticket, boarding pass, travel authority and personal articles were subjected to
rigid immigration and security routines.13 After passing through said immigration and security
procedures, respondent was allowed by JAL to enter its airplane.14
While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel
document and imputed that he would only use the trip to the United States as a pretext to stay
and work in Japan.15 The stewardess asked respondent to show his travel documents. Shortly
after, the stewardess along with a Japanese and a Filipino haughtily ordered him to stand up and
leave the plane.16 Respondent protested, explaining that he was issued a U.S. visa. Just to allow
him to board the plane, he pleaded with JAL to closely monitor his movements when the aircraft
stops over in Narita.17 His pleas were ignored. He was then constrained to go out of the plane. 18In
a nutshell, respondent was bumped off the flight.
Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane
took off and he was left behind. 19 Afterwards, he was informed that his travel documents were,
indeed, in order.20 Respondent was refunded the cost of his plane ticket less the sum of
US$500.00 which was deducted by JAL.21 Subsequently, respondent's U.S. visa was cancelled.22
Displeased by the turn of events, respondent filed an action for damages against JAL with the
Regional Trial Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He
claimed he was not able to donate his kidney to Loreto; and that he suffered terrible
embarrassment and mental anguish.23 He prayed that he be awarded P3 million as moral
damages, P1.5 million as exemplary damages and P500,000.00 as attorney's fees.24
JAL denied the material allegations of the complaint. It argued, among others, that its failure to
allow respondent to fly on his scheduled departure was due to "a need for his travel documents to
be authenticated by the United States Embassy"25 because no one from JAL's airport staff had
encountered a parole visa before.26 It posited that the authentication required additional time; that
respondent was advised to take the flight the following day, July 30, 1992. JAL alleged that
respondent agreed to be rebooked on July 30, 1992. RTC ruled in favor of Simangan. Stating
that,
The RTC explained:
In summarily and insolently ordering the plaintiff to disembark while the latter was
already settled in his assigned seat, the defendant violated the contract of carriage; that
when the plaintiff was ordered out of the plane under the pretext that the genuineness of
his travel documents would be verified it had caused him embarrassment and besmirched
reputation; and that when the plaintiff was finally not allowed to take the flight, he
suffered more wounded feelings and social humiliation for which the plaintiff was asking
to be awarded moral and exemplary damages as well as attorney's fees.
The reason given by the defendant that what prompted them to investigate the
genuineness of the travel documents of the plaintiff was that the plaintiff was not then
carrying a regular visa but just a letter does not appear satisfactory. The defendant is
engaged in transporting passengers by plane from country to country and is therefore

conversant with the travel documents. The defendant should not be allowed to pretend, to
the prejudice of the plaintiff not to know that the travel documents of the plaintiff are
valid documents to allow him entry in the United States.
The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in his
assigned seat clearly demonstrated that the defendant breached its contract of carriage with the
plaintiff as passenger in bad faith and as such the plaintiff is entitled to moral and exemplary
damages as well as to an award of attorney's fees. CA affirmed with modification stating thus,
While the protection of passengers must take precedence over convenience, the implementation
of security measures must be attended by basic courtesies.
In fact, breach of the contract of carriage creates against the carrier a presumption of
liability, by a simple proof of injury, relieving the injured passenger of the duty to
establish the fault of the carrier or of his employees; and placing on the carrier the burden
to prove that it was due to an unforeseen event or toforce majeure.
That appellee possessed bogus travel documents and that he might stay illegally in Japan
are allegations without substantiation. Also, appellant's attempt to rebook appellee the
following day was too late and did not relieve it from liability. The damage had been
done. Besides, its belated theory of novation, i.e., that appellant's original obligation to
carry appellee to Narita and Los Angeles on July 29, 1992 was extinguished by novation
when appellant and appellant agreed that appellee will instead take appellant's flight to
Narita on the following day, July 30, 1992, deserves little attention. It is inappropriate at
bar. Questions not taken up during the trial cannot be raised for the first time on
appeal.40 (Underscoring ours and citations were omitted)
Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of

common carriage, inattention and lack of care on the part of the carrier resulting in the failure of
the passenger to be accommodated in the class contracted for amounts to bad faith or fraud
which entitles the passengers to the award of moral damages in accordance with Article 2220 of
the Civil Code."42
Nevertheless, the CA modified the damages awarded by the RTC.
Issue: Whether or not JAL is correct when it used as a defense NOVATION in not being liable for
breach of contract of carriage.
Held: NO. That respondent purchased a round trip plane ticket from JAL and was issued the
corresponding boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel authority
and personal articles were subjected to rigid immigration and security procedure.50 After passing
through said immigration and security procedure, he was allowed by JAL to enter its airplane to
fly to Los Angeles, California, U.S.A. via Narita, Japan. 51 Concisely, there was a contract of
carriage between JAL and respondent.
Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29,
1992. He was not allowed by JAL to fly. JAL thus failed to comply with its obligation under the
contract of carriage.
JAL justifies its action by arguing that there was "a need to verify the authenticity of
respondent's travel document."52 It alleged that no one from its airport staff had encountered a
parole visa before.53 It further contended that respondent agreed to fly the next day so that it
could first verify his travel document, hence, there was novation.54 It maintained that it was not
guilty of breach of contract of carriage as respondent was not able to travel to the United States
due to his own voluntary desistance.55
We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a
need to first check the authenticity of his travel documents with the U.S. Embassy. 56 As admitted
by JAL, "the flight could not wait for Mr. Simangan because it was ready to depart."57
Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no
choice but to be left behind. The latter was unceremoniously bumped off despite his protestations
and valid travel documents and notwithstanding his contract of carriage with JAL. Damage had
already been done when respondent was offered to fly the next day on July 30, 1992. Said offer
did not cure JAL's default.
Considering that respondent was forced to get out of the plane and left behind against his will, he
could not have freely consented to be rebooked the next day. In short, he did not agree to the
alleged novation. Since novation implies a waiver of the right the creditor had before the
novation, such waiver must be express.58 It cannot be supposed, without clear proof, that
respondent had willingly done away with his right to fly on July 29, 1992.
Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that
JAL personnel imputed that respondent would only use the trip to the United States as a pretext
to stay and work in Japan.59
Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal
articles already passed the rigid immigration and security routines, 60 JAL, as a common carrier,
ought to know the kind of valid travel documents respondent carried. As provided in Article
1755 of the New Civil Code: "A common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with
a due regard for all the circumstances."61 Thus, We find untenable JAL's defense of "verification
of respondent's documents" in its breach of contract of carriage.
It bears repeating that the power to admit or not an alien into the country is a sovereign act which
cannot be interfered with even by JAL.62
In an action for breach of contract of carriage, all that is required of plaintiff is to prove the
existence of such contract and its non-performance by the carrier through the latter's failure to
carry the passenger safely to his destination.63 Respondent has complied with these twin
requisites.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals
is AFFIRMED WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered to
pay respondent Jesus Simangan the following: (1) P500,000.00 as moral damages;
(2) P100,000.00 as exemplary damages; and (3) P200,000.00 as attorney's fees.
The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of
judgment of the Regional Trial Court on September 21, 2000 until the finality of this Decision.
From the time this Decision becomes final and executory, the unpaid amount, if any, shall earn
legal interest at the rate of 12% per annum until its satisfaction.
Case: Anamer Salazar vs. J.Y. Brothers Marketing Corp., October 20, 2012, J. Peralta.
Facts: J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of
selling sugar, rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance
sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice.
Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar
with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worthP214,000.00. As
payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated
October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000.00 with the
assurance that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of
rice to Salazar. However, upon presentment, the check was dishonored due to "closed account."
Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a
replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by
Nena Jaucian Timario in the amount ofP214,000.00 but which, just the same, bounced due to
insufficient funds. When despite the demand letter dated February 27, 1997, Salazar failed to
settle the amount due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa
before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474.
After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer
to evidence. On November 19, 2001, the court a quo rendered an Order, the dispositive portion
of which reads:
WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of

the crime charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer
D. Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum
of P214,000.00. The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with
the trial on the civil aspect of the criminal case.
On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:
WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D.

Salazar the civil aspect of the above-entitled case.
The RTC found that the Prudential Bank check drawn by Timario for the amount of P214,000.00
was payable to the order of respondent, and such check was a negotiable order instrument; that
petitioner was not the payee appearing in the check, but respondent who had not endorsed the
check, much less delivered it to petitioner. It then found that petitioner’s liability should be
limited to the allegation in the amended information that "she endorsed and negotiated said
check," and since she had never been the holder of the check, petitioner's signing of her name on
the face of the dorsal side of the check did not produce the technical effect of an indorsement
arising from negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it
was replaced by a Solid Bank check which, however, was also subsequently dishonored; that
since the Solid Bank check was a crossed check, which meant that such check was only for
deposit in payee’s account, a condition that rendered such check non-negotiable, the substitution
of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential
change which had the effect of discharging from the obligation whoever may be the endorser of
the negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the
obligation arising from the technical act of indorsing a check and, thus, had the effect of
novation; and that the ultimate effect of such substitution was to extinguish the obligation arising
from the issuance of the Prudential Bank check.
CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid
Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice
bought from respondent. Petitioner contends that the issuance of the Solid Bank check and the
acceptance thereof by the respondent, in replacement of the dishonored Prudential Bank check,
amounted to novation that discharged the latter check; that respondent's acceptance of the Solid
Bank check, notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing
whatever criminal responsibility, under Article 315 of the Revised Penal Code, the drawer or
indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount
of P214,000.00; and that a check is a contract which is susceptible to a novation just like any
other contract.
Respondent filed its Comment, echoing the findings of the CA.
Issue: Whether or not there is novation in the case at bar.
Held: NO. We find no merit in this petition.
Section 119 of the Negotiable Instrument Law provides, thus:
SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made
or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of
money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in
his own right. (Emphasis ours)
And, under Article 1231 of the Civil Code, obligations are extinguished:
xxxx
(6) By novation.
Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the
dishonored Prudential bank check resulted to novation which discharged the latter check is
unmeritorious.
In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co.,
Inc.,12 we stated the concept of novation, thus:
x x x Novation is done by the substitution or change of the obligation by a subsequent one which
extinguishes the first, either by changing the object or principal conditions, or by substituting the
person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may:
[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never presumed; there must be an express
intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate
their intent to dissolve the old obligation as the moving consideration for the emergence of the
new one. Implied novation necessitates that the incompatibility between the old and new
obligation be total on every point such that the old obligation is completely superceded by the
new one. The test of incompatibility is whether they can stand together, each one having an
independent existence; if they cannot and are irreconcilable, the subsequent obligation would
also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing
obligation and, second, creating a new one in its stead. This kind of novation presupposes a
confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all
parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the
birth of a valid new obligation. Novation is merely modificatory where the change brought about
by any subsequent agreement is merely incidental to the main obligation (e.g., a change in
interest rates or an extension of time to pay; in this instance, the new agreement will not have the
effect of extinguishing the first but would merely supplement it or supplant some but not all of
its provisions.)
The obligation to pay a sum of money 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.13
In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's

claim that novation took place when the dishonored BPI check it endorsed to BA Finance
Corporation was subsequently replaced by a Security Bank check,15 and said:
There are only two ways which indicate the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. First, novation must be
explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the
old and the new obligations must be incompatible on every point.1avvphi1 The test of
incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the
first. In the instant case, there was no express agreement that BA Finance's acceptance of the
SBTC check will discharge Nyco from liability. Neither is there incompatibility because both
checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to
BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.16
In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as there was no express agreement to establish
that petitioner was already discharged from his liability to pay respondent the amount
of P214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed,
there must be an express intention to novate. In fact, when the Solid Bank check was delivered to
respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of the
existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank
check.
Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility,
since the two checks − Prudential and Solid Bank checks − were precisely for the purpose of
paying the amount of P214,000.00,i.e., the credit obtained from the purchase of the 300 bags of
rice from respondent. Indeed, there was no substantial change in the object or principal condition
of the obligation of petitioner as the indorser of the check to pay the amount of P214,000.00. It
would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay
her obligation.
Case: Metropolitan Bank and Trust Company vs. Rural bank of Gerona, Inc. (RBG), July 5,
2012, J. Brion.
Facts: RBG is a rural banking corporation organized under Philippine laws and located in
Gerona, Tarlac. In the 1970s, the Central Bank and the RBG entered into an agreement providing
that RBG shall facilitate the loan applications of farmers-borrowers under the Central Bank-
International Bank for Reconstruction and Development’s (IBRD’s) 4th Rural Credit Project.
The agreement required RBG to open a separate bank account where the IBRD loan proceeds
shall be deposited. The RBG accordingly opened a special savings account with Metrobank’s
Tarlac Branch. As the depository bank of RBG, Metrobank was designated to receive the credit
advice released by the Central Bank representing the proceeds of the IBRD loan of the farmers-
borrowers; Metrobank, in turn, credited the proceeds to RBG’s special savings account for the
latter’s release to the farmers-borrowers.
On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and
accordingly credited Metrobank’s demand deposit account in the amount of P178,652.00, for the
account of RBG. The amount, which was credited to RBG’s special savings account represented
the approved loan application of farmer-borrower Dominador de Jesus. RBG withdrew
the P178,652.00 from its account.
On the same date, the Central Bank approved the loan application of another farmer-borrower,
Basilio Panopio, for P189,052.00, and credited the amount to Metrobank’s demand deposit
account. Metrobank, in turn, credited RBG’s special savings account. Metrobank claims that the
RBG also withdrew the entire credited amount from its account.
On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application
for P220,000.00. As with the two other IBRD loans, the amount was credited to Metrobank’s
demand deposit account, which amount Metrobank later credited in favor of RBG’s special
savings account. Of the P220,000.00, RBG only withdrew P75,375.00.
On November 3, 1978, more than a month after RBG had made the above withdrawals from its
account with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD
loans.6 The Central Bank implemented the reversal by debiting from Metrobank’s demand
deposit account the amount corresponding to all three IBRD loans.
Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following
amounts from RBG’s special savings account: P189,052.00, P115,000.00, and P8,000.41.
Metrobank, however, claimed that these amounts were insufficient to cover all the credit advices
that were reversed by the Central Bank. It demanded payment from RBG which could make
partial payments. As of October 17, 1979, Metrobank claimed that RBG had an outstanding
balance of P334,220.00. To collect this amount, it filed a complaint for collection of sum of
money against RBG before the RTC, docketed as Civil Case No. 6028.7
In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had
ensued:
[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of
[RBG’s special savings account] which credit advices and deposits were under its supervision.
Being faulted in these acts or omissions, the Central Bank [sic] debited these amounts against
[Metrobank’s] demand [deposit] reserve; thus[, Metrobank’s] demand deposit reserves
diminished correspondingly, [Metrobank as of this time,] suffers prejudice in which case legal
subrogation has ensued.9
It thus ordered RBG to pay Metrobank the sum of P334,200.00, plus interest at 14% per annum
until the amount is fully paid.
On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the
Civil Code.
Issue: Whether or not legal subrogation under Article 1302 applies.
Held: YES. Our disagreement with the appellate court is in its conclusion that no legal
subrogation took place; the present case, in fact, exemplifies the circumstance contemplated
under paragraph 2, of Article 1302 of the Civil Code which provides:
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the latter’s
share. [Emphasis supplied.]
As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest
except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was
Metrobank’s demand deposit account, instead of RBG’s, which the Central Bank proceeded
against, on the assumption perhaps that this was the most convenient means of recovering the
cancelled loans. That Metrobank’s payment was involuntarily made does not change the reality
that it was Metrobank which effectively answered for RBG’s obligations.
Was there express or tacit approval by RBG of the payment enforced against Metrobank? After
Metrobank received the Central Bank’s debit advices in November 1978, it (Metrobank)
accordingly debited the amounts it could from RBG’s special savings account without any
objection from RBG.14 RBG’s President and Manager, Dr. Aquiles Abellar, even wrote
Metrobank, on August 14, 1979, with proposals regarding possible means of settling the amounts
debited by Central Bank from Metrobank’s demand deposit account. 15 These instances are all
indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit
approval came after payment had been made does not completely negate the legal subrogation
that had taken place.
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." 16 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.
While we would like to fully and finally resolve this case, certain factual matters prevent us from
doing so. Metrobank contends in its petition that it credited RBG’s special savings account with
three amounts corresponding to the three credit advices issued by the Central Bank:
the P178,652.00 for Dominador de Jesus; the P189,052.00 for Basilio Panopio; and
the P220,000.00 for Ponciano Lagman. Metrobank claims that all of the three credit advices were
subsequently reversed by the Central Bank, evidenced by three debit advices. The records,
however, contained only the credit and debit advices for the amounts set aside for de Jesus and
Lagman;17 nothing in the findings of fact by the RTC and the CA referred to the amount set aside
for Panopio.
Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand
deposit account were only the amounts of P178,652.00 and P189,052.00. With these amounts
combined, RBG’s liability would amount to P398,652.00 – the same amount RBG
acknowledged as due to Metrobank in its August 14, 1979 letter. 18 Significantly, Metrobank
likewise quoted this amount in its July 11, 197919 and July 26, 197920 demand letters to RBG and
its Statement of Account dated December 23, 1982.21
RBG asserts that it made partial payments amounting to P145,197.40,22 but neither the RTC nor
the CA made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted
that RBG indeed made partial payments, it never mentioned the actual amount paid; neither did it
state that the P145,197.40 was part of theP312,052.41 that, it admitted, it debited from RBG’s
special savings account.
Deducting P312,052.41 (representing the amounts debited from RBG’s special savings account,
as admitted by Metrobank) from P398,652.00 amount due to Metrobank from RBG, the
difference would only be P86,599.59. We are, therefore, at a loss on how Metrobank computed
the amount of P334,220.00 it claims as the balance of RBG’s loan. As this Court is not a trier of
facts, we deem it proper to remand this factual issue to the RTC for determination and
computation of the actual amount RBG owes to Metrobank, plus the corresponding interest and
penalties.
EUSEBIO MILLAR VS. COURT OF APPEALS, ANTONIO GABRIEL- 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. SLIGHT MODIFICATIONS ON CAUSE,
OBJECT OR CONDITION OF THE OLD OBLIGATION DO NOT AFFECT
SUBSTANTIAL INCOMPATIBILITY.
FACTS: Millar obtained a favorable judgment against Gabriel. A writ of execution was issued, on
the basis of which Gabriel’s Willy’s Ford Jeep was seized. Subsequently, Gabriel pleaded with
Millar to release the jeep under an agreement whereby Ganriel would mortgage the jeep in favor of
Millar to secure the payment of the judgment debt. The chattel mortgage reduced the amount to be
paid by Gabriel. However, Gabriel failed to comply with the said agreement. Millar obtained
another writ of execution but was opposed by Gabriel arguing that the judgment debt has already
been extinguished by NOVATION. The lower court ruled that novation had taken place, and that
the parties had executed the chattel mortgage only "to secure or get better security for the
judgment.
The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the
order of execution in a decision rendered on October 17, 1968, holding that the subsequent
agreement of the parties impliedly novated the judgment obligation in civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate the
incompatibility between the judgment debt and the obligation embodied in the deed of chattel
mortgage, warranting a conclusion of implied novation:
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with
interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the
costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to
P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to the
petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal
installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates
the respondent to pay liquidated damages in the amount of P300 in case of default on his part;
and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed
extrajudicially in case of default, secured the obligation.
On November 26, 1968, the petitioner moved for reconsideration of the appellate court's
decision, which motion the Court of Appeals denied in its resolution of December 7, 1968.
Hence, the present petition for certiorari to review the decision of the Court of Appeals, seeking
reversal of the appellate court's decision and affirmance of the order of the lower court.
ISSUE: WON the mortgage debt novated the judgment debt.
HELD: 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 2 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. Hence, the SC held that there is NO incompatibility
between the mortgage obligation and the judgment liability of Gabriel sufficient to justify a
conclusion of implied novation.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of
whether or not the subsequent agreement of the parties as embodied in the deed of chattel
mortgage impliedly novated the judgment obligation in civil case 27116. The Court of Appeals,
in arriving at the conclusion that implied novation has taken place, took into account the four
circumstances heretofore already adverted to as indicative of the incompatibility between the
judgment debt and the principal obligation under the deed of chattel mortgage.
1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance
in implying novation of the judgment debt, stating that in the interim — from the time of the
rendition of the judgment in civil case 27116 to the time of the execution of the deed of chattel
mortgage — the respondent made partial payments, necessarily resulting in the lesser sum stated
in the deed of chattel mortgage. He adds that on record appears the admission by both parties of
the partial payments made before the execution of the deed of chattel mortgage. The erroneous
conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong
impression that the execution of the deed of chattel mortgage provided the consideration or the
reason for the reduced judgment indebtedness.
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 he 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 indictum 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.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still
owed the petitioner by virtue of the judgment in civil case 27116. The parties apparently in their
desire to avoid any future confusion as to the amounts already paid and as to the sum still due,
decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment
debt properly collectible from the respondent. All told, therefore, the first circumstance fails to
satisfy the test of substantial and complete incompatibility between the judgment debt an the
pecuniary liability of the respondent under the chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as
indicative of incompatibility, is directly contrary to the admissions of the respondent and is
without any factual basis. The appellate court pointed out that while the judgment made no
mention of payment of damages, the deed of chattel mortgage stipulated the payment of
liquidated damages in the amount of P300 in case of default on the part of the respondent.
However, the petitioner contends that the respondent himself in his brief filed with the Court of
Appeals admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300
by way of attorney's fees and not as liquidated damages. Similarly, the judgment makes mention
of the payment of the sum of P400 as attorney's fees and omits any reference to liquidated
damages.
The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the
judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the
partial payments made by the respondent before the execution of the chattel mortgage agreement
were applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in
the judgment, thereby reducing both amounts.
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating
the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an
obligation for the payment of liquidated damages in case of default on the part of the respondent,
we find it difficult to agree with the conclusion reached by the Court of Appeals.
3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that
the montage obligation superseded, through implied novation, the judgment debt, the petitioner
points out that the appellate court considered said circumstances in a way not in accordance with
law or accepted jurisprudence. The appellate court stated that while the judgment specified no
mode for the payment of the judgment debt, the deed of chattel mortgage provided for the
payment of the amount fixed therein in two equal installments.
On this point, we see no substantial incompatibility between the mortgage obligation and the
judgment liability of the respondent sufficient to justify a conclusion of implied novation. The
stipulation for the payment of the obligation under the terms of the deed of chattel mortgage
serves only to provide an express and specific method for its extinguishment — payment in two
equal installments. The chattel mortgage simply gave the respondent a method and more time to
enable him to fully satisfy the judgment indebtedness. 1 The chattel mortgage agreement in no
manner introduced any substantial modification or alteration of the judgment. Instead of
extinguishing the obligation of the respondent arising from the judgment, the deed of chattel
mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode
and period for compliance by the respondent.
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible
with the judgment because the chattel mortgage secured the obligation under the deed, whereas
the obligation under the judgment was unsecured. The petitioner argues that the deed of chattel
agreement clearly shows that the parties agreed upon the chattel mortgage solely to secure, not
the payment of the reduced amount as fixed in the aforesaid deed, but the payment of the
judgment obligation and other incidental expenses in civil case 27116.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the
chattel mortgage purposely to secure the satisfaction of the then existing liability of the
respondent arising from the judgment against him in civil case 27116. As a security for the
payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial
alteration in the liability of the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. 2 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.
We do not see any substantial incompatibility between the two obligations as to warrant a
finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by
explicit terms, intended the full discharge of the respondent's liability under the judgment by the
obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of
express novation.
INTEGRATED CONSTRUCTION SERVICES, INC. AND ENGINEERING

