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OBLIGATIONS and CONTRACTS

St. Thomas More


Midterm Exam
Case Doctrines
ARTICLE. 1226-PENAL CLAUSE
LIGUTAN VS CA
*A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the part
of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide,
in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay
the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the
breach.
*a stipulated penalty, nevertheless, may be equitably reduced
by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied
with.
*The question of whether a penalty is reasonable or iniquitous
can be partly subjective and partly objective. Its resolution
would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of
the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court.
PRYCE CORP. VS PAGCOR
*In obligations with a penal clause, the general rule is that the
penalty serves as a substitute for the indemnity for damages
and the payment of interests in case of noncompliance; that
is, if there is no stipulation to the contrary, in which case proof
of actual damages is not necessary for the penalty to be
demanded.
*There are exceptions to the aforementioned rule, however,
as enumerated in paragraph 1 of Article 1226 of the Civil
Code:
1) when there is a stipulation to the contrary,
2) when the obligor is sued for refusal to pay the agreed
penalty, and
3) when the obligor is guilty of fraud.
*In these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. --Hence, the obligee can
recover from the former not only the penalty, but also other
damages resulting from the nonfulfillment of the principal
obligation.
*In the present case, the first exception applies because
Article XX (c) provides that, aside from the payment of the
rentals corresponding to the remaining term of the lease, the
lessee shall also be liable "for any and all damages, actual or
consequential, resulting from such default and termination of
this contract." Having entered into the Contract voluntarily
and with full knowledge of its provisions, PAGCOR must be
held bound to its obligations. It cannot evade further liability
for liquidated damages.
RCBC VS CA
*Court is constrained to rule in favor of RCBC, who, in good
faith, relied upon the endorsement documents sent to it as
this was pursuant to the stipulation in the mortgage contracts.
*Regarding the payment of additional interest, penalties, and
charges, the Court ruled that the essence for the payment of

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
interest is separate & distinct from that of surcharges &
penalties. What may justify a court in not allowing the creditor
to charge surcharges & penalties despite express stipulation
may not equally justify non-payment of interest. The charging
of interest for loans forms a very essential & fundamental
element of the banking business. It is inconceivable for a bank
to grant loans for which it will not charge any interest at all.
*There being written stipulations as to the rate of interest
owing on each specific promissory note, such agreed interest
rates must be followed.
*Surcharges & penalties agreed to be paid by the debtor shall
be determined by the Court whether such would be iniquitous
& unconscionable. Given the circumstances under which
GOYU found itself after the occurrence of the fire, the Court
rules the surcharge rate ranging from 9%-27% plus penalty of
36% to be iniquitous & unconscionable. In light of GOYUs
offer to pay the amount to RCBC, which RCBC refused, the
Court finds it more in keeping with justice & equity for RCBC
not to charge additional interest, surcharges & penalties.
AGNER VS BPI
*Replevin; Prior demand is not a condition precedent to an
action for a writ of replevin, since there is nothing in Section
2, Rule 60 of the Rules of Court that requires the applicant to
make a demand on the possessor of the property before an
action for a writ of replevin could be filed.A provision on
waiver of notice or demand has been recognized as legal and
valid in Bank of the Philippine Islands v. Court of Appeals, 490
SCRA 168 (2006), wherein We held: The Civil Code in Article
1169 provides that one incurs in delay or is in default from the
time the obligor demands the fulfillment of the obligation from
the obligee. However, the law expressly provides that demand
is not necessary under certain circumstances, and one of
these circumstances is when the parties expressly waive
demand. Hence, since the co-signors expressly waived
demand in the promissory notes, demand was unnecessary
for them to be in default. Further, the Court even ruled in
Navarro v. Escobido, 606 SCRA 1 (2009), that prior demand is
not a condition precedent to an action for a writ of replevin,
since there is nothing in Section 2, Rule 60 of the Rules of
Court that requires the applicant to make a demand on the
possessor of the property before an action for a writ of
replevin could be filed.
* Settled is the principle which this Court has affirmed in a
number of cases that stipulated interest rates of three percent
(3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant. While Central Bank Circular
No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said
circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a
hemorrhaging of their assets. Since the stipulation on the
interest rate is void for being contrary to morals, if not against
the law, it is as if there was no express contract on said
interest rate; thus, the interest rate may be reduced as reason
and equity demand.
MULTI-INTL BUS VS MARTINEZ
* Payment; Burden of Proof; The debtor has the burden of
showing with legal certainty that the obligation has been
discharged by payment.It is established that the one who
pleads payment has the burden of proving it. Even where the
creditor alleges nonpayment, the general rule is that the

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
debtor has the burden to prove payment, rather than the
creditor. The debtor has the burden of showing with legal
certainty that the obligation has been discharged by payment.
Where the debtor introduces some evidence of payment, the
burden of going forward with the evidence as distinct
from the general burden of proof shifts to the creditor, who
is then under a duty of producing some evidence to show
nonpayment.
* The fact of payment may be established not only by
documentary evidence but also by parol evidence.Although
not exclusive, a receipt of payment is the best evidence of the
fact of payment. We held that the fact of payment may be
established not only by documentary evidence but also by
parol evidence. Except for respondents bare allegations that
he has fully paid the P648,288.00 car loan, there is nothing in
the records which shows that full payment has indeed been
made. Respondent did not present any receipt other
than the certification dated September 10, 1996 which
only proves that respondent has already paid
P337,650.00 of the car loan. A balance of P310,638.00
still remained.
EFFECT OF DEATH
STRONGHOLD INS. VS REP. ASAHI
* Death of a PartyAs a general rule, the death of either the
creditor or the debtor does not extinguish the obligation.
Obligations are transmissible to the heirs, except when the
transmission is prevented by the law, the stipulations of the
parties, or the nature of the obligation. Only obligations that
are personal or are identified with the persons themselves are
extinguished by death. Section 5 of Rule 86 of the Rules of
Court expressly allows the prosecution of money claims
arising from a contract against the estate of a deceased
debtor. Evidently, those claims are not actually extinguished.
What is extinguished is only the obligees action or suit filed
before the court, which is not then acting as a probate court.
*In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with respondent
were not intransmissible by their nature, by stipulation, or by
provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which merely
passed on to his estate. Death is not a defense that he or his
estate can set up to wipe out the obligations under the
performance bond. Consequently, petitioner as surety cannot
use his death to escape its monetary obligation under its
performance bond.
*Although the contract of surety is in essence secondary only
to a valid principal obligation, his liability to the creditor or
promisee of the principal is said to be direct, primary and
absolutehe is directly and equally bound with the principal.
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as follows:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship. x xxxxxxxx
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 which may subsequently be directed against the others,
so long as the debt has not been fully collected.

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW

TO WHOM PAYMENT SHALL BE MADE


PNB VS CA
*Debts; 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.
There is no question that no payment had ever been made to
private respondent as the check was never delivered to him.
When the court ordered petitioner to pay private respondent
the amount of P32,480.00, it had the obligation to deliver the
same to him. Under Art. 1233 of the Civil Code, a debt shall
not be understood to have been paid unless the thing or
service in which the obligation consists has been completely
delivered or rendered, as the case may be.
*Evidence; Burden of Proof.The burden of proof of such
payment lies with the debtor. In the instant case, neither the
SPA nor the check issued by petitioner was ever presented in
court.
*Agency; Where payment has been made to an agent, aside
from proving the existence of a Special Power of Attorney, it is
also necessary for evidence to be presented regarding the
nature and extent of the alleged powers and authority granted
to the agent.Furthermore, contrary to petitioners
contention that all that is needed to be proved is the
existence of the SPA, it is also necessary for evidence to be
presented regarding the nature and extent of the alleged
powers and authority granted to Sonia Gonzaga; more
specifically, to determine whether the document indeed
authorized her to receive payment intended for private
respondent. However, no such evidence was ever presented.
*Best Evidence Rule; Only the original document is the
best evidence of the fact as to whether the creditor
authorized a third person to receive the check from
the debtor, and in the absence of such document, the
debtors arguments regarding due payment must fail.
Considering that the contents of the SPA are also in issue
here, the best evidence rule applies. Hence, only the original
document (which has not been presented at all) is the best
evidence of the fact as to whether or not private respondent
indeed authorized Sonia Gonzaga to receive the check from
petitioner. In the absence of such document, petitioners
arguments regarding due payment must fail.
CULABA VS CA
*PAYMENT is a mode of extinguishing an obligation. Article
1240 of the Civil Code provides that payment shall be made to
the person in whose favor the obligation has been constituted,
or his successor-in-interest, or any person authorized to
receive it. In this case, the payments were purportedly made
to a supervisor of the private respondent, who was clad in
an SMC uniform and drove an SMC van. He appeared to be
authorized to accept payments as he showed a list of customers accountabilities and even issued SMC liquidation receipts
which looked genuine. Unfortunately for petitioner Francisco
Culaba, he did not ascertain the identity and authority of the
said supervisor, nor did he ask to be shown any identification
to prove that the latter was, indeed, an SMC supervisor. The
petitioners relied solely on the mans representation that he
was collecting payments for SMC. Thus, the payments the

