This document discusses various modes by which obligations can be extinguished under Philippine law. It outlines the main modes listed in the Civil Code, including payment/performance, loss of the thing due, condonation/remission of debt, confusion or merger of creditor and debtor rights, compensation, and novation. It also discusses additional potential modes and analyzes whether they should properly be considered separate modes or fall under existing categories, such as compromise agreements and renunciation. The document provides detailed analysis of payment/performance as a mode of extinguishment and the various rules regarding who can make payment and to whom.
This document discusses various modes by which obligations can be extinguished under Philippine law. It outlines the main modes listed in the Civil Code, including payment/performance, loss of the thing due, condonation/remission of debt, confusion or merger of creditor and debtor rights, compensation, and novation. It also discusses additional potential modes and analyzes whether they should properly be considered separate modes or fall under existing categories, such as compromise agreements and renunciation. The document provides detailed analysis of payment/performance as a mode of extinguishment and the various rules regarding who can make payment and to whom.
This document discusses various modes by which obligations can be extinguished under Philippine law. It outlines the main modes listed in the Civil Code, including payment/performance, loss of the thing due, condonation/remission of debt, confusion or merger of creditor and debtor rights, compensation, and novation. It also discusses additional potential modes and analyzes whether they should properly be considered separate modes or fall under existing categories, such as compromise agreements and renunciation. The document provides detailed analysis of payment/performance as a mode of extinguishment and the various rules regarding who can make payment and to whom.
This document discusses various modes by which obligations can be extinguished under Philippine law. It outlines the main modes listed in the Civil Code, including payment/performance, loss of the thing due, condonation/remission of debt, confusion or merger of creditor and debtor rights, compensation, and novation. It also discusses additional potential modes and analyzes whether they should properly be considered separate modes or fall under existing categories, such as compromise agreements and renunciation. The document provides detailed analysis of payment/performance as a mode of extinguishment and the various rules regarding who can make payment and to whom.
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MODES OF EXTINGUISHMENT OF OBLIGATIONS
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.
Aside from those mentioned in Art. 1031, death of one of the party may also extinguished an obligation as viewed by some authors. But Professor Tolentino is of the view that obligation is not extinguished by the death of one of the parties. But CU believed that the statement of Prof. Tolentino apply only to contracts, because as an example for obligations arising from law, it is the law which would determine if the death of one of the parties will extinguish the obligation.
As to contracts, as a rule death of a party does not extinguish the obligation arising from contracts because under Art. 1311 obligations arising from contracts, rights and obligation are transmissible to the heirs or to the estate, and therefore they are not extinguished.
On the other hand, it was said that renunciation by a creditor is a mode of extinguishment. This is considered as other causes. If it is considered as other causes it is implied that it is not covered by those mention in Art. 1231. The civil code honors renunciation as a gratuitous or an onerous act. If renunciation is a gratuitous act, clearly it would fall under condonation. If renunciation is for a consideration, then this would rightfully fall under novation. By then, he would waive his right, but he
will be demanding for another for the performance of another obligation. Hence, there is novation when there is a change in the object of the obligation. Hence from the foregoing, this would not be considered a separate and distinct mode.
One other which is allegedly may be considered to be a mode of extinguishment of obligation would be compromise. This would appear to be another mode of extinguishment separate and distinct than that mentioned in Art. 1031. It is another mode of extinguishment because the effect of a compromise agreement. Ordinarily it would only decrease the liability of the debtor. As in the case of Ronquillo vs. CA, the liability was decreased from 170 to 110. Thus, a compromise agreement is only a partial extinguishment. Is this not a separate and distinct mode? No because it would fall under condonation or remission. However, can there be a compromise where the object of the obligation can be changed? Yes, such as when the obligation to deliver a horse was changed to a laptop. Would it be considered a separate and distinct obligation other than those mentioned? No, because it would fall under novation.
May the unilateral act of one of the parties extinguish the obligation?
Yes it may, however in contracts, as a rule it cannot. The unilateral act of one of the parties will not extinguish the obligation arising from contracts, because it would violate the fundamental principle in contracts known as the mutuality of contracts, except on those contracts which are based on trust and confidence such as when the law grant a party to a contract the right to terminate the obligation arising therefrom. For example, a contract of agency. Under the law the principal can terminate the authority of the agent and thus extinguish the contract, and thereby the obligations arising from it by revocation which is the act of the principal. And the agent may also terminate the obligation by withdrawal.
Is a happening of a fortuitous event a mode of extinguishment?
No. The Supreme Court has consistently ruled that a happening of a fortuitous event is not a mode of extinguishment. Rather it is the effect of the happening of the fortuitous event which is the impossibility of performance, if it would have such effect, or the loss of the thing due which is a mode of extinguishment.
Likewise, if there is an obligation to deliver a generic thing or pay a sum of money, the same would not likewise extinguish the obligation even if the thing is lost because the genus does not perish. This is of course as a rule.
If there is an obligation to deliver a determinate t h i n g w o u l d n o t n e c e s s a r i l y r e s u l t t o t h e extinguishment of the obligation if the same is lost through a fortuitous event. If the fortuitous event does not affect the thing which is to be delivered.
However if the fortuitous even caused the impossibility of the performance, then it will extinguished the obligation. It is the impossibility of performance which is the mode of extinguishment and not the fortuitous event. This impossibility of performance is considered by Prof. Tolentino as nullity of contracts. But CU is of the view that it cannot be considered as a mode of extinguishment because when a contract is null and void there is nothing to extinguish.