CONSTRUCTION INC. VS. RELOVA AND METROPOLITAN WATERWORKS AND
SEWERAGE SYSTEM, [146 SCRA 360]
Novation; While the tenor of the subsequent letter-agreement in a sense novates the judgment
award there being a shortening of the period within which to pay, the failure of the party to
comply with the suspensive and conditional nature of d agreement, remitted the parties to their
original rights under the judgment award.
FACTS: Petitioners sued the MWSS, formerly NAWASA, at CFI-Manila for breach of contract.
The Arbitration Board rendered decision-award which became final and executory, and ordered
MWSS to pay petitioners. Petitioners subsequently agreed to give MWSS some discounts due to
early payment of the award provided that MWSS would pay the judgment. However, MWSS only
paid on December of 1972 instead of the agreed October 1972 payment. Hence, petitioners moved
for Execution of judgment against MWSS. The trial court however denied the motion averring that
the letter-agreement (Re: discounts) NOVATED the award.
ISSUE: Whether novation applies.
HELD: While the tenor of the subsequent letter-agreement in a sense novates the judgment
award there being a shortening of the period within which to pay (Kabangkalan Sugar Co. vs.
Pacheco, 55 Phil. 555), the suspensive and conditional nature of the said agreement (making the
novation conditional) is expressly acknowledged and stipulated in the 14th whereas clause of
MWSS' Resolution. However, MWSS' failure to pay within the stipulated period removed the
very cause and reason for the agreement, rendering some ineffective. Petitioners, therefore,
were remitted to their original rights under the judgment award.
As to whether or not petitioners are now in estoppel to question the subsequent agreement,
suffice it to state that petitioners never acknowledged full payment; on the contrary, petitioners
refused MWSS' request for a conforme or quitclaim. (p. 125, Rollo)
Accordingly, the award is still subject to execution by mere motion, which may be availed of
as a matter of right any time within (5) years from entry of final judgment in accordance
with Section 5, Rule 39 of the Rules of Court.
JOSEPH COCHINGYAN JR. AND JOSE VILLANUEVA VS. R AND B SURETY AND
INSURANCE COMPANY [151 SCRA 339]
Novation defined. There can be no implied novation because the parties to the new obligation
expressly recognized the continuous existence and validity of the old one.
FACTS: Pacific Agricultural Suppliers, Inc. PAGRICO (P) submitted a surety bond issued by R
and B surety in favor of PNB. Under the bond, PNB had the right to proceed directly against R
and B without going after P. In turn, 2 indemnity agreements were entered into with R and B by
CCM (Catholic Church Mart) and Joseph Cochingyan in his capacity as CCM President and in his
personal capacity; and by P, Jose Villanueva as P’s manager and in his personal capacity, Liu Tua
Beth, as PACOCO President, and in his personal capacity. 2 years after the execution of these
documents, a TRUST AGREEMENT was entered into between Jose and Susana Cochingyan,
Tomas Besa, a PNB officer, as trustee; and PNB was the beneficiary. The trust agreement
expressly provides that it shall not, in any manner release R and B from their respective liabilities
under the bond. When P failed to pay, PNB demanded payment from R and B. R and B in turn
demanded reimbursement from Joseph Cochingyan and Jose V. who refused to pay on the ground
that the trust agreement had extinguished their obligation under the Indemnity Agreements.
ISSUE: Whether there is NOVATION.
HELD: 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.
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.
If old debtor is not released, no novation occurs and the third person who assumed the
obligation becomes a co-debtor 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 the 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.
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 n ovation is not reached at all.
In the case at bar, the Trust Agreement does not expressly terminate the obligation of R and
B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides
for the continuing subsistence of that obligation by stipulating that it “shall not in any
manner release” R and B Surety from its obligation under the Surety Bond. What the Trust
did was merely to bring in another person to assume the same obligation . The precise legal
effect is the increase of the number of persons liable to the obligee and NOT the
extinguishment of the liability of the first debtor. PNB never intended to release and never
did release R and B. Thus, R and B, which was NOT a party to the Trust Agreement could
not have been intended to release any of its own indemnitors simply because one of those
indemnitors, the Trustor under the Trust Agreement became also directly liable to PNB.
FUA CAM LU VS. YAP FAUCO AND YAP SINGCO [74 PHIL. 287]
NOVATION BY SUBSEQUENT AGREEMENT
FACTS: Fua Cam Lu, judgment-Creditor of Yap Fauco and Yap Singco, agreed subsequently to
the execution of a mortgage in his favor by the Yaps of a camarin being built on the same lot plus
reduction of debt to 1,200 payable in 4 installments; that in case of default they would pay balance
plus the discounted amount and 10% attorney’s fees. Consequently, no public auction was held.
However, on March 31, 1934, the provincial sheriff, without publication sold land at public
auction. Fauco and Singco refused to recognize Fua’s title arguing that the judgment in Civil Case
no. 42125 was NOVATED.
ISSUE: Whether Fauco and Singco’s liabiliy the Civil Case No. 42125 has been extinguished.
HELD: YES. The Yaps’ liability under the judgment has been extinguished by the new
agreement. Although the mortgage did not expressly cancel the old obligation, this was impliedly
novated by reason of incompatibility resulting from the fact that, whereas the judgment was for
P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new
obligation is for P1200 payable in installments, stipulates for attorney's fees and is secured by a
mortgage. The later agreement did not merely extend the time to pay the judgment, because it was
therein recited that appellants promised to pay P1,200 to appellee as a settlement of the said
judgment. Said judgment cannot be said to have been settled, unless it was extinguished.
** Foreclosure of such new mortgage under the judgment in the old OBLIGATION was VOID.
CARLOS SANDICO, SR. AND TEOPISTO TIMBOL VS. HON. PIGUING AND
DESIDERIO PARAS [42 SCRA 322]
FACTS: Spouses Sandico and Timbol as administrator of the Estate of late Sixta Paras obtained
judgment in their favor against Desiderio Paras for the recognition of easement rights of the former
and payment of damages; the judgment debt was later on agreed by them to be reduced from
P6,000 to P4,000 and was subsequently paid by Paras.
When the spouses demanded for performance of the part of the judgment about the recognition of
the easement rights of the petitioner, they demanded that defendant rebuild and reconstruct the
irrigation canal in its original dimensions. When defendant refused, the spouses asked the court a
quo in a motion for execution to compel them or hold them in contempt. An alias writ of execution
was issued which was later, on appeal was ordered quashed by the CA because the parties
“novated by subsequent agreement” the judgment in question, thus there is nothing more to be
executed.
ISSUE: WON CA erred in quashing the alias writ of execution due to its interpretation hat the
subsequent agreement extinguished the defendant’s OBLIGATION on the judgment of court a
quo.
HELD: NO. CA was not in grave abuse of discretion.
Novation results in 2 stipulations  (1) to extinguish an existing obligation, and (2) to substitute
a new one in its place. Fundamental it is that novation effects a substitution or modification of an
obligation by another or an extinguishment of one obligation by the creation of another. In the case
at hand, we fail to see what new or modified obligation arose out of the payment by the respondent
of the reduced amount of P4,000 and substituted the monetary liability for P6,000 of the said
respondent under the appellate court's judgment.
Additionally, to sustain novation necessitates that the same be so declared in unequivocal terms
 clearly and unmistakably shown by the express agreement of the parties or by acts of
equivalent import  or that there is complete and substantial incompatibility between the 2
obligations.
Record showed that defendant attempted to rebuild the irrigation canal but not in the original
dimensions, which was not disputed by both parties. Such partial reconsideration does not
constitute substantial compliance. Thus SC remanded the case to Trial Court for ocular on the job
done and if defendant refuses to complete to ask another to do the work at the expense of
defendant.
NATIONAL POWER CORPORATION VS. JUDGE DAYRIT AND DANIEL ROXAS,

DOING BUSINESS AS UNITED VETERANS SECURITY AGENCY AND FOREIGN
BOATS WATCHMENT [125 SCRA 849]
Novation is never presumed but must be explicitly stated; No novation in the absence of explicit
novation or incompatibility on every point between the old and the new agreements of the
parties.
FACTS: DANIEL E. ROXAS, doing business under the name and style of United Veterans
Security Agency and Foreign Boats Watchmen, sued the NATIONAL POWER
CORPORATION (NPC) and two of its officers in Iligan City. The purpose of the suit was to
compel the NPC to restore the contract of Roxas for security services which the former had
terminated. The parties drafted a Compromise Agreement which the Trial Court approved. The
agreement consisted of NPC paying plaintiff sum of money, plaintiff will pay or return materials
lost and found by his agency, the contract for security services with NPC will remain, and they
both waive other claims and counter-claims with each other.
NPC subsequently contracted another security agency. Thus, plaintiff asked court a quo for writ
of execution which was granted. NPC appealed claiming that the judgment was novated thus
extinguished, and nothing more to execute.
ISSUE: WON novation of judgment by subsequent agreement of parties extinguished the

OBLIGATION of NPC to sustain the security contract with plaintiff.
HELD: NO. It is elementary that novation is never presumed; it must be explicitly stated or
there must be manifest incompatibility between the old and the new obligations in every aspect.
Thus the Civil Code provides: Article 1292. 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. In the case
at bar, there is nothing in the May 14, 1982 agreement which supports the petitioner's
contention. There is neither explicit novation nor incompatibility on every point between the
"old" and the "new" agreements…said contract was executed precisely to implement the
compromise agreement for which reason there was no novation.
SPOUSES BALILA VS. IAC, DEL CASTILLO [155 SCRA 262]
Subsequent mutual agreements and actions of petitioners and private respondents allowing the
former extension of time to pay their obligations and in installments novated and amended the
period of payment decreed by the trial court in its judgment by compromise.
FACTS: Amicable settlement of this dispute was arrived at and made basis of decision of Trial
Court. Defendants admitted "having sold under a pacto de retro sale the parcels of land
described in the complaint in the amount of P84,000.00" and that they "hereby promise to pay
the said amount within the period of four (4) months but not later than May 15,1981.
Subsequently, private respondent Guadalupe Vda. de del Castillo, represented by her son
Waldo del Castillo as for attorney-in-fact, accepted payments from petitioners and gave
petitioners several extensions of time to pay their remaining OBLIGATIONS. Plaintiffs filed for
the consolidation of titles which the defendants opposed because they already made payments.
ISSUE: WON decision of trial court in its judgment by compromise was novated and amended
by the subsequent mutual agreements and actions of petitioners and private respondents
HELD: YES. The fact therefore remains that the amount of P84,000 payable on or before May
15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by
the subsequent mutual agreements and actions of petitioners and private respondent
Spouses. Petitioners paid the afore-stated amount on an installment basis and they were given by
private respondents no less than 8 extensions of time to pay their obligation. These transactions
took place during the pendency of the motion for reconsideration of the order of the trial court
dated 4/26/83, during the pendency of the petition for certiorari before the IAC and after the filing
of the petition before Us. This answers the claim of the respondent Spouses on the failure of the
petitioners to present evidences or proofs of payment in the lower court and the appellate court.
PEOPLE'S BANK AND TRUST COMPANY VS. SYVEL'S INCORPORATED, ANTONIO

SYYAP AND ANGEL SYYAP [164 SCRA 247]
When does novation take place; Novation is never presumed. Absence of existence of explicit
novation nor incompatibility between the old and the new agreements. Novation was not
intended in the case at bar as the Real estate mortgage was taken as additional security for the
performance of the contract. If objective novation is to take place, it is essential that the new
obligation expressly declare that the old obligation is to be extinguished or that the new obligation
be on every point incompatible with the old one. xxx
FACTS: Action for foreclosure of chattel mortgage executed in favor of the plaintiff by the
defendant Syvel's Inc. on its stocks of goods, personal properties and other materials owned by it
and located at its stores or warehouses. This chattel mortgage was duly registered in Register of
Deed of Manila and Pasay City, in connection with a credit commercial line in the amount of
P900K granted to Syvel’s; defendants Antonio and Angel V. Syyap guaranteed absolutely and
unconditionally and without the benefit of excussion the full and prompt payment of any
indebtedness to be incurred on account of the said credit line.
The failure of Syvels’ to pay in accord with terms and conditions of the Commercial Credit
Agreement, bank started to foreclose extrajudicially the chattel mortgage but was not pushed
through after Syvel’s attempted to settle. As no payment was made, this case was filed in Court.
During its pendency, Syyap proposed to have the case settled amicably and to that end a
conference was held in which Mr. Antonio de las Alas, Jr., VP of the Bank, plaintiff, defendant
Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff
dismiss this case because he did not want to have the goodwill of Syvel's Incorporated impaired,
and offered to execute a Real Estate Mortgage on his property in Bacoor. Mr. De las Alas
consented, and so the Real Estate Mortgage. Syvel’s did not agree to People’s motion to dismiss
which included the dismissal of their counterclaim and filed instead their own motion to dismiss
on the ground that by the execution of said real estate mortgage, the obligation secured by the
chattel mortgage was NOVATED and therefore, appellee’s cause of action thereon was
extinguished.
ISSUE: WON on the ground that by the execution of said real estate mortgage, the obligation
secured by the chattel mortgage subject of this case was novated, and therefore, appellee's cause
of action thereon was extinguished.
HELD: NO. Novation takes place when the object or principal condition of an obligation is
changed or altered. It is elementary that novation is never presumed; it must be explicitly
stated or there must be manifest incompatibility between the old and the new obligations in
every aspect. In the case at bar, there is nothing in the REM which supports appellants'
submission. The contract on its face does not show the existence of an explicit novation nor
incompatibility on every point between the old and the new agreements as the second contract
evidently indicates that the same was executed as new additional security to the CM previously
entered into by the parties. Records show that in the real estate mortgage, appellants agreed that
the chattel mortgage "shall remain in full force and shall not be impaired by this (real estate)
mortgage." It is clear, therefore, that a novation was not intended. The real estate mortgage
was evidently taken as additional security for the performance of the contract
b. FORMS OF NOVATION:
Article 1281. Compensation may be total or partial. When the two debts are of the same amount,
there is a total compensation. (Classmates, I think there was a typo error in Ma’am Bubbles’
outline. I think this should have been Article 1291, reproduced below)
1. Substitution of debtor--
Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.
the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from
a mortgage, guaranty, or penalty.
Article 1835 second paragraph
A partner is discharged from any existing liability upon dissolution of the partnership by an
agreement to that effect between himself, the partnership creditor and the person or partnership
continuing the business; and such agreement may be inferred from the course of dealing
between the creditor having knowledge of the dissolution and the person or partnership
continuing the business.
PNB VS. MALLARI
FACTS: Def borrowed from PNB and this loan was secured by a chattel mortgage on his standing
crop. Mallari defaulted so the sacks of rice deposited in a warehouse were attached. Guanzon,
defendant’s Er, offered to pay the obli of the latter. This was accepted by PNB so the attachment
was later lifted. Guanzon defaulted in his payment so PNB sued the def on the same obligation.
The LC dismissed the comp on the ground that there was novation brought about by the alteration
of the principal conditions of the original obli and the substitution of a news debtor.
HELD: The acceptance of PNB of the offer of G to pay under the terms specified by him
constituted not only a substitution of the debtor but an alteration or modification of the terms and
conditions of the original K.
Effect of insolvency of new debtor--
Article 1294. If the substitution is without the knowledge or against the will of the debtor, the
debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the
part of the original debtor.
Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original obligor,
except when said insolvency was already existing and of public knowledge, or known to the
debtor, when he delegated his debt.
2. Change of Principal Condition or Object
3. Subrogation/Subjective Novation
a. In case of active subjective novation
Article 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this Code; the
latter must be clearly established in or order that it may take effect.
Legal (Article 1302)  In all cases of Article 1302, subrogation takes place by operation of law.
(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval
of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share;
Conventional/ Contractual (Article 1301)  Consent of the 3 parties (old creditor, debtor and
new creditor) are required.
Article 1301. Conventional subrogation of a third person requires the consent of the original
parties and of the third person.
Q: Is it possible for a creditor to transfer his credit without consent of the debtor?
A: Yes. But this is not novation but an assignment of rights under Article 1624.
 Assignment is also a novation but much simpler. But is not subrogation.
KINDS OF NOVATION:
a. Legal
(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval
of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share;
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same
purpose, save those which are inherent in his person; they may also impugn the acts which the
debtor may have done to defraud them.
(Conventional Redemption)
Article 1610. The creditors of the vendor cannot make use of the right of redemption against the
vendee, until after they have exhausted the property of the vendor.
Article 1729. Those who put their labor upon or furnish materials for a piece of work
undertaken by the contractor have an action against the owner up to the amount owing from the
latter to the contractor at the time the claim is made. However, the following shall not prejudice
the laborers, employees and furnishers of materials:
(1) Payments made by the owner to the contractor before they are due;
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws:
(Assignment of Credits and Other Incorporeal Rights)
Article 1629. In case the assignor in good faith should have made himself responsible for the
solvency of the debtor, and the contracting parties should not have agreed upon the duration of
the liability, it shall last for one year only, from the time of the assignment if the period had
already expired.
If the credit should be payable within a term or period which has not yet expired, the liability
shall cease one year after the maturity.
Article 2207. If the plaintiff's property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or injury.
2. Effect:
Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in
virtue of the partial payment of the same credit.
Article 1303. Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons, be they guarantors or
possessors of mortgages, subject to stipulation in a conventional subrogation.
b. Passive Subjective Novation
(Substitution of the debtor)

Article 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not without
the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles
1236 and 1237.
mortgage, guaranty or penalty.
RODRIGUEZ VS. REYES [37 SCRA 195]
FACTS: On November 13, 1962, Alberto Benipayo was sued by his siblings for the partition of
the properties held by them in common as heirs of the late spouses, Donato Benipayo. The parties
agreed to have the properties sold at public auction. The list of properties includes properties which
were mortgaged to the Development Bank of the Philippines (DBP). After the sale of said
properties, Jose Dualan (one of the winning bidders) asked the Court to order the payment of the
mortgaged debt to DBP from the proceeds of the auction sale. The siblings argued that upon
purchase of the mortgaged property, Dualan replaced the debtors in the principal obligation.
ISSUE: Whether there is novation.
HELD: NO. By buying the property covered by TCT No. 48979 with notice that it was
mortgaged, respondent Dualan only undertook either to pay or else allow the land's being sold if
the mortgage creditor could not or did not obtain payment from the principal debtor when the debt
matured. Nothing else. Certainly, the buyer did not obligated himself to replace the debtor in the
principal obligation, and he could not do so in law without the creditor's consent. (Article 1293)
The obligation to discharge the mortgage indebtedness therefore, remained on the shoulders of the
original debtors and their heirs, petitioners herein, since the record is devoid of any evidence of
contrary intent. xxx
Article 1835. xxx
A partnership is discharged from any existing liability upon dissolution of the partnership by an
agreement to that effect between himself, the partnership creditor and the person or partnership
continuing the business; and such agreement may be inferred from the course of dealing
between the creditor having knowledge of the dissolution and the person or partnership
continuing the business.
[Balane]
Passive Subjective Novation-- Articles 1293 and 1295

