Oblicon Bathan Midterm Notes.docx

OBLIGATIONS & CONTRACTS MIDTERM NOTES

February 13, 2019 E. Extinguishment of Obligation ART. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. Other causes 1. Death of a party (in case of personal obligation) 2. Mutual desistance or withdrawal  principle: since mutual agreement can create a contract, mutual disagreement can cause its extinguishment 3. Arrival of RP 4. Compromise 5. Impossibility of fulfillment 6. Happening of a FE Classification: Modes of extinguishment 1. Voluntary a. Performance i. Payment ii. Consignation b. Substitution i. dacion en pago (conveyance for payment) ii. novation c. by Release agreement i. agreement subsequent to constitution of obligation 1. mutual waiver

2.

2. unilateral waiver 3. remission ii. agreement simultaneous to the constitution of the obligation 1. resolutory condition 2. extinctive period Involuntary a. by reason of the subject i. confusion ii. death of the contracting parties (personal obligations) b. by reason of the object i. lost of the thing due/impossibility of performance c. by failure to exercise (right of action) i. extinctive prescription

I.

Payment or Performance

ART. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. Payment 1. delivery of money 2. giving of a thing 3. doing of an act 4. not doing of an act 5. D pays damages or penalty (in lieu of fulfillment)

NB: in law, payment and performance are synonymous. Elements: Payment 1. persons (payor, payee) 2. thing or object 3. cause 4. mode or form 5. place and time 6. imputation of expenses 7. special parts (which may modify the same and the effects they generally produce) Burden of Proof: Payment  incumbent upon D to prove with legal certainty that the obligation has been discharged by payment  once D introduces evidence of payment, the burden shifts to C  best evidence: receipt (written, signed acknowledgment that money/goods have been delivered)  disputable presumption: money paid is due to the other ART. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

consists has been completely delivered or rendered, as the case may be. When debt considered paid 1. integrity of the prestation  prestation to be fulfilled completely  GR: partial/irregular performance will not produce the extinguishment of an obligation 2. identity of the prestation  very prestation due must be delivered or performed GR: Debt is not paid unless there is complete fulfillment. EXC: (1) ob is substantially performed in GF (2) C accepts the performance knowing it incomplete/irregular + no protests/objections

is

ART. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. In case of substantial performance in GF D may recover as though there had been a strict and complete fulfillment LESS damage suffered by C. Requisites for application of Art. 1234 1. substantial performance (case to case basis) 2. D in GF (presumed in the absence of contrary proof) ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.  

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founded on the principle of estoppel considers as a waiver by C

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Requisites for application of Art. 1235 1. C knows performance is incomplete/irregular 2. C accepts the performance without protest/objection Accept  to take as satisfactory or sufficient  to give assent to  to agree or accede

NB: mere receipt of partial payment is not equivalent to

acceptance of performance within the purview of Article 1235 (therefore, does not extinguish whole obligation). ART. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. Persons from whom C must accept PMT 1. D 2. person who has an interest in the OB (eg: G) 3. 3P who has no interest in the OB when there is stipulation that he can make payment

NB: C is not compelled to accept payment from a stranger. Effect: PMT by 3P 1. made without knowledge or against D’s will  3P can recover from D only in so far as PMT has been beneficial to D (up to amount of debt at time of payment) + the overpayment to C (defense only available to D)  C is liable for interest in case of BF



2.

3P is not subrogated to C’s rights (eg: rights on mortgage, guaranty, penalty) made with D’s knowledge  3P has the right of reimbursement + subrogation

ART. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. Subrogation vs. Reimbursement Subrogation Reimbursement  payor is put in the  only the bare right to shoes of C be refunded  reimburse + other  no right to guarantees, rights (guaranty, securities mortgages) ART. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it. Principle: no one should be compelled to accept the generosity of another. 3P pays without intention to be reimbursed  must be with D’s consent  if C accepts, valid as to C although D did not give his consent ART. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on “Natural Obligations.’’

OBLIGATIONS & CONTRACTS MIDTERM NOTES

Free disposal of thing due Thing to be delivered must not be subject to any claim or lien or encumbrance of a third person. Capacity to alienate Person is not incapacitated to enter into contracts and for that matter, to dispose of the thing due. GR: In obligations to give, payment by one who does not have the free disposition of the thing due or the capacity to alienate it is NOT VALID. Therefore, thing paid can be recovered. EXC: (1) minor between 18-21 (entered in contract without P/G’s consent) voluntarily pays sum of money or delivers fungible thing in fulfillment of obligation. There shall be no right to recover the same from C who has spent or consumed it in GF. ART. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. To whom payment shall be made 1. C or obligee (persom in whose favor ob has constituted)  must be the C at time payment is made, at the constitution 2. C’s successor in interest (eg: heir, assignee) 3. any person authorized to receive it  authorized by C or by law  eg; guardian, executor/administrator estate, assignee or liquidator partnership/corp  if to agent, prove existence of SPA

thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor’s rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment. GR: payment to person incapacitated to administer/manage property is NOT VALID EXC: (1) such person kept the thing paid or delivered (invested in some profitable venture) (2) such was benefited by the payment

be

In the absence of benefit, D may be made to pay C’s guardian or C upon acquiring/recovery of capacity.

not

NB: Payment should be made to C’s legal representative, if

or of

ART. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the

not possible, D may consign in court.

GR: payment to third person or wrong party is NOT VALID EXC: (1) redounded to C’s benefit When D need not prove C’s benefit 1. subrogation of payor in C’s rights 2. ratification by C 3. C is estopped (C made D believe 3P has authority)

NB: if D pays the original C before having knowledge of

assignment of credit to 3P, D shall be release from obligation. ART. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. Illustration D is indebted to C in the amount of P1,000.00 which indebtedness is evidenced by a promissory note signed by D in favor of C. C lost the promissory note which was later found by X who demanded payment from D. Payment to X is not valid because X is the possessor merely of the document evidencing the credit and not of the credit itself. If the promissory note is payable to bearer or holder (Negotiable Instruments Law [Act No. 2031], Sec. 9.) the obligation will be extinguished if D pays X in good faith. Similarly, if the promissory note was indorsed by C to X, under a private agreement that X would not collect from D, payment by D in good faith to X will also extinguish the debt. It is immaterial that X acted in bad faith. The right of C will be against X. ART. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. When payment to C not valid Payment made by DS to D despite court order to retain the debt during pendency of case is not valid if the C wins the case.

NB: benefit granted by Article 1243 can only be invoked by C who secures the order of retention.

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

Garnishment A proceeding in rem for the purpose of subjecting D’s credit to payment of his debt to another. An attachment by means of which C seeks to subject to his claim the property of D in the hands of DS or money owed by such DS or garnishee to D. In the nature of an involuntary novation by substitution of one C for another. ART. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will. Very prestation due must be complied with  1st para: real obligation (specific) o C cannot be compelled to receive a different thing although same value or more valuable  2nd para: personal obligation o act to be performed or prohibited cannot be substituted against obligee’s will Substitution of object  if C consents, substitution can be made

NB: Article 1244 will not apply in case of C’s waiver or if sub is allowed by stipulation with C’s consent.

ART. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.

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NB: Dacion en pago requires delivery and transmission

Special forms of PMT 1. dation in payment (dacion en pago) 2. application of payments 3. payment by cession 4. tender of payment and consignation

of ownership of a thing to C who accepts it as equivalent of payment of debt.

NB: strictly speaking, application of payment is not a special form of payment

Dacion en pago  conveyance of ownership of D’s thing to C as an accepted equivalent of performance of a monetary obligation  requisites o performance of prestation in lieu of payment (animo solvendi) which may consist in delivery of corporeal thing or real right or credit against 3P o difference between prestation due and that which is given in substitution (aliud pro alio) o agreement between C and D that ob is immediately extinguished 

partakes the nature of sale (ie: C buys D’s property) o essential elements of contract must be present

Sale vs. Dacion en pago Sale  no pre-existing credit  ob is created  cause = price (S)  acquire thing (B)



more freedom in fixing price B has to pay price



S&B



Dacion en pago  with pre-existing credit  ob is extinguished  extinguish ob (D)  acquire object in lieu of credit (C)  not as free  

payment received D&C

is

already

ART. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. Rule of medium quality (generic) Consider the purpose of the obligation and circumstances to determine the quality or kind.

NB:

other

(1) C may waive such benefit by accepting a thing of inferior quality. (2) D may waive by delivering a thing of superior quality.