If there is a change in civil status there may be an obligation which may be extinguished which is the obligation to give support. If the marriage is declared null and void or if there is legal separation, a spouse may no longer have the obligation to give support. Note however, the court may order the guilty spouse to continue with the support.
Payment or Performance
Payment is synonymous to performance that even an obligation to do may be extinguished by payment. Although there is a view that when the code was being drafted payment is only limited only to monetary obligations but those who advocated t h i s v i e w d i d n o t s u c c e e d . T h i s m o d e o f extinguishing an obligation is applicable to any kind of obligation, even obligations not to do, as long he is not doing what he is supposed to do he is actually fulfilling his obligation. Payment does not necessarily pertain to a monetary obligation.
To determine whether an obligation is extinguished by payment, or to determine whether payment is a valid payment or not, it would be good to classify the rules of payment into 4,
1. There are rules which pertain to the person who pays. 2. There are rules which pertain to the person to whom payment is made. 3. There are rules which pertain to the prestation to be performed, or to the thing to be delivered. 4. There are rules which pertain to the date, time, place and manner of payment.
All these rules will have to be complied in order that payment may extinguish the obligation.
To the person who pays need not be the debtor, such as third party payment. Also the person to whom the payment is made need not be the creditor. He is called the payee.
As to the person who pays, the requirements of the law to extinguish the obligation
Payment by a minor may extinguish the obligation especially in obligation arising from quasi delict.
However payment by a minor may likewise not extinguish the obligation because there are payments which may only be made by the person who has the capacity to alienate his properties. Payment may be made by the minors guardian, or if there is none to court may appoint a guardian ad litem.
If the minor wanted to pay or extinguish his obligation, who may question his capacity to make payment? The other creditors.
Secondly, a person who who pays must also have the free disposal of his property. Hence, a person suffering from civil interdiction cannot validly fulfill or pay his debts because he has no free disposal of his property.
If A is indebted to B and X offered to pay B. May this extinguish the obligation?
The obligation may be extinguished if B accepts. Though he may not be compelled, he may want to accept. A creditor as a rule may not accept performance from a third person, except:
a. by stipulation b. if the third person has an interest in the fulfillment of the obligation.
Why cant a creditor be compelled to accept payment or performance?
In an obligation to do, a creditor may not want to accept performance from a person with whom the creditor does not want to make the performance, probably by taking into consideration the personal circumstances of the debtor.
In an obligations to give, the creditor may not likewise be compelled to accept payment from a person other than the original debtor, probably because the money coming from another person may probably come from drugs or the money is counterfeit.
Who are these persons who have an interest in the fulfillment of the obligation other than the debtor?
Persons with Interest in the payment are those who are subsidiarily liable like, guarantors, mortgagors, or pledgors. They have an interest because if the obligaiton is not complied their property may be lost.
If there are 5 debtors in an obligation to pay 100,000 can any one of the debtors compel acceptance from the creditors the payment of the entire of the obligation?
There should be no debate in solidary obligations because in a solidary obligations, any one of the debtors can be compelled to perform the fulfillment of the entire obligation.
As to co-joint debtors can also compel the creditor to accept payment of the entire obligation, if the co- joint debtors has an interest in the fulfillment of the obligation. Even he cannot be compelled to pay the entire, he has an interest in the performance of the obligation.
What if a person who has no interest in the fulfillment of the obligation, yet he paid the creditor voluntarily the payment of the entire obligation, can the creditor be compelled to accept payment of the entire obligation? Can t h e p e r s o n w h o p a i d , v a l i d l y d e m a n d reimbursement from one of the principal debtors? Third if the one who paid cannot validly make the demand from the debtors, can X go after the guarantors?
The creditor cannot be compelled because the one paying does not have an interest, but he may accept. Assuming he accepts, the one who paid claims reimbursement the following observations are seen:
As to the demand for reimbursement, the answer would depend on whether the payment was made with or without the knowledge or against the will(therefore without consent) of the principal debtors, then in such instance when there is no knowledge, the one who paid may or may not validly demand reimbursement. If there is knowledge or consent, the person who paid may validly demand without issue. With respect with the instance where there is no knowledge, under the law, the one who paid may only demand reimbursement from one of the principal debtors only to the extent that he may be benefited. Here, one of the principal debtor may have previously paid a part of the debt, hence to be asked for reimbursement of the amount paid by such third person may work to the prejudice of one of the principal debtors demanded of reimbursement, as
he can only reimburse the amount from which he was benefited.
X demanded for reimbursement under the same scenario (has no interest), and he cannot demand reimbursement, may X foreclose the mortgage?
No. When X paid the creditor, the obligation is extinguished. It does not matter whether the debtor consented payment or not. The fact that the creditor accepted payment, the obligation is extinguished. If the obligation is extinguished, which is the principal contract, and the mortgage was only an accessory contract, therefore the mortgage follows the principal, therefore the mortgage may likewise be extinguished. It is also argued that X cannot foreclose the mortgage because X is not a party to the mortgage. The parties to the mortgage is the mortgagor and the creditor. It was constituted to secure the debtors obligation and not Xs obligation. (WRONG)
Assuming that this payment was with the consent of the debtor, and X cannot claim reimbursement from the former. X can foreclose the mortgage even when the obligation was already extinguished. This is because in this payment with the creditor, X will be subrogated to the rights of the principal debtor. Even when this obligation was extinguished which apparently result with the extinguishment of the mortgage, that will not prejudice X right to go over the principal debtors or guarantors under the principle of subrogation.