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.
* The basis of agency is representation. A person dealing with
an agent is put upon inquiry and must discover upon his peril
the authority of the agent. In the instant case, the petitioners
loss could have been avoided if they had simply exercised due
diligence in ascertaining the identity of the person to whom
they allegedly made the payments. The fact that they were
parting with valuable consideration should have made them
more circumspect in handling their business transactions.
Persons dealing with an assumed agent are bound at their
peril to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it.
The petitioners in this case failed to discharge this burden,
considering that the private respondent vehemently denied
that the payments were accepted by it and were made to its
authorized representative.
*Negligence is the omission to do something which a
reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or
the doing of something, which a prudent and reasonable man
would not do. In the case at bar, the most prudent thing the
petitioners should have done was to ascertain the identity and
authority of the person who collected their payments. Failing
this, the petitioners cannot claim that they acted in good faith
when they made such payments. Their claim therefor is
negated by their negligence, and they are bound by its
consequences. Being negligent in this regard, the petitioners
cannot seek relief on the basis of a supposed agency.
ALLIED BANKING VS LIM SIO WAN
* Fundamental and familiar is the doctrine that the
relationship between a bank and a client is one of debtorcreditor.As to the liability of the parties, we find that Allied is
liable to Lim Sio Wan.
*A money market is a market dealing in standardized shortterm credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but
through a middle man or dealer in open marketin a money
market transaction, the investor is a lender who loans his
money to a borrower through a middleman or dealer; The
creditor of the bank for her money market placement is
entitled to payment upon her request, or upon the maturity of
the placement, or until the bank is released from its obligation
as debtor. In the case at bar, the money market transaction
between the petitioner and the private respondent is in the
nature of a loan. Lim Sio Wan, as creditor of the bank for her
money market placement, is entitled to payment upon her
request, or upon maturity of the placement, or until the bank
is released from its obligation as debtor. Until any such event,
the obligation of Allied to Lim Sio Wan remains
unextinguished.
* Payment made by the debtor to a wrong party does not
extinguish the obligation as to the creditor, if there is no fault
or negligence which can be imputed to the latter. Even when
the debtor acted in utmost good faith and by mistake as to
the person of his creditor, or through error induced by the
fraud of a third person, the payment to one who is not in fact
his creditor, or authorized to receive such payment, is void,
except as provided in Article 1241. Such payment does not
prejudice the creditor, and accrual of interest is not
suspended by it.

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
* In the instant case, the trial court correctly found Allied
negligent in issuing the managers check and in transmitting it
to Santos without even a written authorization. In fact, Allied
did not even ask for the certificate evidencing the money
market placement or call up Lim Sio Wan at her residence or
office to confirm her instructions. Both actions could have
prevented the whole fraudulent transaction from unfolding.
Allieds negligence must be considered as the proximate
cause of the resulting loss. To reiterate, had Allied exercised
the diligence due from a financial institution, the check would
not have been issued and no loss of funds would have
resulted. In fact, there would have been no issuance of
indorsement had there been no check in the first place. The
liability of Allied, however, is concurrent with that of
Metrobank as the last indorser of the check. When Metrobank
indorsed the check in compliance with the PCHC Rules and
Regulations without verifying the authenticity of Lim Sio
Wans indorsement and when it accepted the check despite
the fact that it was cross-checked payable to payees account
only, its negligent and cavalier indorsement contributed to the
easier release of Lim SioWans money and perpetuation of the
fraud. Given the relative participation of Allied and Metrobank
to the instant case, both banks cannot be adjudged as equally
liable. Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.
DELA CRUZ VS. CONCEPCION
* On March 25, 1996, petitioners entered into a Contract to
Sell with respondent involving a house and lot in Antipolo City
for a 2 million consideration.
Respondent made the following payments, to wit:
(1) 500,000 by way of downpayment;
(2) 500,000 on May 30, 1996;
(3) 500,000 paid on January 22, 1997; and
(4) 500,000 bounced check dated June 30, 1997 which was
replaced.
Thus, Respondent was able to pay the 2 million total
obligation.
Before respondent issued the 500,000 replacement check, she
told petitioners that based on the computation of her
accountant as of July 6, 1997, her unpaid obligation which
includes interests and penalties was only 200,000. Petitioners
agreed with respondent. Despite repeated demands,
petitioners failed to collect the amounts they claimed. Hence,
the complaint for sum of money with damages filed with the
RTC of Antipolo Rizal. In her answer with Compulsory
counterclaim and during the presentation of evidence,
respondent presented a receipt purportedly indicating
payment of the remaining balance of 200,000 to Losloso who
allegedly received the same on behalf of petitioners.
On March 8, 2014, the RTC rendered a decision in favor of
respondent. On appeal, the CA affirmed the decision with
modification by deleting the award of moral damages and
attorney's fees in favor of respondent. Aggrieved, petitioners
come before the Court in this petition for review on certiorari
under Rule 45.

*Respondents obligation consists of payment of a sum of


money. In order to extinguish said obligation, payment should
be made to the proper person as set forth in Article 1240 of
the Civil Code, to wit:
Article 1240. Payment shall be made to the person in whose
favor the obligation has been constituted, or his successor in

FRANKLIN L. FLORES
-852-

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
interest, or any person authorized to receive it. (Emphasis
supplied)

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
Q: Yes, but you have authorized her to receive payment?
A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)

The Court explained in Cambroon v. City of Butuan, cited in


Republic v. De Guzman,to whom payment should be made in
order to extinguish an obligation:
Payment made by the debtor to the person of the creditor or
to one authorized by him or by the law to receive it
extinguishes the obligation. When payment is made to the
wrong party, however, the obligation is not extinguished as to
the creditor who is without fault or negligence even if the
debtor acted in utmost good faith and by mistake as to the
person of the creditor or through error induced by fraud of a
third person.

*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.
Admittedly, payment of the remaining balance of P200,000.00
was not made to the creditors themselves. Rather, it was
allegedly made to a certain Losloso. Respondent claims that
Losloso was the authorized agent of petitioners, but the latter
dispute it.
*Loslosos authority to receive payment was embodied in
petitioners Letter addressed to respondent, dated August 7,
1997, where they informed respondent of the amounts they
advanced for the payment of the 1997 real estate taxes. In
said letter, petitioners reminded respondent of her remaining
balance, together with the amount of taxes paid. Taking into
consideration the busy schedule of respondent, petitioners
advised the latter to leave the payment to a certain "Dori"
who admittedly is Losloso, or to her trusted helper. This is an
express authority given to Losloso to receive payment.
Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an agent of
the appellant spouses is borne out by the following
admissions of plaintiff-appellant Atty. Miniano dela Cruz, to
wit:
Q: You would agree with me that you have authorized this
Doiry Losloso to receive payment of whatever balance is due
you coming from Ana Marie Concepcion, that is correct?
A: In one or two times but not total authority, sir.

FRANKLIN L. FLORES
-852-

Thus, as shown in the receipt signed by petitioners agent and


pursuant to the authority granted by petitioners to Losloso,
payment made to the latter is deemed payment to
petitioners. We find no reason to depart from the RTC and the
CA conclusion that payment had already been made and that
it extinguished respondent's obligations.
WHEREFORE, premises considered, the petition is DENIED for
lack of merit.

ARTICLE 1242 PAYMENT MADE IN GOOD FAITH

NATL. POWER CORP. VS IBRAHIM

* Bad Faith-A finding of bad faith usually assumes the


presence of two
(2) elements:
1.)
that the actor knew or should have known that a
particular course of action is wrong or illegal.
2.)
that despite such actual or imputable knowledge,
the actor, voluntarily, consciously and out of his own free will,
proceeds with such course of action.
Verily, the clear denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists in
the deliberate commission of a wrong.
Indeed, the concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple negligence
or oversight.
*Only with the concurrence of these two elements can we
begin to consider that the wrong committed had been done
deliberately and, thus, in bad faith.
POSSESSOR OF CREDIT
- The law considers the payment to the possessor of credit
as valid even as against the real creditor taking into account
the good faith of the debtor.Should the Ibrahims and
Maruhoms turn out to be the real owners of the subject land,
petitioners previous payment to Mangondato pursuant to Civil
Case No. 605-92 and Civil Case No. 610-92
given the absence of bad faith on petitioners part as
previously discussed may nonetheless be considered as
akin to a payment made in good faith to a person in
possession of credit per Article 1242 of the Civil Code that,
just the same, extinguishes its obligation to pay for the rental
fees and expropriation indemnity due for the subject land.
Article 1242 of the Civil Code reads:
Payment made in good faith to any person in possession of
the credit shall release the debtor.
*It contemplates a situation where a debtor pays a:

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
possessor of credit i.e.,- someone who is not the real
creditor but appears, under the circumstances, to be
the real creditor.
In such scenario, the law considers the payment to the
possessor of credit - valid even as against the real creditor
taking into account the good faith of the debtor.
ARTICLE 1245 DATION IN PAYMEN
ESTANISLAO VS EASTWEST BANKING
* Dation in Payment; In a deed of assignment in the nature of
a dation in payment, property is alienated to the creditor in
satisfaction of a debt in money; Consent to contracts is
manifested by the meeting of the offer and the acceptance of
the thing and the cause which are to constitute the contract
upon due acceptance, the contract is perfected, and from that
moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the
consequences of the same.The nature of the assignment
was a dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money. Such transaction is
governed by the law on sales. Even if we were to consider the
agreement as a compromise agreement, there was no need
for respondents signature on the same, because with the
delivery of the heavy equipment which the latter accepted,
the agreement was consummated. Respondents approval
may be inferred from its unqualified acceptance of the heavy
equipment. Consent to contracts is manifested by the meeting
of the offer and the acceptance of the thing and the cause
which are to constitute the contract; the offer must be certain
and the acceptance absolute. The acceptance of an offer must
be made known to the offeror, and unless the offeror knows of
the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance. Upon
due acceptance, the contract is perfected, and from that
moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law.
* Since there is no more credit to collect, no principal
obligation to speak of, then there is no more second deed of
chattel mortgage that may subsist. A chattel mortgage cannot
exist as an independent contract since its consideration is the
same as that of the principal contract. Being a mere accessory
contract, its validity would depend on the validity of the loan
secured by it. This being so, the amended complaint for
replevin should be dismissed, because the chattel mortgage
agreement upon which it is based had been rendered
ineffectual.
ONG VS ROBAN LENDING
*Pactum Commissorium; Court finds that the Memorandum
of Agreement and Dation in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the
Civil Code. The creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
*Elements of Pactum Commissorium.The elements of
pactum commissorium, which enables the mortgagee to
acquire ownership of the mortgaged property without the
need of any foreclosure proceedings, are:
(1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
(2) there should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period.
* Dation In Payment; Dacion En Pago; In a true dacion en
pago, the assignment of the property extinguishes the
monetary debt.Respondent argues that the law recognizes
dacion en pago as a special form of payment whereby the
debtor alienates property to the creditor in satisfaction of a
monetary obligation. This does not persuade. In a true dacion
en pago, the assignment of the property extinguishes the
monetary debt. In the case at bar, the alienation of the
properties was by way of security, and not by way of
satisfying the debt. The Dacion in Payment did not extinguish
petitioners obligation to respondent. On the contrary, under
the Memorandum of Agreement executed on the same day as
the Dacion in Payment, petitioners had to execute a
promissory note for P5,916,117.50 which they were to pay
within one year.
* The questioned contracts were freely and voluntarily
executed by petitioners and respondent is of no moment,
pactum commissorium being void for being prohibited by law.
Respondent cites Solid Homes, Inc. v. Court of Appeals, 271
SCRA 157 (1997), where this Court upheld a Memorandum of
Agreement/Dacion en Pago. That case did not involve the
issue of pactumcommissorium. That the questioned contracts
were freely and voluntarily executed by petitioners and
respondent is of no moment, pactum commissorium being
void for being prohibited by law.
TAN SHUY VS MAULAWIN
*Dation in Payment; There is dation in payment when property
is alienated to the creditor in satisfaction of a debt in money;
Dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement
express or implied, or by their silenceconsider the thing as
equivalent to the obligation, in which case the obligation is
totally extinguished.Pursuant to Article 1232 of the Civil
Code, an obligation is extinguished by payment or
performance. There is payment when there is delivery of
money or performance of an obligation. Article 1245 of the
Civil Code provides for a special mode of payment called
dation in payment (dacin en pago). There is dation in
payment when property is alienated to the creditor in
satisfaction of a debt in money. Here, the debtor delivers and
transmits to the creditor the formers ownership over a thing
as an accepted equivalent of the payment or performance of
an outstanding debt. In such cases, Article 1245 provides that
the law on sales shall apply, since the undertaking really
partakesin one senseof the nature of sale; that is, the
creditor is really buying the thing or property of the debtor,
the payment for which is to be charged against the debtors
obligation. Dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either as agreed
upon by the parties or as may be proved, unless the parties
by agreementexpress or implied, or by their silence
consider the thing as equivalent to the obligation, in which
case the obligation is totally extinguished.
* Dation in payment exists when there was partial payment
every time Guillermo delivered copra to petitioner, chose not
to collect the net proceeds of his copra deliveries, and instead
applied the collectible as installment payments for his loan
from Tan Shuy.The subsequent arrangement between Tan
Shuy and Guillermo can thus be considered as one in the
nature of dation in payment. There was partial payment every
time Guillermo delivered copra to petitioner, chose not to
collect the net proceeds of his copra deliveries, and instead

Page 5 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
applied the collectible as installment payments for his loan
from Tan Shuy. We therefore uphold the findings of the trial
court, as affirmed by the CA, that the net proceeds from
Guillermos copra deliveries amounted to P378,952.43. With
this partial payment, respondent remains liable for the
balance totaling P1,047.57.
SERFINO VS FAR EAST BANK
*An assignment of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by
a legal cause, such as sale, dation in payment,
exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor
could enforce it against the debtor. It may be in the
form of sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit
he has against a third person."
*As a dation in payment, the assignment of credit operates as
a mode of extinguishing the obligation; the delivery and
transmission of ownership of a thing (in this case, the credit
due from a third person) by the debtor to the creditor is
accepted as the equivalent of the performance of the
obligation.
*The terms of the compromise judgment, however, did not
convey an intent to equate the assignment of Magdalenas
retirement benefits (the credit) as the equivalent of the
payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the
compromise judgment merely identified the fund from which
payment for the judgment debt would be sourced.
*In the present case, the judgment debt was not extinguished
by the mere designation in the compromise judgment of
Magdalenas retirement benefits as the fund from which
payment shall be sourced. That the compromise agreement
authorizes recourse in case of default on other executable
properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment
of Magdalenas credit with the GSIS that would have
extinguished the obligation.
The compromise judgment in this case also did not give the
supposed assignees, the spouses Serfino, the power to
enforce Magdalenas credit against the GSIS. In fact, the
spouses Serfino are prohibited from enforcing their claim until
after the lapse of one (1) week from Magdalenas receipt of
her retirement benefits
*Since no valid assignment of credit took place, the spouses
Serfino cannot validly claim ownership of the retirement
benefits that were deposited with FEBTC. Without ownership
rights over the amount, they suffered no pecuniary loss that
has to be compensated by actual damages. The grant of
actual damages presupposes that the claimant suffered a duly
proven pecuniary loss.
PEN VS JULIAN
*Court adopted CAs conclusion that the Deed of Sale is a
prohibited pactum commissorium.
Elements of PACTUM COMMISSORIUM:
1- There must be a thing pledged/mortgaged by way of
security for the payment of the prin. Obli.

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
This element is present in this case when
respondents mortgaged their property in favour of
Pen.
2-

There should be stipulation of the automatic


appropriation of the creditor of the thing
pledged/mortgaged in the event of non-payment of
the principal obli.
The authorization of Adelaide to appropriate the
property was implied through Lindas act of signing
the blank document.

Art. 2088 of CC prohibits creditor from


appropriating the thing pledge or mortgage.
The eventual transfer of the property in a manner
not in a valid dacion en pago confirmed the
nature
of
the
transaction
as
pactumcommissorium.
Elements of Dacion en pago:
1- There is a money obligation
2- The alienation of the creditor to the
property of the debtor with consent
3- The satisfaction of the money obligation
Therefore, in order for a valid dacion to transpire, the
alienation of the property should fully extinguish the debt
of the debtor. In the case at bar, the debt of the respondents
subsisted despite the transfer of the property in favour of
Adelaida. In light of this, the deed of sale was void. Petitioners
are ordered to reconvey the title of the property to
defendants.
ARTICLE 1250 EXTRAORDINARY
INFALTION/DEFLATION
EQUITABLE PCI VS NG SHEUNG NGOR
*Extraordinary Inflation or Deflation; Words and Phrases;
Extraordinary
Inflation
and
Extraordinary
Deflation, Defined.Extraordinary inflation exists when
there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value
of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the
parties at the time of the obligation. Extraordinary deflation,
on the other hand, involves an inverse situation.
*Requisites; Despite the devaluation of the peso, the
BangkoSentralngPilipinas (BSP) never declared a situation of
extraordinary inflation. Moreover, although the obligation in
this instance arose out of a contract, the parties did not agree
to recognize the effects of extraordinary inflation (or
deflation).
For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
1. that there was an official declaration of extraordinary
inflation or deflation from the BangkoSentralngPilipinas (BSP);
2. that the obligation was contractual in nature; and
3. that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.
*Despite the devaluation of the peso, the BSP never declared
a situation of extraordinary inflation. Moreover, although the
obligation in this instance arose out of a contract, the parties
did not agree to recognize the effects of extraordinary
inflation (or deflation). The RTC never mentioned that there
was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-

Page 6 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
denominated loans at the exchange rate fixed by the BSP on
the date of maturity.
ALMEDA v. BATHALA MARKETING
*Article 1250 of the Civil Code states:
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.
Inflation has been defined as the sharp increase of money or
credit, or both, without a corresponding increase in business
transaction. There is inflation when there is an increase in the
volume of money and credit relative to available goods,
resulting in a substantial and continuing rise in the general
price level. In a number of cases, this Court had provided a
discourse on what constitutes extraordinary inflation, thus:
*[E]xtraordinary inflation exists when there is a
decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation
in the value of said currency, and such increase or decrease
could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the
establishment of the obligation.
The factual circumstances obtaining in the present
case do not make out a case of extraordinary inflation or
devaluation as would justify the application of Article 1250 of
the Civil Code. We would like to stress that the erosion of the
value of the Philippine peso in the past three or four decades,
starting in the mid-sixties, is characteristic of most currencies.
And while the Court may take judicial notice of the decline in
the purchasing power of the Philippine currency in that span
of time, such downward trend of the peso cannot be
considered as the extraordinary phenomenon contemplated
by Article 1250 of the Civil Code. Furthermore, absent an
official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to
be applied.
ARTICLE 1252 APPLICATION OF PAYMENTS
PREMIERE DEVT. BANK VS CENTRAL SURETY
* The debtors right to apply payment is not mandatory. This is
clear from the use of the word may rather than the word
shall in the provision which reads: He who has various
debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of
the same must be applied. Indeed, the debtors right to apply
payment has been considered merely directory, and not
mandatory, following this Courts earlier pronouncement that
the ordinary acceptation of the terms may and shall may
be resorted to as guides in ascertaining the mandatory or
directory character of statutory provisions.
* Article 1252 gives the right to the debtor to choose to which
of several obligations to apply a particular payment that he
tenders to the creditor. But likewise granted in the same
provision is the right of the creditor to apply such payment in
case the debtor fails to direct its application. This is obvious in
Art. 1252, par. 2, viz.: If the debtor accepts from the creditor
a receipt in which an application of payment is made, the
former cannot complain of the same. It is the directory
nature of this right and the subsidiary right of the creditor to
apply payments when the debtor does not elect to do so that
make this right, like any other right, waivable. Rights may be
waived, unless the waiver is contrary to law, public order,
public policy, morals or good customs, or prejudicial to a third
person with a right recognized by law.