 Article 1293 talks of expromission (not upon the old debtor's initiative. It could be upon
the initiative of the creditor or of the new debtor.)
 Article 1295 talks of delegacion (change at the old debtor's initiative.)
 In expromission, the change in the person of the debtor is not upon the initiative of the old
debtor, whether or not he gave his consent. As soon as a new debtor and creditor agree,
novation takes place.
 In both cases, the intent of the parties must be to release the old debtor.
What is the difference in effect between expromission and delegacion?
 In expromission, the release of the old debtor is absolute (even if it turns out that the new
debtor is insolvent.)
 In delegacion, the release of the old debtor is not absolute. He may be held liable (1) if the
new debtor was already insolvent at the time of the delegacion; and (2) such insolvency
was either known to the old debtor or of public knowledge.
Cases of expromission are quite rare.
Case: Odiamar v. Odiamar Valencia, G.R. No. 213582, June 28, 2017
Facts: Linda Valencia filed a complaint for sum of money against Nympha Odiamar alleging that
the latter owed her P2,100,000.00 and refused to pay despite demands. Nympha sought to dismiss
the complaint on the ground that it was her deceased parents who owed Linda and she should have
filed a claim against the estate. The RTC denied the motion to dismiss. The RTC ruled in favor of
Linda and ordered Nympha to pay P1,710,049.00 which represents the unpaid portion of the debt
and interest. By assuming the liability of her deceased parents and agreeing to pay their debt in
installments — which she in fact paid from December 29, 2000 to May 31, 2003 in amounts of
P500.00 to P10,000.00, and which payments respondent did actually accept — a mixed novation
took place and petitioner was substituted in their place as debtor. Thus, the liabilities of the
estates of petitioner’s deceased parents were extinguished and transferred to petitioner. The CA
affirmed the RTC ruling and noted that novation took place insofar as petitioner was substituted
in place of petitioner’s late parents, considering that petitioner undertook to pay her deceased
parents’ debt. However, the CA opined that there was no novation with respect to the object of
the contract, following the rule that an obligation is not novated by an instrument which
expressly recognizes the old obligation and changes only the terms of paying the same, as in this
case where the parties merely modified the terms of payment of the P2,100,000.00.
Issue: Whether or not there was novation
Held: No. the Court finds it apt to correct the mistaken notions that: (a) novation by
substitution of the debtor took place so as to release the estates of the petitioner’s deceased
parents from their obligation, which, thus, rendered petitioner solely liable for the entire
P2,100,000.00 debt; and (b) the P100,000.00 of the P2,100,000,00 debt was in the nature of
accrued monetary interests.
The Court finds it apt to correct the mistaken notions that: (a) novation by substitution of the
debtor took place so as to release the estates of the petitioner’s deceased parents from their
obligation, which, thus, rendered petitioner solely liable for the entire P2,100,000.00 debt; and
(b) the P100,000.00 of the P2,100,000,00 debt was in the nature of accrued monetary
interests.
In S.C. Megaworld Construction and Development Corporation v. Parada,43 the Court held

that to constitute novation by substitution of debtor, the former debtor must be expressly
released from the obligation and the third person or new debtor must assume the former’s place
in the contractual relations.44 Moreover, the Court ruled that the “fact that the creditor accepts
payments from a third person, who has assumed the obligation, will result merely in the
addition of debtors and not novation.”45 At its core, novation is never presumed, and
the animus novandi, whether totally or partially, must appear by express agreement of the
parties, or by their acts that are too clear and unequivocal to be mistaken. 46 Here, the intent to
novate was not satisfactorily proven by respondent. At best, petitioner only manifested her desire
to shoulder the debt of her parents, which, as above discussed, does not amount to novation.
Thus, the courts a quo erred in holding petitioner liable for the debts obtained by her deceased
parents on account of novation by substitution of the debtor.
Similarly, both courts faultily concluded that the principal sum loaned by petitioner and her
deceased parents amounted to P2,000,000.00 and the P100,000.00 was added as interest because
petitioner undertook to pay the loan in installments.
Having established that no novation took place and that no interest was actually due, and
factoring in the payments already made for her account, petitioner is, thus, ordered to pay
respondent the amount of P1,010,049.00, which is the remaining balance of her principal debt to
the latter in the original amount of P1,400,000.00.
Food Fest Land, Inc. V. Romualdo C. Siapno, G.R. No. 226088, February 27, 2019
Facts: The Sapianos are owners of a parcel of land in Dagupan City which they leased to Food Fest
Corp. for a period of 15 years. The Contract of Lease featured a non-waiver clause as follows:
16. NON-WAIVER – The failure of the parties to insist upon a strict performance of any of the
terms, conditions and covenants hereof shall not be deemed a relinquishment or waiver of any
rights or remedy that said party may have, nor shall it be construed as a waiver of any subsequent
breach or default of the terms, conditions and covenants hereof which shall continue to be in full
force and effect. No waiver by the parties of any of their rights under this Contract of Lease
shall be deemed to have been made unless expressed in writing and signed by the party
concerned.
Subsequently, Food Fest assigned its rights in favor of Tucky Foods, Inc. which in turn
assigned its rights to Joy Foods, Inc. The rental escalation clause in the said contract, which
requires the annual escalation of monthly rent by 10%, was consistently observed on the second
to the fifth year.
Thus, by the fifth year of the lease, 18 Joyfoods was paying the respondents a monthly rent of
P64,275.45.
The rental escalation clause, however, was not observed during the sixth up to the tenth year
of the lease. For failing to reach an agreement as to the payment of the rental’s escalation, the
Sapianos filed a complaint for sum of money in the amount of P988,907.74 from Food Fest and
Joyfoods — which sum respondents refer to as the “escalation for the years 2007 and 2008. The
RTC ruled in favor of the Sapinos. The CA affirmed the RTC decision.
Issue: whether or not there was novation; or whether or not Joy Foods has already substituted
Food Fest as debtor of the Sapianos.
Held: No. Food Fest and Joyfoods’ plea is, in substance, an invocation of the concept of novation
— particularly, novation of an obligation by the substitution of the person of the debtor. Their
basic assertion is that the assignment by Food Fest of its rights and obligations under the
Contract of Lease to Tucky Foods, and the assignment by Tucky Foods of the same rights and
obligations to Joyfoods, ought to have resulted in Food Fest’s release from its obligations under
the Contract of Lease and its substitution therein by Joyfoods.
Novation is the extinguishment of an obligation by its modification and replacement by a

subsequent one. It takes place when an obligation is modified in any of the following ways: (a)
by changing its object or principal conditions, (b) by substituting the person of the debtor, or (c)
by subrogating a third person in the rights of the creditor. 41 In such instances, the obligation
ceases to exist as a new one — bearing the modifications agreed upon — takes its place.
Novation is, thus, a juridical act of dual function — for as it extinguishes an obligation, it also
creates a new one in lieu of the old.42
Novation of an obligation by substituting the person of the debtor, as the term suggests, entails
the replacement of the debtor by a third person. When validly made, it releases the debtor from
the obligation which is then assumed by the third person as the new debtor. To validly effect
such kind of novation, however, it is not enough for the debtor to merely assign his debt to a
third person, or for the latter to assume the debt of the former; the consent of the creditor to the
substitution of the debtor is essential and must be had.
The consent of the creditor to the substitution of a debtor, as a rule, may be given expressly or
impliedly.46 As can be observed, the law does not require that the creditor’s consent to the
substitution to come at a particular time or in a particular form.47 What it only demands is that the
consent of the creditor be given one way or another. 48 This notwithstanding, there is also
nothing that precludes the parties in an obligation, pursuant to their freedom to
contract,49 to agree to a specific form by which the creditor’s consent to any potential
novation should be expressed. Once an agreement is reached that subjects the creditor’s
consent to certain formal requirements, such requirements naturally become binding upon the
parties.50
Going back to the instant case, We find that the established facts do not permit the conclusion
that novation had taken place.
First. The settled facts do not show that respondents had expressly consented in writing to the
substitution of Food Fest by Joyfoods. The consent of respondents to such substitution has to be
in writing, in light of the non-waiver clause of the Contract of Lease. As can be recalled, the non-
waiver clause of the Contract of Lease required the parties thereto to express any waiver of their
rights under said contract in writing lest their waiver be considered null, viz.:
16. NON-WAIVER – The failure of the parties to insist upon a strict performance of any
of the terms, conditions and covenants hereof shall not be deemed a relinquishment or
waiver of any rights or remedy that said party may have, nor shall it be construed as a
waiver of any subsequent breach or default of the terms, conditions and covenants hereof
which shall continue to be in full force and effect. No waiver by the parties of any of
their rights under this Contract of Lease shall be deemed to have been made unless
expressed in writing and signed by the party concerned.51

Respondents’ consent to the substitution of Food Fest falls within the ambit of the foregoing
clause, because a novation by the substitution of the person of the debtor implies a waiver
on the part of the creditor of his right to enforce the obligation as against the original
debtor.52
Verily, without the consent of the respondents — conveyed in the form required under the
Contract of Lease — there can be no substitution of Food Fest by Joyfoods. On this score alone,
Food Fest and Joyfoods’ plea is dismissible.
Second. Yet, even if we are to set aside the non-waiver clause of the Contract of Lease, Food
Fest and Joyfoods’ claim of novation is still doomed to fail. This is so because the consent of
respondents to the substitution of Food Fest, just the same, cannot be deduced or implied from
any of the established acts of the former. Indeed, under the settled facts, the respondents did
nothing in the way of releasing Food Fest from its obligations other than, perhaps, its acceptance
of rental payments from Joyfoods.
The consent of respondents to the substitution of Food Fest by Joyfoods, however, cannot be
presumed from the sole fact that they accepted payments from Joyfoods. It is well-settled that
mere acceptance by a creditor of payments from a third person for the benefit of the debtor, sans
any agreement that the original debtor will also be released from his obligation, does not result
in novation but merely the addition of debtors. As Ajax Marketing Development Corporation v.
Court of Appeals55 instructs:
The well-settled rule is that novation is never presumed. Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect
an objective novation, 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 new one. In the same vein, to effect a subjective novation by a
change in the person of the debtor it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor assumes his place
in the relation. There is no novation without such release as the third person who has
assumed the debtor’s obligation becomes merely a co-debtor or surety.56
Effect of Novation
Article 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent.
[Balane]
Effect of novation as to accessory obligations Accessory obligations may subsist only insofar
as they may benefit third persons who did not give their consent, e.g., stipulation pour atrui
General rule: In a novation, the accesory obligation is extinguished.
Exception: In an active subjective novation, the guarantors, pledgors, mortgagors are not released.
Look at Article 1303, accessory obligations are not extinguished. So there is a conflict.
How do you resolve? According to commentators, Article 1303 is an exception to Article 1296.
Article 1297. If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relation should be extinguished in any event.
Article 1298. The novation is void if the original obligation was void, except when annulment
may be claimed only by the debtor, or when ratification validates acts which are voidable.
Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the
new obligation shall be under the same condition, unless it is otherwise stipulated.
Illustrations:
1. Special forms of payment:

a. Dation
b. Application – Before the courts do not consider application as special form of
payment.
c. Tender of payment and consignation – Tender of payment is not a form of payment
consignation is a special form of payment.
d. Cession
2. Distinguish one from the other or the rest:
a. Consent: is consent of both parties required in this special form of payment?
There is no question that as to debtors consent is obviously there because he is the
one offering to pay, so if he is the one offering to pay then there must be consent, but
as to creditor?
i. Dation in payment – YES. the creditor has to accept the delivery of a thing
instead of the other prestation for the satisfaction of the debt, if there is no
consent on the part of the creditor, there can be no dation in payment. CASE:
Filinvest v. Phil. Acetelyn
ii. Application of payment –NO. As a rule the consent of the creditor is not
required, it is only under certain circumstances that the consent of the creditor
will be present.
iii. Payment by cession – YES. Definitely the consent of the creditor is required,
if the creditor would not agree that the debtor would abandon the properties
for the creditors to sell, there can be no payment by cession.
iv. Consignation – NO. The consent of the creditor is not required even if the
creditor refuses to accept the thing delivered by the debtor to the court by way
of consignation, the court may declare the consignation to be valid.
b. As to the effect of the delivery of the thing from the debtor to the creditor or
from the debtor to the court is there transfer of ownership?
i. Dation in payment – yes there is transfer of ownership, because that thing is
being delivered and the ownership thereof is being transferred in satisfaction
of his debt.
ii. Application of payment – Yes there is transfer of ownership. If money is
delivered by the debtor to the creditor ownership passes to the creditor. The
only question here in this form of payment is to which debt the payment will
apply? This is the issue in this kind of payment, but as to ownership it passes
immediately to the creditor.
iii. Cession - Ownership does not pass because the creditor upon delivery
because the creditors just accept the things or those things to be sold and the
proceeds thereof to be applied to the indebtedness.
iv. Consignation – Upon the delivery of the thing to the court ownership does
not automatically pass to the creditors because the consignation may be void,
if it is void, then ownership does not pass to the creditor. However, if the
creditor will accept thereafter, may be months or years thereafter, or maybe
the court declares the consignation valid, then the ownership passes, however,
by law the effect of acceptance or the declaration by the court that the
consignation is valid retroacts to the time of the delivery of the court as if
the creditor is already the owner of the thing at the time of the delivery.
c. Extent of Extinguishment: May there be total extinguishment of the debt?

i. Application of payment – No, there can never be total extinguishment,
precisely because there is a need to determine to which debt the payment is to
be applied. Because the amount paid is not sufficient to cover all the debts,
because you will no longer have a problem is the amount is sufficient to cover
all the debts you just have to invoke the rules on application on payments.
Necessarily there is no total extinguishment of the debts under the rules
on application of payment.
ii. Cession – the extinguishment will only be to the extent of the net profits of the
sale, unless the parties agree that the abandonment will result to the
extinguishment of the entire debt. So here, the net proceeds is the basis of the
extent of the extinguishment of the debt.
iii. Consignation – Because this is a special form of payment it follows the rule
in payment, thus as a rule “partial performance is non performance” therefore
if the debtor delivers only a portion of his debt, then the consignation is null
and void. The exception will only be if the creditor would agree to the
delivery of partial amount, then to that extent there will be partial
extinguishment.
iv. Dation in payment – There are authors who will take the position that if there
is Dation in payment then the obligation is totally extinguished unless it is
clear in the intention of the parties that it will result only to partial
extinguishment. But is this the better rule? For example if A is the debtor of B
in the amount of 1M and A delivered to B a car stating that it is to be applied
to the amount that B owes A, the value of the car is 150K, if the creditor
accepted the car, does that mean that the entire obligation is extinguished?
This rule does not seem to be equitable, the BETTER RULE: As a rule
the extinguishment is only to the extent of the value of the thing delivered
unless it is clear from the agreement of the parties that the delivery of a
thing, no matter the value, is equivalent to the amount of the obligation.
3. Specific Rules:
a. Dation in payment – Again in Dation a thing is delivered and ownership thereof is
delivered by the debtor to the creditor in satisfaction of his debt. Dation apparently
will only apply to the delivery of the thing THIS IS NOT TRUE. The SC has ruled
that even rights can be the subject of Dation for example: if hereditary right is
already vested to the debtor, the debtor can deliver his rights to his creditor for
the satisfaction of his debt. Also, in one case, a credit owing to the debtor may be
delivered by him to his creditor for the satisfaction of his debt. But just like the
other modes of payment, in order that there be Dation there has to be an obligation to
be extinguished (CASE: Citizen’s Surety v. CA: Perez was claiming that with the
execution of deed of assignment that practically extinguishes his obligation under the
indemnity agreement by way of Dation, the scenario here was: a contract of sale was
entered into, payable by installment, the buyer is Pascual enterprises, to secure the
fulfillment of his obligation, a surety bond was executed in favor of the seller, not
citizen’s surety executed an indemnity agreement just in case it will be held liable
under the bond, Pascual Perez and his wife being the party thereto, Citizen’s also had
Perez execute a deed of assignment over certain stocks. The surety obviously was
held liable under the bond, the surety went after Perez under the indemnity
agreement. Perez claimed that the execution of deed of assignment was a form of
Dation, but the facts showed that at the time the deed of assignment was
executed there was no obligation under the indemnity agreement nor under the
surety bond. Why? Because the contract were all dated earlier than the time he
was made liable, therefore there was no obligation yet. So what is really the
nature of deed of assignment? It was a form of security arrangement. Other
facts relied upon by the SC in ruling that the deed of assignment was not Dation
in payment was that after the deed of assignment was executed, Perez also
executed a real estate mortgage, so why would he execute a real estate mortgage
if his obligation was already extinguished by Dation. Also, in deed of assignment,
there were partial payments made, if there was Dation then he would not have
made the payments.)
What is the law governing Dation? Others would say that this is governed by
the law of sales. If you will read 1245, it would appear that Dation is governed by law
of sales, but reading it more closely; the law on sales will only apply if the obligation
is in money. For instance, A owes B 20K, instead of paying cash, A offered his cell
phone to B in satisfaction of the obligation, there is here Dation and this will be
governed by the law on sales as provided for in 1245. Tolentino criticized this
provision, considering that the trend worldwide is to consider this as a form of
novation because practically there is a change in the object, from money to a
thing. REMEMBER! 1245 will not apply if the pre-existing obligation is not in
money. For example: A is obliged to deliver to B a horse, so instead of delivering a
horse he delivered a car to B. 1245 will not apply here because the pre-existing
obligation is not in money, but it is to deliver a horse. So in this case Novation shall
apply because there was a changed in the object of the obligation, from horse to
car. Again, going back to Tolentino’s criticism, he said that regardless of pre-existing
obligation whether money or thing, still the law that will apply is the law of novation.
Atty. Uribe: I find wisdom in 1245 because, instead of paying in cash, (refer to the
cell phone example) the debtor paid by giving his phone to the creditor, but is this not
almost similar to the scenario where the debtor paid in cash and the creditor used the
cash to buy the cell phone? And therefore the law on sales will govern. I think 1245
will do.
b. Application of payment – the only question relevant in this rule is “to which debt
will the payment be applied?” the premise of this question is a debtor has two or
more debts to one creditor but may the rules on application of payments be
invoked if the debtor has two or more creditors? Yes. As long as as to one
creditor he has two or more debts. The law does not require that the debtor should
only have one creditor. For example: A’s creditors are XYZ, for the rules to be
invoked, he must have two debts to one creditor. Let us say A owes X 100K, 50K, and
20K, now if A delivers to X 30K, the question here is to which debt will the payment
apply? 1. AS A RULE: The debt designated by the debtor, so under the law, the
debtor has the right to designate to which debt the payment will apply. So here,
A can designate the 30K to apply to 100K or to 50K or to 20K or 30K. But having
said that, if A instructed the creditor to apply the 30K to 50K, can the creditor be
compelled to apply the payment to the 50K debt? AS A RULE THE ANSWER IS
NO because this is a special form of payment, the rules of payment shall apply, the
creditor cannot be compelled to accept partial payment, nor the debtor be compelled
to perform partial payment. Therefore, unless there is a stipulation giving the debtor a
right to designate to a debt that will constitute partial payment, he cannot designate
payment to which the payment should be applied. In the first place why would he
designate it to the 50K? The 50K may be interest bearing. THEREFORE, THE
RIGHT OF THE DEBTOR TO DESIGNATE TO WHICH PAYMENT SHALL
APPLY IS NOT ABSOULTE, ONE OF THE EXCEPTIONS IS AS TO
PARTIAL PAYMENT. SECOND LIMITATION, A delivered the 30K, he