However, when this payment is without the knowledge of the debtor or against the will, there will be no right of subrogation, hence he cannot go to the mortgagors and guarantors.
If X and B (creditor) entered into an agreement without the knowledge of A (principal debtor) that if X pays B as to his obligation, X will be subrogated in the rights of B. X paid B. Can X now foreclose the mortgage if A fails to reimburse?
No X cannot foreclose the mortgage even when there is an agreement. Although the answered would be yes as implied by the provision. The provision says that if payment was without the knowledge or against the will of the debtor,l X cannot compel B for him to be reimbursed, but they can come to an agreement. But such is not the intention of the law. The intention of the law is that when there is no knowledge or it is against the will, X cannot be subrogated. Such is for the protection of the debtor.
If X paid B, without the intention of being reimbursed by A, after two weeks he demanded what he paid to B claiming that A did not give consent to this payment. Since it is a form of an indirect donation, A did not give consent, which is a requirement in donations where the donee must accept. Here, there is no acceptance, hence the payment is void. Is the contention correct?
No. Even if the payment was without the knowledge of A and did not intend to be reimbursed, as far as the creditor is concerned, he would no have the right to reclaim what was paid. To whom payment should be made in order for the obligation is to be extinguished?
Payment should me made to:
a. To the person in whose favor the obligation is constituted.
Note: The person in whose favor the obligation is constituted need not necessarily be the person who entered into a contract, it may be another person.
For example if A and B entered into a contract and A paid B, does it necessarily extinguished the obligation? No. Maybe it is not B who is the person in whose favor the obligation is constituted.
b. Succesors in interests, or assigns.
c. To the person who has the authority to receive payment.
Note: To the person who has the authority from the creditor to receive payment is not accurate because a person may have the authority to receive payment when the same is authorized or granted by law (sheriff, guardian, liquidators, receivers, conservators, etc. ).
When the debtor paid the sheriff, does it extinguish the obligation when the sheriff pocketed the money? Yes. because he has the authority of the law to receive payment.
If payment was made to a person who is not one of those persons mentioned in Art. 1240, what will be the effect of such payment? It will not extinguish the obligation. As a rule, payment to a wrong party is not a proper payment and therefore does not extinguish an obligation.
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. (1162a).
What is the remedy of a person to whom he wrongfully paid? To recover from the person with whom he pays under solution indebiti because that person will not have the right to demand for payment. By way of exception, payment to a wrong party may also extinguish the obligation, when: When the payment redounded to the benefit of the creditor, but only up to the extent that the creditor was benefited.
Payment to the child of the creditor, would that extinguish the obligation? As a rule no, because the child is not the creditor. It is a payment to a wrong party. Who will have the burden in proving that the payment redounded to the benefit of the creditor? Obviously, the payer or debtor will have this burden. As an exception where the payer or debtor would not have the burden of proving that the payment redounded to the benefit of the creditor when: 1. When there is ratification of the creditor, as such it is deemed redounded to the creditors benefit. Why would he ratify if it did not redound to his benefit; 2. through the acts of the creditor, the debtor was lead to believe that the person or payee has authority to receive payment, this is under the principle of the estoppel; 3. when the payee acquired the rights of the creditor after the payment. Note: The payee should acquire the right of the creditor after the payment and not before the payment, this is because when the payee acquired the rights of the creditor before the payment, this would not be a payment to a wrong party, as this would be a payment to a successor in interest or an assignee, and such would be a valid payment.
A executed a promissory note and delivered the same to B the creditor. But few weeks thereafter, the promissory note was already in the possession of C. In the hands of C the promissory note matured and C demanded payment from A. A paid C. Would payment to C by A extinguished the obligation to B?
Yes.
Not just because C was in possession of the promissory note does not make him a proper party to receive payment. There are two requirements which are required in order for it to be considered a valid payment: 1. This person (C) must be in possession of the credit. Note that possession of a promissory note does not necessarily mean that he was in possession of the credit. The latter is merely an evidence of credit. To be in possession of a credit is that such person must appear to have possession of the credit. For example, the promissory note provides that payment to Jose Reyes It could not be considered as a person
appearing to have possession of the credit, the same not being a negotiable instrument. It would be different if the promissory note is a negotiable and a bearer promissory note and in possession of C. Therefore under this circumstance it can be inferred that C negotatiated the note by mere delivery. He therefore is in possession of the credit. But note that payment to him does not necessarily extinguish the obligation because the other requirement is, 2: payment must be in good faith. meaning that when A paid C he must have no knowledge of the defect of title C.
These two requirement must concur in order that the payment to a wrong party to extinguish the obligation of A to B.
Since under the foregoing circumstance, the obligation of A is extinguished, B therefore has the remedy against C.
A is the debtor of B, thereafter B assigned his credit to C. It was after the assignment that A paid B. That is a payment to a wrong party because C is not supposed to be the new creditor through assignment. May the payment of A to B, extinguish his obligation to C?
Yes, when A paid B without knowledge of the assignment.
May a creditor be compelled to partial performance?
As a rule, no, unless there is a stipulation to the contrary or if the obligation is partly liquidated or partly unliquidated to the extent of the portion which is liquidated, the creditor may compel the debtor to perform, likewise the debtor may compel the creditor to accept.