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
*If neither party has exercised its option, to apply the
payment, the court will apply the payment according to the
justice and equity of the case, taking into consideration all its
circumstances.A debtor, in making a voluntary payment,
may at the time of payment direct an application of it to
whatever account he chooses, unless he has assigned or
waived that right. If the debtor does not do so, the right
passes to the creditor, who may make such application as he
chooses. But if neither party has exercised its option, the
court will apply the payment according to the justice and
equity of the case, taking into consideration all its
circumstances.
NOTE:
Even without this Courts prescription in Prudential, the
release of the WackWack Membership as the pledged security
for Promissory Note 714-Y cannot yet be done as sought by
Central Surety. The chain of contracts concluded between
Premiere Bank and Central Surety reveals that the WackWack
Membership, which stood as security for Promissory Note 714Y, and which also stands as security for subsequent debts of
Central Surety, is a security in the form of a pledge. Its return
to Central Surety upon the pretext that Central Surety is
entitled to pay only the obligation in Promissory Note No. 714Y, will result in the extinguishment of the pledge, even with
respect to the subsequent obligations, because Article 2110 of
the Civil Code provides: (I)f the thing pledged is returned by
the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary is void. This is contrary to the
express agreement of the parties, something which Central
Surety wants this Court to undo. We reiterate that, as a rule,
courts cannot intervene to save parties from disadvantageous
provisions of their contracts if they consented to the same
freely and voluntarily.
YULIM VS INTL. BANK
* The assignment being in its essence a mortgage, it was but
a security and not a satisfaction of the petitioners
indebtedness.To stress, the assignment being in its essence
a mortgage, it was but a security and not a satisfaction ofthe
petitioners indebtedness. Article 1255 of the Civil Code
invoked by the petitioners contemplates the existence of two
or more creditors and involves the assignment of the entire
debtors property, not a dacion en pago. Under Article 1245 of
the Civil Code, [d]ation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales. Nowhere in the Deed
of Assignment can it be remotely said that a sale of the
condominium unit was contemplated by the parties, the
consideration for which would consist of the amount of
outstanding loan due to iBank from the petitioners.
*Novation must be clearly proved since its existence is not
presumed. In this light, novation is never presumed; it must
be proven as a fact either by express stipulation of the parties
or by implication derived from an irreconcilable incompatibility
between old and new obligations or contracts. Novation
takes place only if the parties expressly so provide, otherwise,
the original contract remains in force. In other words, the
parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one. Where
there is no clear agreement to create a new contract in place
of the existing one, novation cannot be presumed to take
place, unless the terms of the new contract are fully
incompatible with the former agreement on every point. Thus,
a deed of cession of the right to repurchase a piece of land
does not supersede a contract of lease over the same
property.

Page 7 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
* Payment; Unless the application of payment is expressly
indicated, the payment shall be applied to the obligation most
onerous to the debtor.Now respondent contends that the
petitioners subsequent acceptance of such payment
effectively withdrew the cancellation of the provisional sale.
We do not agree. Unless the application of payment is
expressly indicated, the payment shall be applied to the
obligation most onerous to the debtor. In this case, the unpaid
rentals constituted the more onerous obligation of the
respondent to petitioner. As the payment did not fully settle
the unpaid rentals, petitioners cause of action for ejectment
survives. Thus, the Court of Appeals erred in ruling that the
payment was additional payment for the purchase of the
property.

MARQUEZ VS ELISAN CREDIT


* Payments; Interest Rates; The rule under Article 1253 that
payments shall first be applied to the interest and not to the
principal shall govern if two (2) facts exist:
(1) the debt produces interest (e.g., the payment of interest is
expressly stipulated) and
(2) the principal remains unpaid.
*The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite the
presence of (1) and (2) above.The presumption under Article
1176 does not resolve the question of whether the amount
received by the creditor is a payment for the principal or
interest. Under this article the amount received by the
creditor is the payment for the principal, but a doubt arises on
whether or not the interest is waived because the creditor
accepts the payment for the principal without reservation with
respect to the interest. Article 1176 resolves this doubt by
presuming that the creditor waives the payment of interest
because he accepts payment for the principal without any
reservation. On the other hand, the presumption under Article
1253 resolves doubts involving payment of interest-bearing
debts. It is a given under this Article that the debt produces
interest. The doubt pertains to the application of payment; the
uncertainty is on whether the amount received by the creditor
is payment for the principal or the interest.
*Article 1253 resolves this doubt by providing a hierarchy:
payments shall first be applied to the interest; payment shall
then be applied to the principal only after the interest has
been fully paid. Correlating the two provisions, the rule under
Article 1253 that payments shall first be applied to the
interest and not to the principal shall govern if two facts exist:
(1) the debt produces interest (e.g., the payment of interest is
expressly stipulated) and (2) the principal remains unpaid.
The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite the
presence of (1) and (2) above. In such case, the payments
shall obviously be credited to the principal.
*The fact that the official receipts did not indicate whether the
payments were made for the principal or the interest does not
prove that the respondent waived the interest. We reiterate
that the petitioner made the daily payments after the second
loan had already matured and a portion of the principal
remained unpaid. As stipulated, the principal is subject to 26%
annual interest. All these show that the petitioner was already
in default of the principal when he started making the daily
payments. The stipulations providing for the 10% monthly
penalty and the additional 25% attorneys fees on the unpaid

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
amount also became effective as a result of the petitioners
failure to pay in full upon maturity. In other words, the socalled interest for default (as distinguished from the stipulated
monetary interest of 26% per annum) in the form of the 10%
monthly penalty accrued and became due and demandable.
Thus, when the petitioner started making the daily payments,
two types of interest were at the same time accruing, the 26%
stipulated monetary interest and the interest for default in the
form of the 10% monthly penalty. Article 1253 covers both
types of interest. As noted by learned civilist, Arturo M.
Tolentino, no distinction should be made because the law
makes no such distinction. He explained: Furthermore, the
interest for default arises because of nonperformance by the
debtor, and to allow him to apply payment to the capital
without first satisfying such interest, would be to place him in
a better position than a debtor who has not incurred in delay.
The delay should worsen, not improve, the position of a
debtor. [Emphasis supplied] The petitioner failed to specify
which of the two types of interest the respondent allegedly
waived. The respondent waived neither.
*In the present case, it was not proven that the respondent
accepted the payment of the principal. The silence of the
receipts on whether the daily payments were credited against
the unpaid balance of the principal or the accrued interest
does not mean that the respondent waived the payment of
interest. There is no presumption of waiver of interest without
any evidence showing that the respondent accepted the daily
instalments as payments for the principal. Ideally, the
respondent could have been more specific by indicating on
the receipts that the daily payments were being credited
against the interest. Its failure to do so, however, should not
be taken against it. The respondent had the right to credit the
daily payments against the interest applying Article 1253. It
bears stressing that the petitioner was already in default.
Under the promissory note, the petitioner waived demand in
case of nonpayment upon due date. The stipulated interest
and interest for default have both accrued. The only logical
result, following Article 1253 of the Civil Code, is that the daily
payments were first applied against either or both the
stipulated interest and interest for default. Moreover, Article
1253 is viewed as having an obligatory character and not
merely suppletory. It cannot be dispensed with except by
mutual agreement. The creditor may oppose an application of
payment made by the debtor contrary to this rule.
ARTICLE 1256 TENDER OF PAYMENT/CONSIGNATION
PABUGAIS VS SAHIJWANI
* Requisites :
Consignation is the act of depositing the thing due
with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment and it generally
requires a prior tender of payment. In order that consignation
may be effective, the debtor must show that:
(1) there was a debt due;
(2) the consignation of the obligation had been made
because the creditor to whom tender of payment was made
refused to accept it, or because he was absent or
incapacitated, or because several persons claimed to be
entitled to receive the amount due or because the title to the
obligation has been lost;
(3) previous notice of the consignation had been
given to the person interested in the performance of the
obligation;
(4) the amount due was placed at the disposal of the
court; and
(5) after the consignation had been made the person
interested was notified thereof. Failure in any of these

Page 8 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
requirements is enough ground to render a consignation
ineffective.
*The issues to be resolved in the instant case concerns one of
the important requisites of consignation, i.e., the existence of
a valid tender of payment. As testified by the counsel for
respondent, the reasons why his client did not accept
petitioners tender of payment were(1) the check mentioned
in the August 5, 1994 letter of petitioner manifesting that he
is settling the obligation was not attached to the said letter;
and (2) the amount tendered was insufficient to cover the
obligation. It is obvious that the reason for respondents nonacceptance of the tender of payment was the alleged
insufficiency thereofand not because the said check was not
tendered to respondent, or because it was in the form of
managers check. While it is true that in general, a managers
check is not legal tender, the creditor has the option of
refusing or accepting it. Payment in check by the debtor may
be acceptable as valid, if no prompt objection to said payment
is made. Consequently, petitioners tender of payment in the
form of managers check is valid.
*The amount consigned with the trial court can no longer be
withdrawn by petitioner because respondents prayer in his
answer that the amount consigned be awarded to him is
equivalent to an acceptance of the consignation, which has
the effect of extinguishing petitioners obligation.
LLOBERERA VS FERNANDEZ
* The judgment favoring the ejectment of petitioners being
consistent with law and jurisprudence can only be affirmed.
The alleged consignation of the P20.00 monthly rental to a
bank account in respondents name cannot save the day for
the petitioners simply because of the absence of any
contractual basis for their claim to rightful possession of the
subject property. Consignation based on Article 1256 of the
Civil Code indispensably requires a creditor-debtor relationship
between the parties, in the absence of which, the legal effects
thereof cannot be availed of.
*Where the possession of the property by certain persons is
by mere tolerance of the owner, the latter has no obligation to
receive any payment from themUnless there is an unjust refusal by a creditor to accept
payment from a debtor, Article 1256 cannot apply. In the
present case, the possession of the property by the
petitioners being by mere tolerance as they failed to establish
through competent evidence the existence of any contractual
relations between them and the respondent, the latter has no
obligation to receive any payment from them. Since
respondent is not a creditor to petitioners as far as the alleged
P20.00 monthly rental payment is concerned, respondent
cannot be compelled to receive such payment even through
consignation under Article 1256. The bank deposit made by
the petitioners intended as consignation has no legal effect
insofar as the respondent is concerned.
BENOS VS LAWILAO
* Consignation; Words and Phrases; Consignation is made by
depositing the proper amount to the judicial authority, before
whom the tender of payment and the announcement of the
consignation shall be proved, and all interested parties are to
be notified of the consignationand, compliance with these
requisites is mandatory.Compliance with the requirements
of tender and consignation to have the effect of payment are
mandatory. ThusTender of payment is the manifestation by
debtors of their desire to comply with or to pay their
obligation. If the creditor refuses the tender of payment