designated it for the payment of the 30K debt, however, the 30K debt is interest
bearing, can he compel the creditor to apply the payment to the principal first, then he
will just pay the interest later? NO BY EXPRESS PROVISION OF THE LAW,
PAYMENT SHOULD ALWAYS BE APPLIED TO INTEREST FIRST, IF
THERE ARE EXCESS THEN THAT WILL BE THE AMOUNT APPLIED TO
THE PRINCIPAL. THIRD LIMITATION: A designated the 30K for the payment of
the 30K debt, but the 30K debt is not yet due. THE LAW REQUIRES THAT THE
DEBT IS ALREADY DUE IN ORDER THAT THE DEBTOR WOULD HAVE
THE RIGHT TO DESGINATE SUCH PAYMENT TO THE DEBT. What is the
meaning of due here? The period must be fixed for the benefit of the creditor or for
both of them. If it is not yet due, but the period is fixed solely for the benefit of the
debtor it does not matter the debtor can designate such debt because the period is
for his benefit. But also he cannot vary an agreement which they had as to which
debt the payment to be applied.
PROBLEM: What if A entrusted X to apply the 30K to 30K debt, but the debt is
secured by a mortgage, as instructed X applied the payment, he issued a receipt
stating that the 30K is applied to the 30K debt, however, days thereafter, A asked X
to apply the amount to another debt, the 50K, though the creditor cannot be
compelled to accept, he may accept if he wants to. So, if X agrees, and he applied
the payment of the 50K debt instead of the 30K, thereafter A was not able to pay
X as to the 30K debt, can X foreclose the mortgage? NOT ANYMORE! A
already paid the 30K, although it was revived (when he chose that the payment
be applied to 50K instead) the mortgage was not revived (mortgage is not
revived without the consent of the mortgagor).
SECOND RULE: What if the debtor did not designate the debt to which the
payment shall apply? The debt designated by the creditor. He would have the right
to designate to which debt the payment shall apply. However, is the debtor’s consent
required in the designation made by the creditor? Yes! By express provision of the
law, if in the receipt the debtor sees that the payment was applied to a particular debt,
and the debtor does not agree to such application, he may refuse to accept the
application.
THIRD RULE: Neither the debtor nor the creditor made the designation.
Scenario: the debtor made payment; the creditor accepted and issued a receipt without
designating the particular debt, so to which debt the payment shall apply? IT
WILL DEPEND ON WHETHER THE DEBT OF THE SAME NATURE AND
BURDEN OR WHETHER THE DEBT IS MOST ONEROUS OF THEM ALL.
If all the debts are of the same nature and burden, the law requires proportional
application. As regards to the most onerous debt, apply the payment to the most
onerous obligation. TAKE NOTE! That you should only go into these rules if the
law would not guide you as to which debt the payment should be applied, there are
guides like partial payment, interest bearing, and the circumstances which may show
the intention of the parties, if these guides are not present, then that is the time you
go into the rules considering the nature and burden of the debts. IN
DETERMINING WHICH DEBT IS THE MOST ONEROUS: is there a particular
rule? None. The SC held that there is no hard and fast rule! This is because each debt
has its own features, for example, there are debts which consist of bigger amount the
other smaller amount but interest bearing, the other one secured. For example one
debt is secured by real estate mortgage and another debt is secured by pledge, what is
more burdensome? The debt secured by a real estate mortgage. However, real
estate mortgage may be constituted by one real estate, so consider if the real estate
mortgage constitutes a small lot and the pledge constitutes ships, which is more
onerous? Obviously the debt secured by pledge constituting ships. TAKE NOTE
THAT ALL FACTORS ARE CONSIDERED IN DETERMINING WHICH IS
MORE ONEROUS. If for instance in one debt the debtor is merely the guarantor
and other debt he is the principal, apparently the debt in which he is the principal
debtor is more onerous, but the common reason given by few authors is because in
this debt where he is a guarantor, his liability is only subsidiary, in fact inchoate, he
may or may not be held liable because the principal debtor should first be held in
default then his properties dissolved before the guarantor may be held liable, BUT
THIS IS A WRONG REASON WHY? If the rules on applications of payment are
to be invoked, it presupposes as to the two debts he is already liable, his liability is
not merely inchoate, and even if it is only subsidiary, he is already liable, in other
words in this scenario for the rules to be applied, the principal debtor should have
defaulted and his properties exhausted that is why the guarantor is liable, if he is not
yet liable there is no reason to apply the rules on application of payment because
there is only one debt, which is the debt to which he is the principal debtor. But
even considering that in the contract of guaranty the guarantor is already liable, which
is more onerous, Atty. Uribe: the debt more onerous is the debt to which the debtor is
a principal, because in guaranty the guarantor may be able to recover what he paid to
the creditor from the debtor, in the debt to which he is a principal, he cannot recover
anything by way of reimbursement. One author would claim: bigger amount is
more onerous than smaller amount. Is there any basis for this claim? Atty. Uribe: I
beg to disagree to this claim, first, if the debt is one peso or two pesos or even one
thousand pesos bigger in amount, does that really matter in this country? But if you
go by the rules, if you follow this claim, then what will happen to the rule that there
are debts of the same nature and burden because if the debts would have 1 peso
difference, then that debt is already more onerous, since the law provides that
proportional application to debts, presupposes that the debts are of different
amounts. OBVIOUSLY THIS IS WRONG. Example this is 1M the other debt is
10K, you think 1M is more onerous, not necessarily, let’s say the debt is only 10K
but it is interest bearing, what should I pay first? Of course the 10K interest bearing.
Who cares about the 1M, after 2 years it is still 1M! Again the amount is irrelevant.
Another, OLDER DEBT IS MORE ONEROUS. There is no basis to this claim. In
fact, older debts may be less onerous why? Because it is about to prescribe.
c. Cession or assignment – Here the debtor would abandon or assign all his properties
to the creditor which properties will have to be sold by the creditor the net proceeds
shall be applied to the credit. FIRST ISSUE: All the properties of the debtor shall be
delivered? No there are properties which are exempt from execution. But can the
debtor deliver to the creditor properties which are exempt from execution? Yes!
Because that is a right which the debtor can waive, though he cannot be compelled he
may abandon those properties to the creditor. However, there are certain properties
which cannot be the subject of the claim of the creditor even with the consent of
the debtor LIKE THE FAMILY HOME, of course there are beneficiaries of the
family home who can object to the sale thereof.
What if the debtor is willing to abandon all his properties and the creditors
would refuse, what is the remedy of the debtor? Authors would say that the best
remedy of the debtor is to file an action for insolvency. In a way insolvency
proceeding has its advantages, however, here in the Philippines businessmen are
really not keen on filing an insolvency proceedings.
What if the creditors did agree for this kind of payment but they failed to
agree as to how they will partition/distribution the proceeds? Atty. Uribe agrees
that the rules on concurrence and preference of credits because in these rules there are
preferred debts and those debts which are not preferred they shall be paid
proportionately.
Alleged requirement of few authors that in this form of payment, the debtor
is insolvent. In other words, there can be no cession if the debtor is not insolvent.
Atty. Uribe CANNOT AGREE TO THIS REQUIREMENT because if you read
1265 there is no requirement that the debtor must be insolvent for payment of cession
to take place. Another important reason is the fact that this is by agreement of parties,
there can only be payment of cession because the creditor agreed, as long as the
debtor is willing to abandon the properties and the creditors agree and the proceeds
shall be applied to the debt, there is cession. Other authors claim that the debtor
should be partially insolvent, is there any basis to this? NONE! Once a debtor
failed to comply with his obligations and xxx is insolvent. There is no such thing as
partial insolvent. The statement of Professor Sta. Maria is a better statement “this
mode of extinguishing obligation would normally be resorted to by debtors who are
in a financially difficult position.”
d. Tender of payment and consignation – Fist, let us go to the claim of Prof. Jurado,
as a rule tender of payment is necessary for consignation to be valid, correct?
Reading 1256, there are how many grounds or causes for consignation wherein the
law expressly provides that tender of payment is not required. In 1256 there are about
5 grounds, where the law provides that in those grounds tender of payment is not
required, obvious because in those grounds the creditor is not present. So in those
causes, there is no tender of payment but the consignation is valid. What are the
grounds or causes for consignation where tender of payment is necessary under
the law? Where the creditor refuses to accept without just cause. Therefore going
back to the statement tender of payment is required for consignation to be valid,
it seems wrong. AS A RULE TENDER OF PAYMENT IS NOT REQUIRED,
THE ONLY EXCEPTION TO THAT RULE IS WHEN THE GROUND FOR
CONSIGNATION IS THAT THE CREDITOR REFUSES TO ACCEPT
WITHOUT JUST CAUSE.
On the other hand, Jurado is very much correct in his statement that “tender
of payment by its very nature is extrajudicial” as you have read in the case of Soco
v. Milintante, tender of payment is made during the pendency of the action, that
consignation is void. Tender of payment should be made prior to consignation not
during the pendency of the action. SO IT IS BY ITS VERY NATURE
EXTRAJUDICIAL IN CHARACTER.
Now, if the ground for consignation requires tender of payment and the
debtor sent probably three letters to the creditor informing the creditor that “I
am willing to pay my debt xxx” is this a valid tender of payment? NO! In order
for tender of payment to be a valid tender of payment, you have to actually offer the
amount to the creditor; IT IS THE ACT OF OFFERING THE AMOUNT
WHICH CONSTITUTES A VALID TENDER OF PAYMENT.
In to the requisites of a valid consignation:
i. There must be a debt to be extinguished – a sum of money is delivered not

to extinguish a debt but to exercise a right, like the right of redemption, if the
other party refuses to accept the money, then the person who has the right is
not required to deliver to the court the amount by way of consignation because
he is not intending to extinguish an obligation. Example: A had the right to
redeem, he offered to redeem, the other party refused to accept, when the
action was filed the defendant claimed that the action should be dismissed
because the redemptioner was not sincere in redeeming the property
because if the redemptioner was sincere, when I refused to accept the
money he should have deliver the money to the court by way of
consignation. The SC: the claim is erroneous, because the redemptioner is
exercising a right, and in the exercise thereof there was refusal without
just cause, there is no need for consignation. But if the intention is to
extinguish an obligation and the money was refused, that is when the
debtor has to go to the court and deliver the money by way of
consignation.
ii. The consignation must be based on a ground provided by law – Is the
enumeration under 1256 an exclusive enumeration? Atty. Uribe agrees with
the position that the enumeration does not have to be exclusive because as
long as it would be more burdensome to the debtor if he will not be allowed to
deliver the thing or the money to the court, consignation should be allowed.
Some of the grounds are:
a. When without just cause the creditor refuses to issue a receipt – is
the issuance of the receipt the operative fact which extinguishes the
obligation? NO! in our jurisdiction PAYMENT IS THE MODE OF
EXTINGUISHMENT, THE RECEIPT IS MERELY AN EVIDENCE.
But if the creditor refuses to issue a receipt or does not want to issue a
receipt, it is better that the debtor does not give the payment to him,
because he can easily deny that the debtor did not pay. Actually, in
other jurisdiction, it is the issuance of the receipt that extinguishes the
obligation, this rule seems to have an advantage because it would

minimize the litigation involving issues as to payment.
b. When two or more persons claim the same right to collect – A
good example is an obligation to deliver a carabao, in this obligations
three creditors are claiming from the debtor, because three persons
are claiming to the carabao that will give the person a right to
deliver the carabao to the court by way of consignation? Not
necessarily. The SC held that the debtor should determine for himself
the person who has the right over the thing or the money.
iii. Notices required for consignation to be valid: AT LEAST TWO: Why?
Because if the obligation pertain to an obligation to pay on a monthly basis,
like rental, the SC as rule in the case of SOCO, THERE MUST BE AT
LEAST TWO NOTICES FOR EACH AMOUNT WHICH BECAME
DUE (so every month that the payment is not accepted sent notice prior the
consignation). But if there is only one debt, there should be two notices
required, is it required that both notices should come from the debtor? NO!
But the first notice should come from the debtor prior the consignation and the
second notice may come into the form of summons. Is notice really an
essential requisite for the validity? TOLENTINO DOES NOT AGREE
WITH THIS VIEW, he thinks that even without such notice the consignation
may still be considered as valid. But it can be the basis of holding the debtor
liable, this rule is better but THIS IS NOT THE RULE LAID DOWN BY
THE SUPREME COURT. SECOND: if the payment is monthly and the
creditor already refused to accept the payment in the first month the defendant
will question the necessity of second notices, since the creditor already knows
that the debtor will again deliver to the court the payment by way of
consignation RATIONALE: THIS IS TO GIVE THE CREDITOR THE
OPPORTUNITY TO CHANGE HIS MIND. Which is very true, the
bigger the amount the more difficult to refuse.
There are only two questions in consignation: After the delivery of the money
or the thing with the court, what if thereafter the money was withdrawn from
the court, thereafter the debtor failed to pay the creditor, can the creditor still
go after those who are subsidiarily liable for the debt (like the mortgagor)?
PREMISE HERE IS: A is indebted to B, A delivered a sum of money to the
court by way of consignation however, A withdrew the money, the debt is
secured by a mortgage, thereafter A failed to pay the creditor, can the creditor
foreclose the mortgage? It depend on the manner how A was able to withdraw the
money from the court. IF A WITHDREW THE MONEY AS A MATTER OF
RIGHT (when even the court cannot refuse the withdrawal, and this can
happen if the creditor has not yet accepted and the court has not yet declared
the consignation to be valid, in this scenario, the debtor can still withdraw the
money as a matter of right at anytime), THUS, NO DEBT HAS BEEN
EXTINGUISHED, BECAUSE IN CONSIGNATION THE DEBT WILL ONLY BE
EXTINGUISHED EITHER BECAUSE THE CREDITOR HAS ALREADY
ACCEPTED OR THE COURT HAS ALREADY DECLARED THAT THE
CONSIGNATION IS VALID, ABSENCE OF THE TWO NO OBLIGATION IS
EXTINGUISHED, THEREFORE NO OBLIGATION IS REVIVED, THEREFORE

IF THE DEBTOR WITHDREW UNDER THIS SCENARIO AND FAILED TO
PAY, THE CREDITOR MAY STILL FORECLOSE THE MORTGAGE,
BECAUSE THE OBLIGATION WAS NEVER EXTINGUISHED. HOWEVER,
IF THE WITHDRAWAL IS NOT AS A MATTER OF RIGHT, THEREFORE
HE WAS ONLY ABLE TO WITHDRAW WITH THE CONSENT OF THE
CREDITOR (this may happen either when the withdrawal was made after the
acceptance or the withdrawal was made after the declaration by the court that
the consignation was valid.) IN THIS CASE, THE CREDITOR CONSENTED TO
THE WITHDRAWAL. WHAT HAPPENS TO THE OBLIGATION, UPON THE
ACCEPTANCE BY THE CREDITOR OR DECLARATION BY THE COURT
THAT THE CONSIGNATION IS VALID, THE OBLIGATION IS
EXTINGUISHED, AND THEREFORE, WHEN THE AMOUNT WAS
WITHDREW BY THE DEBTOR THE OBLIGAITON WAS REVIVED, UPON
REVIVAL THE DEBTOR FAILED TO PAY, THE CREDITOR CAN NO
LONGER FORECLOSE THE MORTGAGE, WITH THE EXTINGUISHMENT
OF PRINCIPAL OBLIGAITON THE ACCESSORY CONTRACTS ARE
ALSO EXTINGUISHED.
Liability to pay interest: Let us assume that the obligation became due on 1.
Jan. 1, 2002, 2. tender of payment was made Jan. 1, 2003 which is the due date, and
3. consignation was made January 2, 2006 three years after the tender. 4. Thereafter
the court’s decision was released January 2, 2008, QUESTION: can the debtor be
held liable from period 3 to period 4? If the court declared the consignation to be
VOID there is no question that the debtor is liable to pay interests, on the premise
that there was demand and that demand was necessary for the debtor to incur in
delay. However, what if the court declared the consignation to be valid? Is he
liable for interest? Is he liable from period 2 to 4? Obviously he is liable because
he made the tender of payment only period number two, but from the time of
consignation to the time the declaration of decision of the court is he liable for
interest? NO! because the effect of the declaration retroact to the time of the delivery
of the amount to the court as if the obligation was extinguished at the time the
consignation was made, therefore there will be no obligation to pay the interest. The
problem is in period of tender of payment to the consignation, can he be made
liable for payment of interest? Juridically speaking, there is basis to the SC ruling
that the debtor is still liable because the effect of consignation will only be from the
time the thing is delivered to the court, so until the obligation is extinguished the
debtor should still be held liable for interest. However, in the recent cases of the
SC, it was held that from the time tender of payment was made the debtor is no
longer required to pay interest, here, the law requires that if the creditor
refuses acceptance, the debtor should immediately go to court, otherwise the
debtor will have no reason to go to the court because he no longer has liability
for interest. However, in the recent ruling of the SC, it held that BY REASON
OF JUSTICE AND EQUITY, why? Because here as the consignation is valid it
means that the creditor refused to accept without just cause, if the creditor
accepted it would there be liability on the part of the debtor to pay interest?
None! So, under the principle of justice and equity the debtor should no longer
be held liable to pay interest from the time tender of payment was made up to
the time of consignation even if the consignation was made years after. ATTY.
URIBE: This is quite inconsistent with consignation, there is a much better basis
than justice and equity, if you remember our discussion in period, in periods two
to three the debtor is liable for interest, but when the creditor refused to accept
without just cause, is it not that he is also in delay which is known as mora xxx
so if both parties are already in delay, following the ruling of the SC in Agcaoili
v. GSIS, in contemplation of law, no one is in delay and if no one is in delay
could there be liability to pay interest? None. Without invoking justice and
equity, this decision seems to be more correct.
4. LOSS OF A THING DUE – Can this mode of extinguishment be invoked in all kinds of
obligations meaning obligations to do? It does not seem like it because it says loss of the
thing. If you will read the provisions under this mode, loss of the thing due, there are
provisions pertaining to obligation to do, thus, authors would consider a better name for this
mode, instead of loss of the thing due a better name would be Impossibility of Performance.
In impossibility of performance it would already include even obligations to give or to
deliver, in case of obligations to give it will be impossible to perform because the thing to be
delivered is lost.
a. May this mode apply to obligations to deliver generic thing? YES. If you
remember the doctrine genus non quam peruit this applies to a scenario where the
loss or destruction of anything of the same kind does not extinguish the obligation.
EXAMPLE: there is an obligation to deliver a brand new 2009 Toyota camry,
just because the brand new Toyota camry was lost does not mean that the
obligation is extinguished under this doctrine. GOING BACK TO THE
ORIGINAL QUESTION: May an obligation to deliver a generic thing be
extinguished because the obligation became impossible to perform? YES! As the law
would define loss it is a scenario where the thing goes out of commerce, so if the
thing went out of commerce there is nothing to deliver. Another scenario, is when it
became legally impossible to perform, impossibility of performance may either be
physical impossibility or legal impossibility. Pesigan v. Angeles Delivery of carabao
from one province to another, along the way the carabaos were confiscated because a
law became effective during the pendency of the obligation, therefore the obligation
was considered legally impossible to perform. TAKE NOTE THAT when the law
became effective, there must already be an obligation which will become
impossible to perform because if the law became effective before the obligation
was instituted in the first place the obligation is void and there is nothing to be
extinguished.
b. Obligations to deliver a determinate thing: if the thing to be delivered was lost or

destroyed, is the obligation extinguished? If you will read 1262 literally, it will
depend on the cause of the loss. If the cause of the loss was due to the fault of the
debtor then the obligation is not extinguished 1263 provides that if the thing is lost or
destroyed without the fault of the debtor, the obligation is extinguished, therefore, if
the loss is caused by the debtor the obligations is not extinguished. However, Prof.
Tolentino opines even if the loss is due to the fault of the debtor, what will be
delivered? None, so here, there is physical impossibility, and therefore the
obligation should be deemed to be extinguished without prejudice to his liability
to pay damages because the loss is due to his fault. Nonetheless if you want stick
with the opinion of Tolentino you can always cite 1262 as the basis but this does not
seem to be correct. BUT ULTIMATELY IN CASES DECIDED BY THE
SUPREME COURT: As to the thing to be delivered is lost or destroyed, what is
the issue that is always mentioned in the case, is it “won the obligation was
extinguished?” No, the ISSUE IS WHEHTER THE DEBTOR CAN BE HELD
FOR DAMAGES in other words it does not matter whether the obligation was
extinguished or not, what matters is is the debtor liable for the damages caused by the
loss of the thing. If the loss was due to his fault he is liable for damages, otherwise
he cannot be held liable for damages. In fact Sta. Maria also take this position, Sta.
Maria will not state whether the obligation is extinguished or not, the issue that will
be posted is that whether or not the obligation to deliver a thing is converted to an
obligation to pay a sum of money. However, if this is your position, you actually
take the position that there was extinguishment. If you remember in prescription,
prescription is a mode of extinguishing an obligation because it converts the civil
obligation to natural obligation, there is a change in the obligation therefore there is
extinguishment, in the same manner if the obligation to deliver is converted to a
monetary obligation then there is an extinguishment of an obligation.
Who has the burden of proving as to the cause of the loss? The creditor
or the one claiming that it was the debtor’s fault who caused the loss. Reasonable,
because this follows the rule that whoever alleges the fact must prove the fact.
However, in certain circumstances, the creditor or the plaintiff may not have the
burden, because the law provides for a presumption that the cause of the loss was due
to the debtor, when will this happen? If at the time of the loss the thing is in the
possession of the debtor. But take note that the presumption is not an absolute
presumption because the debtor can always post a defense that even if the thing
was in his possession the loss was due to the fault of somebody else. However,
even if a thing is lost while in his possession is it possible that there is no presumption
that it was due to his fault? Yes if the loss happened during a calamity or on the
occasion of a calamity. Because even if the thing was lost even if in the possession
of the debtor but it was during a calamity, more often than not, the calamity is
the cause of the loss and not the fault of the debtor, therefore the burden again
will be shifted to the creditor or plaintiff if he would claim that the loss was
caused by the debtor.
We have already discussed that even if the loss was caused during fortuitous
event that will not necessarily exempt the debtor from liability. That may be the
general rule under 1174 but there are EXCEPTIONS APPLICABLE TO
OBLIGAITONS TO DELIVER A DETERMINATE THING: stipulation of the
party that the debtor will be liable whatever may be the cause of the loss, or may
be the law provides for liability even if the loss was caused by a fortuitous event.
Occenia v. Jobson when the performance has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may also be released
in whole or in part. THE LAW GRANTS THE COURT THE POWER TO

RELEASE THE DEBTOR IN WHOLE OR IN PART BUT IT DID NOT VEST
THE COURT THE POWER TO CHANGE THE TERMS AND CONDITIONS
AGREED UPON BY THE PARTIES. Requirements:
i. The performance of the obligation has become so difficult. This should not
be confused with impossible; if the obligation has become impossible to
perform then 1267 will not apply in fact as a rule the obligation will be
considered extinguished.
ii. The difficulty to perform must be due to a fortuitous event or beyond the
contemplation of the parties.
Effect of partial loss. A scenario could be an obligation to deliver a cell

phone with housing, what if the cell phone was lost but the housing is still available,
is the obligation totally extinguished, can the debtor still be compelled to deliver the
housing? The answer depends on the intention of the parties as to really what
was the principal motivation in entering the transaction. But is it possible that
the housing is more valuable than the cell phone? Yes it is possible for instance it
has diamonds. So if the delivery of the housing was the intention, apparently the
buyer cannot be compelled to accept the cell phone.
5. Condonation or Remission of the debt or a.k.a donation of credit – As to the kinds of

condonation:
a. Extent of extinguishment whether total or partial: Condonation may be partial.
PARTIAL: the principal amount may not even be reduced and the creditor will only
condone the interest or the principal amount nor the interest will not be condoned but
the accessory obligations will be condoned and therefore it will result to partial
condonation.
b. Whether Condonation is express or implied: if the condonation is EXPRESS you
should consider the rules as to formalities of donation. BAR QUESTION: The
son is indebted to his father 500K, the son paid 300K through a check, thereafter the
father died, the executor demanded for the payment of the balance 200K, the son
claimed that the 200K was condoned by his father as can be seen from the writing at
the back of the check stating that the check is for the full payment of the debt, was
there extinguishment by condonation? U.P. LAW CENTER: the effect of the writing
on the check will depend on who wrote the same, if the son is the one who wrote the
writing the obligation was not totally extinguished, if the father was the one who
wrote was there a valid condonation? Yes because this is a form of implied
condonation and therefore the law does not require a particular form nor acceptance is
required, Do you agree to this? ATTY URIBE: I do not agree to this answer, I agree
more to the alternative answer that as can be seen from the facts, what could be more
express than that? How express can this be? And therefore if this is an express
condonation this has to comply to the formalities of law as to donation, this is a
donation of credit and therefore under the law, if the credit is more than 5K, the
condonation must be in writing and that there must be acceptance in writing, so there
was a condonation in writing, but there was no acceptance in writing, hence, there
was no valid condonation. IMPLIED CONDONATION, WHEN WILL THIS
HAPPEN? If the debt is evidenced by a promissory note, and the promissory

note after having been delivered to the creditor was found in the possession of
the debtor was the obligation extinguished? At best there was only a
presumption, a presumption that the promissory note was voluntarily returned
to the debtor. If it is voluntarily returned the effect is that the obligation is
extinguished. Then when would the presumption arise that the delivery was a
voluntary delivery? It will only arise if the document is a private document, but if it
is a public instrument, there is no such presumption because a public document has
several copies in custody of several people. At any rate, the presumption here is only
a disputable presumption. But ultimately if it was voluntarily returned to the
debtor, how was the obligation extinguished? DE LEON: Not by condonation
but by payment. Thus, it was voluntarily returned because there was payment,
however, if the debtor cannot prove that payment, like for instance he does not
have a receipt, maybe he can invoke the presumption of the law that there was a
condonation, but again, the presumption is disputable. LAST RULE: A debtor of
B, a ring was delivered to B as a security, ordinarily this will be a pledge, now,
after the perfection of the pledge, the thing again was found in the possession of
A the debtor, is the obligation of A to B extinguished? NO! Is there a presumption
that this obligation is extinguished if there is a presumption under the law it will
pertain to the pledge. If the thing to be delivered by way of pledge is thereafter found
in the possession of the debtor there may arise a presumption that it was voluntarily
delivered and therefore the pledge was extinguished. “PRESUMPTION MAY
ARISE” because the presumption may not arise, why? The law requires that after
the perfection of the pledge, the thing must be found in the possession of the
owner of the thing pledged. Is the debtor necessarily the owner of the thing
pledged? No because pledge may be constituted by a third person, so if it was found
in the possession of the debtor, then no presumption will arise, the presumption of
voluntarily returned if thereafter it is found in the possession of the owner of the
thing pledged. Again, this presumption is disputable presumption, because there are
hundred and one reasons why the debtor would return the thing to the owner, one of
the reasons may be for safe keeping. So again it is a DISPUTABLE
PRESUMPTION.
6. CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just

imagining the merger of banks in the past few years. Now, it is common that before the
merger, one of the banks is indebted to the other banks and therefore instead of xxx the
creditor may agree to just buy the debtor bank. Obviously this is by agreement of the
parties. Can there be confusion by operation of law? Yes if the creditor for example
died and the only heir is the debtor, of course the heir will inherit the credit, the heir
now who is the debtor will now become the creditor, therefore there will be a meeting in
one person of the character of the debtor and creditor and therefore the obligation will
be extinguished. What if the decedent is the debtor and the heir is the creditor, will the
obligation be extinguished? It seems like it will not be extinguished because the heir will
not accept the obligation. So the creditor will normally demand from the executor payment.
Can a guarantor invoke a merger or confusion? YES! But he may invoke merger and
confusion as to the character of debtor and creditor because if the principal obligation is
extinguished then the guaranty will also be extinguished, the guarantors will benefit with the
confusion of the character of the principal debtor and the creditor, but if the confusion was
between the guarantor and the debtor will the principal obligation be extinguished? NO!
What will happen here is that there will no longer be security because the debtor and
the guarantor will be one. CAN THERE BE A PARTIAL EXTINGUISHMENT IN
CONFUSION OR MERGER? YES! By express provision of law, in joint obligations
and there was a confusion pertaining to one of the joint debtors in the person of the
creditor, the extinguishment will only be to the extent of the debt of the joint debtor.
This is different of course if the obligation is solidary, if there is confusion between the
creditor and one of the solidary creditor the obligation is totally extinguished.
PROBLEM: THE OBLIGATION BECAME OVERDUE IN 1992, THE OBLIGATION
IS 1M PESOS AND THERE WAS MEREGER IN 1999 BETWEEN THE DEBTOR
AND THE CREDITOR, BUT JUST LIKE ANY OTHER AGREEMENT THE
AGREEMENT MAY BE RESCINDED, AND ASSUMING THAT THE CONTRACT
WAS RESCINDED IN 2007, 2008 B FILED AN ACTION AGAINST A TO RECOVER
THE 1M, WHY? In rescission the effect is restitution, the parties will be reverted back to
their status prior to the merger, so as if A owes B 1M, so B files an action today against A to
recover the 1M, may the action prosper? It seems that not anymore the action already
prescribed, the obligation was due in 1992 and the action was filed only in 2008, 16 years
after. BUT THE SC HELD THAT IT YES IT WILL PROSPER, THE TIME OF THE
MERGER TO THE TIME OF RESCISSION SHOULD NOT BE INCLUDED IN THE
COMPUTATION OF THE PRESCRIPTIVE PERIOD. This a very good decision
because creditor and the debtor are one at that time. Therefore only 8 years has lapsed so
the action has not yet prescribed.
7. COMPENSATION – By express provision of law, compensation may be total or partial.