If the obligation is to deliver a determinate thing, the creditor may not be compelled to accept the delivery of another thing even if such other thing is more valuable than the thing supposed to be delivered.
In Art. 1234 what is the effect of substantial performance?
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. (n)
The premise of substantial performance is that the creditor accepted. Whether or not he can be compelled to accept does not matter, what matters is he accepted the partial performance.
For example when the debtor is indebted to a sum of money payable in 10 years in monthly installments. When the debtor has already paid for 8 years, the creditor can no longer rescind the contract because there is payment which is considered partial performance.
If there is substantial performance in relation to Art. 1181 there is no more substantial breach.
What would constitute substantial performance?
8 out of 10 installments is substantial performance.
95 installments out of 120 is also substantial performance.
6 5 % o f t h e o b l i g a t i o n i s n o t s u b s t a n t i a l performance.
74% is not a substantial performance.
What are the rights of the parties when there is an obligation to pay or deliver 100 sacks of rice. 85 sacks has been delivered, the other 15 can no longer be delivered despite good faith. How much can the seller recover from the buyer?
Under the law the seller may recover only the value of the 85 sacks less damage that may be suffered by the creditor. The buyer not having been able to receive 100 sacks of rice, he may have suffered because if the 100 sacks of rice has been all delivered, he may have sold it for a higher prize. This is called unrealized profit where the the value of the 85 sacks of rice shall be lessened because of the unrealized profits which the buyer may have received were it not for the incomplete delivery
When there is an irregular or incomplete fulfillment, there is an instance under the law that the obligation is fully complied with. However the following requisites must be complied with, namely:
1. There must be acceptance by the creditor
2. The acceptance must be with full knowledge of the incompleteness or irregularity.
3. He must not have made an objection.
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.
In the case of Azcona vs. Amandre where the Supreme Court ruled that the payment extinguished the obligation where the actual
amount due was 7,200 but only paid 7,000 when the seller issued a receipt 7000 as per contract, it is as if there was faithful compliance.
In monetary obligations, can there be a valid obligation in money which is not in Philippine currency?
Yes. with or without RA 529, as amended it will be a valid obligation.
REPUBLIC ACT NO. 8183 . . AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED TWENTY-NINE AS AMENDED, ENTITLED "AN ACT TO ASSURE THE UNIFORM VALUE OF PHILIPPINE COIN AND CURRENCY."
Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.
Sec. 2. Republic Act Numbered Five Hundred Twenty- Nine (R.A. No. 529), as amended entitled "An Act to Assume the Uniform Value of Philippine Coin and Currency," is hereby repealed.
Sec. 3. This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in two (2) national newspapers of general circulation. The Bangko Sentral ng Pilipinas and the Department of Finance shall conduct an intensive information campaign on the effect of this Act.
If the currency agreed upon is not in Philippine pesos, can the creditor demand fulfillment in the currency agreed upon and not in Philippine currency?
Under R.A. 529 it is not allowed. Even if the parties agree to a currency expressly stipulated, under RA 529, such is a void stipulation.
The obligation is not void, it is the stipulation of payment in the currency offered which is void.
However in RA 8183 amending RA 529 a creditor can demand fulfillment other than Philippine currency if such was the stipulation is valid.
Can the creditor be compelled to accept payment by checks?
No. whatever kind of check is not allowed, they are not legal tenders.
When creditor accepted the check and the same became stale, is the obligation extinguished?
No. It is only that it cannot be be encashed.
When creditor accepted the check and the same became stale, can the creditor demand for the issuance of another check?
No.
When the creditor was in possession of a check, there is a disputable presumption that the debt has not yet been paid. It may be rebutted when the debtor had already paid, and the creditor was still in possession of the check. What are those which are considered legal tenders?
a. notes (cash) b. coins
Note: Even when the money is considered legal tenders the same has been withdrawn from circulation or has been demonitized.
An action was filed under quasi delict and thereafter a judgment was rendered in favor of the plaintiff on a contract entered into 10 years ago, today A filed a motion to have his judgment adjusted claiming that there is an extraordinary inflation. May the judge award As motion?
Under 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.
Under the facts, for Art 1250 to apply, the same must be based on a contract and not quasi delict because the law as worded currency stipulated. Hence, Art 1250 will not apply and therefore adjustment cannot be allowed.
If the action was filed based on contract, the judge should not grant the motion for adjustment if the same is not an extraordinary inflation. Because the adjustment should be granted if there is only an extraordinary inflation that occur, otherwise not granted.
Note: Art. 1250 means that there must be an adjustment at the time of the constitution of the obligation if there is an extraordinary inflation or deflation based on a contract.
If the due date for the performance of the obligation is a sunday and demand was made on that day however the debtor only performed it the next day, may he be considered in delay?
Yes. Even if sunday or holiday, if the debtor promised to perform the obligation on such day and he did not perform, he is considered in delay. As an exception, even if the date agreed upon is a sunday the debtor may not be considered in delay when there is an impossibility of performance of the obligation, or when the debtor gave the creditor a check and the checks due date is a holiday or a non banking day, in the latter case it is allowed for as long as it is the next banking day.
In an obligation to give or deliver a determinate thing and the thing was delivered at the place of business of the creditor, and the creditor refused to accept. Is the creditor already in delay?
Not necessarily, because there may be a stipulation that delivery be made in another place.
If there is no stipulation as to the place where the thing is to be delivered, where should such thing be delivered?