ART. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. GR: D shall pay for the extrajudicial expenses. EXC: (1) parties made a stipulation as to who will bear (2) expenses C incurred in going to D’s domicile to collect Rationale: because D benefited from the extinguishment of the obligation. Judicial costs

OBLIGATIONS & CONTRACTS MIDTERM NOTES

 



statutory amounts allowed to a party to an action for his expenses incurred in the action RoC: paid by the losing party o court may, for special reasons, adjudge tjat either party shall pay or that same be divided. GR: no costs allowed against Govt o unless provided by law

ART. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter.

NB: Article 1248 only applies where there is only 1C & 1D. GR: In order that PMT may extinguish obligation, complete performance is necessary. EXC: (ie: partial performance is allowed) (1) with express stipulation (2) debt is in part liquidated (definitely determined or determinable) and in part unliquidated  eg: share of profit not yet liquidated or determined (3) different object in obligation are subject to different terms or conditions (4) parties know the obligation reasonably cannot be expected to be performed completely at one time (5) when there is abuse of right or if GF requires acceptance  there is abuse of right when it is exercised for the only purpose of prejudicing or injuring another



GF eg: D promised to deliver 10 bags of rice to C. D delivers 5 bags informing that continuous deliveries will follow. C cannot, in GF, refuse to accept partial deliveries as long as the object is sufficient for his needs.

ART. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance.

NB: RA 8183 (June 11, 1996) repealed RA 529. There is no

longer any legal impediment to having obligations or transactions paid in a foreign currency as long as the parties agree to such arrangement. Payment by means of money (order) 1. in currency stipulated 2. if #1 not possible, in legal tender in PH Legal Tender Currency which D can legally compel C to accept in payment of a debt in money when tendered by D in the right amount. in PH: all coins and notes issued by BSP

NB: pursuant to BSP Circular no. 537 (July 18, 2006), maximum amount of coins to be considered legal is (1) P1000 for P1, P5, P10 coins

(2) P100 for P.01, P.05, P.10, P.25 coins (3) all coins and bills above P1 are valid for any amount Payment by means of instruments of credits  C is not compelled to accept PNs, checks, BoE and other commercial documents as they are not legal tender (even though check is certified) o C may accept them but acceptance does not produce the effect of payment. Only upon encashing/realizing the check or upon impairment through fault of C is the debt paid. 

A redemption of property sold under execution is not rendered invalid by reason of the fact that the payment to the sheriff for the purpose of redemption is effected by means of a check for the amount due. (Mere tender of checks is sufficient to compel redemption)

GR: Payment by means of mercantile documents does not extinguish obligation. EXC: (1) upon encashment (doc executed by D or 3P) (2) if they have been impaired through C’s fault (doc executed by 3P) ART. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. Inflation Sharp sudden increase of money or credit or both without a corresponding increase in business transactions. Effect: drop in the value of money, rise of the general price level.

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

Deflation Reduction in volume and circulation of available money or credit; opposite of inflation.

exchange market forces is a depreciation and not a devaluation. However, both are synonymous when used in a contract.

Effect: decline of general price level.

ART. 1251. Payment shall be made in the place designated in the obligation.

Requisites for application (the ff must be proven) 1. official declaration of extraordinary IF/DF by BSP 2. obligation is contractual in nature 3. parties expressly agreed to consider the effects of extraordinary IF/DF Basis of payment in case of extraordinary IF/DF GR: Purchasing value of currency at time of establishment of obligation EXC: (1) agreement of parties to the contrary (ie: pay the stipulated amount regardless of any extraordinary IF/DF) Extraordinary IF/DF When neither party had reason to foresee such event during the establishment of the obligation OR manifestly beyond the contemplation of the parties. Devaluation vs. Depreciation Devaluation  reduction in value of one currency from an official fixed level imposed by monetary authorities

Depreciation  downward change in the value of one currency in terms of currencies of other nations which occurs as a result of market forces in the foreign exchange market

NB: PH presently maintains a floating foreign exchange rate system and not an officially fixed rate regime. So, any lowering of the value of the peso as a result of foreign

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There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. Places where obligation shall be paid (order) 1. place stipulated 2. if no stipulation a. thing is specific: at place where the thing was at perfection of contract b. thing is generic: D’s domicile (C bears expenses in going to D’s place) Order is successive and exclusive.

NB: this is without prejudice to venue under the Rules of

Court (place where a court suit or action must be filed/instituted). Domicile Place of a person’s habitual residence.

OBLIGATIONS & CONTRACTS MIDTERM NOTES

February 20, 2019

Thus, Montecillo's payment to Cebu Ice Storage is not the payment that would extinguish Montecillo's obligation to Reynes under the Deed of Sale.

CASES: Payment or Performance 1.

Montecillo vs. Abucay (2002)

Reynes,

Sps

Redemptor,

FACTS:  Reynes (R/S): owner of a subject lot (448 sqm) o sold a portion (185 sqm) to Sps Abucay (R/B)  signed a deed of sale to Montecillo (P)  P failed to pay o Reynes revoked the sale o executed deed of sale transferring to Sps. Abucay the whole lot + confirm previous sale of portion of lot  P claimed that o consideration for sale was amount he paid to Cebu Ice Storage for mortgaged debt of Jayag o release of mortgage was necessary since mortgage constituted lien on the lot  TC: sale to P null and void (lack of cause/consideration) o P never paid the PP  CA: affirmed TC ISSUE: W/N there was payment or performance on P’s part RULING: No. SC held that absent any showing that Reynes had agreed to the payment of the PP to any other party, the payment to be effective must be made to Reynes, the vendor in the sale. Article 1240 - Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.

SC further ruled that where the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void ab initio for lack of consideration. 2.

PNB vs. CA, Loreto Tan (1996)

FACTS:  Tan (PR): owner of a parcel of land o subject to expropriation  Tan requested: release of expropriate price (P32 480) o P (thru Asst Branch Manager) issued a manager’s check + deliver to Gonzaga without Tan’s knowledge, consent or authority o Gonzaga deposited in here account at Far East + withdrew same  Tan demanded o P refused; contended that they already delivered to Gonzaga by virtue of a SPA allegedly executed by Tan  Tan executed affidavit o never executed any SPA o never authorized Mrs. Gonzaga o signed a motion to release sum to him and gave the same to Mr. Gonzaga but Engr. Decena issued authority to release funds to Mr. Gonzaga, not to Tan  Hearing ensued o PNB failed to present the SPA o claimed that Mrs. Gonzafa borrowed it with the promise to return it o SPA existence already proved by certification of FEB in encashing the check ISSUE:

W/N there was payment or performance RULING: No. There is not question that no payment had ever been made to Tan as the check was never delivered to him. Art. 1233 - a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. Burden of proof lies with D. In this case, neither the SPA nor the check was ever presented in court. Thus, PNB was ordered to pay Tan the sum + attorney’s fees. 3.

Pagsibigan vs. CA, Planters Development Bank (1993)

FACTS:  Pagsibigan (P) through daughter (AIF) obtained an agricultural loan (4.5k) from Planters (PR) secured by mortgage over parcel of loan o fully paid  obtained another loan o secured by same land o PN: payment every 6 mo + 18% int + acceleration clause  P paid o only 4 of such payments were applied to loan o rest were “temporarily lodged to AP since account was already past due”  property was foreclosed  P contended o bank no right to foreclose as there was full payment; in fact, they overpaid  bank contended o computation not in consonance with PN o when P failed to pay 1st installment, the entire ob became due and demandable

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

ISSUE: W/N there was payment or performance RULING: Yes. Respondent bank has the right to foreclose the mortgage upon default but the records show that P did not default payment. The court held that there is, at the very least, substantial performance, and the law provides that: Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. Further, when bank received P’s payment (2m3d delayed) and applied it to P + int + penalty, it waived its right under the acceleration clause. The bank computed the penalty based on the defaulted amortization payment instead of the entire amount, which would have been due and demandable by virtue of the acceleration clause. Lastly, for more than 4 years, the bank made P believe that it was applying her payments on the loan and the interest. It is bound by estoppel to apply the same. 4.

Tayag, Galicia vs. CA, Leyva (1993)

FACTS:  P: heirs of Galicia, Sr., who executed a deed of conveyance in favor of R involving a piece of land o terms: portion of payment represents S’s indebtedness with PVB which is assumed by B  Suit for specific performance was filed by R for failure of P to execute final deed of sale  P argued that remaining balance was not paid by R ISSUE: W/N there was payment or performance

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RULING: Yes. SC held that act of the co-vendor in paying PVB is construed to be a ploy that “prematurely prevented plaintiff from paying the installment fully,” thus constitutes constructive fulfillment. Further, the acts of Ps in accepting the payments even beyond the periods agreed upon without expressing any protest or objection was perceived as tantamount to faithful performance of obligation. PR also consigned an amount sufficient to offset the remaining balance. 5.