With partial compensation may there be two or ten debts extinguished as partial
compensation? Yes, there can be two or 100 debts extinguished by compensation but it is
still partial compensation why? As long as the debts of one are not equal to the debts of the
other the compensation will only be to the concurrent amount and there will be no total
extinguishment. Total extinguishment will only take place when the debts are totally
equal for instance if the debt is 1M and the other is 1M. Scenario: A owes B 100K, but B
has several debts to A 2K, 1K, 5K, 20K but if you add it all up it is only 80K, with
compensation, all the debts will be totally extinguished, because the extinguishment is for the
concurrent amount, the 80K will be totally extinguished, but A would still owe B 20K, why
is this so important? This is important as to the liability to pay interest or as to whether or
not there can be valid foreclosure etc. EXAMPLE: A obligation to B, B has obligation to A,
A’s obligation is interest bearing, after compensation can B still collect interest can A be
held liable for interest? It will depend on the amount involved, if B’s debt is smaller may be
50K, A’s debt is 100K, can be collect interest? Not anymore because the debt will be totally
extinguished, the 100K will be reduced by 50K to the concurrent amount. On the other
hand what if the 100K is secured by a mortgage after compensation may A foreclose the
mortgage? Yes! because there will still be a balance of 50K, a mortgage is an indivisible
contract, until the obligation is not extinguished the mortgage will remain in force. And
therefore if B failed to pay A the fifty thousand A can still foreclose the mortgage. BAR
EXAM QUESTION: A opened a savings account with Y bank in the amount of 1M,
thereafter A borrowed money from the same bank 800K, thereafter A wanted to withdraw the
1M, the bank said no you cannot withdraw the 1M because your obligation to pay the 800K
is already due we are invoking compensation, you can only withdraw 200K less the charges,
A claimed you cannot do that because under 1287 there can be no compensation when one of
the debts arises from a deposit. WHO IS CORRECT? The bank was correct because a
savings account deposit is not a deposit it is a contract of loan, that is why 1287
(compensation will not be proper if one of the obligations arises from depositum) will not
apply. So if both are simple loan there can be compensation. 1287 provides that there can be
no compensation when 1 of the obligations is arises from a deposit, this is known as, as some
authors would name it, a facultative obligation. However, other authors does not see this as
independent obligation, this is just treated as a modification of the other kinds of
compensation recognized by law which is a facultative or conventional compensation the
third one is judicial compensation the first obviously is legal compensation. Legal
compensation is considered as the xxx if the examiner does not mention any kind of
compensation he is referring to LEGAL COMPENSATION. Voluntary compensation:
the consent of both parties is required. In facultative: it is only the consent of one of the
parties which is required. Judicial: this would normally happen when a case is filed for a
sum of money but what would normally happen in cases, the defendant will have
counterclaim, usually the counterclaim is bigger, so in the end the plaintiff becomes liable on
the premise that the claim of plaintiff is valid and was granted and the court also granted the
counterclaim it is compensated up to the concurrent amount. The obligations which are not
yet liquidated at the time of the filing of the action, they can be liquidated during the
proceedings. In compensation it is also called as set off or counterclaim but it seems that
this word is proper in judicial compensation because counterclaim is usually used in the
court.
a. VOLUNTARY COMPENSATION – this is by agreement of the parties, even if not
all of the requirements for legal compensation are present it does not matter the
obligations will be extinguished by agreement of the parties. For example: the debts
are not yet due and they want to compensate, what can we do? The parties already
agreed. Also, probably one of the debts pertain to a carabao and the other to a car, we
cannot do anything about it. In fact in lay man’s term we call this “quits”.
b. FACULTATIVE COMPENSATION it occurs in depositum, commodatum,
gratuitous support, and civil liability arising from crime- this will arise if one of
the debts arises from a depositum, in a depositum a thing is delivered to the
depositary for safekeeping, this can happen even also with a bank. If a person for
example would deliver 1M pesos to the bank only for safekeeping, this will be a
DEPOSITUM What if A deposited 1M not as a savings account but in the safety
deposit box, and A borrowed 800K, now if A would want to withdraw the 1M from
the safety deposit box can the bank invoke compensation? The depositary cannot
invoke compensation but the DEPOSITOR CAN! Aside from depositum,
mentioned COMMODATUM when one of the debts arises from commodatum xxx
in this obligation the thing has to be returned upon demand however here, the bailor
can invoke consignation but not the bailee. SUPPORT should be gratuitous
support and not contractual support why? if this is legal support, a person needs this
to survive thus, it cannot be subject to compensation. But if it is support in arrears
compensation may take place. CIVIL LIABILITY ARISING FROM CRIME –
probably the scenario here is A is indebted to B 100K when B tried to collect A

cannot be so he stabbed A, so B was held criminally liable, then there was a monetary
award, what if the award to A is 120K, if A demands for 100K from B can B invoke
compensation? NO! The convict cannot invoke compensation but the aggrieved
party can invoke compensation.
c. LEGAL COMPENSATION, THIS IS BY OPERATION BY LAW – From the
moment all the essential requisites are present compensation takes place even without
the knowledge of the parties, even before they invoke compensation . SCENARIO:
A owes B due 1992, B owes A due in 1999, possible that it’s both 1M based on
different transaction, A filed an action against B the defense of B is compensation,
however, A may claim that no you cannot invoke compensation because you credit
has already prescribed since my debt has become due in 1992 is A correct? NO!!! in
1999 even without their knowledge when the debts become due and demandable
compensation took place. REQUIREMENTS OF LEGAL COMPENSATION:
i. THEY MUST BE MUTUAL CREDITORS AND DEBTORS - but if you
have read one case and a few authors would consider this instead of mutual
they would use reciprocal creditors ATTY. URIBE: I would not encourage
you to use reciprocal creditors, if reciprocal debtors and creditors it will
imply reciprocal obligations, if it is reciprocal obligations then this obligations
arose from the same transactions if this is the case one of the requisites for
legal compensation to take place will never be complied with. CASE:
Francia vs. IAC was there legal compensation? NONE because in the case
Francia was indebted to the city government of pasay because of xxx
however, Francia was invoking legal compensation because he was the
creditor of an expropriation proceedings, it just so happen that the city
government did not expropriate his property the national government did since
the requirement no. 1 is not present there is no legal compensation. CASE:
PNB v. ACERO: PNB was debtor of Isabela, this is simple loan, so PNB
owed Isabela, however ACERO was the judgment debtor of isabela who
wants to have the savings of Isabela garnished, however PNB claimed that
they invoked compensation because Isabela was also their debtor, who is
correct? No claim is correct, although PNB is the debtor of Isabela, there was
no proof that Isabela is the debtor of PNB.
ii. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY
PERTAIN TO GOODS THEY MUST BE OF THE SAME KIND AND
QUALITY – in other words may the obligations be both in sums of money if
they are reciprocal obligations? It cannot happen. In reciprocal obligations
there are different prestations one is delivery and the other monetary, it
can never be both sums of money. Reading several cases it might appear that
this compensation may occur only when the obligation arise from contracts, is
this correct, will there be legal compensation only if the debt in money
arose from contract? NOT TRUE! Even if the obligation arose from other
sources there can be compensation. In fact if you read the CASES: Mindanao
Portland xxx in these two cases the amounts which are the subject of
compensation were attorney’s fees, these fees did not arise from contract.
Mindanao Portland is unlikely, company A filed a case against company B,
one of them won and the court awarded attorney’s fees, in another case the
other company won and attorney’s fees were also awarded, so the award is of
the same amount, the obligation is of the same nature,
COMPENSATION TOOK PLACE. Ultimately the QUESTION HERE
IS: Does it mean that all monetary obligations may be the subject of legal
compensation? No! If you have read the case of Francia v. IAC certain
monetary obligations cannot be subject of legal compensation like payment of
taxes, customs duties, tariff etc.
iii. BOTH PARTIES MUST BE PRINCIPALLY BOUND – Principally bound
because in a scenario where A is indebted to B and this obligation is secured
by a guarantor G on the other hand B is the debtor of G in this obligation, if G
demands payment from G Can he claim that G is also indebted to him
because he is a guarantor in B’s obligation to A? In its face NO, because
the guarantor is not principally bound but take note the moment A
defaults and his properties are already exhausted, the GUARANTOR
WILL NOW BE LIABLE TO B AND FROM THEN ON
COMPENSATION WILL TAKE PLACE.
iv. THEY MUST BE CREDITORS AND DEBTORS OF EACH OTHER IN
THEIR OWN RIGHT: SYCIP v. CA: the owner of the shares of stocks
authorized Lapuz to sell the shares of stock, lapuz on then authorized Sycip to
sell the shares of stock, the latter was able to sell the shares of stock (5K),
however, despite the demand to Sycip to remit the proceeds of the sale he
refused to do so. A complaint for estafa was filed against Sycip, he was
convicted in the lower court, on appeal Sycip claimed that Lapuz owed him
(5K) so compensation took place, therefore he cannot be liable for estafa, is
Sycip’s contention correct? NO, even assuming that Lapuz is indebted to
Sycip, the latter is really not indebted to Lapuz in his own right. The real
creditor of Lapuz is the buyer of the shares.
v. BOTH DEBTS MUST ALREADY BE DUE AND DEMANDABLE – The
MOST COMMON MISTAKE WHEN ASKED WHY IS THERE NO
LEGAL COMPENSATION IS BECAUSE THE OBLIGAITON HAS NOT
YET BECOME DUE AT THE SAME TIME. REMEMBER: the
requirement of the law is that both debts are due and it is not required
that the debts are due at the same time. But if one debt became due 3 years
ago and the other debt became due today, compensation will only take place
today, but there can be compensation. ANOTHER COMMON MISTAKE:
EXAMPLE: A borrowed money, the other one bought on credit, so they
are debtors and creditors of each other, however, they say that there can
be no legal compensation because the obligations do not pertain to sums
of money, one is money the other one car. HERE THE OBLIGATION
OF THE BUYER IS TO PAY THE PRICE SO IT IS ALSO
MONETARY LEGAL COMPENSATION WILL TAKE PLACE.
vi. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE – In other
words there should be no claim by a third person over this right or credit,
because if the claim is subject of legal proceeding, there can be no legal
compensation. Example: International Corporate Bank v. IAC: Fajardo
borrowed money from ICB 50M the bank released only 20M to secure this
obligation, Fajardo mortgaged properties amounting to 110M, thereafter she
also delivered 1M to the bank for money market investment, so just like any
other investments it matured, so she demanded for the return of the 1M, the
bank claimed that she has nothing to recover from the bank because as to her
loan which she failed to pay, when the foreclosed the mortgage she still has
deficiency of 6M, so compensation took place, however Fajardo questioned
the mortgage the SC HELD: there can be no legal compensation because
one of the claims is still being litigated.
vii. ONE OF THE DEBTS MUST NOT ARISE FROM 1287 AND 1288
Because in such cases legal compensation will not take place since in
depositum the depositor or the bailor must invoke legal compensation.
d. EFFECT OF ASSIGNMENT OF A CREDIT AS TO THE RIGHT TO INVOKE
COMPENSATION – Scenario: A was indebted to B 50K, 30K, and 20K, B on the
other hand is indebted to A 100K, A assigned his credit to X, X demanded payment
from B, how much can X demand from B? Questions on assignment the first thing
to look at is the DATE OF ASSIGNMENT! If the date of assignment took place
long after the deed of assignment took place, For example: 50K June 15, 2002,
30K Oct. 15, 2002, 20K Dec. 15 2002, the 100K due November 15, 2002, if the
assignment was made, Jan. 15, 2003, how much can X demand from B? 10,000
Pesos only as of Dec. 15, 2002, compensation took place as to the extent of 90K
pesos. PROBLEM: Let us assume the 100K obligation became due on November 15,
2002, this obligation may be assigned even in March of the same year, so it was
assigned in March 2002, if the demand was made Oct. 1, 2002, how much can X
demand from B? NONE!!! Because the obligation is not yet due! PROBLEM:
Due date, November 15, 2002, assignment July 2002, as of November 15, the X
demanded from B, how much can B be compelled to pay? The first factor you have
to consider: WHETHER THE ASSIGNMENT WAS WITH THE
KNOWLEDGE OF B OR WITHOUT KNOWLEDGE: IF WITH
KNOWLEDGE, YOU HAVE TO DETERMINE WHETHER OR NOT THERE
WAS CONSENT TO THE ASSIGMENT OR NONE: IF CONSENT IS GIVEN,
YOU HAVE TO DETERMINE WHETHER OR NOT HE MADE A
RESERVATION OR NO RESERVATION: (so the scenario here is A and X
advised B that A is assigning the credit to X, B consented but he reserved his right to
invoke compensation) IF B RESERVED, HOW MUCH CAN X COLLECT
FROM B? ONLY 50K BECAUSE AS OF THE DATE OF THE ASSIGNMENT
WHICH WAS WITH THE KNOWLEDGE OF B, THE DEBT IN JUNE 15 IS
ALREADY DUE, AS TO DEBTS OWING TO B WHICH ARE ALREADY DUE
HE CAN INVOKE COMPENSATION OR AT LEAST RESERVE
COMPENSAITON BECAUSE COMPENSATION WILL TAKE PLACE ONLY
NOV. 15, SO AS TO 30K AND 10K B CANNOT INVOKE COMPENSATION, AT
THE TIME OF ASSIGNMENT JULY 15, THE CREDITS ARE NOT YET DUE TO
HIM. NO RESERVATION HOW MUCH CAN X DEMAND FROM B? 100K
BECAUSE BY AGREEING WITHOUT RESERVATION HE WAIVED HIS
RIGHT TO COMPENSATION, B’S REMEDY HERE IS TO DEMAND THE
PAYMENT OF THE DEBTS FROM A. WITHOUT KNOWLEDGE: X demanded
from B in December, how much can B be compelled to pay? 10K he can invoke
compensation to those debts which became due if the assignment is without his
knowledge.
MODES OF EXTINGUISHMENT OF OBLIGATIONS
CLASS DISCUSSIONS
Illustrations:
1. All kinds of obligations as to prestations may be extinguished by payment? NOT ALL.

Some may be extinguished by performance.
2. Who are persons who pays, being called? PAYOR or PAYER because person who pays
is NOT ALWAYS the debtor.
3. A –debtor, B –creditor; if A is a minor and he paid B, may that amount be recovered from
B? YES, because one of the requisites is that there must be capacity to pay and the minor
being a minor doesn’t have the capacity to alienate his property and cannot therefore be
considered as a valid payment. A is a minor – may a minor have a valid obligation? YES.
What could be the source of the obligation? Common is: in Quasi-delict or if there is a
law which requires a minor to pay a sum of money, say, to PAY TAX and also from
Delict (12-14 years old) = criminal liability.
4. What if A this time is under receivership and A paid B, may that amount paid to B may
be recovered from B? Yes, because aside from the requirement that the payor should
have the capacity to pay, he must also have the capacity to freely dispose of his property.
In what instance where a person doesn’t have the freedom to dispose his property?
 Under receivership
 Civil interdiction
 Those ordered by the court to retain the property – by way of attachment/

garnishment – Custodia Legis
5. X offered to pay B. He offered to pay the debt of A to B, A borrowed 1 year ago from B
for the amount of 100k, and this is secured by a guaranty executed by G, may this
obligation be extinguished upon the payment of X to B? When? It DEPENDS if B would
accept. Can B be compelled to accept payment by X? General Rule: Creditor may not be
compelled to accept payment from a third person. EXCEPTIONS:
a. If there is a STIPULATION that a 3rd person would perform or pay the obligation.
b. 3rd party has an interest in the fulfilment of the obligation.
6. DIFFERENCE between 3rd person who has INTEREST IN THE FULFILMENT of

the obligation vs. 3rd person who has interest IN THE EXTINGUISHMENT of the
obligation? Because payment or performance is just one mode or form of extinguishment

– law is very specific that it said performance as there are other modes of
extinguishment– this provision pertains to the right of the 3rd person to seek
reimbursement from the principal debtor – if you think this is a condonation, there is a
right to seek reimbursement? No – that’s why the law is very specific: he has an interest
in the fulfilment of the obligation and not extinguishment in general.
7. How come the law expressly provides as a rule that the creditor cannot be compelled to
accept payment? Because here if the creditor refuses to accept and when compelled, there
will be breach of consent due to the supposed consideration to the personal qualification
of the debtor. In the OLD CIVIL CODE  the provision only pertains to obligations To
Do – like let’s say to repair a car, so why would the creditor accepts performance of the
3rd person will repair his car, maybe because that person isn’t good at repairing cars. In
NEW CIVIL CODE  there is no more distinction as to what obligation – e.g. why
would the creditor not compelled to accept? These days money can easily be
counterfeited. That is why creditor may not want to accept payment from a 3rd person.
8. Example of 3rd person who would have an interest in the fulfilment of the obligation:
Mortgagor, Pledgor, or a Guarantor. Guarantor vs. Surety – surety: bonds but is just
like guarantor, it is subsidiarily liable with the debtor. Executor – he represents the
estate, if it pertains to a Right owing to the estate, the executor is? They are called
CREDITORS but they are NOT creditors in THEIR OWN RIGHT. Why are they called
creditors? Because they have the power to demand fulfilment but they are only
representing somebody else.
9. If there are 5 debtors in an obligation, one of them has an interest in the fulfilment of the
obligation? It DEPENDS. If it is a JOINT or SOLIDARY Obligations but regardless of
whether the obligation is Joint or Solidary each of the debtors has an interest in the
fulfilment of the entire obligation. It is easy to understand if the obligation is Solidary,
because any one of them may be responsible or liable for the entire obligation so each
one would have an interest in the fulfilment of the entire obligation. But if this is JOINT,
BASIS:
a. If it is a divisible obligation like to pay a sum of money, he would not have an

interest. Each debtor has an interest in the fulfilment of the entire obligation?
YES. SC ruled that even if the obligation is joint then 4 of them cannot pay or
refuse to pay, the 5th one will be affected by the refusal or inability to pay – his
credit standing and reputation would be affected as the creditor can easily tell the
whole world that this person doesn’t know how to pay his debt and is a swindler
in a way.
10. X paid B, like 100k, scenario: A borrowed from B a year ago 100k and this was secured
by a guaranty by G, and X today paid B 100k.
a. How much can X validly demand from A? You have to qualify. If A did not give
his consent to the payment, X would only have the right to demand to the extent
that A was benefited from the payment made. Is it possible that A did give
consent to the payment but still would have the right to demand from X for
reimbursement to the extent of 100k? YES, as long as A has benefited thereto. If
X paid B without A’s consent, X can only demand to the extent that A was
benefited from the payment made, only if accepted by B.
b. If A refuses to pay the reimbursement to X, can X run after the guarantor G?