It depends on whether the thing is determinate or generic.
If it is a determinate thing, then payment shall be made at the placer wherever the thing might be at the moment the obligation was constituted.
In any other case (such as when the thing is indeterminate) then the debtors domicile shall be the place of payment.
What are the special forms of payment?
1. Dation in payment 2. Application of payment 3. payment by cession or assignment 4. tender of payment and consignation
Is payment by a third party a special form of payment?
No. It is a payment by a person not a party to a contract.
In these special forms of payment, do they require the consent of the parties in order that the obligation be extinguished?
As to debtors, their consent is required because he is the one offering to pay.
As to the creditor, as a rule the creditors consent is not required because the debtor under the law has the right to designate to which the payment is to be applied.
Is the consent of the creditor required in order that obligation be extinguished by way of consignation?
No. Consignation does no require the creditors consent if the creditor refuses to accept, then the court shall determine whether the consignation is valid or not. The creditor cannot do anything if the consignation is a valid consignation. Hence, the obligation is to be extinguished. It may either by acceptance or by declaration of the court. In these special forms of payment, when the debtor delivers a thing to the creditor, there is transfer of ownership?
Not necessarily. In case of cession. This is because when the thing is delivered to the creditor in order for him to sell. The creditor does not acquire ownership because this thing is to be sold to third persons who will be the one to acquire ownership.
When can consignation to the court pass ownership to the creditor?
In case of valid consignation, ownership is transferred to the creditor at the time of delivery.
In case of invalid consignation, and the creditor did not accept, ownership is not transferred to the creditor.
If there is dation in payment, the obligation of the debtor is totally extinguished?
Not necessarily. This is because when the thing alienated is less than the value the indebtedness, the obligation is not extinguished totally. It is merely a partial performance.
Note: Different view under 1235
In dation in payment if the thing is alienated by the debtor in satisfaction of his debt and the value of such thing is less than the indebtedness, is the obligation extinguished to the extent of the value unless otherwise stipulated? Or in dation in payment, it totally extinguishes the obligation, unless there is a stipulation to the contrary?
It only extinguishes to the extent of the value of the thing unless agreed upon by the parties. It is a proper position because no creditor would accept less than than what is the value of the thing. This position would appear to be just.
However, there is a view to the effect that it may totally extinguish the obligation under 1235, as 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.
Dation in payment shall be governed in the law on sales?
Not necessarily. It will be governed in the law on sales when property is alienated to the creditor in satisfaction of a debt in money, otherwise it will be governed by the law of novation because there is a change in the object.
Is it correct to say that when a property is alienated to the creditor in satisfaction of a debt in money, it can be governed by the law on novation, since there is a change in the object?
It may be said that since there is a change in the object, the law on novation is proper. However, there is a law on the matter which is Art. 1245 which provides that when property is alienated to the creditor in satisfaction of a debt in money, shall be governed in the law on sales.
There is wisdom in the latter view (Art. 1245) because If a person is indebted to another person, and in this pre-existing debt the debtor paid the creditor a watch, in a way it will have to be governed by the law on sales because it may be said that the debtor paid in cash and the creditor used this cash to buy the watch of the debtor.
For the rules of application of payment to be invoked, there should only be one creditor?
Not necessarily. There may be 2 or more creditors since the law does not specify that the debtor should only have 1 creditor.
In application of payments therefore, is there a scenario where there will be total extinguishment of obligation?
No. For application of payments to be applied, the debtor paid partially. If the debtor paid in a sum which is sufficient to cover all the debts, there will no longer a question to which debt is payment is to be applied. This happens when the debtor paid less than the amount of the debt.
A has an obligation of 30,000, 50,000, and 500000 to X. A paid the 30,000 to satisfy the 500,000 debt? Is that allowed? Why would A apply the payment to the 500,000?
It is allowed to apply the payment to 500,0000. A would apply the payment to the 500,000 because it would be more burdensome to the 500,000 because the latter is interest bearing.
To which the debt the payment is to be applied?
It is a debtor as a rule, has the choice to which the payment is to be applied. Under the above scenario, if 2 of the debts is not yet due and the first one is due the debtor may apply the payment to the first debt if the debtor is the person to whom the period is fixed, otherwise, even if one is due but the period was fixed in the creditors favor, then the debtor may not apply the payment in the first debt.
If all the debts is already due, the debtor cannot compel the creditor to apply the payment to the first debt by choice, under the principle that the creditor cannot be compelled to accept partial performance or by stipulation of the parties the first debt is the last to be paid or 2nd.
What are the limitations to the right of the debtor for which the payment is to be applied?
1. Partial payment 2. due and demandability 3. If there is an agreement that the debtor cannot make the choice of application without the consent of the creditor. 4. When the debt produces interests
All the debts are due and demandable, and one of the debt produces interests, may the debtor apply the payment to the debt which does not incur interests?
If one of the demandable debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.
What if the debtor failed to designate to which the payment is to be applied, to which the payment is to be applied?
The debt designated by the creditor and such designation is to be accepted by the debtor.
If the debtor and the creditor failed to designate to which the payment is to be applied, to which the payment is to be applied?
It depends if the debts are of the same nature and burden, payment shall be applied to all of them proportionately under Art. 1254.
However, if the debts are not of the same nature or burden, meaning one of them is more onerous, apply the payment to the most onerous obligation.
If the amount of the debt is bigger does it mean that it is the most onerous?