Panganiban vs. Cuevas

FACTS:  Panganiban (P) owner of Camarin and lot o sold same to Gonzales (1.3k) o stipulation: S has right to repurchase within 6mo o if S fails to do so, B will pay P200 + become absolute owner  Gonzales sold property to Cuevas (R) o stip: Panganiban has right to repurchase  Cuevas asked judicial possession of property (granted) o action of ejectment filed against Panganiban  P contended that o he sought to repurchase property but could not locate Gonzales due to the revolutionary war  Rev Govt seized land from Gonzales o Panganiban redeemed property from Rev Govt ISSUE: W/N there was payment or performance. RULING: No. The property was seized by the army not confiscated, and a seizure just prohibits the owner from enjoying his/her

property. Panganiban repurchased the property from the army but the army was not the owner. SC held that payment made to a third person, even through error and in good faith, shall not release the debtor of the obligation to pay and will not deprive the creditor of his right to demand payment. If it becomes impossible to recover what was unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is the only one responsible for his own acts unless there is a stipulation for the wrongful payment. Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successorsin interest, or any person authorized to receive it

OBLIGATIONS & CONTRACTS MIDTERM NOTES

6.

BPI (as successor-in-interest of CBTC) vs. CA, Eastern Plywood Corp, Benigno Lim (1994)

FACTS:  Eastern and Lim (as officer and stockholder) had at least 1 joint bank account with CBTC  Velasco + Lim opened a joint account with funds withdrawn from Eastern/Lim account o various D/W o money placed in money market  Velasco died o Lim transferred ½ to bank accounts of Eastern  Eastern obtained loan (payable on demand + 14% interest) o Eastern issued unsecured negotiable PN signed by Lim as P and GM  Later, Eastern, Lim and CBTC signed another document stating Lim/Velasco as security for loan upon finality of judicial action or settlement (holdout agreement)  in settlement proceeding of Velasco’s estate, the whole joint account was claimed as part of Velasco’s estate o heirs filed to withdraw the amount and divide among themselves  BPI (after it merged with CBTC) filed complaint demanding payment of PN o RTC & CA: PN not subject to holdout agreement ISSUE #1: W/N there was payment or performance RULING: No. The bank cannot be compelled to retain and apply the deposit in Lim/Velasco’s joint account to the payment of the loan. What the agreement conferred on CBTC was a power, not duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the

payment of a loan is a privilege, a right of set-off which the bank has the option to exercise.

ISSUE: W/N the deed of assignment constituted as dacion en pago

ISSUE #2: W/N BPI is still liable to Eastern and Lim on the account withdrawn by the heirs of Velasco

RULING: No. SC held that the deed of assignment executed is not a dacion en pago and did not totally extinguish R’s obligation.

RULING: Yes. The account was proven to belong to Eastern even if it was in the names of Lim and Velasco. BPI was the D and Eastern was the C. As the real creditor of the bank, Eastern has the right to withdraw it or demand payment thereof.

Dacion en pago does not necessarily mean total extinguishment of obligation. The obligation is totally extinguish only when the parties, by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, which is not present in the case.

BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. Payment made by D to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence. 7.

Caltex cs. IAC, Asia Pacific Airways, Inc. (1992)

FACTS:  Asia Pacific (PR) entered into agreement with Caltex (P) o P to supply aviation fuel for 2 years  PR had an outstanding balance to P (4M+) o PR executed deed of assignment: receivables or refunds from National Treasury of PH (5M+) to be applied as payment  upon learning that the amount exceeded, PR asked P for a refund o P made the refund  PR believed it was entitled to a larger amount, demanded again o P informed that amount not returned represented % + service charges for overdue account  PR filed complaint

8.

FEBTC vs. Diaz Realty Inc. (2001)

FACTS:  Diaz (R) obtained a loan from Pacific Bank (720k) o secured by REM of 2 parcels of land  Allied Bank rented an office on the mortgaged properties o monthly rentals to be applied on lessor’s account with Pacific Bank  CB closed Pacific Bank + placed it under receivership  Far East purchased the credit of Diaz in favor of Pacific but it was only later that Diaz was informed  Diaz tendered an interbank check bearing the remaining obligation as full payment o Far East did not accept it as payment o instead asked Diaz to deposit it ISSUE W/N there was payment or performance RULING: Yes. SC held that the tender was made by R for the purpose of settling its obligation. Thus, by accepting the tendered check and converting it into money, P is presumed to

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

have accepted it as payment. To hold otherwise would be inequitable and unfair to the obligor.

a. b.

a) Application of Payments ART. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. Application of Payments Designation of the debt to which the payment should be applied where D has various debts of the same kind in favor of one and the same C. Requisites 1. 1D and 1C 2. 2 or more debts 3. debts: same kind 4. debts (to which payment has been applied) must be due 5. payment not sufficient to cover all debts due GR: payment cannot be applied to debts not yet due EXC: (1) with stipulation that D may so apply (2) it is made by D or C for whose benefit the period has been constituted Rules on Application of Payments 1. D has the 1st choice

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must indicate at time of payment which particular debt is being paid D cannot later on claim that it should be applied to another debt unless there is a cause for invalidating (eg: fraud, mistake)

2.

right to make application once irrevocable a. unless C consents to change

exercised

is

3.

D’s right to apply payment: merely directory a. if D does not apply, C has subsidiary right to make the designation (with D’s consent) through specifying in the receipt which debt is being paid

4.

if no designation by both or if application is invalid: apply to debt most onerous to D

5.

if debt are of the same nature and burden: apply payment proportionately

6.

if neither party designated and there is disagreement as to application: courts will apply payment according to the justice and equity of the case

ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.

NB: Rule is mandatory. GR: Payment must be applied first to the interest and whatever balance is left, must be credited to the principal. EXC: (1) agreement between parties (2) waiver by C

ART. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. SC 1. 2. 3. 4. 5. 6.

Ruling of what is more onerous interest-bearing debt > NIB sole debt > solidary debtor older debts > newer debts secured debts > unsecure debts higher interest rate > lower interest rate with a penal clause > without penal clause

NB: if debts are subject to different burdens, apply to them proportionately.

OBLIGATIONS & CONTRACTS MIDTERM NOTES

CASES: Application of Payments 9.

Espina vs. CA, Diaz (2000)

FACTS:  Espina (P) sold a condo unit to Diaz (R); R used to lease such unit o Jan 15: 400k o Feb 1: 200k o Feb 22: 200k o Mar 14: 200k o Apr 4 200k o Apr 25: 200k  Diaz informed Espina that check account has been closed and opened a new checking account with same bank o PDCs issued shall be replaced with new ones  because of the closed account, the six installments bounced o R continued to occupy the unit but failed to pay the rentals due  P gave R notice to vacate + pay back rentals  However, Diaz (thru wife) partially paid o Espina sent a notice of cancellation of sale o yet Espina still accepted payment + encashed the check  R contends o P acceptance of such payment withdrew the cancellation of the sale ISSUE: What is the application of the payment RULING: Unless the application of payment is expressly indicated, the payment shall be applied to the obligation most onerous to D. In this case, the unpaid rentals constituted the more onerous obligation. As payment did not fully settle

the unpaid rentals, P’s cause of action for ejectment survives. 10. Tan vs. Mendez Jr. (2002) FACTS:  Steve and Marciano Tan (Ps): owners of Master Tours and Travel + operators of PH Lawin Bus  Mendez (R): owner of 3 gasoline stations  Ps opened a credit line for fuel consumption o drivers purchase on credit fuel & oil thru withdrawal slips o periodic payments to Mendez thru issuance of checks  R remitted the proceeds + remittance of ticket sales from Baao Booking managed separately by another agent o P’s checks were dishonored for insufficiency of funds  R demanded but no reply o hence, case for violation of BP 22  Marciano contended o he cannot be held liable for BP 22 because check has already been extinguished by offset or compensation against collection from ticket sale

The Tans also never alleged compensation when they received the demand letter, during preliminary investigation, or before trial. Moreover, if indeed there was a payment by compensation, Tans should have redeemed the checks back in the ordinary course of business.

ISSUE: W/N Tan brothers can claim compensation RULING: No. No compensation can take place as Mendez is not a debtor of the Tans insofar as the checks representing ticket sales are concerned. Mendez only acted as an intermediary in remitting the Baao ticket sales and thus, is not a debtor of the Tans.