Whether or not X will have a right of action against the guarantor will depend on
whether it is subrogated in the rights of the creditor. Does it matter if A gave
consent to the payment? When X paid B, the obligation of A to B was extinguish,
does it matter if A consented to the payment or not as to the extinguishment of the
obligation? The obligation is extinguished because there is payment, and
payment is a mode of extinguishment. The consent of A would only matter as to
the rights of the payor. In other words, if X paid with the consent of A, first he
would have the right to seek reimbursement as to the entire amount and second, X
will be subrogated in the rights of the creditor, does it matter that the guaranty
was not constituted in favour of X? It doesn’t matter, by the word “subrogation”
this person who is subrogated will acquire all the rights of the creditor, could have
exercised not only against the debtor but also against anyone who are subsidiarily
obliged, just like guarantors. Otherwise, if X paid B without the knowledge or
against the will of A, he will not be subrogated. Following the rule, when he
paid, the obligation was extinguished, and this being a principal obligation and
accessory is that of the guaranty, the accessory was also extinguished due to the
principle of subrogation being applicable; hence, he cannot run after the
guarantor.
c. What if X and B had an agreement, that instead of A, X will be the one to pay B,
with the agreement thereafter X paid B and this is without the knowledge of A, it
was also agreed upon by X and B that upon payment that X will be subrogated in
the right of the creditor. X then paid B but A failed to reimburse X. Can X run
after the guarantor? As far as extinguishment is concerned, A’s consent is NOT
REQUIRED because as long as there is payment there is extinguishment. In the
facts, there was nothing said that B was compelled. It was by agreement. Was B
subrogated by X by reason of the agreement between X and B? Article appears
not to be well formulated and that there is an implication that if there is an
agreement that the 3rd person will be subrogated to the rights of the creditor then
he can be subrogated because he was not compelled, therefore 3rd person can
subrogate the creditor. THIS IS A WRONG INTERPRETATION considering the
fact that this provision is intended to protect debtors. In other words,
REGARDLESS of the agreement between the creditor and the 3 rd person, as
long as the payment was without the knowledge or against the will of the debtor,
B will never be subrogated by X or 3 rd person will never be subrogated in the
rights of the creditor. This will only be true if X doesn’t have an interest in the
fulfilment of the obligation.
11. If X is a guarantor and he paid B, will he be subrogated in the rights of B even if the
payment was made without the knowledge of A? YES. And the basis is under Article
1302. Under certain circumstances there would be legal subrogation and one of the three
scenarios there is that when a person has an interest in the fulfilment of the obligation
pays with or without the consent of the debtor. This is also true in guaranty, except?
a. General Rule: If he pays, he is subrogated.
b. EXCEPTION: Under the law on guaranty
12. If X paid B without the intention of seeking reimbursement from A, but 2 weeks
thereafter X demanded that B return the amount he paid for A, claiming that A did not
give consent to the payment. Can B be compelled to pay the amount or to return the
amount to X? What appears to be the argument of X? Why would he have the right to
demand the return in this scenario? What is his theory? NO because the law expressly
provides that the creditor has the right to retain even if it was without the consent of the
donee or even if the donee did not accept the donation. So there was a valid payment.
When X paid B, it was like a donation to A, and therefore A is a donee known as
indirect donation. Why the donor did not give the money to the donee? Because the
donor has no confidence or trust in the donee because the donee may just spend the
money and not pay his debts. If this is a valid payment even without the consent of the
donee, what is the relevance of the acceptance by the donee? It is relevant because in
donation, acceptance is needed. And if the donation will accordingly be void, upon the
death of the donor, that amount may still be considered part of the estate.
13. The person to whom payment is made is known as ? PAYEE, again not necessarily the
creditor. For a payment to be a valid payment, to whom should it be made? Who is the
payee? Under Article 1240, the persons are enumerated thereto.
14. What if the payment was made not to the person whom the obligation was constituted in
favour to does it mean that it was a payment to the wrong party? Therefore will it not
extinguish the obligation? NOT NECESSARILY. It could be successor in interest. E.g.
heir, assignee  but is he a creditor? YES at the TIME of the FULFILMENT OF THE
OBLIGATION. For payment to be valid he doesn’t have to be the creditor at the time of
the constitution. Finally if the payee is not in whose favour the person authorizes to
receive it nor a successor in interest, then it is a payment made to a wrong person? NOT
NECESSARILY. He may be a proper party. The authority as to where it came from was
not specified by the law. So it may be from the law or from the creditor.
15. ARANAS CASE: Obligation involved is to pay cash dividends. ISSUE: whether the
payment by UTEX to Castaneda did extinguish the obligation to spouses Aranas? The
creditor here is Aranas and the basis of the claim that they are creditors: Judgment of the
court but still UTEX paid it to a 3 rd party. If you were the counsel of UTEX, what would
be your advice? Instead of paying to the 3rd person, Castaneda, you should have availed
of consignation which is to deposit the money to the court until a party will be claimed as
the rightful creditor. General rule was applied in this case that payment made to a
wrong party did not extinguish obligation. Exception: when the payment redounded to
the benefit of the creditor even when it was paid to a wrong party.
16. When the payment redounded to the benefit of the creditor – who has the burden of
proof? PAYOR or DEBTOR. Will the payor always have the burden of proof? NO.
When would the payor not have the burden? Article 1241.
a. If after payment, 3rd person acquires the creditor’s rights. Why after? If before it
will be a payment to the right or proper party – successor in interest.
b. If the creditor ratifies the payment to the 3rd person. This raises a conclusive
presumption that it redounded to the benefit of the creditor.
c. If by the creditor’s conduct, the debtor has been led to believe that the 3 rd person
had authority to receive the payment also known as Estoppel in pais.
d. When without notice of the assignment of the credit he pays to the original debtor
(Article 1626)
e. When in good faith he pays to one on possession of the credit (Article 1242)
17. A debtor of B, A borrowed 100k and it was evidenced by a PN which A executed and
delivered to B, but before obligation became due and demandable, PN was already in the
possession of X and premise here is that X doesn’t have the right to credit. So when PN
became due and demandable, X demanded for the payment, then A paid X. Who is the
creditor? B is the creditor. Because A paid X, A’s obligation has already been
extinguished? It DEPENDS. If X was in possession of the credit and payment was made
in good faith, then the obligation is extinguished. When would X be considered in
possession of the credit?
a. If it is a bearer instrument. Possession of credit means that this person only

appears to have the right to the credit but in truth and in fact he really doesn’t
have the right.
b. Had this been, when would X be in not possession of the credit? If it was said in
the bearer instrument that it was payable to a certain person and that person is not
X. – not necessarily also. No if it is a negotiable instrument. Yes if this is a non-
negotiable instrument because there is no endorsement.
c. For the payment to be considered made in Good Faith, it must be required that?
The debtor does not know or is not aware of any defect.
d. If X was in possession of the PN, why would there be a defect is it is in the

possession of X? If it may be stolen.
18. A debtor of B, then B assigned his credit to X, normally when would B assign the right to
3rd person? Before. Why would assign to other? Maybe because the creditor also has an
outstanding debt to the 3rd person or he owes to X. Say, in Sale or donation or creditor
needs money but such obligation is not yet due or lastly, in checks – “rediscounting”.
19. If B assigned the credit to X but after assignment A paid B. Who is creditor here? X is
now the creditor because he is the successor in interest. If thereafter A paid B, would that
extinguish the obligation of B? If payment was made without the knowledge of the
assignment. This matters as to the time, because before he may not have the knowledge
but after the assignment, he may already have the knowledge.
Illustrations:
8. Special forms of payment:

a. Dation
b. Application – Before the courts do not consider application as special form of
payment.
c. Tender of payment and consignation – Tender of payment is not a form of
payment consignation is a special form of payment.
d. Cession
9. Distinguish one from the other or the rest:
a. Consent: is consent of both parties required in this special form of payment?
There is no question that as to debtors consent is obviously there because he is the
one offering to pay, so if he is the one offering to pay then there must be consent, but
as to creditor?
i. Dation in payment – YES. the creditor has to accept the delivery of a thing
instead of the other prestation for the satisfaction of the debt, if there is no
consent on the part of the creditor, there can be no dation in payment. CASE:
Filinvest v. Phil. Acetelyn
ii. Application of payment – YES, There is always consent. The debtor and
creditors. The consent is always with the creditor.
iii. Payment by cession – YES. Definitely the consent of the creditor is required,
if the creditor would not agree that the debtor would abandon the properties
for the creditors to sell, there can be no payment by cession.
iv. Consignation – NO. The consent of the creditor is not required even if the
creditor refuses to accept the thing delivered by the debtor to the court by way
of consignation, the court may declare the consignation to be valid.
b. As to the effect of the delivery of the thing from the debtor to the creditor or
from the debtor to the court is there transfer of ownership?
i. Dation in payment – YES. yes there is transfer of ownership, because that
thing is being delivered and the ownership thereof is being transferred in
satisfaction of his debt.
ii. Application of payment – YES. Yes there is transfer of ownership. If money
is delivered by the debtor to the creditor ownership passes to the creditor. The
only question here in this form of payment is to which debt the payment will
apply? This is the issue in this kind of payment, but as to ownership it passes
immediately to the creditor.
iii. Cession – NOT NECESSARILY Ownership does not pass because the
creditor upon delivery because the creditors just accept the things or those
things to be sold and the proceeds thereof to be applied to the indebtedness.
iv. Consignation – NOT AUTOMATIC. Upon the delivery of the thing to the
court ownership does not automatically pass to the creditors because the
consignation may be void, if it is void, then ownership does not pass to the
creditor. However, if the creditor will accept thereafter, may be months or
years thereafter, or maybe the court declares the consignation valid, then the
ownership passes, however, by law the effect of acceptance or the
declaration by the court that the consignation is valid retroacts to the
time of the delivery of the court as if the creditor is already the owner of
the thing at the time of the delivery.
c. Extent of Extinguishment: May there be total extinguishment of the debt?

i. Application of payment – NO. No, there can never be total extinguishment,
precisely because there is a need to determine to which debt the payment is to
be applied. Because the amount paid is not sufficient to cover all the debts,
because you will no longer have a problem is the amount is sufficient to cover
all the debts you just have to invoke the rules on application on payments.
Necessarily there is no total extinguishment of the debts under the rules on
application of payment.
ii. Cession – NO. UNLESS THERE IS STIPULATION. the extinguishment
will only be to the extent of the net profits of the sale, unless the parties agree
that the abandonment will result to the extinguishment of the entire debt. So
here, the net proceeds is the basis of the extent of the extinguishment of the
debt.
iii. Consignation – YES. Because this is a special form of payment it follows the
rule in payment, thus as a rule “partial performance is non performance”
therefore if the debtor delivers only a portion of his debt, then the
consignation is null and void. The exception will only be if the creditor
would agree to the delivery of partial amount, then to that extent there
will be partial extinguishment.
iv. Dation in payment – YES. There are authors who will take the position that
if there is Dation in payment then the obligation is totally extinguished unless
it is clear in the intention of the parties that it will result only to partial
extinguishment. But is this the better rule? For example if A is the debtor of B
in the amount of 1M and A delivered to B a car stating that it is to be applied
to the amount that B owes A, the value of the car is 150K, if the creditor
accepted the car, does that mean that the entire obligation is extinguished?
This rule does not seem to be equitable, the BETTER RULE: As a rule
the extinguishment is only to the extent of the value of the thing delivered
unless it is clear from the agreement of the parties that the delivery of a
thing, no matter the value, is equivalent to the amount of the obligation.
10. Specific Rules:
a. Dation in payment – Again in Dation a thing is delivered and ownership thereof is
delivered by the debtor to the creditor in satisfaction of his debt. Dation apparently
will only apply to the delivery of the thing. THIS IS NOT TRUE. The SC has ruled
that even rights can be the subject of Dation for example: if hereditary right is
already vested to the debtor, the debtor can deliver his rights to his creditor for
the satisfaction of his debt. Also, in one case, a credit owing to the debtor may be
delivered by him to his creditor for the satisfaction of his debt. But just like the
other modes of payment, in order that there be Dation there has to be an obligation
to be extinguished (CASE: Citizen’s Surety v. CA: Perez was claiming that with the
execution of deed of assignment that practically extinguishes his obligation under the
indemnity agreement by way of Dation, the scenario here was: a contract of sale was
entered into, payable by installment, the buyer is Pascual enterprises, to secure the
fulfillment of his obligation, a surety bond was executed in favor of the seller, now
citizen’s surety executed an indemnity agreement just in case it will be held liable
under the bond, Pascual Perez and his wife being the party thereto, Citizen’s also had
Perez execute a deed of assignment over certain stocks. The surety obviously was
held liable under the bond, the surety went after Perez under the indemnity
agreement. Perez claimed that the execution of deed of assignment was a form of
Dation, but the facts showed that at the time the deed of assignment was
executed there was no obligation under the indemnity agreement nor under the
surety bond. Why? Because the contracts were all dated earlier than the time he
was made liable, therefore there was no obligation yet. So what is really the
nature of deed of assignment? It was a form of security arrangement. Other
facts relied upon by the SC in ruling that the deed of assignment was not Dation
in payment was that after the deed of assignment was executed, Perez also
executed a real estate mortgage, so why would he execute a real estate mortgage
if his obligation was already extinguished by Dation. Also, in deed of assignment,
there were partial payments made, if there was Dation then he would not have
made the payments.)
What is the law governing Dation? Others would say that this is governed by
the law of sales. If you will read Article 1245, it would appear that Dation is governed
by law of sales, but reading it more closely; the law on sales will only apply if the
obligation is in money. For instance, A owes B 20K, instead of paying cash, A
offered his cell phone to B in satisfaction of the obligation, there is here Dation and
this will be governed by the law on sales as provided for in Article 1245. Tolentino
criticized this provision, considering that the trend worldwide is to consider this
as a form of novation because practically there is a change in the object, from
money to a thing. REMEMBER! 1245 will not apply if the pre-existing
obligation is not in money. For example: A is obliged to deliver to B a horse, so
instead of delivering a horse he delivered a car to B. 1245 will not apply here because
the pre-existing obligation is not in money, but it is to deliver a horse. So in this case
Novation shall apply because there was a changed in the object of the obligation,
from horse to car. Again, going back to Tolentino’s criticism, he said that regardless
of pre-existing obligation whether money or thing, still the law that will apply is the
law of novation. Atty. Uribe: I find wisdom in Article 1245 because, instead of
paying in cash, (refer to the cell phone example) the debtor paid by giving his phone
to the creditor, but is this not almost similar to the scenario where the debtor paid in
cash and the creditor used the cash to buy the cell phone of the debtor. And therefore
the law on sales will govern.
b. Application of payment – the only question relevant in this rule is “to which debt
will the payment be applied?” the premise of this question is a debtor has two or
more debts to one creditor but may the rules on application of payments be
invoked if the debtor has two or more creditors? Yes. As long as to one creditor
he has two or more debts. The law does not require that the debtor should only have
one creditor. For example: A’s creditors are XYZ, for the rules to be invoked, he must
have two debts to one creditor. Let us say A owes X 100K, 50K, and 20K, now if A
delivers to X 30K, the question here is to which debt will the payment apply?
i. AS A RULE: The debt designated by the debtor, under the law, the
debtor has the right to designate to which debt the payment will apply. So
here, A can designate the 30K to apply to 100K or to 50K or to 20K or 30K.
But having said that, if A instructed the creditor to apply the 30K to 50K, can
the creditor be compelled to apply the payment to the 50K debt? AS A RULE
THE ANSWER IS NO because this is a special form of payment, the rules of
payment shall apply, the creditor cannot be compelled to accept partial
payment, nor the debtor be compelled to perform partial payment. Therefore,
unless there is a stipulation giving the debtor a right to designate to a debt that
will constitute partial payment, he cannot designate payment to which the
payment should be applied. What are the limitations on the right of the debtor
to designate the application for payment?
1. Partial Payment- In the first place why would he designate it to the
50K? The 50K may be interest bearing. THEREFORE, THE
RIGHT OF THE DEBTOR TO DESIGNATE TO WHICH
PAYMENT SHALL APPLY IS NOT ABSOLUTE, ONE OF THE
EXCEPTIONS IS AS TO PARTIAL PAYMENT.
2. Payment of Interest first- A delivered the 30K, he designated it for
the payment of the 30K debt, however, the 30K debt is interest
bearing, can he compel the creditor to apply the payment to the
principal first, then he will just pay the interest later? NO BY
EXPRESS PROVISION OF THE LAW, PAYMENT SHOULD
ALWAYS BE APPLIED TO INTEREST FIRST, IF THERE ARE
EXCESS THEN THAT WILL BE THE AMOUNT APPLIED TO
THE PRINCIPAL.
3. Debts already due and demandable- A designated the 30K for the
payment of the 30K debt, but the 30K debt is not yet due. THE LAW
REQUIRES THAT THE DEBT IS ALREADY DUE IN ORDER
THAT THE DEBTOR WOULD HAVE THE RIGHT TO
DESGINATE SUCH PAYMENT TO THE DEBT. What is the
meaning of due here? The period must be fixed for the benefit of the
creditor or for both of them. If it is not yet due, but the period is fixed
solely for the benefit of the debtor it does not matter the debtor can
designate such debt because the period is for his benefit. But also
he cannot vary an agreement which they had as to which debt the
payment to be applied.
PROBLEM: What if A entrusted X to apply the 30K to 30K debt, but the debt is
secured by a mortgage, as instructed, X applied the payment, he issued a receipt
stating that the 30K is applied to the 30K debt, however, days thereafter, A asked X to
apply the amount to another debt, the 50K, though the creditor cannot be compelled
to accept, he may accept if he wants to. So, if X agrees, and he applied the payment
of the 50K debt instead of the 30K, thereafter A was not able to pay X as to the 30K
debt, can X foreclose the mortgage? NOT ANYMORE! A already paid the 30K,
although it was revived (when he chose that the payment be applied to 50K instead)
the mortgage was not revived (mortgage is not revived without the consent of the
mortgagor).
ii. SECOND RULE: What if the debtor did not designate the debt to which the
payment shall apply? The debt designated by the creditor. He would have
the right to designate to which debt the payment shall apply. However, is the
debtor’s consent required in the designation made by the creditor? Yes!
By express provision of the law, if in the receipt the debtor sees that the
payment was applied to a particular debt, and the debtor does not agree to
such application, he may refuse to accept the application.
iii. THIRD RULE: Neither the debtor nor the creditor made the designation.
Scenario: the debtor made payment; the creditor accepted and issued a receipt
without designating the particular debt, so to which debt the payment shall
apply? IT WILL DEPEND ON WHETHER THE DEBT OF THE SAME
NATURE AND BURDEN OR WHETHER THE DEBT IS MOST
ONEROUS OF THEM ALL. If all the debts are of the same nature and
burden, the law requires proportional application. As regards to the most
onerous debt, apply the payment to the most onerous obligation. TAKE
NOTE! That you should only go into these rules if the law would not guide
you as to which debt the payment should be applied, there are guides like
partial payment, interest bearing, and the circumstances which may show the
intention of the parties, if these guides are not present, then that is the time
you go into the rules considering the nature and burden of the debts. IN
DETERMINING WHICH DEBT IS THE MOST ONEROUS: is there a
particular rule? None. The SC held that there is no hard and fast rule! This is
because each debt has its own features, for example, there are debts which
consist of bigger amount the other smaller amount but interest bearing, the
other one secured. For example one debt is secured by real estate mortgage
and another debt is secured by pledge, what is more burdensome? The debt
secured by a real estate mortgage. However, real estate mortgage may be
constituted by one real estate, so consider if the real estate mortgage
constitutes a small lot and the pledge constitutes ships, which is more
onerous? Obviously the debt secured by pledge constituting ships. TAKE
NOTE THAT ALL FACTORS ARE CONSIDERED IN
DETERMINING WHICH IS MORE ONEROUS. If for instance in one
debt the debtor is merely the guarantor and other debt he is the principal,
apparently the debt in which he is the principal debtor is more onerous, but the
common reason given by few authors is because in this debt where he is a
guarantor, his liability is only subsidiary, in fact inchoate, he may or may not
be held liable because the principal debtor should first be held in default then
his properties dissolved before the guarantor may be held liable, BUT THIS
IS A WRONG REASON WHY? If the rules on applications of payment are
to be invoked, it presupposes as to the two debts he is already liable, his
liability is not merely inchoate, and even if it is only subsidiary, he is already
liable, in other words in this scenario for the rules to be applied, the principal
debtor should have defaulted and his properties exhausted that is why the
guarantor is liable, if he is not yet liable there is no reason to apply the rules
on application of payment because there is only one debt, which is the debt
to which he is the principal debtor. But even considering that in the contract
of guaranty the guarantor is already liable, which is more onerous, Atty.
Uribe: the debt more onerous is the debt to which the debtor is a principal,
because in guaranty the guarantor may be able to recover what he paid to the
creditor from the debtor, in the debt to which he is a principal, he cannot
recover anything by way of reimbursement. One author would claim: bigger
amount is more onerous than smaller amount. Is there any basis for this
claim? Atty. Uribe: I beg to disagree to this claim, first, if the debt is one
peso or two pesos or even one thousand pesos bigger in amount, does that
really matter in this country? But if you go by the rules, if you follow this
claim, then what will happen to the rule that there are debts of the same nature
and burden because if the debts would have 1 peso difference, then that debt is
already more onerous, since the law provides that proportional application
to debts, presupposes that the debts are of different amounts. Example
this is 1M the other debt is 10K, you think 1M is more onerous, not
necessarily, let’s say the debt is only 10K but it is interest bearing, what
should I pay first? Of course the 10K interest bearing. Who cares about the
1M, after 2 years it is still 1M! Again the amount is irrelevant. Another,
OLDER DEBT IS MORE ONEROUS. There is no basis to this claim. In
fact, older debts may be less onerous why? Because it is about to prescribe.
c. Payment by Cession or Assignment – Here the debtor would abandon or assign

all his properties to the creditor which properties will have to be sold by the creditor
the net proceeds shall be applied to the credit.
i. FIRST ISSUE: All the properties of the debtor shall be delivered? No, there
are properties which are exempt from execution. But can the debtor deliver
to the creditor properties which are exempt from execution? Yes! Because that
is a right which the debtor can waive, though he cannot be compelled he may
abandon those properties to the creditor. However, there are certain
properties which cannot be the subject of the claim of the creditor even
with the consent of the debtor LIKE THE FAMILY HOME, of course
there are beneficiaries of the family home who can object to the sale
thereof.
ii. What if the debtor is willing to abandon all his properties and the
creditors would refuse, what is the remedy of the debtor? Authors would
say that the best remedy of the debtor is to file an action for insolvency. In a
way insolvency proceeding has its advantages, however, here in the
Philippines businessmen are really not keen on filing an insolvency
proceedings.
iii. What if the creditors did agree for this kind of payment but they failed to
agree as to how they will partition/distribution the proceeds? Atty. Uribe
agrees that the rules on concurrence and preference of credits because in these
rules there are preferred debts and those debts which are not preferred they
shall be paid proportionately.
iv. Alleged requirement of few authors that in this form of payment, the
debtor is insolvent. In other words, there can be no cession if the debtor is
not insolvent. Atty. Uribe CANNOT AGREE TO THIS REQUIREMENT
because if you read Article 1265 there is no requirement that the debtor must
be insolvent for payment of cession to take place. Another important reason is
the fact that this is by agreement of parties, there can only be payment of
cession because the creditor agreed, as long as the debtor is willing to abandon
the properties and the creditors agree and the proceeds shall be applied to the
debt, there is cession.
v. Other authors claim that the debtor should be partially insolvent, is

there any basis to this? NONE! Once a debtor failed to comply with his
obligations, he is in delay, is likewise insolvent. There is no such thing as
partial insolvent. The statement of Professor Sta. Maria is a better
statement “this mode of extinguishing obligation would normally be resorted
to by debtors who are in a financially difficult position.”
d. Tender of payment and consignation – Fist, let us go to the claim of Prof. Jurado,
as a rule tender of payment is necessary for consignation to be valid, correct?
Reading Article 1256, there are how many grounds or causes for consignation
wherein the law expressly provides that tender of payment is not required. In 1256
there are about 5 grounds, where the law provides that in those grounds tender of
payment is not required, obvious because in those grounds the creditor is not present.
So in those causes, there is no tender of payment but the consignation is valid. What
are the grounds or causes for consignation where tender of payment is necessary
under the law? Where the creditor refuses to accept without just cause. Therefore
going back to the statement tender of payment is required for consignation to be
valid, it seems wrong. AS A RULE TENDER OF PAYMENT IS NOT
REQUIRED, THE ONLY EXCEPTION TO THAT RULE IS WHEN THE
GROUND FOR CONSIGNATION IS THAT THE CREDITOR REFUSES TO
ACCEPT WITHOUT JUST CAUSE.
i. On the other hand, Jurado is very much correct in his statement that
“tender of payment by its very nature is extrajudicial” as you have read in
the case of Soco v. Milintante, tender of payment is made during the
pendency of the action, that consignation is void. Tender of payment should
be made prior to consignation not during the pendency of the action. SO IT IS
BY ITS VERY NATURE EXTRAJUDICIAL IN CHARACTER.
ii. Now, if the ground for consignation requires tender of payment and the
debtor sent probably three letters to the creditor informing the creditor
that “I am willing to pay my debt xxx” is this a valid tender of payment?
NO! In order for tender of payment to be a valid tender of payment, you have
to actually offer the amount to the creditor; IT IS THE ACT OF