Not necessarily. The smaller amount may incur bigger interests. There is no hard and fast rule to determine which of the debt is more onerous. A 6% interest in fact may be more onerous than a 12% interest when the amounts involved are different.
If in one of the debt, A is a principal debtor, and in another debt, he is merely a guarantor, which is more onerous?
The more onerous is the debt in which the debtor is principally bound because the guarantor can demand from reimbursement from the creditor.
Payment by Cession
If the client is the debtor, and he is willing to abandon his properties to his creditor, what if the creditors refused to adhere to this offer, what advice would you give to your client?
Under 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. (1175a)
So it means that when the value of the thing to be ceded to the creditor is less than the debt, such will be a partial payment and shall release the debtor only to the extent of the net proceeds of the thing assigned or ceded.
Is insolvency a requirement that the debtor is insolvent in order for him to assign or cede his property?
Not payment by cession is by agreement of the parties and therefore as long as the debtor cedes and the creditor accepts for the latter to sell, insolvency is not required.
Tender of payment and consignation
Is tender of payment a mode of extinguishment?
Tender of payment is not a mode of extinguishment. No obligation is extinguished by mere tender of payment.
Tender of payment, as a rule, required in order to extinguish an obligation by way of consignation?
As a rule, it is not required that tender of payment be made to extinguish an obligation by way of consignation, except when 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 thin or sum due (Art. 1256). Under the law, tender of payment is not required as provided by law, which are:
a. When the creditor is absent or unknown, or does not appear at the place of payment; b. When he is incapacitated to receive the payment at the time at the time it is due; c. When, without just cause, he refuses to give a receipt; d. When two or more persons claim the same right to collect; e. When the title of the obligation has been lost (Art. 1256).
Tender of payment may be extrajudicial?
No, it is always extrajudicial and can never be judicial. It is not required to involve the court to make a tender of payment. By its nature it is extrajudicial.
However, in a case where the SC held that tender of payment may be judicial when the tender of payment was made during the pendency of the action. But note by its nature tender of payment is extrajudicial.
A has a right to redeem within the period within which A has a right to redeem, he offered the money to the other party for the redemption of a property. However, the other party refused to accept without just cause, after the lapse of the period to redeem, the redemptioner filed an action to sell the property and deliver the same to him. One of the defenses raised by the other party was the tender was not in good faith because the redemptioner did not deliver the money to the court by way of consignation, when he refused to accept the money? IS it a valid defense?
In the case of Immaculata vs. Navarro, the defense is not tenable. It is not required that when the other party refused to accept by way of consignation, the redemptioner should deliver the money to the court by way of consignation before the lapse of the redemption period. The reason is that consignation is only required when there is an obligation to be extinguished. Here there was no obligation to be extinguished but only a right to be exercised.
One of the requisite in order to have a valid consignation is that there must be a debt which is due.
If the creditor refuses to issue a receipt, is it a ground to make a delivery to the court by way of consignation?
Yes because a receipt is an evidence of payment, non issuance of a receipt the creditor may again demand for the payment.
A law which provides that a payment is only considered as such upon issuance of the receipt, is it advantageous?
Yes. It is advantageous because it would involve less litigations, secondly the debtor can compel the creditor to issue a receipt.
But of course, payment is the one which extinguishes the obligation and not a receipt.
In an obligation to deliver a horse, 3 persons are claiming to have a right over this horse, therefore the creditor has the right to deliver the horse to the court by way of consignation?
Not necessarily because one person may have a better right than the others such as when one has a certificate of title over the horse
Is the two notice requirement under consignation mandatory? Would these two notices both come from the creditor?
Yes it is required as held in the case Soco vs. Militante. In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a consignation ineffective.
Do these notice both come from the debtor?
No. The first notice (prior consignation) must come from the debtor but the second one (after consignation) may come from the creditor.
A sum of money was delivered to the court by way of consignation, however he was able to withdraw the sum of money, thereafter he paid the debt. If the obligation of the debtor is secured by a mortgage because of failure of the debtor to pay the debt, may the creditor foreclose the mortgage even if the debtor withdraw the payment by way of consignation?
It depends whether the withdrawal was a matter of right, the creditor may foreclose the mortgage. It would be a matter of right where the consent of the creditor is irrelevant when it is done before acceptance and there or no declaration by the court that there is a valid consignation (Art 1260).
The authority of the creditor is required when the withdrawal is a matter of right, since the consent of the creditor is required, there can no longer be a foreclosure because the creditor gave his/her consent and the obligation is already extinguished.
The due date was 1-1-01, tender of payment was made 1-1-02 and consignation was made 1-1-05, on 1-22-10 the court rendered judgment in relation to this consignation, would the debtor be held liable for interest from the tender of payment on 1-1-01?
If there was demand made, he is liable for interest because with such he is considered in delay, without demand no liability to pay interest.
The debtor may be held liable to pay interest (assuming debtor is in delay) from 1-1-01 to 1-22-01 if the court considered to consignation to be void.
Assuming the court declared the consignation to be valid (there is also delay), the interest shall be counted only upto the time the debtor delivered the payment in court. But justice and equity serves that payment of interest should only be counted up to the time tender of payment is made or the principle where both the debtor and creditor is in delay, such when the debtor refuses to accept, as such the debtor can no longer be held liable for interest.
when property is alienated to the creditor in satisfaction of a debt in money, it will be governed on the law on sales pursuant to Art. 1245, unless there is a stipulation to the contrary, further
Loss of the Thing Due or impossibility of performance
Can loss of the thing be invoked in all kinds of obligations?