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b) Payment by Cession ART. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. Payment by Cession Special form of payment wherein D assigns or abandons all his properties for the benefit of Cs in order that they may sell the same and apply the proceeds thereof to the satisfaction of their credits. Requisites 1. 2 or more Cs 2. D must be (partially) insolvent 3. assignment must include all properties 4. cession must be accepted by all Cs (contractual or voluntary assignment) a. if legal/judicial assignment: Insolvency Law

NB:

Assignment does not make Cs the owners of the property. GR: D is released from his obligation only up to the net proceeds of the sale of the property assigned. (D is still liable for balance) EXC: stipulation to the contrary. Dacion en pago vs. Cession Dacion en pago  one C  does not presuppose insolvency

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Cession  several Cs  D is insolvent at time of assignment

 

not all properties C becomes owner of the thing

 



act of novation



all properties C only acquires the right to sell the thing + apply proceeds to credits pro rata not act of novation

NB: Both dacion and cession are governed by the law on sales.

CASE: Payment by Cession 11. Lopez vs. CA, Philippine American General Insurance Co., Inc. (1982) FACTS:  Lopez (P) obtained loan (20k) from Prudential Bank o P posted a surety bond with Philamgen (R) as surety o in return, P executed an indemnity agreement and deed of assignment of 4k shares of stock in favor of R o the assignment of shares was made due to a commitment made by determinate 3Ps to the surety that in case P defaults in payment said 3Ps would buy the shares from the surety and the proceeds will be paid to the bank  P defaulted o R paid the loan o R sued P for reimbursement after R cancelled P’s name in the stock certificates + executed one under R’s name  P argued that o transfer of shares was a dacion en pago o there was novation of the indemnity contract when the surety and the determinate 3Ps agreed that the latter would buy the shares of stock

ISSUE: Whether there was a pledge or dacion en pago between Lopez and Philamgen. Ruling: Pledge. SC held that the assignment of stock is not a dation in payment since the obligation of the petitioner towards the surety has not matured at the time the same was executed. There was no novation of the obligation by substitution of debtor since it was not established nor shown that P would be released from responsibility. Further, in case of doubt as to whether a transaction is pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.

OBLIGATIONS & CONTRACTS MIDTERM NOTES

February 23, 2019 c) Tender of Payment and Consignation ART. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the fol lowing cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. Tender of Payment D’s act of offering to C the thing or amount due. An act preparatory to consignation. Consignation Act of depositing the thing or amount due with the proper court when C does not desire, or refuses to accept payment or cannot receive it, after complying with the formalities required by law. Tender of payment: extra-judicial Consignation: judicial Rationale for consignation 1. a facultative remedy  a remedy D may or may not avail 2. avoidance of greater liability

 

for failure to consign, D may become liable for damages and/or interest such failure is not tantamount to a breach where by the fact of tendering payment, he was willing and able to comply the obligation

Requisites: Valid Consignation 1. valid debt is due 2. D tenders payment and C refuses to accept without justifiable reason 3. previous notice of consignation to persons interested in the fulfillment 4. consignation of thing/sum due 5. subsequent notice of consignation to interested parties

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. Prior notice to persons interested is REQUIRED. Persons interested 1. Guarantors 2. Mortgagees 3. Solidary Ds 4. Solidary Cs

ineffective.

Purpose of Notice To give C a chance to reflect on his previous refusal to accept payment considering that consignation expenses shall be charged against him + in case of loss of thing consigned, C shall bear the risk.

Requirements: Valid Tender of Payment 1. must comply with the rules on payment 2. must be unconditional and for the whole amount 3. must be actually made

Content of Notice 1. Warning of deposit of thing tendered 2. Date and hour of consignation 3. Name of court

Proof of tender of payment  must be proved by D  if tender is not required: prove prior notice to interested persons

NB: ToP and notice of consignation may be done in the

NB: absent any requisite is ground to render consignation

ToP not required (D can consign immediately) 1. C is absent or unknown or does not appear at place of payment 2. C incapacitated to accept payment when it is due 3. C refuse (without just cause) to give a receipt 4. 2 or more Cs claim the same right 5. title of obligation has been lost ART. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation.

same act.

ART. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. Effective consignation (summary: 1258)  must be with proper judicial authority o GR: court o EXC: prescribed by special law  notify interested parties of consignation made

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thru service of summons + copy of complaint purpose: to withdraw the thing/sum consigned or take possession in case C accepts the consignation consignation applicable only to payment of debt o not applicable if no obligation to pay like exercise of a right or privilege o o



NB: Property deposited in the court is exempt from attachment and not subject to execution (except with express order of the court). ART. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. If consignation properly made: costs against C If consignation not properly made: costs against D When consignation deemed properly made 1. when C accepts the thing/sum deposited as payment of obligation (without objection) 2. when C questions the validity of the consignation and the court (after hearing) declares that it has been properly made 3. when C neither accepts nor questions the validity of the consignation, and the court (after hearing) orders the cancellation of the obligation

NB: C may accept the consignation with reservation or

qualification; therefore, he is not barred from raising the claims he reserved against D. ART. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the

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sum deposited, allowing the obligation to remain in force.

CASES: Tender of Payment and Consignation

When all requisites of consignation are observed  operates as valid payment  D can ask the courts to cancel the obligation

1.

D may withdraw the thing/sum deposited a) before C accepts b) before a judicial declaration that the consignation has been properly made In both cases, D is still the owner of thing/sum. Risk of loss  without o  without o

D’s fault; before acceptance/judicial approval C bears the risk D’s fault; no valid consignation D bears the risk

ART. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. C consents to withdrawal after acceptance/judicial approval  obligation subsists  C shall lose every preference over the thing  co-SDs, guarantors, and sureties shall be released

NB: co-solidary debtor is only released from solidary liability, not from his share of the obligation.

FACTS:

Eternal Gardens Park Memorial vs. CA (1997)

OBLIGATIONS & CONTRACTS MIDTERM NOTES

2.

Rayos vs. Reyes (2003)

FACTS:  3 parcels of land owned by spouses tazal o sold to Mamerto Reyes (predecessor-ininterest of Rs) o with a right to repurchase after 2 years.  without availing of right to repurchase, Tazal sold 2 of the 3 lands to Rayos (P)  right to repurchase expired without it being exercised  after expiration, Tazal (seller) attempted to repurchase the properties from Reyes arguing that o the contract was actually en equitable mortgage + offered P724 as payment as payment for alleged debt  Reyes refused the tender of payment claiming that o the agreement was not an EM but a sale with a right to repurchase and the right has expired (note: equitable mortgage is where the contract of the parties purports to be a sale with a right to repurchase but the actual intention of the parties is a contract of loan with mortgage of property to secure the debt)  

 

Tazal filed a complaint and deposited the P724 with the court as the supposed payment for the debt. Tazal again sold the 3rd parcel of land to petitioner Spouses Rayos. The 2 other parcel of land was bought by the spouses from Blas Rayos. TC: not an EM; Tazal can still repurchase within 30 days from finality of judgment P Rayos did nothing to repurchase the land within 30 days believing that the consignation of P724 had perfected the repurchase.

ISSUE: W/N the consignation was valid and can be considered to have perfected the right of repurchase

RULING: No. There is no evidence to prove that the Ps paid at any time the repurchase price except for the deposit of P724 which fell short of all the acts necessary for a valid consignation and discharge of their obligations to respondent. In order that consignation may be effective the debtor must show that (a) there was a debt due; (b) the consignation of the obligation had been made because the creditor refused to accept it without just cause; (c) previous notice of the consignation had been given to the person interested in the performance of the obligation; (d) the amount due was placed at the disposal of the court; and, (e) after the consignation had been made the person interested was notified thereof. In this case, Ps failed to offer a valid and unconditional tender of payment; second, to notify the respondents of the intention to deposit the amount in court; and third, to show that there is acceptance by the creditor of consignation or a judicial declaration that a valid consignation has been made. Thus, the consignation is ineffective for failing to comply with the requirements. Further, the tender of payment of P724 was conditional and therefore void. It was tendered upon the argument that he was paying a debt as a consequence of the contract of equitable mortgage and not a sale with a right to repurchase. Thus, Mamerto Reyes was within his right to refuse the tender. Therefore, deposit of P724 cannot perfect the repurchase for it was neither approved by the court nor accepted by Mamerto or his heirs.

3.