OFFERING THE AMOUNT WHICH CONSTITUTES A VALID
TENDER OF PAYMENT.
iii. Into the requisites of a valid consignation:
1. There must be a debt to be extinguished – a sum of money is

delivered not to extinguish a debt but to exercise a right, like the right
of redemption, if the other party refuses to accept the money, then the
person who has the right is not required to deliver to the court the
amount by way of consignation because he is not intending to
extinguish an obligation. Example: A had the right to redeem, he
offered to redeem, the other party refused to accept, when the
action was filed the defendant claimed that the action should be
dismissed because the redemptioner was not sincere in redeeming
the property because if the redemptioner was sincere, when I
refused to accept the money he should have deliver the money to
the court by way of consignation. The SC: the claim is erroneous,
because the redemptioner is exercising a right, and in the exercise
thereof there was refusal without just cause, there is no need for
consignation. But if the intention is to extinguish an obligation and
the money was refused, that is when the debtor has to go to the
court and deliver the money by way of consignation.
2. The consignation must be based on a ground provided by law – Is
the enumeration under 1256 an exclusive enumeration? Atty. Uribe
agrees with the position that the enumeration does not have to be
exclusive because as long as it would be more burdensome to the
debtor if he will not be allowed to deliver the thing or the money to the
court, consignation should be allowed. Some of the grounds are:
a. When without just cause the creditor refuses to issue a
receipt – is the issuance of the receipt the operative fact which
extinguishes the obligation? NO! In our jurisdiction
PAYMENT IS THE MODE OF EXTINGUISHMENT, THE
RECEIPT IS MERELY AN EVIDENCE. But if the creditor
refuses to issue a receipt or does not want to issue a receipt, it
is better that the debtor does not give the payment to him,
because he can easily deny that the debtor did not pay.
Actually, in other jurisdiction, it is the issuance of the receipt
that extinguishes the obligation, this rule seems to have an
advantage because it would minimize the litigation involving
issues as to payment.
b. When two or more persons claim the same right to collect –
A good example is an obligation to deliver a carabao, in this
obligations three creditors are claiming from the debtor,
because three persons are claiming to the carabao that will
give the person a right to deliver the carabao to the court
by way of consignation? Not necessarily. The SC held that
the debtor should determine for himself the person who has
the right over the thing or the money.
3. Notices required for consignation to be valid: AT LEAST TWO:
Why? Because if the obligation pertain to an obligation to pay on a
monthly basis, like rental, the SC as rule in the case of SOCO,
THERE MUST BE AT LEAST TWO NOTICES FOR EACH
AMOUNT WHICH BECAME DUE (so every month that the
payment is not accepted sent notice prior the consignation). But if
there is only one debt, there should be two notices required, is it
required that both notices should come from the debtor? NO! But the
first notice should come from the debtor prior the consignation and the
second notice may come into the form of summons. Is notice really
an essential requisite for the validity? TOLENTINO DOES NOT
AGREE WITH THIS VIEW, he thinks that even without such notice
the consignation may still be considered as valid. But it can be the
basis of holding the debtor liable, this rule is better but THIS IS NOT
THE RULE LAID DOWN BY THE SUPREME COURT.
SECOND: if the payment is monthly and the creditor already refused
to accept the payment in the first month the defendant will question the
necessity of second notices, since the creditor already knows that the
debtor will again deliver to the court the payment by way of
consignation RATIONALE: THIS IS TO GIVE THE CREDITOR
THE OPPORTUNITY TO CHANGE HIS MIND. Which is very
true, the bigger the amount the more difficult to refuse.
iv. There are only two questions in consignation: After the delivery of the
money or the thing with the court, what if thereafter the money was
withdrawn from the court, thereafter the debtor failed to pay the
creditor, can the creditor still go after those who are subsidiarily liable
for the debt (like the mortgagor)? PREMISE HERE IS: A is indebted to
B, A delivered a sum of money to the court by way of consignation
however, A withdrew the money, the debt is secured by a mortgage,
thereafter A failed to pay the creditor, can the creditor foreclose the
mortgage? It depend on the manner how A was able to withdraw the money
from the court.
1. IF A WITHDREW THE MONEY AS A MATTER OF RIGHT

(when even the court cannot refuse the withdrawal, and this can
happen if the creditor has not yet accepted and the court has not
yet declared the consignation to be valid, in this scenario, the
debtor can still withdraw the money as a matter of right at
anytime), THUS, NO DEBT HAS BEEN EXTINGUISHED,
BECAUSE IN CONSIGNATION THE DEBT WILL ONLY BE
EXTINGUISHED EITHER BECAUSE THE CREDITOR HAS
ALREADY ACCEPTED OR THE COURT HAS ALREADY
DECLARED THAT THE CONSIGNATION IS VALID, ABSENCE
OF THE TWO NO OBLIGATION IS EXTINGUISHED,
THEREFORE NO OBLIGATION IS REVIVED, THEREFORE IF

THE DEBTOR WITHDREW UNDER THIS SCENARIO AND
FAILED TO PAY, THE CREDITOR MAY STILL FORECLOSE
THE MORTGAGE, BECAUSE THE OBLIGATION WAS NEVER
EXTINGUISHED.
2. HOWEVER, IF THE WITHDRAWAL IS NOT AS A MATTER

OF RIGHT, THEREFORE HE WAS ONLY ABLE TO
WITHDRAW WITH THE CONSENT OF THE CREDITOR (this
may happen either when the withdrawal was made after the
acceptance or the withdrawal was made after the declaration by
the court that the consignation was valid.) IN THIS CASE, THE
CREDITOR CONSENTED TO THE WITHDRAWAL. WHAT
HAPPENS TO THE OBLIGATION, UPON THE ACCEPTANCE
BY THE CREDITOR OR DECLARATION BY THE COURT THAT
THE CONSIGNATION IS VALID, THE OBLIGATION IS
EXTINGUISHED, AND THEREFORE, WHEN THE AMOUNT
WAS WITHDREW BY THE DEBTOR THE OBLIGAITON WAS
REVIVED, UPON REVIVAL THE DEBTOR FAILED TO PAY,
THE CREDITOR CAN NO LONGER FORECLOSE THE
MORTGAGE, WITH THE EXTINGUISHMENT OF PRINCIPAL
OBLIGAITON THE ACCESSORY CONTRACTS ARE ALSO
EXTINGUISHED.
v. Liability to pay interest: Let us assume these material dates and events to
have occurred:
1 |2002 (Due) 2 |2003 (Tender of Payment) 3 |2006 (Consignation) 4 |2008 (Decision)
QUESTION: Can the debtor be held liable from period 3 to period 4?
1. If the court declared the consignation to be VOID, there is no question that

the debtor is liable to pay interests, on the premise that there was demand
and that demand was necessary for the debtor to incur in delay.
2. However, what if the court declared the consignation to be valid, he is not

liable from period 3 to 4 because the effect of the declaration retroact to the
time of the delivery of the amount to the court as if the obligation was
extinguished at the time the consignation was made, therefore there will be
no obligation to pay the interest.
Question: Can he be liable from period 1 to 2?

1. Obviously he is liable because he made the tender of payment only period

number two and the obligation has long been due and demandable.
Question: The problem is in period of tender of payment to the

consignation, can he be made liable for payment of interest?
1. Juridically speaking, there is basis to the SC ruling that the debtor is still
liable because the effect of consignation will only be from the time the thing
is delivered to the court, so until the obligation is extinguished the debtor
should still be held liable for interest. However, in the recent cases of the
SC, it was held that from the time tender of payment was made the
debtor is no longer required to pay interest, here, the law requires that
if the creditor refuses acceptance, the debtor should immediately go to
court, otherwise the debtor will have no reason to go to the court
because he no longer has liability for interest. However, in the recent
ruling of the SC, it held that BY REASON OF JUSTICE AND
EQUITY, why? Because here as the consignation is valid it means that
the creditor refused to accept without just cause, if the creditor
accepted it would there be liability on the part of the debtor to pay
interest? None! So, under the principle of justice and equity the debtor
should no longer be held liable to pay interest from the time tender of
payment was made up to the time of consignation even if the
consignation was made years after. ATTY. URIBE: This is quite
inconsistent with consignation, there is a much better basis than justice and
equity, if you remember our discussion in period, in periods two to three
the debtor is liable for interest, but when the creditor refused to accept
without just cause, is it not that he is also in delay which is known as
compensation morae if both parties are already in delay, following the
ruling of the SC in Agcaoili v. GSIS, in contemplation of law, no one is
in delay and if no one is in delay could there be liability to pay interest?
None. Without invoking justice and equity, this decision seems to be
more correct.
11. LOSS OF THE THING DUE – Can this mode of extinguishment be invoked in all kinds of
obligations meaning obligations to do? It does not seem like it because it says loss of the
thing. If you will read the provisions under this mode, loss of the thing due, there are
provisions pertaining to obligation to do, thus, authors would consider a better name for this
mode, instead of loss of the thing due a better name would be Impossibility of Performance.
In impossibility of performance it would already include even obligations to give or to
deliver, in case of obligations to give it will be impossible to perform because the thing to be
delivered is lost.
c. May this mode apply to obligations to deliver generic thing? YES. If you
remember the doctrine genus non quam peruit this applies to a scenario where the
loss or destruction of anything of the same kind does not extinguish the obligation.
EXAMPLE: there is an obligation to deliver a brand new 2009 Toyota camry,
just because the brand new Toyota camry was lost does not mean that the
obligation is extinguished under this doctrine. GOING BACK TO THE

ORIGINAL QUESTION: May an obligation to deliver a generic thing be
extinguished because the obligation became impossible to perform? YES! As the law
would define loss it is a scenario where the thing goes out of commerce, so if the
thing went out of commerce there is nothing to deliver. Another scenario, is when it
became legally impossible to perform, impossibility of performance may either be
physical impossibility or legal impossibility. Pesigan v. Angeles Delivery of carabao
from one province to another, along the way the carabaos were confiscated because a
law became effective during the pendency of the obligation, therefore the obligation
was considered legally impossible to perform. TAKE NOTE THAT when the law
became effective, there must already be an obligation which will become
impossible to perform because if the law became effective before the obligation
was instituted in the first place the obligation is void and there is nothing to be
extinguished.
d. Obligations to deliver a determinate thing: if the thing to be delivered was lost or

destroyed, is the obligation extinguished? If you will read Article 1262 literally, it
will depend on the cause of the loss.
a. If the cause of the loss was due to the fault of the debtor then the obligation is
not extinguished 1263 provides that if the thing is lost or destroyed without
the fault of the debtor, the obligation is extinguished, therefore, if the loss is
caused by the debtor the obligations is not extinguished. However, Prof.
Tolentino opines even if the loss is due to the fault of the debtor, what will
be delivered? None, so here, there is physical impossibility, and therefore
the obligation should be deemed to be extinguished without prejudice to
his liability to pay damages because the loss is due to his fault.
Nonetheless if you want stick with the opinion of Tolentino you can always
cite 1262 as the basis but this does not seem to be correct. BUT
ULTIMATELY IN CASES DECIDED BY THE SUPREME COURT: As
to the thing to be delivered is lost or destroyed, what is the issue that is
always mentioned in the case, is it “WON the obligation was
extinguished?” No, the ISSUE IS WHETHER THE DEBTOR CAN BE
HELD FOR DAMAGES in other words it does not matter whether the
obligation was extinguished or not, what matters is the debtor liable for the
damages caused by the loss of the thing. If the loss was due to his fault he is
liable for damages, otherwise he cannot be held liable for damages. In fact
Sta. Maria also take this position, Sta. Maria will not state whether the
obligation is extinguished or not, the issue that will be posted is that whether
or not the obligation to deliver a thing is converted to an obligation to pay
a sum of money. However, if this is your position, you actually take the
position that there was extinguishment. If you remember in prescription,
prescription is a mode of extinguishing an obligation because it converts the
civil obligation to natural obligation, there is a change in the obligation
therefore there is extinguishment, in the same manner if the obligation to
deliver is converted to a monetary obligation then there is an extinguishment
of an obligation.
e. Who has the burden of proving as to the cause of the loss?
a. The creditor or the one claiming that it was the debtor’s fault who caused the
loss. Reasonable, because this follows the rule that whoever alleges the fact
must prove the fact.
b. However, in certain circumstances, the creditor or the plaintiff may not have
the burden, because the law provides for a presumption that the cause of the
loss was due to the debtor, when will this happen? If at the time of the loss
the thing is in the possession of the debtor. But take note that the
presumption is not an absolute presumption because the debtor can
always post a defense that even if the thing was in his possession the loss
was due to the fault of somebody else.
c. However, even if a thing is lost while in his possession is it possible that there
is no presumption that it was due to his fault? Yes if the loss happened
during a calamity or on the occasion of a calamity. Because even if the
thing was lost even if in the possession of the debtor but it was during a
calamity, more often than not, the calamity is the cause of the loss and not the
fault of the debtor, therefore the burden again will be shifted to the creditor or
plaintiff if he would claim that the loss was caused by the debtor.
f. We have already discussed that even if the loss was caused during fortuitous event
that will not necessarily exempt the debtor from liability. That may be the general
rule under 1174 but there are EXCEPTIONS APPLICABLE TO OBLIGAITONS
TO DELIVER A DETERMINATE THING: stipulation of the party that the
debtor will be liable whatever may be the cause of the loss, or may be the law
provides for liability even if the loss was caused by a fortuitous event.
g. Effect of Difficulty of Performance- Occenia v. Jobson when the performance has

become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released in whole or in part. THE LAW GRANTS THE
COURT THE POWER TO RELEASE THE DEBTOR IN WHOLE OR IN
PART BUT IT DID NOT VEST THE COURT THE POWER TO CHANGE
THE TERMS AND CONDITIONS AGREED UPON BY THE PARTIES.
Requirements:
i. The performance of the obligation has become so difficult. This should not
be confused with impossible; if the obligation has become impossible to
perform then Article 1267 will not apply in fact as a rule the obligation will be
considered extinguished.
ii. The difficulty to perform must be due to a fortuitous event or beyond the
contemplation of the parties.
h. Effect of partial loss. A scenario could be an obligation to deliver a cell phone with
housing, what if the cell phone was lost but the housing is still available, is the
obligation totally extinguished, can the debtor still be compelled to deliver the
housing? The answer depends on the intention of the parties as to really what
was the principal motivation in entering the transaction. But is it possible that
the housing is more valuable than the cell phone? Yes it is possible for instance it
has diamonds. So if the delivery of the housing was the intention, apparently the
buyer cannot be compelled to accept the cell phone.
12. Condonation or Remission of the debt or a.k.a donation of credit – As to the kinds of
condonation:
a. Extent of extinguishment whether total or partial: Condonation may be partial.
PARTIAL: the principal amount may not even be reduced and the creditor will only
condone the interest or the principal amount nor the interest will not be condoned but
the accessory obligations will be condoned and therefore it will result to partial
condonation.
b. Whether Condonation is express or implied: if the condonation is EXPRESS you
should consider the rules as to formalities of donation.
i. BAR QUESTION: The son is indebted to his father 500K, the son paid 300K
through a check, thereafter the father died, the executor demanded for the
payment of the balance 200K, the son claimed that the 200K was condoned by
his father as can be seen from the writing at the back of the check stating that
the check is for the full payment of the debt, was there extinguishment by
condonation? U.P. LAW CENTER: the effect of the writing on the check
will depend on who wrote the same, if the son is the one who wrote the
writing the obligation was not totally extinguished, if the father was the one
who wrote was there a valid condonation? Yes because this is a form of
implied condonation and therefore the law does not require a particular form
nor acceptance is required, Do you agree to this? ATTY URIBE: I do not
agree to this answer, I agree more to the alternative answer that as can be seen
from the facts, what could be more express than that? How express can this
be? And therefore if this is an express condonation this has to comply to
the formalities of law as to donation, this is a donation of credit and
therefore under the law, if the credit is more than 5K, the condonation
must be in writing and that there must be acceptance in writing, so there
was a condonation in writing, but there was no acceptance in writing,
hence, there was no valid condonation.
ii. IMPLIED CONDONATION, WHEN WILL THIS HAPPEN? If the debt
is evidenced by a promissory note, and the promissory note after having
been delivered to the creditor was found in the possession of the debtor
was the obligation extinguished? At best there was only a presumption, a
presumption that the promissory note was voluntarily returned to the
debtor. If it is voluntarily returned the effect is that the obligation is
extinguished. Then when would the presumption arise that the delivery
was a voluntary delivery? It will only arise if the document is a private
document, but if it is a public instrument, there is no such presumption
because a public document has several copies in custody of several people. At
any rate, the presumption here is only a disputable presumption. But
ultimately if it was voluntarily returned to the debtor, how was the
obligation extinguished? DE LEON: Not by condonation but by payment.
Thus, it was voluntarily returned because there was payment, however, if

the debtor cannot prove that payment, like for instance he does not have
a receipt, maybe he can invoke the presumption of the law that there was
a condonation, but again, the presumption is disputable.
iii. LAST RULE: A debtor of B, a ring was delivered to B as a security,

ordinarily this will be a pledge, now, after the perfection of the pledge, the
thing again was found in the possession of A the debtor, is the obligation
of A to B extinguished? NO! Is there a presumption that this obligation is
extinguished if there is a presumption under the law it will pertain to the
pledge. If the thing to be delivered by way of pledge is thereafter found in the
possession of the debtor there may arise a presumption that it was voluntarily
delivered and therefore the pledge was extinguished. “PRESUMPTION
MAY ARISE” because the presumption may not arise, why? The law
requires that after the perfection of the pledge, the thing must be found in
the possession of the owner of the thing pledged. Is the debtor necessarily
the owner of the thing pledged? No because pledge may be constituted by a
third person, so if it was found in the possession of the debtor, then no
presumption will arise, the presumption of voluntarily returned if thereafter it
is found in the possession of the owner of the thing pledged. Again, this
presumption is disputable presumption, because there are hundred and one
reasons why the debtor would return the thing to the owner, one of the reasons
may be for safe keeping. So again it is a DISPUTABLE PRESUMPTION.
13. CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just
imagining the merger of banks in the past few years. Now, it is common that before the
merger, one of the banks is indebted to the other banks and therefore instead of xxx the
creditor may agree to just buy the debtor bank. Obviously this is by agreement of the
parties.
a. Can there be confusion by operation of law? Yes if the creditor for example died
and the only heir is the debtor, of course the heir will inherit the credit, the heir
now who is the debtor will now become the creditor, therefore there will be a
meeting in one person of the character of the debtor and creditor and therefore
the obligation will be extinguished.
b. What if the decedent is the debtor and the heir is the creditor, will the obligation be
extinguished? It seems like it will not be extinguished because the heir will not
accept the obligation. So the creditor will normally demand from the executor
payment.
c. Can a guarantor invoke a merger or confusion? YES! But he may invoke merger
and confusion as to the character of debtor and creditor because if the principal
obligation is extinguished then the guaranty will also be extinguished, the guarantors
will benefit with the confusion of the character of the principal debtor and the
creditor, but if the confusion was between the guarantor and the debtor will the
principal obligation be extinguished? NO! What will happen here is that there will
no longer be security because the debtor and the guarantor will be one.
d. CAN THERE BE A PARTIAL EXTINGUISHMENT IN CONFUSION OR