No. because there are obligations to do or not to do which does not include a thing.In the former cases it would be proper to call it impossibility of performance.
In an obligation to deliver a generic thing, is loss of the thing extinguish an obligation?
Impossibility pertains to physical and legal. A law which prohibits the performance of an obligation to give even if it pertains to a generic thing, in which the law became effective during the pendency of the obligation, by law it is considered legally impossible to perform. If prior the constitution of the obligation it is considered as void being contrary to law, hence there is nothing to be extinguished.
Loss of the thing may be extinguished even if the thing is a generic thing, by mutual agreement of the parties, it is not because of the loss of thing.
Another scenario is when the generic thing is the last of its kind, as when it goes out of commerce.
In an obligation to deliver a determinate thing, when would this obligation be extinguished under the Code?
If the loss of the thing is due to the fault of the debtor, it is not extinguished, but if the debtor was not at fault the obligation is extinguished.
If the obligation was not extinguished and the thing was lost (a determinate thing), what is the effect?
The thing itself can no longer be delivered extinguishes his obligation to deliver the thing, but would entitle the creditor to damages.
Any person who in the performance of their obligations are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof shall be liable for damages (Art 1170).
If there was a lost of the thing due to the fault of the debtor, which makes him liable, who has the burden of proving that the loss was due to the fault of the debtor?
The creditor absolutely has the burden of proving that it was lost if the same was lost due to the fault of the debtor.
However, there when the thing lost was in the possession of the debtor, a presumption will arise
that is was due to his fault, unless there is proof to the contrary. This presumption take place only when there is no allegation that the thing was lost was not due to the fault of the debtor. However, this presumption will not apply in case of earthquake, flood, storm, or other natural calamity.
When the lost of the thing was due to a fortuitous event, may the debtor shall be held liable due to the loss of the thing?
Not necessarily. He may be liable when he was in delay. If he was not in delay, he will likewise be liable if there is a stipulation to the contrary. Aside from stipulation, if the law so provides.
Note: When the nature of the obligation requires the assumption of risks as a defense cannot apply to determinate things.
If the performance of the obligations becomes so difficult, the obligation is extinguished?
Not necessarily. It may be extinguished when it became so difficult, so difficult that it is beyond the contemplation of the parties. The court may release the debtor partially or wholly from this obligation.
An action was filed for the court to adjust the agreement of the parties as to their share in the profits in relation to the sale of a house and lot. Defendant was the owner of the land and the plaintiff was the owner of the materials used in the construction, the proceeds to be divided between them 60/40. The plaintiff went to court to adjust the shares due to difficulty of performance as the prices of the materials increased. The court did adjust the terms and conditions of the agreement. A motion to dismiss was filed on the adjustment. Is the motion granted? adjustment proper?
The. The court has no power to change the terms and conditions of the agreement. The only power given by law to the court is to release the debtor in whole or in part . Even if the reason for the difficulty is because of an unforeseen event still the court has not power to change the terms and conditions of the contract. The court may however, release the debtor in whole or in part. That is the only power granted to the court under this provision provided in Art. 1267 which provides that 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.
A has a cellphone, and it had a casing, and if someone would forcibly take his cellphone he would request that the cellphone alone should be taken. If there is an obligation to deliver a
cellphone with its case, and the cellphone was lost or destroyed due to a fortuitous event, the obligation therefore is extinguished?
It depends on the intention of the parties as to the importance of the thing which was lost in relation to the entire obligation. In other words, when the creditor would not have entered into the contract without the other thing which was lost, the obligation would therefore be extinguished. The casing would be considered be more important when the casing was jewel encrusted.
Condonation or Remission of the debt
Condonation is also known as?
Donation of credit or remission of the debt.
Is renunciation also a good name for condonation?
No because renunciation may not be a gratuitous act. The civil code would recognize an onerous renunciation. If the renunciation is a gratuitous act it will amount to condonation.
Son A is indebted to his father B in the amount of 500,000. Through a check A paid his father B 300,000. B, his father died. The executor of the father of the decedent demanded payment from A 200,000. However the son raised that his obligation was totally extinguished because as shown in the annotation at the back of the check, it provides that it was in full payment of the obligation. Is it condoned?
It will depend on who wrote the annotation. If the father who made the annotation, it depends on whether it is express or implied. If the obligation is express there must be an acceptance by the son because it is a form of donation, which requires acceptance. Hence the son is still compelled to pay.
A borrowed money from B, 100,000. A executed a promissory note which he delivers to B was already in the possession of A. Was the obligation of A was extinguished by condonation?
Not necessarily. There is a presumption that the obligation is extinguished when the promissory note is a private instrument. If the promissory note is contained in a public instrument the presumption will not arise.
When the promissory note was a private instrument and it was already in the possession of the debtor, does it raise the presumption that
the obligation was extinguished by condonation?
What the law provides under Art 1272, when the private document was in the possession of the debtor, there is a presumption that the creditor delivered it voluntarily, then it presupposes that there is payment when there is a receipt (evidence of payment) given. If there is none, a disputable presumption is given that there is condonation.
A borrowed 100,000 from B. To secure fulfillment of his obligation a watch was delivered to B. Thereafter, the watch was already in the possession of X. Therefore, the obligation of A to B was extinguished?