Badayos vs. CA, Sps Lisondra, Gabisan (1992)

FACTS:  P: seller  R: buyers  P executed in favor of Rs a deed of sale with right to repurchase (undivided half portion of lot in Talisay Cebu for P7400) o stipulation: Badayos (S) has the right to repurchase after 2 years from and after execution of contract for the same amount (7400)  R filed with CFI (now RTC) to consolidate ownership over property, alleging that o P never repurchased the said property  P answer that o document in question is actually an equitable mortgage intended to secure her loan of P4000 o she was granted an extension by Rs as she was waiting for approval of loan of her daughter o she owns the property + enjoys the fruits + pays the taxes o Rs are only lessees paying rentals annually  P further claimed that o she consigned her payment of the obligation and/or her payment for the repurchase price; thus, the case has become moot and academic and should be dismissed ISSUE: W/N the consignation is valid RULING: Yes. SC held that P’s consignation operated as a valid offer or tender of the redemption price. It must be emphasized that

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consignation was not necessary for the reason that the relationship that existed was not one of D-C. P was exercising a right, not discharging an obligation, hence a mere tender of payment is sufficient to preserve the right of a vendor a retro. MAIN RULING: P is able to repurchase the property in question because the stipulation clearly states that the redemption shall be made AFTER TWOYEARS FROM AND AFTER THE EXECUTION OF THE CONTRACT, not within 2 years. Thus, repurchase shall only be after March 1975 (execution date: March 1973).

4. FACTS:

Adelfa Properties, Inc. vs. CA (1995)

5.

De Mesa vs. CA, OSSA House Inc., DBP (1999)

FACTS:  De Mesa (P) owns several parcels of land which were mortgaged to DBP as security for loan  P failed to pay all mortgage debts o all properties were foreclosed o in all auction sales, DBP was the winning bidder  P requested DBP to repurchase said properties  P sold said properties to OSSA House Ince (R) unde “Deed of Sale with Assumption of Mortgage” she be allowed to repurchase her foreclosed properties under condition that the OSSA would assume the payment of the mortgage on installment basis  DBP granted request  after OSSA paid the 8th installment, P notified OSSA that she was rescinding the “Deed of Sale with Assumption of Mortgage” on the ground that OSSA failed to comply with terms of agreement o OSSA offered to pay the difference between PP and mortgage obligation to DBP but P refused to accept  because of this, OSSA filed for consignment against P and specific performance against DBP ISSUE: W/N the consignation was valid Ruling: Yes. SC held the consignation is valid only as far as Petitioner De Mesa is concerned and ordered de Mesa to receive the said amount consigned with the court and pay DBP the said amount.

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

II.

Loss of Thing Due

ART. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. Thing is considered lost  when it perishes  goes out of commerce  disappears in such a way that its existence is unknown or cannot be recovered

NB: Loss of determinate thing is equivalent of impossibility of performance is obligations to do.

Requisites: loss of thing will extinguish ob to give 1. ob: deliver a specific or determinate thing 2. loss of thing occurs without D’s fault 3. D is not guilty of delay Loss of thing will NOT extinguish ob 1. when law so provides 2. by stipulation 3. nature of obligation requires assumption of risk 4. ob to deliver a specific thing arises from a crime ART. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Effect: loss of generic thing Obligation subsists, even if due to FE.

Rationale: genus nunquam perit or genus never perishes. ART. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. Effect: partial loss of specific thing  in case of disagreement, court has the discretion to determine if the partial loss is so important as to extinguish the obligation

NB: partial loss of specific thing = difficulty of performance

Kinds of impossibility 1. Physical 2. Legal Natural impossibility vs. Impossibility in fact  natural – inability of party to do because of the nature of the thing to be done; contract VOID  impossibility in fact – absence of inherent impossibility, only improbable or out of the power of D; VALID 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.

in obligations to do.

ART. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This presumption does not apply in case of earthquake, flood, storm or other natural calamity. GR: loss of thing in D’s possession is presumed to through D’s fault. EXC: (1) proof to the contrary (2) natural calamities (flood, earthquake, storm)

NB: D has the burden to prove. ART. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.

NB: The impossibility must take place after constitution of the obligation; OW void if impossible from the very beginning.

Performance of the obligation has become so difficult as to be manifestly beyond the contemplation of both parties  court is authorized to release D in whole or in part

NB: Court is only authorized (under 1267) to release or not

release D from the obligation, not modify or revise the terms and conditions. ART. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. FE does not exempt D from liability where ob proceeds from a criminal offense. ART. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third person by reason of the loss.

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The moment the ob is extinguished, D’s rights are transferred to C by operation of law. Therefore, C is given the right to proceed against 3P responsible for the loss. CASES: Loss of Thing Due 6. Yu Tek Co vs. Gonzales FACTS:

III.

Condonation or Remission of Debt

7. Labayen vs. Talisay-Silay Milling Co. ART. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. Condonation/Remission Gratuitous renunciation by C of his right against D resulting in extinguishment of D’s obligation in its entirety or in part. A form of donation; therefore, must be with D’s acceptance. Requisites: Condonation 1. gratuitous 2. accepted by D 3. parties must have capacity 4. must not be inofficious 5. if express, must comply with forms of donation If remission not gratuitous a) dation in payment – if thing is received instead of amount b) cession – if assignment of property for Cs’ benefit c) novation – if object/circumstance is changed d) compromise – if what is renounced is a doubtful or litigious right in exchange of other concessions Kinds of remission 1. As to extent a. Complete – covers entire ob b. Partial – does not cover entire ob 2.

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As to form a. Express – made verbally or in writing b. Implied – can only be inferred from conduct

OBLIGATIONS & CONTRACTS MIDTERM NOTES

o 3.

As to date of effectivity a. Inter vivos – during lifetime of donor b. Mortis causa – upon death of donor i. must comply with the formalities of a will

NB: Testamentary dispositions which impair the legitime

shall be reduced on petition of the heirs insofar as they are inofficious or excessive. ART. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt.

when it is know that there is no payment, presumed remitted

9. Lopez vs. Tambunting

ART. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. if thing pledged is found in D’s or 3P owner’s hands  only accessory ob of pledge is presumed to be remitted (not the principal ob) CASES: Condonation or Remission of Debt 8. Velasco vs. Masa

if C voluntarily delivers private document to D  implied remission (disputable presumption)  if joint, applies only to the share of D who is in possession  if solidary, total obligation

NB: applies only to private document because a public doc can easily be obtained being a public record

ART. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. if private document found to be in D’s possession  presumed to be voluntarily delivered by C o presumed paid

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February 27, 2019 IV.

Confusion or Remission of the Debt

ART. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. Confusion/Merger Meeting in one person of the qualities of C and D with respect to same obligation. Rationale If D becomes his own C, enforcement of obligation becomes absurd. Further, when there is confusion of rights, purpose of obligation is deemed realized.

if mortgagee becomes the owner of the mortgaged property  mortgage extinguished  principal obligation subsists Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. Effect of Merger on Guarantors Guaranty is ALSO extinguished. “Accessory follows the principal.” Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur.

Requisites 1. must take place between principal D & C a. in case C and G merge, only accessory obligation of guaranty is extinguished 2. must be clear, complete and definite 3. must be same/identical obligation

Merger: Joint Obligations Share corresponding to merged D/C shall be extinguished.

NB: If heir is D and deceased is C, merger does NOT

FACTS:  Paulina (P) filed complaint, alleging that o Andres (R) is the widower of P’s daughter (Marcela) o Marcela died without any legitimate heir other than R o P paid for all expenses (medical + burial) o only estate is conjugal property P1000 o R has not paid P  R admitted all facts except that o W left house without his knowledge or consent o he asked W to return but P opposed o he sent support (P12/mo)  R prayed for dismissal of case

necessarily follow as other Cs may be prejudiced.

Extinction of real rights by confusion  Real rights like usufruct, mortgage, pledge, right of repurchase, lease record, servitude may be extinguished by merger when right is merged with ownership  aka: consolidation of ownership o thru: assignment, subrogation, sale of inheritance Revocability of Merger If reason for confusion ceases, obligation is REVIVED.

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CASES: Confusion or Merger of Rights 1.