MERGER? YES! By express provision of law, in joint obligations and there was
a confusion pertaining to one of the joint debtors in the person of the creditor,
the extinguishment will only be to the extent of the debt of the joint debtor. This
is different of course if the obligation is solidary, if there is confusion between
the creditor and one of the solidary creditor the obligation is totally
extinguished. But there is NO partial confusion.
1 |1999 (Due) 2 |2005 (Merger) 3 |2009 (Rescission) 4 |2012 (Action filed for Collection)
e. PROBLEM: In the above illustration, the obligation of A to B was for the amount of
1 Million. In rescission the effect is restitution, the parties will be reverted back to
their status prior to the merger, so as if A owes B 1M, so B files an action today
against A to recover the 1M The defense of the debtor was that the action will no
longer prosper because it has already prescribed. Will the action prosper during 2012
filed by B? YES SC HELD THAT IT YES IT WILL PROSPER, BECAUSE
THE TIME OF THE MERGER TO THE TIME OF RESCISSION SHOULD
NOT BE INCLUDED IN THE COMPUTATION OF THE PRESCRIPTIVE
PERIOD. During those times, the creditor will not file a case because it will be
absurd given that he is also the creditor of himself. This a very good decision
because creditor and the debtor are one at that time. Therefore only 9 years has
lapsed so the action has not yet prescribed.
14. COMPENSATION – By express provision of law, compensation may be total or partial.

a. According to law, with partial compensation may there be two or ten debts
extinguished as partial compensation? Yes, there can be two or 100 debts
extinguished by compensation but it is still partial compensation why? As long as the
debts of one are not equal to the debts of the other the compensation will only be to
the concurrent amount and there will be no total extinguishment.
b. Total extinguishment will only take place when the debts are totally equal for
instance if the debt is 1M and the other is 1M. Scenario:
i. A owes B 100K, but B has several debts to A 20K, 10K, 50K but if you add it
all up it is only 80K, with compensation, all the debts will be totally
extinguished, because the extinguishment is for the concurrent amount, the
80K will be totally extinguished, but A would still owe B 20K, why is this so
important? This is important as to the liability to pay interest or as to whether
or not there can be valid foreclosure
ii. EXAMPLE: A has obligation to B, B has obligation to A, A’s obligation is
interest bearing, after compensation can B still collect interest can A be
held liable for interest? It will depend on the amount involved, if B’s debt is
smaller may be 50K, A’s debt is 100K, can B collect interest? Not anymore
because the debt will be totally extinguished, the 100K will be reduced by
50K to the concurrent amount.
iii. On the other hand what if the 100K is secured by a mortgage after
compensation may A foreclose the mortgage? Yes! Because there will still
be a balance of 50K, a mortgage is an indivisible contract, until the obligation
is not extinguished the mortgage will remain in force. And therefore if B
failed to pay A the fifty thousand, A can still foreclose the mortgage.
c. BAR EXAM QUESTION: A opened a savings account with Y bank in the amount
of 1M, thereafter A borrowed money from the same bank 800K, then A wanted to
withdraw the 1M, the bank said no you cannot withdraw the 1M because your
obligation to pay the 800K is already due we are invoking compensation, you can
only withdraw 200K less the charges, A claimed you cannot do that because under
Article 1287 there can be no compensation when one of the debts arises from a
deposit. WHO IS CORRECT? The bank was correct because a savings account
deposit is not a deposit it is a contract of loan, that is why 1287 (compensation will
not be proper if one of the obligations arises from depositum) will not apply. So if
both are simple loan there can be compensation. Article 1287 provides that there can
be no compensation when 1 of the obligations is arises from a deposit, this is known
as, as some authors would name it, a facultative compensation. However, other
authors does not see this as independent obligation, this is just treated as a
modification of the other kinds of compensation recognized by law which is a
voluntary or conventional compensation the third one is judicial compensation
the first obviously is legal compensation.
Kinds of Compensation
i. Legal compensation is considered as the true kind of compensation. Hence,
if the examiner does not mention any kind of compensation he is referring to
LEGAL COMPENSATION.
ii. Voluntary/ Conventional compensation: the consent of both parties is
required.
1. In facultative: it is only the consent of one of the parties which is
required.
iii. Judicial: this would normally happen when a case is filed for a sum of money
but what would normally happen in cases, the defendant will have
counterclaim, usually the counterclaim is bigger, so in the end the plaintiff
becomes liable on the premise that the claim of plaintiff is valid and was
granted and the court also granted the counterclaim it is compensated up to the
concurrent amount. The obligations which are not yet liquidated at the time of
the filing of the action, they can be liquidated during the proceedings. In
compensation it is also called as set off or counterclaim but it seems that
this word is proper in judicial compensation because counterclaim is
usually used in the court.
d. VOLUNTARY COMPENSATION – this is by agreement of the parties, even if not
all of the requirements for legal compensation are present, it does not matter because
the obligations will be extinguished by agreement of the parties. For example: the
debts are not yet due and they want to compensate, what can we do? The parties
already agreed. Also, probably one of the debts pertain to a carabao and the other to a
car, we cannot do anything about it. In fact in lay man’s term we call this “quits”.
e. FACULTATIVE COMPENSATION it occurs in depositum, commodatum,

gratuitous support, and civil liability arising from crime-
i. This will arise if one of the debts arises from a depositum, in a depositum a
thing is delivered to the depositary for safekeeping, this can happen even also
with a bank. If a person for example would deliver 1M pesos to the bank only
for safekeeping, this will be a DEPOSITUM What if A deposited 1M not as a
savings account but in the safety deposit box, and A borrowed 800K, now if A
would want to withdraw the 1M from the safety deposit box can the bank
invoke compensation? The depositary cannot invoke compensation but the
DEPOSITOR CAN!
ii. Aside from depositum, mentioned COMMODATUM when one of the debts
arises from commodatum. In this obligation the thing has to be returned upon
demand however here, the bailor can invoke consignation but not the
bailee.
iii. SUPPORT should be gratuitous support and not contractual support. Why?
Because if this is legal support, a person needs this to survive thus, it cannot
be subject to compensation. But if it is support in arrears compensation may
take place.
iv. CIVIL LIABILITY ARISING FROM CRIME – probably the scenario
here is A is indebted to B 100K when B tried to collect A cannot be so he
stabbed A, so B was held criminally liable, then there was a monetary award,
what if the award to A is 120K, if A demands for 100K from B can B invoke
compensation? NO! The convict cannot invoke compensation but the
aggrieved party can invoke compensation.
f. LEGAL COMPENSATION, THIS IS BY OPERATION BY LAW – From the
moment all the essential requisites are present compensation takes place even without
the knowledge of the parties, even before they invoke compensation.
i. SCENARIO: A owes B due 1992, B owes A due in 1999, possible that it’s
both 1M based on different transaction, A filed an action against B the defense
of B is compensation, however, A may claim that no, you cannot invoke
compensation because your credit has already prescribed since my debt has
become due in 1992. Is A correct? NO!!! In 1999 even without their
knowledge when the debts become due and demandable compensation took
place. REQUIREMENTS OF LEGAL COMPENSATION:
1. THEY MUST BE MUTUAL CREDITORS AND DEBTORS - but
if you have read one case and a few authors would consider this
instead of mutual they would use reciprocal creditors ATTY. URIBE:
I would not encourage you to use reciprocal creditors, if reciprocal
debtors and creditors it will imply reciprocal obligations, if it is
reciprocal obligations then this obligations arose from the same
transactions if this is the case one of the requisites for legal
compensation to take place will never be complied with. Here, debtors
and creditors must be principally bound to each other. In a case, A
is indebted to B secured with a guaranty of G. G paid to B; hence B is
indebted to G. Can B invoke legal compensation? If the debtor is
already in default, G will now be liable; thus, legal compensation take

place.
a. CASE: X as the owner of shares authorize Y to sell shares of
stock, Z bought it from Y, but the latter fail to remit to X,
hence, he was filed Estafa. Y is also liable to Z. The trial court
convicted Y. Z argued that Y is also liable to him invoking
compensation. SC ruled that even if Y is indebted to Z, Z is
not indebted to Y, the latter being an agent to X. Hence,
parties are not mutually indebted to each other.
b. CASE: Francia vs. IAC, was there legal compensation?
NONE because in the case Francia was indebted to the city
government of pasay because of the expropriation of the
former’s property xxx however, Francia was invoking legal
compensation because he was the creditor of an expropriation
proceedings, it just so happen that the city government did not
expropriate his property the national government did. Since
the requirement no. 1 is not present there is no legal
compensation.
c. CASE: PNB v. ACERO: PNB was debtor of Isabela, this is
simple loan, so PNB owed Isabela, however ACERO was the
judgment debtor of Isabela who wants to have the savings of
Isabela garnished, however PNB claimed that they invoked
compensation because Isabela was also their debtor, who is
correct? No claim is correct, although PNB is the debtor of
Isabela, there was no proof that Isabela is the debtor of PNB.
2. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY
PERTAIN TO GOODS THEY MUST BE OF THE SAME KIND
AND QUALITY – in other words may the obligations be both in
sums of money if they are reciprocal obligations? It cannot happen. In
reciprocal obligations there are different prestations one is
delivery and the other monetary, it can never be both sums of
money. Reading several cases it might appear that this compensation
may occur only when the obligation arises from contracts, is this
correct, will there be legal compensation only if the debt in money
arose from contract? NOT TRUE! Even if the obligation arose from
other sources there can be compensation.
a. In fact if you read the CASES: Mindanao Portland xxx in
these two cases the amounts which are the subject of
compensation were attorney’s fees, these fees did not arise
from contract. Mindanao Portland is unlikely, company A
filed a case against company B, one of them won and the court
awarded attorney’s fees, in another case the other company
won and attorney’s fees were also awarded, so the award is of
the same amount, the obligation is of the same nature,
COMPENSATION TOOK PLACE. Ultimately the
QUESTION HERE IS: Does it mean that all monetary
obligations may be the subject of legal compensation? No!

If you have read the case of Francia v. IAC certain monetary
obligations cannot be subject of legal compensation like
payment of taxes, customs duties, tariff etc.
3. BOTH PARTIES MUST BE PRINCIPALLY BOUND –
Principally bound because in a scenario where A is indebted to B and
this obligation is secured by a guarantor G on the other hand B is the
debtor of G in this obligation, if G demands payment from B, Can he
claim that G is also indebted to him because he is a guarantor in
B’s obligation to A? In its face NO, because the guarantor is not
principally bound but take note the moment A defaults and his
properties are already exhausted, the GUARANTOR WILL NOW
BE LIABLE TO B AND FROM THEN ON COMPENSATION
WILL TAKE PLACE.
4. THEY MUST BE CREDITORS AND DEBTORS OF EACH
OTHER IN THEIR OWN RIGHT: SYCIP v. CA: the owner of the
shares of stocks authorized Lapuz to sell the shares of stock, lapuz on
then authorized Sycip to sell the shares of stock, the latter was able to
sell the shares of stock (5K), however, despite the demand to Sycip to
remit the proceeds of the sale he refused to do so. A complaint for
estafa was filed against Sycip, he was convicted in the lower court, on
appeal Sycip claimed that Lapuz owed him (5K) so compensation took
place, therefore he cannot be liable for estafa, is Sycip’s contention
correct? NO, even assuming that Lapuz is indebted to Sycip, the
latter is really not indebted to Lapuz in his own right. The real
creditor of Lapuz is the buyer of the shares.
5. BOTH DEBTS MUST ALREADY BE DUE AND
DEMANDABLE – The MOST COMMON MISTAKE WHEN
ASKED WHY IS THERE NO LEGAL COMPENSATION IS
BECAUSE THE OBLIGAITON HAS NOT YET BECOME DUE AT
THE SAME TIME. REMEMBER: The requirement of the law is
that both debts are due and it is not required that the debts are
due at the same time. But if one debt became due 3 years ago and the
other debt became due today, compensation will only take place today,
but there can be compensation. ANOTHER COMMON MISTAKE:
EXAMPLE: A borrowed money, the other one bought on credit, so
they are debtors and creditors of each other, however, they say
that there can be no legal compensation because the obligations do
not pertain to sums of money, one is money the other one car.
HERE THE OBLIGATION OF THE BUYER IS TO PAY THE
PRICE SO IT IS ALSO MONETARY LEGAL
COMPENSATION WILL TAKE PLACE.
6. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE –
In other words there should be no claim by a third person over this
right or credit, because if the claim is subject of legal proceeding, there
can be no legal compensation.
a. Example: International Corporate Bank v. IAC: Fajardo

borrowed money from ICB 50M the bank released only 20M to
secure this obligation, Fajardo mortgaged properties amounting
to 110M, thereafter she also delivered 1M to the bank for
money market investment, so just like any other investments it
matured, so she demanded for the return of the 1M, the bank
claimed that she has nothing to recover from the bank because
as to her loan which she failed to pay, when the foreclosed the
mortgage she still has deficiency of 6M, so compensation took
place, however Fajardo questioned the mortgage the SC
HELD: there can be no legal compensation because one of
the claims is still being litigated.
7. ONE OF THE DEBTS MUST NOT ARISE FROM Article 1287
AND Article 1288 because in such cases legal compensation will not
take place since in depositum the depositor or the bailor must invoke
legal compensation.
X is indebted to Y for 100k--------- Y assigned this credit to Z- (May 1, 2012)-------- Z demanded payment
from X
Y is also indebted to X
1. 50K (Due on March 1, 2012)

2. 20K (Due on May 15, 2012)
3. 10K (Due on July 31, 2012)
June 30, 2012------- Z demanded payment from X
g. EFFECT OF ASSIGNMENT OF A CREDIT AS TO THE RIGHT TO INVOKE

COMPENSATION –
i. Can X validly claim compensation for these 3 debts?
1. X cannot be compelled to pay Z if the obligation has not yet due and
demandable. If the assignment was made before debts became due,
and you demand on that date, the person to whom payment should be
made cannot yet be compelled.
2. Hence, the first thing to look at is the DATE OF ASSIGNMENT!
3. To answer the question raised above, the first factor you have to
consider: WHETHER THE ASSIGNMENT WAS WITH THE
KNOWLEDGE OF X OR WITHOUT KNOWLEDGE:
a. IF WITH KNOWLEDGE, YOU HAVE TO DETERMINE
WHETHER OR NOT THERE WAS CONSENT TO THE
ASSIGMENT OR NONE:
i. IF CONSENT IS GIVEN, YOU HAVE TO
DETERMINE WHETHER OR NOT HE MADE A
RESERVATION OR NO RESERVATION:
1. (so the scenario here is Y and Z advised X that
Y is assigning the credit to Z, X consented but
he reserved his right to invoke compensation)

IF X RESERVED, HOW MUCH CAN Z
COLLECT FROM X? ONLY 50K BECAUSE
AS OF THE DATE OF THE ASSIGNMENT
WHICH WAS WITH THE KNOWLEDGE OF
X, THE DEBT IN March 1 IS ALREADY
DUE, AS TO DEBTS OWING TO Y WHICH
ARE ALREADY DUE, HE CAN INVOKE
COMPENSATION OR AT LEAST RESERVE
COMPENSAITON BECAUSE
COMPENSATION WILL TAKE PLACE
ONLY June 30, SO AS TO 20K AND 10K B
CANNOT INVOKE COMPENSATION, AT
THE TIME OF ASSIGNMENT June 30, THE
CREDITS ARE NOT YET DUE TO HIM.
2. NO RESERVATION HOW MUCH CAN Z
DEMAND FROM X? 100K BECAUSE BY
AGREEING WITHOUT RESERVATION HE
WAIVED HIS RIGHT TO COMPENSATION,
Z’S REMEDY HERE IS TO DEMAND THE
PAYMENT OF THE DEBTS FROM X.
b. WITHOUT KNOWLEDGE: Z demanded from X in June 30,
how much can X be compelled to pay? Only 30K because he
can invoke compensation to those debts which became due if
the assignment is without his knowledge, 70K.
15. NOVATION- it is a peculiar mode of extinguishment because it creates an obligation. This

is somewhat the same as that of prescription, which the latter can extinguish civil obligations
but can be converted into natural obligation.
a. What is the relevance of determining whether there is novation or not? Because if

there will be novation, it consequently required a new set of requirements to be
complied with since a new obligation arises.
b. Will change of person amounts to novation? No, say in a case wherein A executed a
PN dated 1996 to secure payment of loan to B. In 2001, A died. Heirs of B filed in
2007. The defense of A is prescription since it already lapsed as far as time is
concerned. B argued that there is novation. There is NO novation here. Hence, not
all change of person leads to novation since here the same obligation, hence,
prescriptive period was not tolled.
c. In a case wherein A had a contract with B which was voidable, B thereafter

assigned his right to C. Can A invoke vitiation of consent? No, because there was the
creation of new obligation between B and C, hence A cannot raise the defense he had
against B. But if the assignment was done without knowledge of A, can A invoke
vitiation against C? Yes, because this involved the same obligation; hence, A can
raise his defense against C.
d. In Fua case, these are subjected to agreement of parties, (1) Reduction of amount, (2)
Payment in installment; (3) Secured with Real Estate Mortgage; (4) With order of
payment of attorney’s fees. But despite those agreement, debtor still failed to pay.
Hence, the creditor continued with execution sale. Debtor questioned the execution
sale arguing that there WAS NOVATION. Hence, if there was, the sheriff must
comply anew with the requirements, because such will give rise to a new obligation.
SC ruled that there was indeed novation. The Dissenting opinion of this case
made classification of Novation as follows:
i. Subjective Novation/personal- pertaining to parties.
1. Active subjective- Subrogation in the rights of creditor
a. The change of creditor may not necessarily extinguish the

obligation because third person might subrogate. When? It
could be express, that is with an agreement, or implied under
Article 1302, as an operation of a right.
2. Passive subjective- Substitution of the person of the debtor
a. In a scenario, A is indebted to B, X offers to pay B. Will X

subrogate in the rights of B? Not yet, because B did not accept
such offer.
b. In the scenario above, X demanded from A, is A bound to

reimburse X? Yes, insofar as A has been benefited under
Article 1236. If A fails to reimburse, can X run after the
guarantor, if any? And if B demanded payment from X, since
X offered to pay him, but later on X became insolvent, can he
recover from A? You have to qualify if this is a case of
EXPROMISSION OR DELEGACION.
i. Expromission- if there is substitution of debtor without

or against the original debtor’s will. If it is this kind, X
cannot run after the guarantor because it is not
subrogated in the rights of B. Here, if payment to B was
with consent of A, X is subrogated in the rights of B,
hence, Article 1302 applies. In case of insolvency, A
here will never be liable because the substitution was
without his consent.
ii. Delegacion- the original debtor gave consent. If in this

kind, X can run after the guarantor. B cannot demand
from A because the obligation has already been
extinguished by novation. However, if A is in bad
faith, HE CAN BE HELD LIABLE TO B. If
insolvent after substitution, there is NO BAD FAITH.
And if A and B are aware of the insolvency of X but
still allows substitution, B cannot held A liable

because both are in BAD FAITH.
ii. Objective Novation/real- pertaining to subject-matter.
1. Change in the object- easiest kind
a. In a case wherein A is the lessee and B is the lessor, when A

surreptitiously left the premises, he left along with him the
arrears in payment of telephone bills. Then, the telephone
company sued B for the unpaid bills. The latter however
argued that it should be A who will be held liable. Whether or
not there is substitution in the person of debtor here? No,
because substitution was without the consent of the creditor.
b. The case of Japan Airlines.
2. Change in the principal conditions- most difficult.
a. There is no hard and fast rule. In Fua case which was

followed by a recent case in Millare vs. CA, the SC found
that there was no NOVATION, by reason set forth.
iii. Mixed- combination of the above two.
e. If the original obligation is void, parties had an agreement which was also void,
what will be the result? THERE IS NO NOVATION because there is nothing to
extinguish. Can new agreement be enforced? No, because the consideration is void.
f. If original obligation is void, and new agreement valid, will there be novation?
No.

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Amen | Compiled Notes – Updated by CVC (2021)

Civil Law Review 2

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

b. They could be an individual person or juridical persons.

c. They must be determinable in some manner. Exceptions are the following

3. an object or the prestation (a particular conduct);

i. Law (relation to give support)

ii. Bilateral acts (contracts giving rise to obligation)

iii. Unilateral acts (crimes and quasi-delict)

What are the requisites of a prestation?

1. must be possible, physically and juridically;

2. must be determinable or at least determinable according to pre-established elements or

Etymology – two Latin words, ligare, meaning "to bind"

& ob w/c is a proposition used to intensify a verb.

Literally obligare means "to bind securely."

1. It represents an exclusively private interest

2. It creates ties that are by nature transitory

Essential Elements of an Obligation:

(1) Active Subject – This refers to the creditor or the obligee.

 A creditor generally used in an obligation to give

 while obligee is used in an obligation to do

(2) Passive Subject – This refers to the debtor or the obligor.

 debtor is used in an obligation to give

 while obligor is used in an obligation to do

 It must be determinate or determinable.

 Juridical tie, the efficient cause established by the various sources of

Efficient cause / vinculum  may either be relation established by:

1. Law (e.g. marital relation giving rise to OBLIGATION for support;

3. Unilateral acts (e.g. crimes and quasi-delicts)

OBLIGATION “to give”  prestation consists in the delivery of a movable or an immovable

1. it must be possible, physically and juridically

2. it must be determinate, or at least determinable; and

3. it must have a positive equivalent in money. (susceptible of pecuniary appreciation)

Positive Law – valid legal laws enacted by the legislative department;

2. KINDS OF OBLIGATIONS AS TO BASIS & ENFORCEABILITY

(a) NATURAL OBLIGATIONS

H. NATURAL OBLIGATIONS – ARTS. 1423-1430. 1155

What are the types of obligations?

In juridical science, four types of which include the following:

1. Moral obligation- duties of conscience completely outside of the field of law

4. Mixed obligation- have full juridical effect

However, jurisprudence makes only two classifications, as follows:

Requisites of Natural OBLIGATION:

 an OBLIGATION without a sanction, susceptible of voluntary performance, but

Voluntary fulfillment – may be understood as spontaneous, free from fraud or coercion or it

-with knowledge that he cannot be compelled to pay OBLIGATION;

RATIO: “reputation” (clan)

Case: Ansay vs. National Development Company

xxx xxx xxx

Natural OBLIGATION vs. Moral OBLIGATION:

Juridical tie Exists None

Performance legal fulfillment act of pure

Basis of Within the entirely domain

Enforceability The juridical tie moral duty is

Examples of natural OBLIGATIONS:

 Support of a natural child

 Indemnification of a woman seduced

 Support of relatives, by consanguinity or affinity

Case: Villaroel vs. Estrada