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
without just cause, the debtors are discharged from the
obligation by the consignation of the sum due. Consignation is
made by depositing the proper amount to the judicial
authority, before whom the tender of payment and the
announcement of the consignation shall be proved. All
interested parties are to be notified of the consignation.
Compliance with these requisites is mandatory.
*Rescission; Pleadings and Practice; A counterclaim in the
answer satisfies the requisites for the judicial rescission of a
Pacto de Retro sale.In Iringan v. Court of Appeals, 366 SCRA
41 (2001), we ruled that even a crossclaim found in the
Answer could constitute a judicial demand for rescission that
satisfies the requirement of the law. Similarly, the
counterclaim of the Benos spouses in their answer satisfied
the requisites for the judicial rescission of the subject Pacto de
Retro Sale.
* Where the issue of rescission had been put in issue in the
answer and the same had been litigated upon without
objections of the other party on grounds of jurisdiction, the
trial court should rule on the same and write finis to the
controversy.The issue of rescission having been put in issue
in the answer and the same having been litigated upon
without objections by the Lawilao spouses on grounds of
jurisdiction, the Municipal Circuit Trial Court should have ruled
on the same and wrote finis to the controversy. Thus, as a
necessary consequence of its ruling that the Lawilao spouses
breached the terms of the Pacto de Retro Sale, the Municipal
Circuit Trial Court should have rescinded the Pacto de Retro
Sale and directed the Benos spouses to return P150,000.00 to
the Lawilao spouses, pursuant to our ruling in Cannu v.
Galang.
CACAYORIN VS ARMED FORCES
* Under Article 1256 of the Civil Code, the debtor shall be
released from responsibility by the consignation of the thing
or sum due, without need of prior tender of payment, when
the creditor is absent or unknown, or when he is incapacitated
to receive the payment at the time it is due, or when two or
more persons claim the same right to collect, or when the title
to the obligation has been lost. Applying Article 1256 to the
petitioners case as shaped by the allegations in their
Complaint, the Court finds that a case for consignation has
been made out, as it now appears that there are two entities
which petitioners must deal with in order to fully secure their
title to the property: 1) the Rural Bank (through PDIC), which
is the apparent creditor under the July 4, 1994 Loan and
Mortgage Agreement; and 2) AFPMBAI, which is currently in
possession of the loan documents and the certificate of title,
and the one making demands upon petitioners to pay. Clearly,
the allegations in the Complaint present a situation where the
creditor is unknown, or that two or more entities appear to
possess the same right to collect from petitioners. Whatever
transpired between the Rural Bank or PDIC and AFPMBAI in
respect of petitioners loan account, if any, such that AFPMBAI
came into possession of the loan documents and TCT No.
37017, it appears that petitioners were not informed thereof,
nor made privy thereto.
*The lack of prior tender of payment by the petitioners is not
fatal to their consignation case. They filed the case for the
exact reason that they were at a loss as to which between the
twothe Rural Bank or AFPMBAIwas entitled to such a
tender of payment. Besides, as earlier stated, Article 1256
authorizes consignation alone, without need of prior tender of
payment, where the ground for consignation is that the
creditor is unknown, or does not appear at the place of
payment; or is incapacitated to receive the payment at the
time it is due; or when, without just cause, he refuses to give

Page 9 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
a receipt; or when two or more persons claim the same right
to collect; or when the title of the obligation has been lost.
*SC ruled that the consignation is proper without prior tender
of payment. The petitioners are in quandary on where to pay
their loan obligations. Under Article 1256, prior tender of
payment is not necessary for consignation in cases
(1) where the creditor is unknown or absent,
(2) when the creditor is incapacitated to receive payment
when it is due,
(3) when there are two or more creditors claiming the same
right to collect,
(4) when the creditor unjustly refuses to issue a receipt, and
(5) when the title of the obligation has been lost.
The SC said that the case falls on the first and third
exemption. Clearly, the allegations in the Complaint present a
situation where the creditor is unknown, or that two or more
entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or
PDIC and AFPMBAI in respect of petitioners loan account, if
any, such that AFPMBAI came into possession of the loan
documents and TCT No. 37017, it appears that petitioners
were not informed thereof, nor made privy thereto.
ARTICLE 1267 - SERVICE HAS BECOME SO DIFFICULT
PHIL. NATL. CONST. VS CA
* Article 1266 of the Civil Code is an exception to the principle
of the obligatory force of contracts.It is a fundamental rule
that contracts, once perfected, bind both contracting parties,
and obligations arising therefrom have the force of law
between the parties and should be complied with in good
faith. But the law recognizes exceptions to the principle of the
obligatory force of contracts. One exception is laid down in
Article 1266 of the Civil Code, which reads: The debtor in
obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of
the obligor.
*Petitioner cannot, however, successfully take refuge in the
said article, since it is applicable only to obligations to do,
and not obligations to give. An obligation to do includes all
kinds of work or service; while an obligation to give is a
prestation which 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 its s implepossession, or in order to
return it to its owner.
*The obligation to pay rentals or deliver the thing in a contract
of lease falls within the prestation to give; hence, it is not
covered within the s cope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioner are not
the legal or physical impossibilities contemplated in the said
article. Besides, petitioner failed to state specifically the
circumstances brought about by the abrupt change in the
political climate in the country except the alleged prevailing
uncertainties in government policies on infrastructure
projects.
*The principle of rebus sic stantibus neither fits in with
the facts of the case. Under this theory, the parties stipulate
in the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to exist.
This theory is said to be the basis of Article 1267 of the Civil
Code, which provides: ART. 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.

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
*Anent petitioners alleged poor financial condition, the same
will neither release petitioner from the binding effect of the
contract of lease. As held in Central Bank v. Court of Appeals,
cited by private respondents, mere pecuniary inability to fulfill
an engagement does not discharge a contractual obligation,
nor does it constitute a defense to an action for specific
performance.
*With regard to the non-materialization of petitioners
particular purpose in entering into the contract of lease, i.e.,
to use the leased premises as a site of a rock crushing plant,
the same will not invalidate the contract. The cause or
essential purpose in a contract of lease is the use or
enjoyment of a thing. As a general principle, the motive or
particular purpose of a party in entering into a contract does
not affect the validity nor existence of the contract; an
exception is when the realization of such motive or particular
purpose has been made a condition upon which the contract
is made to depend. The exception does not apply here.
MAGAT VS CA
* The law provides that [w]hen the service (required by the
contract) has become so manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom, in
whole or in part. Here, Guerreros inability to secure a letter
of credit and to comply with his obligation was a direct
consequence of the denial of the permit to import. For this, he
cannot be faulted.
*Guerrero borrowed equipment from the Subic Naval Base
authorities at zero cost. This does not automatically translate
to bad faith. Guerrero was faced with the danger of the
cancellation of his contract with Subic Naval Base. He
borrowed equipment as a prudent and swift alternative. There
was no proof that he resorted to this option with a deliberate
and malicious intent to dishonor his contract with Victorino.
An award of damages surely cannot be based on mere
hypotheses, conjectures and surmises. Good faith is
presumed; the burden of proving bad faith rests on the one
alleging it. Petitioners did not effectively discharge the burden
in this case.
*To recover moral damages in an action for breach of contract,
the breach must be palpably wanton, reckless, malicious, in
bad faith, oppressive or abusive. This is not the case here.
ARTICLE 1278 - COMPENSATION
BPI VS CA
* More importantly, the respondent court erred when it failed
to rule that legal compensation is proper. Compensation shall
take place when two persons, in their own right, are creditors
and debtors of each other. Article 1290 of the Civil Code
provides that when all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the
compensation. Legal compensation operates even
against the will of the interested parties and even
without the consent of them. Since this compensation
takes place ipso jure, its effects arise on the very day on
which all its requisites concur. When used as a defense, it
retroacts to the date when its requisites are fulfilled.
*Elements of legal compensation are all present in the case at
bar.The elements of legal compensation are all
present in the case at bar. The obligors bound principally

Page 10 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
are at the same time creditors of each other. Petitioner bank
stands as a debtor of the private respondent, a depositor. At
the same time, said bank is the creditor of the private
respondent with respect to the dishonored U.S. Treasury
Warrant which the latter illegally transferred to his joint
account. The debts involved consist of a sum of money. They
are due, liquidated, and demandable. They are not claimed by
a third person.
*The rule as to mutuality is strictly applied at law but not in
equity.To frustrate the application of legal compensation on
the ground that the parties are not all mutually obligated
would result in unjust enrichment on the part of the private
respondent and his wife who herself out of honesty has not
objected to the debit. The rule as to mutuality is strictly
applied at law. But not in equity, where to allow the same
would defeat a clear right or permit irremediable injustice.
PNB VS CA AND RAMON LAPEZ
* Compensation; A local bank, while acting as local
correspondent bank, does not have the right to intercept
funds being coursed through it by its foreign counterpart for
transmittal and deposit to the account of an individual with
another local bank, and thereafter apply the said funds to
certain obligations owed to it by the said individual.By this
simplistic approach, petitioner in effect seeks to render
nugatory the decisions of the trial court and the appellate
Court, and have this Court validate its original misdeed,
thereby making a mockery of the entire judicial process of this
country. What the petitioner bank is effectively saying is that
since the respondent Court of Appeals ruled that petitioner
bank could not do a shortcut and simply intercept funds being
coursed through it, for transmittal to another bank, and
eventually to be deposited to the account of an individual who
happens to owe some amount of money to the petitioner, and
because respondent Court ordered petitioner bank to return
the intercepted amount to said individual, who in turn was
found by the appellate Court to be indebted to petitioner
bank, THEREFORE, there must now be legal compensation of
the amounts each owes the other, and hence, there is no
need for petitioner bank to actually return the amount, and
finally, that petitioner bank ends up in exactly the same
position as when it first took the improper and unwarranted
shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could
not be done!
*We see in this petition a clever ploy to use this Court to
validate or legalize an improper act of the petitioner bank,
with the not impossible intention of using this case as a
precedent for similar acts of interception in the future. This
piratical attitude of the nations premier bank deserves a
warning that it should not abuse the justice system in its
collection efforts, particularly since we are aware that if the
petitioner bank had been in good faith, it could have easily
disposed of this controversy in ten minutes flat by means of
an exchange of checks with private respondent for the same
amount. The litigation could have ended there, but it did not.
Instead, this plainly unmeritorious case had to clog our docket
and take up the valuable time of this Court.
*There is no valid compensation on the 1st remittance, PNB
holds the money in favor of Citibank. An implied trust was
created between NCB-Jeddah and PNB. PNB is considered
debtor to Citibank and not to Ramon Lapez. Such transactions
between NCB-Jeddah and PNB may be treated as stipulation
pour autri. For compensation to apply, Article 1279 Civil
Code provides:

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated
in due time to the debtor.
Stipulation pour autri is an agreement in favor of a 3rd party.
In the case at bar, PNB and Ramon Lapez is not principal
debtor and principal creditor to each other.
On the 2 PNB and Lapez 2nd remittance, PNB holds the
money in favor Ramon Lapez. Hence, Both PNB and Ramon
Lapez is principal debtor and principal creditor to each other.
Legal compensation may properly take place between the
parties.
EGV REALTY VS CA
*Compensation; Nature of Compensation.In Article 1278 of
the Civil Code, compensation is said to take place when two
persons, in their own right, are creditors and debtors of each
other. Compensation is a mode of extinguishing to the
concurrent amount, the obligations of those persons who in
their own right are reciprocally debtors and creditors of each
other and the offsetting of two obligations which are
reciprocally extinguished if they are of equal value, or
extinguished to the concurrent amount if of different values.
* At best, what respondent Unisphere has against petitioners
is just a claim, not a debt which is not enforceable in court.
While respondent Unisphere does not deny its liability for its
unpaid dues to petitioners, the latter do not admit any
responsibility for the loss suffered by the former occasioned
by the burglary. At best, what respondent Unisphere has
against petitioners is just a claim, not a debt. Such being the
case, it is not enforceable in court. It is only the debts that are
enforceable in court, there being no apparent defenses
inherent in them. Respondent Unispheres claim for its loss
has not been passed upon by any legal authority so as to
elevate it to the level of a debt. So we held in Alfonso Vallarta
v. Court of Appeals, et al., that: Compensation or offset takes
place by operation of law when two (2) persons, in their own
right, are creditor and debtor of each other. For compensation
to take place, a distinction must be made between a debt and
a mere claim. A debt is a claim which has been formally
passed upon by the highest authority to which it can in law be
submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt
and must pass thru the process prescribed by law before it
develops into what is properly called a debt.
METROBANK VS TONDA
* Compensation is not proper when one of the debts consists
in civil liability arising from a penal offense, the raison detre
for this being that if one of the debts consists in civil liability
arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of such
obligation is imperative.The handwritten note by the
METROBANK officer acknowledging receipt of the checks
amounting to P2.8 Million made no reference to the TONDAS
trust receipt obligations, and we cannot presume that it was
anything more than an ordinary bank deposit. The Court of
Appeals citing the case of Tan Tiong Tick vs. American
Apothecaries implied that in making the deposit, the TONDAS

Page 11 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
are entitled to set off, by way of compensation, their
obligations to METROBANK. However, Article 1288 of the Civil
Code provides that compensation shall not be proper when
one of the debts consists in civil liability arising from a penal
offense as in the case at bar. The raison detre for this is that,
if one of the debts consists in civil liability arising from a
penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is
imperative.
TRINIDAD VS ACAPULCO
*Compensation takes effect by operation of law even without
the consent or knowledge of the parties concerned when all
the requisites mentioned in Article 1279 of the Civil Code are
present. This is in consonance with Article 1290 of the Civil
Code which provides that: Article 1290. When all the
requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the
compensation.
*Since compensation takes place ipso jure, when used as a
defense, it retroacts to the date when all its requisites are
fulfilled.Since it takes place ipso jure, when used as a
defense, it retroacts to the date when all its requisites are
fulfilled.
*In order that moral damages may be awarded, there must be
pleading and proof of moral suffering, mental anguish, fright
and the like, and while no proof of pecuniary loss is necessary
in order that moral damages may be awarded, it is
nevertheless essential that the claimant should satisfactorily
show the existence of the factual basis of damages and its
causal connection to defendants acts. Claims must be
substantiated by clear and convincing proof and there must
be clear testimony on the anguish and other forms of mental
sufferings as mere allegations will not suffice. Allegations of
besmirched reputation, embarrassment and sleepless nights
are insufficient for it must be shown that the proximate cause
thereof was the unlawful act or omission of the opposing
party.
FIRST UNITED CONST. VS BAYANIHAN
*Recoupment (reconvencion) is the act of rebating or
recouping a part of a claim upon which one is sued by means
of a legal or equitable right from a counterclaim arising out of
the same transaction. It is the setting up of a demand arising
from the same transaction as the plaintiffs claim, to abate or
reduce that claim. The legal basis for recoupment by the
buyer is the first paragraph of Article 1599 of the Civil Code.
*It was improper for petitioners to set up their claim for repair
expenses and other spare parts of the dump truck against
their remaining balance on the price of the prime mover and
the transit mixer they owed to respondent. Recoupment must
arise out of the contract or transaction upon which the
plaintiffs claim is founded. To be entitled to recoupment,
therefore, the claim must arise from the same
transaction, i.e., the purchase of the prime mover and
the transit mixer and not to a previous contract
involving the purchase of the dump truck. That there
was a series of purchases made by petitioners could not be
considered as a single transaction, for the records show that
the earlier purchase of the six dump trucks was a separate
and distinct transaction from the subsequent purchase of the
Hino Prime Mover and the Isuzu Transit Mixer. Consequently,
the breakdown of one of the dump trucks did not grant to

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
*Legal compensation takes place when the requirements
set forth in Article 1278 and Article 1279 of the Civil Code are
present, to wit: Article 1278. Compensation shall take place
when two persons, in their own right, are creditors and
debtors of each other. Article 1279. In order that
compensation may be proper, it is necessary: (1) That each
of the obligors be bound principally, and that he be at
the same time a principal creditor of the other; (2) That
both debts consists in a sum of money, or if the things
due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due; (4) That they be
liquidated and demandable; (5) That over neither of
them there be any retention or controversy,
commenced by third persons and communicated in due
time to the debtor.
*A debt is liquidated when its existence and amount are
determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the
plaintiffs claim from the moment it is liquidated by judgment.
Article 1290 of the Civil Code provides that when all the
requisites mentioned in Article 1279 of the Civil Code are
present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount. With
petitioners expenses for the repair of the dump truck being
already established and determined with certainty by the
lower courts, it follows that legal compensation could take
place because all the requirements were present. Hence, the
amount of P71,350.00 should be set off against petitioners
unpaid obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to respondent.
PHILTRUST VS ROXAS
*It would be more unjust to stay the execution of a decision
that had become final and executory twenty-three (23) years
ago. There should be an end to litigation, for public policy
dictates that once a judgment becomes final, executory, and
unappealable, the prevailing party should not be denied the
fruits of his victory by some subterfuge devised by the losing
party.Unjustified delay in the enforcement of a judgment sets
at naught the role and purpose of the courts to resolve
justiciable controversies with finality. To accept PTCs
contentions would not only be unfair to private respondents
but, more importantly, would defeat a vital policy
consideration behind the doctrine of immutability of final
judgments.
*Under Rule 8, Section 2 of the 1964 Rules of Court, [a] party
may set forth two or more statements of a claim or defense
alternatively or hypothetically, either in one cause of action or
defense or in separate causes of action or defenses. Thus,
the defense of compensation would have been proper and
allowed under the rules even if PTC disclaimed any liability at
the time it filed its answer. In Marquez v. Valencia, 99 Phil. 740
(1956), we held that when a defendant failed to set up such
alternative defenses and chosen or elected to rely on one
only, the overruling thereof was a complete determination of
the controversy between the parties, which bars a subsequent
action based upon an unpleaded defense. Unmistakably, the
rationale behind this is the proscription against the splitting of
causes of action.
*Even if we assume that legal compensation was not waived
and was otherwise timely raised, we find that not all requisites
of legal compensation are present in this case. Under Article

Page 12 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
1279, in order for legal compensation to take place, the
following requisites must concur: (a) that each one of the
obligors be bound principally, and that he be at the same time
a principal creditor of the other; (b) 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; (c) that the two debts be due; (d) that they be
liquidated and demandable; and (e) that over neither of them
there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
ARTICLE 1291 - NOVATION
LICAROS VS GATMAITAN
*
Assignment
of
Credit
Distinguished
from
Subrogation.An assignment of credit has been defined as
the process of transferring the right of the assignor to the
assignee who would then have the right to proceed against
the debtor. The assignment may be done gratuitously or
onerously, in which case, the assignment has an effect similar
to that of a sale. On the other hand, subrogation has been
defined as the transfer of all the rights of the creditor to a
third person, who substitutes him in all his rights. It may
either be legal or conventional. Legal subrogation is that
which takes place without agreement but by operation of law
because of certain acts. Conventional subrogation is that
which takes place by agreement of parties.
*What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him as the
assignment takes effect only from the time he has knowledge
thereof; Conventional subrogation requires an agreement
among the three parties concernedthe original creditor, the
debtor and the new creditor.In an assignment of credit, the
consent of the debtor is not necessary in order that the
assignment may fully produce legal effects. What the law
requires in an assignment of credit is not the consent of the
debtor but merely notice to him as the assignment takes
effect only from the time he has knowledge thereof. A creditor
may, therefore, validly assign his credit and its accessories
without the debtors consent. On the other hand, conventional
subrogation requires an agreement among the three parties
concernedthe original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties. Thus, Article
1301 of the Civil Code explicitly states that Conventional
subrogation of a third person requires the consent of the
original parties and of the third person.
*Conventional subrogation has the effect of extinguishing the
old obligation and giving rise to a new one.It is true that
conventional subrogation has the effect of extinguishing the
old obligation and giving rise to a new one. However, the
extinguishment of the old obligation is the effect of the
establishment of a contract for conventional subrogation. It is
not a requisite without which a contract for conventional
subrogation may not be created. As such, it is not
determinative of whether or not a contract of conventional
subrogation was constituted.
GARCIA VS LLAMAS
*Novation - is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Article 1293 of the Civil
Code defines novation.