Sochayseng vs. Trujillo (1915)

ISSUE: W/N R shall be liable RULING: Yes. The surviving spouse is obliged upon the death of the other to settle the conjugal partnership. In this case, the widower is liable for the expenses incurred for the W’s subsistence. ISSUE: W/N there is confusion or merger of rights RULING: Yes. (in the person of Sochayseng) As the matter involved pertains to settlement of an intestate estate in which there is only one interested party of legal age (P herein); and the demand for the part of the community property to which the deceased was entitled, and for her paraphernal property, being a matter which properly pertains to an action for the settlement of the legal conjugal partnership property, apparently such demand is not allowable and it must be held that the estate of the deceased Marcela Yatco is entitled to P659, as community property, and P875, as paraphernal property, or to the total sum of P1,534. From this must be deducted the other part of the credit demanded, to wit, P320, for the funeral expenses of the said deceased, which must be paid, not by the husband, but by the heir. Dispositive: Trujillo should pay Sochayseng a total of P1,944: • P875 – paraphernal property of Marcela • P659 – Marcela’s ½ of the community property • P410 – debt owed by him as the legal administrator of the community property for the cost of the subsistence of Marcela • •

Sochayseng will collect: P410 – under her right as a creditor of Marcela P1,534 – her share as legitimate heir of Marcela

OBLIGATIONS & CONTRACTS MIDTERM NOTES

V. 2.

Yek Ton Lin Fire & Marine Insurance Co. vs. Yusingco (DF), Madrigal (appellant)

FACTS:  Yusingco (DF) – owner of steamship  Madrigal (Apt) – guarantor  Yek Ton Lin (PF) – insurance co.  DF executed power of attorney in favor of Yu Seguioc to administer, lease, mortgage, and sell his properties, including his vessels or steamship o Yu (as AIF) mortgaged to PF the steamship to answer amount P might pay on account of PN 45k loan from CB + on account of guaranty P20k in favor of CB  ship needed some repairs o repairs made upon guaranty of Madrigal  Yusingco defaulted pmt for repeairs o Madrigal had to pay amt + interest  after Madrigal had already paid, Iron works assigned its credit against Yusingco to Madrigal  when Madrigal found that he cannot be reimbursed, he filed an action against Yusingco o ship was sold at public auction to execute judgment o bought by PF (Insurance Co.) ISSUE: W/N there was confusion or merger of rights RULING: Yes. After steamship had been sold by virtue of writ issued for execution of judgment rendered in favor of Madrigal, the only right left to PF was to collect its mortgage credit from purchaser at public auction but its so happens that IT CANNOT TAKE SUCH STEPS NOW because it was the purchaser of the steamship at the public auction, and it was so with full knowledge that it had a mortgage credit on said vessel.

Therefore, obligations are extinguished by the merger of the rights of the creditor and debtor.

Compensation

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Compensation Extinguishment in the concurrent amount of obligations of those persons who are reciprocally Ds and Cs of each other. A specie of abbreviated or simplified payment because two debts are extinguished without the need to transfer money or property.

Cum Ponder – “to weigh together” Advantages 1. facility of payment 2. guaranty for effectiveness of credit  because if one party pays the other without waiting for the other to pay, former can easily be made a victim of fraud or insolvency

NB: in banking operations, a ‘clearing house’ takes care of compensation in banking accounts.

 

Compensation partial extinguishment is permitted true/legal compensation takes place by operation of law

 



Compensation two persons





2 obligations



Payment must be complete and indivisible involves action or delivery

Merger only one in whom qualities of D/C are merged 1 obligation

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

Compensation takes place by mere operation of law



Counterclaim or Set-off  must be pleaded to be effectual  judicial compensation (Rules of Court)

Kinds of Compensation 1. as to effect or extent a. TOTAL – same or requal a b. PARTIAL – a balance remains (one is larger than the other) 2. as to origin or cause a. LEGAL – takes place by operation of law (no need to be pleaded) b. VOLUNTARY or CONVENTIONAL – due to agreement of parties; requires mutual consent c. JUDICIAL – aka set-off; must be pleaded; can only be effective upon order from court d. FACULTATIVE – one party has the choice of claiming the compensation or not Compensation cannot exist  D of corp cannot compensate debt with his share of stock in the corp (because corp is not considered his D) Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention

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Ericka Caballes

or controversy, commenced by third persons and communicated in due time to the debtor. Requisites: Legal Compensation 1. PD and PC 2. 2 debts due 3. both debt: money, or same kind if consumable or fungible, or same quality if stated 4. liquidated and demandable 5. no retention or controversy commenced by 3P and communicated in due time to D  eg: claim is subject of court litigation Negative Requirements for LC 1. no controversy 2. no waiver of compensation 3. debts must not be prohibited by law a. debts from depositum b. debts from obligations of depository c. debts arising from ob of bailee in commodatum (eg: borrow of bike) d. from claim for future support due by gratuitous title e. consisting in civil liability arising from penal offense f. damages suffered by Pship thru fault of partner – cannot be compensation with profits and benefits which he may have earned for the partnerships Requisites: Voluntary Compensation 1. agreement be voluntarily and validly entered into 2. agreement or contract is valid 3. parties have legal capacity + feely give their consent Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor.

GR: PD and PC can set up compensation EXC: (1) G may set up compensation with respect to principal debt (because it will also extinguish his obligation as guarantor) Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. Applies to all kinds of compensation. Art. 1282. The parties may agree upon the compensation of debts which are not yet due. Applies to conventional or voluntary compensation. Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. GR: court jurisdiction depends upon the totality of demand in all causes of action, irrespective of whether the plural cases arose out of the same or different transactions. EXC: (1) claim joined under the same complaint are separately owed by, or due to, different parties, in which case each separate claim furnishes the jurisdictional test (2) where not all the causes of action joined are demands or claims for money

NB: consequential damages and attorney’s fees, when properly claimed and recoverable as an item of damage, are not excluded from the jurisdictional amount.

Art. 1284. When one or both debts are rescissible or

OBLIGATIONS & CONTRACTS MIDTERM NOTES

voidable, they may be compensated against each other before they are judicially rescinded or avoided. In case: rescissible or voidable debts Valid until rescinded or voided; hence, compensation is allowed. To prevent unfairness if rescission/annulment is later on decreed by court, it is as if NO compensation ever took place. IOW, decree acts retroactively. Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. GR: Assignment to 3P of debt already extinguished by compensation (legal) is useless as there is no more debt to assign. EXC: (1) when D gives his consent to the assignment - operates as a waiver of rights to compensation

Effect: Assignment on compensation 1. with D’s consent  no compensation (exc: when D reserves right)  applies whether assignment done BEFORE or AFTER debts became compensable 2.

3.

no consent but with knowledge (or against D’s will)  compensation can be set up on debts maturing BEFORE assignment without D’s knowledge  compensation can be set up for all debts maturing BEFORE his knowledge  crucial time: time of knowledge

Rationale: to prevent fraudulent deprivation of the benefits of total and partial compensation. Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. Compensation by operation of law  indemnity for o expenses of transpo of goods or object o expenses of monetary exchange Whoever claims compensation must pay for the exchange rate. Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository or of a bailee in commodatum. Neither can compensation be set up against a creditor who has claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.

No legal compensation 1. debt arises from depositum  purpose: to prevent breach of trust and confidence  depositary cannot claim compensation, depositor is allowed 2.

debt arises from obligations of a depositary  depositor has right to claim compensation

3.

debt arises from obligations of commodatum  lender may; borrower cannot

4.

debt arises from claim for support due to gratuitous title  support in arrears MAY be compensated but NOT future support (bec vital to life of recipient).

a

bailee

in

NB: First 3 are examples of facultative compensation. Obligations: Depositary 1. keep the thing safe + return it when depositor/heirs/successors/persons designated in contract require 2. cannot deposit with 3P (unless with stipulation) 3. if deposit with 3P allowed, depositary liable for loss if 3P is manifestly careless or unfit 4. responsible for negligence of employees 5. cannot make use of the thing deposited (unless with EXPRESS permission of depositor  OW: liable for damages  however, if preservation of thing requires its use, it must be used but for that purpose only Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal

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offense.

5.

If liability arising from penal offense  no compensation

6.

Rationale: satisfaction of obligation is IMPERATIVE.

NB: victim MAY claim compensation; another instance of facultative compensation.

Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. if several debts susceptible of compensation  rules on application of payments

2.

right to make application once irrevocable a. unless C consents to change

3.

D’s right to apply payment: merely directory a. if D does not apply, C has subsidiary right to make the designation (with D’s consent) through specifying in the receipt which debt is being paid

4.

if no designation by both or if application is invalid: apply to debt most onerous to D

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if neither party designated and there is disagreement as to application: courts will apply payment according to the justice and equity of the case

Art. 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. GR: When all requisites are present, compensation is AUTOMATIC. EXC: valid waiver

Application of Payments 1. D has the 1st choice a. must indicate at time of payment which particular debt is being paid b. D cannot later on claim that it should be applied to another debt unless there is a cause for invalidating (eg: fraud, mistake)

24

if debt are of the same nature and burden: apply payment proportionately

exercised

is

CASES: Compensation 3.

Silahis Mktg. Corp. vs. IAC, De Leon (Mark Industrial Sales) (1989)

FACTS:  in various dates, De Leon (PR) under the name Mark Industrial Sales sold & delivered to Silahis Mktg Corp (P) merchandise payable within 30 days from invoice date  P defaulted despite repeated demands o PR filed a complaint for collection + interest  P contended that o there was a debit memo as a supposed commission that P should have received o P is entitled to return of defective steel + have corresponding account with PR cancelled  TC: confirmed P’s liab + ordered partial offset  CA: dismissed P’s counterclaim thereby setting aside the offset (reason: lack of factual or legal basis; no written or verbal agreement)

ISSUE: W/N P is entitled to compensation RULING: No. SC held that P’s counterclaim contained nothing to show PR obligated himself to set-off or compensate P’s outstanding accounts with the alleged unrealized commission. SC further listed the requirements for compensation (1) parties bound principally (2) both debts: sum of money, or same kind of consumable, or same quality if stated (3) both debts due (4) debts liquidated and demandable (5) no controversy nor retention commenced by 3Ps + communicated in due time to D 4.

BPI, Romero vs. CA, Reyes

FACTS:  Reyes (PR) opened joint savings account with wife at BPI + joint SA with grandmother at same branch o regularly deposited US treasury warrants  GM died but US kept sending US treasury warrant  PR closed GM account o transferred to W account  TW was dishonored as issuance was 3 days prior to death o US Treasury requested BPI for refund o this is also the 1st time BPI knew of GM’s death  bank called PR o PR promised to drop by o also verbally authorized them to debit his W joint o bank proceeded to debit  PR demand restitution for debited amount, claimed that o failed to WD money when he needed them

OBLIGATIONS & CONTRACTS MIDTERM NOTES

o

filed for damages

ISSUE: W/N BPI can claim compensation against PR’s savings account for outstanding obligation to BPI RULING: Yes. Compensation shall take place when 2 persons are creditors and debtors of each other. Legal compensation operates even against the will and consent of the parties. In the case at bar, all elements of legal compensation are present. The obligors bound principally are at the same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the same time, said bank is the creditor of the private respondent with respect to the dishonored U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by 3P. Further, to frustrate the application of legal compensation on the ground that parties are not all mutually obligated would result in unjust enrichment on PR’s part.

5.

Tan vs. Mendez Jr (2002)

FACTS:  Tan (Ps): owners of travel corp + opertors of Lawin Bus  Mendez (PR): owner of gas station  P opened credit line with PR o PR also designated by P as booking and ticketing agent of Bus Co. o P drivers purchased on credit fuel, oil with periodic payments thru check o PR remit proceeds of ticket sales to P thru check + remit ticket sles in Baao Booking office managed separately and independently by another agent  Ps’ check dishonored (insufficient funds) o PR filed BP 22  P argued that o not violated BP 22 bec amount has already been extinguished by compensation against collection from ticket sales  R contended that o could not have offset o provided that it did, it should have been applied to an earlier obligation

No compensation can take place between petitioners and respondent as the latter is not a debtor of petitioners insofar as the two checks representing collections from the Baao ticket sales are concerned. Article 1278 of the Civil Code requires, as a prerequisite for compensation, that the parties be mutually and principally bound as creditors and debtors. If they were not mutually creditors and debtors of each other, the law on compensation would not apply. In this case, the memorandum shows that some unencashed checks returned to respondent to allegedly offset the dishonored check were from the Baao ticket sales which are separate from the ticket sales of respondent. Respondent only acted as an intermediary in remitting the Baao ticket sales and, thus, is not a debtor of petitioners.

ISSUE: W/N there was compensation RULING: No. The alleged compensation is not supported by clear and positive evidence. No application of payment was also made as to which check was to be paid. Petitioners’ defense of compensation is unavailing because they did not clearly specify in the memorandum which dishonored check is being offset.

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March 2, 2019

b.

VI.

Novation

Art. 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the right of the creditor. Novation Substitution or change of an obligation by another, which extinguishes or modifies the first Modes 1. change the object or principal conditions  include change in period (partial novation bec merely affects performance, not creation of obligation) 2. change D 3. subrogate C’s right Civil vs. Common Law Novation No difference. Under both systems, the extinguishment must be made to clearly appear. Function: novation Juridical act of dual function in that at the time it extinguishes an obligation, it creates a new one in lieu of the old. NOTE: true/proper novation extinguishes; partial, modificatory, or imperfect novation merely modifies (relative extinction). Kinds 1. object or purpose a. real or object – changing the object or principal conditions

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Ericka Caballes

2.

3.

personal or subjective – changing the perosns i. expromision or delegacion (D) ii. legal or conventional subrogation (c) c. mixed - both form of constitution a. express – declared in unequivocal terms b. implied – 2 obligations are essentially incompatible with each other extent or effect a. total or extinctive – complete ext. b. partial or modificatory or imperfect or improper – merely modified

NOTE: IOD, presume PARTIAL because extinctive novation is never presumed. Requisites 1. valid old obligation 2. intent to extinguish or modify the old obligation by a substantial difference 3. capacity and consent of all the parties  EXC: expromision, where old D does not participate 4. valid new obligation



eg: if debt with condition is made without one; reduction of period originally stipulated

NOTE: Never presumed. Clear proof must be given. Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. Personal or Subjective Novation 1. passive – change in D 2. active – change in C NOTE: A sub of D without C’s consent is binding upon the parties to the sub but not on C. Passive novation 1. expromision – 3P initiative 2. delegacion – D’s initiative; all three parties must agree (old D, new D, C)

Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on every point incompatible with each other.

Expromision 1. initiative from 3P 2. essential: agreement that old D be RELEASED from obligation 3. new D and C must consent

Implied Novation  done by making SUBSTANTIAL CHANGES – o in object or subject matter  eg: car instead of ring o in cause or consideration  eg: increase in price (bec decrease is remission) o in principal terms or conditions

Delegacion 1. initiative from old D 2. all parties must consent or agree Rights: New D Payment by new D gives him the rights mentioned in Articles 1236 & 1237 namely, (1) beneficial reimbursement, if PMT was made without knowledge or will of old D, and

OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) reimbursement and subrogation, if made with old D’s consent. Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. insolvency or non-fulfillment by new D in expromision  old D not liable Rationale: novation was brought about without his initiative. Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt. NOTE: only on insolvency; in other causes of non-fulfilment, old D is not liable. insolvency by new D in delegacion  old D not liable new D’s insolvency is already existing AND of public knowledge at time of delegation  old D LIABLE new D’s insolvency already existing AND known to D at time of delegation  old D LIABLE new D’s insolvency after delegation  old D not liable NOTE: Article 1295 does not apply if there was no extinctive novation, such as

(1) (2) (3) (4)

2P was only agent, messenger employee of D 3P acting only as G or S new D merely agreed to make himself solidarily liable new D merely agreed to make himself jointly or partly responsible for the obligation

Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. NOTE: Art. 1296 does not apply in cases of novation by subrogation of C. Q: if novation is merely modificatory, are GUARANTORS and SURETIES released if novation is made WITHOUT their consent? A: if modified obligation is MORE ONEROUS  liable for original if modified obligation is LESS ONEROUS  G & S still responsible NOTE: parties may agree that despite extinguishment of old obligation, accessory obligations shall remain PROVIDED that G/M/S give their consent. Stipulation pour autrui GR: Stipulations made in favor of 3Ps remain. EXC: (1) 3Ps gave their consent to the novation. Rationale: their rights to the accessory obligations should not be prejudiced without their consent. Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event.

GR: if new obligation is void, old obligation will SUBSIST. EXC: (1) parties intended for the old obligation to be extinguished in any event if new ob is subject to condition, said condition does not materialize  old ob SUBSIST if new ob is merely voidable  old ob is novated bec a voidable ob is VALID until annulled  if new ob is annulled, old ob SUBSISTS Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts which are voidable. Effect: Old obligation is VOID 1. no valid novation 2. if old ob is voidable and already annulled, no more obligation. novation is void. Old obligation is voidable Q: if old obligation is VOIDABLE and has NOT been annulled, may there be a valid novation? A: YES, provided that (1) only D may claim annulment, or (2) when ratification validates acts which are voidable Old obligation is extinguished by loss Q: may it be novated? A: it depends. (1) if loss purely by FE, novation is VOID bec no obligation to novate

Ericka Caballes 27

OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) if loss is with D’s fault, there is still an existing monetary obligation that may be the subject of novation. Old obligation has prescribed Q: may it be novated? A: Yes, bec unless defense of prescription is set up by D, ob continues, since this failure amounts to a waiver. Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. GR: conditions attached to old ob are also attached to new ob. EXC: contrary stipulation. Rationale: if condition is not fulfilled, old obligation never arose; therefore, nothing to novate. Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. Subrogation Transfer to 3P of all rights appertaining to C, including right to proceed against G, or possessors of mortgages, subject to any legal provision or any modification that may be agreed upon. Kinds 1. cause or origin a. conventional or voluntary – agreement and consent of original parties and of C; must be clearly established b. legal – by operation of law; never presumed.

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Ericka Caballes

2.

extent a. b.

confusion as to the latter’s share. total partial – 2 or more Cs

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person.