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
*Kinds; In general, there are two (2) modes of substituting the
person of the debtor: (1) expromision and (2) delegacion.
In expromision, the initiative for the change does not come
fromand may even be made without the knowledge ofthe
debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the
third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a
third person who consents to the substitution and assumes
the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require
the consent of the creditor.
*Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement.
Whether extinctive or modificatory, novation is made either
by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of
the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation.
*Elements; For novation to take place, the following
requisites must concur.:
1)
2)
3)
4)

There must be a previous valid obligation.


The parties concerned must agree to a new contract.
The old contract must be extinguished.
There must be a valid new contract.

*Novation may also be express or implied. It is express when


the new obligation declares in unequivocal terms that the old
obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The
test of incompatibility is whether the two obligations can
stand together, each one with its own independent existence.
*Well-settled is the rule that novation is never presumed.
Consequently, that which arises from a purported change in
the person of the debtor must be clear and express.
CALIFORNIA BUS LINES VS STATE INVESTMENTS

* Novation has been defined as the extinguishment of an


obligation by the substitution or change of the obligation by a
subsequent one which terminates the first, either by changing
the object or principal conditions, or by substituting the
person of the debtor, or subrogating a third person in the
rights of the creditor.
*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).
*Novation has two functions: one to extinguish an existing
obligation, the other to substitute a new one in its place.
*For novation to take place, four essential requisites have to
be met, namely, (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the

Page 13 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
extinguishment of the old obligation; and (4) the birth of a
valid new obligation.
*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.
The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that their object
in executing the new contract is to extinguish the old
one. Upon the other hand, no specific form is required for an
implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is
really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be
an irreconcilable incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine, the presence
of novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation
novates
the
first.
Corollarily,
changes
that
breed
incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient to extinguish
the original obligation.
The necessity to prove the foregoing by clear and convincing
evidence is accentuated where the obligation of the debtor
invoking the defense of novation has already matured.
With respect to obligations to pay a sum of money, this Court
has consistently applied the well-settled rule that the
obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, and
adds other obligations not incompatible with the old ones, or
where the new contract merely supplements the old one.

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
CBLI fails to pay installments equivalent to 60 days. Where
the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, there can be
no novation. Moreover, this Court has ruled that an agreement
subsequently executed between a seller and a buyer that
provided for a different schedule and manner of payment, to
restructure the mode of payments by the buyer so that it
could settle its outstanding obligation in spite of its
delinquency in payment, is not tantamount to novation.
* The addition of other obligations likewise did not extinguish
the promissory notes. In Young v. CA63, this Court ruled that a
change in the incidental elements of, or an addition of such
element to, an obligation, unless otherwise expressed by the
parties will not result in its extinguishment.
-In fine, the restructuring agreement can stand together with
the promissory notes.

AQUINTEY VS TIBONG
* The court herein held that there was no novation.
Court proceeded to differentiate novation from dacion in
payment which is one of the legal causes to which an
assignment of credit may be effected. Court referred to art.
1292 which proves that in order for an obligation to be
extinguished by another which substitutes the same, it is
imperative that it be declared in unequivocal terms or that the
new and old obligation on every point be incompatible with
one another. Further, court cited the case of Iloilo Traders v
Heirs of Soriano in which it discussed the two types of
novation: extinctive and modificatory. Under an extinctive
novation, there is a complete extinguishment of the original
obligation which shall be effected upon concurrence of these
four requisites: 1.) that there is a previous valid obligation, 2.)
that there is agreement of all the parties concerned to a new
contract 3.) that there is extinguishment of the old obligation,
and 4.) that there is birth of a new valid obligation.
On the other hand, a modificatory novation is one in which the
subsequent change in the agreement is incidental to the main
obligation such as a change in the rate of interest or the
extension of time to pay.

* In this case, the attendant facts do not make out a case of


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

Court then further cited art. 1293 which provides for novation
by virtue of delegacion. Said article states that novation which
consists in substituting a new debtor in the place of the
original one may be made even without the knowledge of the
latter, but not without the consent of the creditor. Further
citing the case of City National Bank v Fuller, court herein
stated that in delegacion, the new debtor contracts with the
old debtor that he will pay the debt while the creditor agrees
to accept the new debtor for the old. Hence, for there to be
extinguishment of the old obligation by delegacion, it is
necessary that the old debtor is relieved of the obligation and
that third person or new debtor takes his place.

* It is clear from the foregoing that the restructuring


agreement, instead of containing provisions "absolutely
incompatible" with the obligations of the judgment, expressly
ratifies such obligations in paragraph 8 and contains
provisions for satisfying them. There was no change in the
object of the prior obligations. The restructuring agreement
merely provided for a new schedule of payments and
additional security in paragraph 6 (c) giving Delta authority to
take over the management and operations of CBLI in case

However, as mentioned before, Court finds that in this case


what transpired between the parties was an assignment of
credit which was executed by Tibong in favor of Aquintey.

FRANKLIN L. FLORES
-852-

An assignment of credit is an agreement by virtue of which


the owner of a credit, known as the assignor, by a legal cause,
such as sale, dation in payment, exchange or donation, and
without the consent of the debtor, transfers his credit and

Page 14 of 17

OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor. It may be in the
form of sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a release
from his debt, assigns to his creditor a credit he has against a
third person.
In a dation, the undertaking is in the nature of a sale which
means that the creditor is really buying the property of the
debtor to be charged against debtors obligation. The
requisites of a valid dacion are: 1.) that there is the
performance of the prestation in lieu of the payment, 2.) that
there is a difference between the prestation due and the one
substituting it, and 3.) that the parties (debtor and creditor)
had agreed that the performance of the prestation would
serve to extinguish the obligation
In this case, it was found by the court that all the requisites
for a dacion were present. Tibong had executed the deeds of
assignment in order to make good the balance of her
obligation since she was not able to comply with the payment.
Tibong and Aquintey also agreed to relieve Tibong of the
obligation to pay the balance and for Aquintey to collect the
same from the debtors of Tibong.
In addition, Aquintey since 1990 when deeds were executed
never once attempted to collect from Tibong and that it was
only 9 years later that Aquintey had attempted to collect from
Tibong when all the while Aquintey had already collected
301,000 from Tibongs debtors.
There being no novation, court ruled that Tibong is still liable
for the balance on their account to Aquintey in the amount of
P33, 841 deducted already were the amounts which were
collected from Tibongs debtors and the partial payment of
50,000 already made beforehand by Tibong.
LEDONIO VS CAPITOL
* This Court cannot sustain petitioners contention and hereby
declares that the transaction between Ms. Picache and
respondent was an assignment of credit, not conventional
subrogation, and does not require petitioners consent as
debtor for its validity and enforceability. An assignment of
credit has been defined as an agreement by virtue of which
the owner of a credit (known as the assignor), by a legal
causesuch as sale, dation in payment or exchange or
donationand without need of the debtors consent, transfers
that credit and its accessory rights to another (known as the
assignee), who acquires the power to enforce it, to the same
extent as the assignor could have enforced it against the
debtor. On the other hand, subrogation, by definition, is the
transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain
acts. Conventional subrogation is that which takes place by
agreement of parties. Although it may be said that the effect
of the assignment of credit is to subrogate the assignee in the
rights of the original creditor, this Court still cannot
definitively rule that assignment of credit and conventional
subrogation are one and the same.
*Assignment
of
Credit
and
Subrogation,
Distinguished; What the law requires in an assignment of
credit is not the consent of the debtor, but merely notice to
him as the assignment takes effect only from the time he has
knowledge thereof while conventional subrogation requires an
agreement among the parties concernedthe original