Legal Subrogation 1. when C pays preferred C with or without D’s knowledge 2. when stranger pays with express or tacit approval of D 3. when interested party pays with or without D’s knowledge, without prejudice to effects of confusion a. G, owner of property mortgaged

Conventional or Voluntary Subrogation ALL PARTIES’ consent is required. 1. D: bec liable for new ob 2. old C: credit is affected 3. new C: bec becomes party to obligation

Art. 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.

Conventional Subrogation - extinguish old ob, creates new - requires D’s consent - defect of old ob may be cured; no right to present against new C any defense which D could have set up against old C

Assignment of Credit - mere transfer of SAME right or credit - does not require D’s consent; mere notification sufficient - defect is not cured simply by assigning; D generally still has the right to present against new C any defense available against old C

Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a per- son interested in the fulfillment of the obligation pays, without prejudice to the effects of

Effects of Subrogation Transfer all credit and appurtenant rights (against D or 3P) Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. old C to whom partial payment has been made is PREFERRED to new C.

OBLIGATIONS & CONTRACTS MIDTERM NOTES

CASES: Novation 1. FACTS 



 

 

 

Diongzon vs. CA, People of the Philippines (1999) Diongzon: sales supervisor of Filipro (now Nestle) & had authority to o allow withdrawal of Filipro products from warehouse for delivery to dealers or customers o receive payment o remit same to Filipro tro depository bank acctg dept found that some del orders signed by P seemed questionable o qty were unusually big and abnormal Palisco (area sales mgr) was authorized to conduct an investigation findings: o P offered assistance to Garibay (sales rep) in collection of pmts o next day, P presented to Garibay 3 checks issued by dealers which was dishonored by the bank o dealers claimed they did not issue the checks nor receive the goods when confronted, P acknowledged responsibility + promised to settle the same P promised to pay 10% of amount and balance to be rolled over for 90 days but P failed to comply with promise; hence, the case. P: guilty of BP 22 CA: P raised the defense that issuance of 3rd check was replacement for 2nd check, which constituted as novation thereby extinguishing his obligation o that novation took place as a result of partial payment he made and the written undertaking he had executed to pay the bal of the check

o

that bec of incompatibility bet last check and partial payment and written undertaking, there was a novation so that any crim liab which he might have had under the former ob was thereby avoided

ISSUE: W/N there was a valid novation. RULING: No. The requisites of, particularly the third (ext. of old ob), were not proven in this case. This obligation was not extinguished when the check was dishonored and a new agreement was reached by the two parties to pay in cash its value. The change in the mode of paying the obligation was not a change in any of the objects or principal conditions of the contract. Neither acceptance of partial payment nor change of place or manner of payment involves novation. For novation cannot be presumed but must be expressly intended by the parties. Further, SC held that novation is not a mode of extinguishing criminal liability. Novation may prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. In other words, novation does not extinguish criminal liability but may only prevent its rise. DISPOSITIVE: Pis found guilty of violating BP Blg. 22 with modification that subsidiary imprisonment be imposed in case of insolvency to pay the fine of P80,647.75.

2.

Sandico, Sr., Timbol vs. Hon. Piguing, Paras (1971)

FACTS:  Sps Sandico, Enrica Timbol & Teopisto Timbol (as admin of Paras estate) won an action for easement and damages against Paras (PR) o Ps moved to enforce judgment o CA issued writ of execution  Ps & PRs reached a settlement to reduce money judgment from 6k to 4k o PRs paid 3k o another pmt of 1k as evidence by receipt issued by Ps’ counsel  Ps demanded to PR regarding the reconstruction and reopening of the irrigation canal as part of the civil case o PRs refused  Ps filed motion to declare PRs in contempt of court o judge piguing dismissed the motion  Ps accused judge: abuse of discretion  P argued that o agreement in reducing amount due constitutes NEITHER waiver of claim of 2k nor novation of money judgment o agreement in reducing amt of money judgment was subject to condition that PRs reopen & reconstruct irrigation canal  R contended that o pmt of 4k was received and acknowledged thereby extinguishing monetary liab o judge believed R is required merely to recognize easement without doing any positive act of reconstruction ISSUE: W/N the agreement in reducing the money judgment constitutes novation RULING: No.

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new one in its place. Fundamental it is that novation effects a substitution or modification of an obligation by another or an extinguishment of one obligation by the creation of another. In the case at hand, we fail to see what new or modified obligation arose out of the payment by the PRs of the reduced amount of P4,000 and substituted the monetary liability for P6,000 of the said respondent under the appellate court's judgment. Additionally, to sustain novation necessitates that the same be so declared in unequivocal terms — clearly and unmistakably shown by the express agreement of the parties or by acts of equivalent import — or that there is complete and substantial incompatibility between the two obligations.

3.

People’s Bank and Trust Company vs. Syvel’s Corp, Syyap (1988)

FACTS:  action for foreclosure of CM in favor of PF by DF on its stock of goods, persona properties and other materials o CM in connection with credit commercial line (900k) granted to said DF o sps syyap agreed to guarantee absolutely and unconditionally and without benefit of excussion the full and prompt payment  in view of corp’s default, bank started to foreclose extrajudicially the CM by virtue of credit agreement o however not pushed thru bec of an attempt to settle o but no payment so case was filed in court  bank found out DFs had been disposing their properties with intent to defraud their Cs, particularly the bank  Mr. Syyap proposed to have the case settled and offered to execute a REM on his property ISSUE: W/N the obligation secured by the CM was novated by the subsequent execution of a REM as additional collateral for the said obligation. RULING: No. Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect In the case at bar, there is nothing in the Real Estate Mortgage which supports defendants' submission. The contract on its face does not show the existence of an explicit novation nor incompatibility on every point between the "old and the "new" agreements as the second contract

30

Ericka Caballes

evidently indicates that the same was executed as new additional security to the chattel mortgage previously entered into by the parties. Moreover, records show that in the real estate mortgage, defendants agreed that the chattel mortgage "shall remain in full force and shall not be impaired by this (real estate) mortgage." It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as additional security for the performance of the contract.

OBLIGATIONS & CONTRACTS MIDTERM NOTES

4.

Cruz vs. CA, Sps. Eliseo, Malolos (1998)

FACTS:  Delfin cruz died leaving wife and 4 children (one of them is Nerissa Cruz-Tamayo)  W & children executed a notarized deed of partial partition o grant each a share of several parcels of land  next day, W & children executed MOA o parties shall receive equal shares from proceeds of sale of any of lots allotted to and adjudicated in their individual names by virtue of DPP  Sps Eliseo (PRs) filed civil case against Sps Tamayo (one of children) for sum of money (126k+) o writ of execution was enforced upon parcel of land in question o sold to highest bidder: Sps Eliseo and Malolos (PRs)  Nerissa failed to exercise her right of redemption within period so final deed of sale was executed  Malolos asked for the owner’s duplicate but Nerissa refused o other siblings filed a motion for leave to intervene and oppose alleging that they are co-owners of lands in question  CA rule: DPP was not materially and substantially incompatible with MOA o DPP: conferred ownership of parcels of land on Nerissa o MOA: created an obligation on her part to share with others the proceeds of the sale of such properties ISSUE: W/N the MOA novated the DPP? RULING: No.

The Court disagrees with Ps contention that the MOA novated the DPP into making them co-owners of the properties. Given the requisites of novation, the MOA cannot have novated the DPP because: (1) It does not express a clear intent to dissolve the old obligation as a consideration for the emergence of the new one (2) Petitioners fail to show that the DPP and MOA are materially and substantially incompatible with each other The DPP grants title to the lots in question to the co-owner to whom they were assigned while the MOA created an obligation on the part of such owner to share with the others the proceeds of the sale of such parcels

5.

Quinto vs. People of the Philippines (1999)

FACTS:  Leonida (P) received in trust several pieces of jewelry from Aurelia (36k) o purpose: sell on a commission basis with express obligation to turn over proceeds or return jewelry within 5 days if not sold  PP: Leonida asked for more time to sell but failed to conclude any sake. after 6 mos, Cariaga demanded for return of items but Leonida failed  DF: buy & sell of jewelry; used to buy from Mrs. Ilagan who introduced her to Aurelia & started to transact business with her o the last transaction Leonida had was with Mrs. Camacho who left a balance (13k) o Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay in installments  Leonida claimed that contract bet herself and Aurelia is novated when the latter agreed to accept payment in installments directly from buyers ISSUE: W/N such agreement constitutes a valid novation/ RULING: No. 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. There are 2 ways which could indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. These are: (1) When novation has been explicitly stated and declared in unequivocal terms.

Ericka Caballes 31

OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) When the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. 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 changes alluded to by petitioner consists only in the manner of payment. There was really no substitution of debtors since private complainant merely acquiesced to the payment but did not give her consent to enter into a new contract.

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Ericka Caballes