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-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
creditor, the debtor, and the new creditor.A noted authority
on civil law provided a discourse on the difference between
these two transactions, to witConventional Subrogation and
Assignment of Credits.In the Argentine Civil Code, there is
essentially no difference between conventional subrogation
and assignment of credit. The subrogation is merely the effect
of the assignment. In fact it is expressly provided (article 769)
that conventional redemption shall be governed by the
provisions on assignment of credit. Under our Code, however,
conventional subrogation is not identical to assignment of
credit. In the former, the debtors consent is necessary; in the
latter, it is not required. Subrogation extinguishes an
obligation and gives rise to a new one; assignment refers to
the same right which passes from one person to another. The
nullity of an old obligation may be cured by subrogation, such
that the new obligation will be perfectly valid; but the nullity
of an obligation is not remedied by the assignment of the
creditors right to another. This Court has consistently adhered
to the foregoing distinction between an assignment of credit
and a conventional subrogation. Such distinction is crucial
because it would determine the necessity of the debtors
consent. In an assignment of credit, the consent of the debtor
is not necessary in order that the assignment may fully
produce the legal effects. What the law requires in an
assignment of credit is not the consent of the debtor, but
merely notice to him as the assignment takes effect only from
the time he has knowledge thereof. A creditor may, therefore,
validly assign his credit and its accessories without the
debtors consent. On the other hand, conventional
subrogation requires an agreement among the parties
concernedthe original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties.
*Article 1300 of the Civil Code provides that conventional
subrogation must be clearly established in order that it may
take effect. Since it is petitioner who claims that there is
conventional subrogation in this case, the burden of proof
rests upon him to establish the same by a preponderance of
evidence.
*Since the Assignment of Credit, dated 1 April 1989, is just as
its title suggests, then petitioners consent as debtor is not
necessary in order that the assignment may fully produce
legal effects. The duty to pay does not depend on the consent
of the debtor; otherwise, all creditors would be prevented
from assigning their credits because of the possibility of the
debtors refusal to give consent. Moreover, this Court had
already noted previously that there does not appear to be
anything in Philippine statutes or jurisprudence which
prohibits a creditor, without the consent of the debtor, from
making an assignment of his credit and the rights accessory
thereto; and, certainly, an assignment of credit and its
accessory rights does not at all obliterate the obligation of the
debtor to pay, but merely puts the assignee in the place of the
assignor. Hence, the obligation of petitioner to pay his debt
subsists despite the assignment thereof; only, his obligation
after he came to know of the said assignment would be to pay
the debt to the respondent (the assignee), instead of Ms.
Picache (the original creditor)
HEIRS OF SERVANDO FRANCO VS GONZALES
* A novation arises when there is a substitution of an
obligation by a subsequent one that extinguishes the first,
either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a
third person in the rights of the creditor. For a valid novation
to take place, there must be, therefore: (a) a previous valid

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
obligation; (b) an agreement of the parties to make a new
contract; (c) an extinguishment of the old contract; and (d) a
valid new contract. In short, the new obligation extinguishes
the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are
incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation
upon compliance with either of these two conditions.
*To be clear, novation is not presumed. This means that the
parties to a contract should expressly agree to abrogate the
old contract in favor of a new one. In the absence of the
express agreement, the old and the new obligations must be
incompatible on every point. According to California Bus Lines,
Inc. v. State Investment House, Inc., 418 SCRA 297 (2003):
The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that their object
in executing the new contract is to extinguish the old one.
Upon the other hand, no specific form is required for an
implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is
really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be
an irreconcilable incompatibility between the old and the new
obligations.
ACE FOODS VS MICROPACIFIC
*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.The Court must dispel the
notion that the stipulation anent MTCLs reservation of
ownership of the subject products as reflected in the Invoice
Receipt, i.e., the title reservation stipulation, changed the
complexion of the transaction from a contract of sale into a
contract to sell. Records are bereft of any showing that the
said stipulation novated the contract of sale between the
parties which, to repeat, already existed at the precise
moment ACE Foods accepted MTCLs proposal. To be sure,
novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with
the amendatory agreement. In either case, however, novation
is never presumed, and the animus novandi, whether totally
or partially, must appear by express agreement of the parties,
or by their acts that are too clear and unequivocal to be
mistaken.
BPI VS DOMINGO
*In De Cortes v. Venturanza, 79 SCRA 709 (1977), the Court
discussed some principles and jurisprudence underlying the
concept and nature of novation as a mode of extinguishing
obligations: According to Manresa, novation is the
extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or by
subrogating a third person to the rights of the creditor (8
Manresa 428, cited in IV Civil Code of the Philippines by
Tolentino, 1962 ed., p. 352). Unlike other modes of extinction
of obligations, novation is a juridical act with a dual function
it extinguishes an obligation and creates a new one in lieu

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
of the old. Article 1293 of the New Civil Code provides:
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. (emphasis supplied) Under this
provision, there are two forms of novation by substituting the
person of the debtor, and they are: (1) expromision; and (2)
delegacion. In the former, the initiative for the change does
not come from the debtor and may even be made without his
knowledge, since it consists in a third person assuming the
obligation. As such, it logically requires the consent of the
third person and the creditor. In the latter, the debtor offers
and the creditor accepts a third person who consents to the
substitution and assumes the obligation, so that the
intervention and the consent of these three persons are
necessary (8 Manresa 436-437, cited in IV Civil Code of the
Philippines by Tolentino, 1962 ed., p. 360). In these two modes
of substitution, the consent of the creditor is an indispensable
requirement (Garcia v. KhuYekChiong, 65 Phil. 466, 468).
*The Court also emphasized in De Cortes the indispensability
of the creditors consent to the novation, whether expromision
or delegacion, given that the [s]ubstitution of one debtor for
another may delay or prevent the fulfillment of the obligation
by reason of the financial 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.
*As a general rule, since novation implies a waiver of the right
the creditor had before the novation, such waiver must be
express. The Court explained the rationale for the rule in
Testate Estate of Lazaro Mota v. Serra, 47 Phil. 464 (1925): It
should be noted that in order to give novation its legal effect,
the law requires that the creditor should consent to the
substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by a
new one, it implies on the part of the creditor a waiver of the
right that he had before the novation, which waiver must be
express under the principle that renuntiatio non praesumitor,
recognized by the law in declaring that a waiver of right may
not be performed unless the will to waive is indisputably
shown by him who holds the right.
*The determination of the existence of the consent of BPI to
the substitution of debtors, in accordance with the standards
set in the preceding jurisprudence, is a question of fact
because it requires the Court to review the evidence on
record. It is an established rule that the jurisdiction of the
Court in cases brought before it from the Court of Appeals via
a petition for review on certiorari under Rule 45 of the Rules of
Court is generally limited to reviewing errors of law as the
former is not a trier of facts. Thus, the findings of fact of the
Court of Appeals are conclusive and binding upon the Court in
the latters exercise of its power to review for it is not the
function of the Court to analyze or weigh evidence all over
again. However, several of the recognized exceptions to this
rule are present in the instant case that justify a factual
review, i.e., the inference is manifestly mistaken, the
judgment is based on misapprehension of facts, and the
findings of the Court of Appeals and the RTC are contrary to
those of the MeTC.
*The acceptance by a creditor of payments from a third
person, who has assumed the obligation, will result merely to
the addition of debtors and not novation. The creditor may
therefore enforce the obligation against both debtors. As the
Court pronounced in Magdalena Estates, Inc. v. Rodriguez, 18
SCRA 967 (1966), [t]he mere fact that the creditor receives a
guaranty or accepts payments from a third person who has

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OBLIGATIONS and CONTRACTS


St. Thomas More
Midterm Exam
Case Doctrines
agreed to assume the obligation, when there is no agreement
that the first debtor shall be released from responsibility, does
not constitute a novation, and the creditor can still enforce the
obligation against the original debtor. The Court reiterated in
Quinto v. People, 305 SCRA 708 (1999), that [n]ot too
uncommon is when a stranger to a contract agrees to assume
an obligation; and while this may have the effect of adding to
the number of persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor. Neither
would the fact alone that the creditor receives guaranty or
accepts payments from a third person who has agreed to
assume the obligation, constitute an extinctive novation
absent an agreement that the first debtor shall be released
from responsibility.
ASB REALTY VS ORTIGAS
* Estoppel - The doctrine of estoppel was based on public
policy, fair dealing, good faith and justice, and its purpose was
to forbid a party to speak against his own act or omission,
representation, or commitment to the injury of another to
whom the act, omission, representation, or commitment was
directed and who reasonably relied thereon.The application
of estoppel was appropriate. The doctrine of estoppel was
based on public policy, fair dealing, good faith and justice, and
its purpose was to forbid a party to speak against his own act
or omission, representation, or commitment to the injury of
another to whom the act, omission, representation, or
commitment was directed and who reasonably relied thereon.
The doctrine sprang from equitable principles and the equities
in the case, and was designed to aid the law in the
administration of justice where without its aid injustice would
result. Estoppel has been applied by the Court wherever and
whenever special circumstances of the case so demanded.
*Section 39 of Act No. 496 (The Land Registration Act)
requires that every person receiving a certificate of title in
pursuance of a decree of registration, and every subsequent
purchaser of registered land who takes a certificate of title for
value in good faith shall hold the same free of all

FRANKLIN L. FLORES
-852-

The Fraternal Order of


Ateneo de Davao Univeristy
COLLEGE OF LAW
encumbrances except those noted on said certificate. An
encumbrance in the context of the provision is anything that
impairs the use or transfer of property; anything which
constitutes a burden on the title; a burden or charge upon
property; a claim or lien upon property. It denotes any right
to, or interest in, land which may subsist in another to the
diminution of its value, but consistent with the passing of the
fee by conveyance. An annotation, on the other hand, is a
remark, note, case summary, or commentary on some
passage of a book, statutory provision, court decision, of the
like, intended to illustrate or explain its meaning. The
purpose of the annotation is to charge the purchaser or title
holder with notice of such burden and claims. Being aware of
the annotation, the purchaser must face the possibility that
the title or the real property could be subject to the rights of
third parties.
*To be clear, contractual obligations, unlikecontractual rights
or benefits, are generally not assignable. But there are
recognized means by which obligations may be transferred,
such as by sub-contract and novation. In this case, the
substitution of the petitioner in the place of Amethyst did not
result in the novation of the Deed of Sale. To start with, it does
not appear from the records that the consent of Ortigas to the
substitution had been obtained despite its essentiality to the
novation. Secondly, the petitioner did not expressly assume
Amethysts obligations under the Deed of Sale, whether
through the Deed of Assignment in Liquidation or another
document. And thirdly, the consent of the new obligor (i.e.,
the petitioner), which was as essential to the novation as that
of the obligee (i.e., Ortigas), was not obtained.
*Rescission under Article 1191 of the Civil Code is proper if
one of the parties to the contract commits a substantial
breach of its provisions. It abrogates the contract from its
inception and requires the mutual restitution of the benefits
received; hence, it can be carried out only when the party who
demands rescission can return whatever he may be obliged to
restore.

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