The thing that was delivered to secure was obviously a form of pledge. When the thing was found no longer in the possession of the creditor, pledgee. There is no presumption that the obligation is extinguished. What is presumed is that the pledge is extinguished.
Under the facts, there would be a presumption that the obligation is extinguished if X was the owner. If X was the pledgor, then there is no presumption that such will arise.
Confusion or merger of rights Confusion is also known as? Merger of rights. Can there be confusion by operation of law?
Yes. If a person inherits the credit, then there will be confusion as when the son who has a debt to his father, the son may inherit from his father the credit thereby extinguishing the obligation by merger of rights, assuming he is the only heir.
If it was the debtor child who died in the above scenario, will there be confusion?
Not necessarily. Ordinarily there will be no confusion because the father will not accept. For transmission of successional rights the heir must accept. If he accepts then there will confusion. Normally, as to obligations or debts, no one would accept.
By agreement of the parties the most common agreement which would result in confusion is known as?
Merger agreement or contracts.
Can there be a partial extinguishment of an obligation by confusion?
Yes. If there are two debtors.
Can there be partial confusion?
No. There is no partial confusion. A debt of A to B became due in 1995, a merger agreement was entered into in 2002, just like any agreement there can be a rescission, as in this case were rescission was made in 2008, today 2010 an action was filed by B against A on the debt, may the action still prosper?
Observation: In the exam when CU uses the word STILL prosper, it talks of prescription. When CU uses May the action prosper, it doesnt talk about prescription but on some other grounds.
The action may still prosper. The obligation is extinguished in 2002 by merger. The merger up to the time of rescission should not be included in the computation of the prescriptive period of 10 years. During the merger period, B cannot sue A, their personality being one and the same. The effect of rescission revives the status of the parties prior to the merger, it is if A again has an obligation to B again. Therefore from 1995 to 2002 and from 2008 to 2010 the time lapsed is only 9 years, hence well within the prescriptive period.
Compensation
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)
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 or controversy, commenced by third persons and communicated in due time to the debtor. (1196)
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. (1197)
Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n)
Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
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. (n)
Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n)
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. (1198a)
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. (1199a)
Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)
Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n)
Art. 1289. If a person should have against him s e v e r a l d e b t s w h i c h a r e s u s c e p t i b l e o f compensation, the rules on the application of payments shall apply to the order of the compensation. (1201)
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. (1202a)
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. (1165)
Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143)
What is compensation?
It is a mode of extinguishing to the concurrent amount, the obligations of those person who in their own right are reciprocally debtors and creditors of each other.
What are the kinds of compensation?
1. Facultative - Deposit, Commodatum, Gratuitous support and civil liability from crime
Requires consent of one of the parties
2. Legal - By operation of law
3. Conventional/Voluntary - by agreement of the parties.
In compensation is required that the parties have capacity to receive and capacity to dispose of their properties?
Not necessary. Compensation operates by operation of law.
Can there be partial compensation?
Yes. There may be partial extinguishment of an obligation. As long as the debts of one are not equal to the debts of the other, the compensation will only be to the concurrent amount and there will be no total extinguishment.
When can total extinguishment take place?
When the debts of one are totally equal with the other.
A owes B 100,000, but B has several debts to A 1k, 2k, 5k and 20k, 80k in total, with compensation, all the debts will be totally extinguished, because the extinguishment is for the concurrent amount, but A will still owe B 20k.
A has an obligation to B, and B has an obligation to A. As obligation is interest bearing, after compensation can B still collect interest from A?
It depends on whether the debt of B is larger than the debt of A. If the debt of B is larger than A, then A will not be liable for interest as there will be total extinguishment of the debt of A.
What if the debt of A is secured by a mortgage, and compensation took place, may B foreclose the mortgage?
Yes. because there will still be a balance of 50k. A mortgage is an indivisible contract, until the obligation is extinguished the mortgage will remain in force. If A failed to pay the 50k then B can foreclose on the mortgage.
A opened a savings account with Y Bank in the amount of 1 M, thereafter A borrowed money from the same bank 800k, thereafter A wanted to withdraw the 1M, the bank refused to allow A to withdraw the 1M as A can only withdraw up t o t h e e x t e n t o f 2 0 0 k a n d i n v o k i n g compensation. Can the bank deposits be a subject of compensation with the debt?
No. Under Art. 1287 it was provided that there can be no compensation when one of the debts arises from a deposit. But a bank deposit is not a contract of deposit which is prohibited. The opening of a savings account is a contract of loan. Since both are simple loan there can be compensation.
What if A delivered a thing to the bank as a depositary for safekeeping, can this be a subject of compensation?
Yes it can be a subject of compensation, but only the depositor can invoke compensation.
What is A promised to give B a specific kind of bike, in the meantime A already had a bike. B borrowed the bike. Can the borrowed bike be a subject of compensation?
Yes. But only the bailor A can invoke compensation and not the bailee B. This is commodatum.
Can support be a subject of compensation?
It depends, if it is legal support it cannot because it is needed for a persons survival. It should be gratuitous support and not contractual support. If gratuitous compensation can take place.
A is indebted to B 100k, when B tried to collect the debt from A, A refused to pay, so B stabbed A and hold B criminally liable. Can there be compensation?
Yes, but only the aggrieved party A (offended party)can invoke compensation and not B (convict)
If A and B are indebted to each other and the debts are not yet due, can compensation take place?
Yes, by voluntary compensation.
If A is indebted to B of a carabao while B is indebted to A of a car, can compensation take place?
Yes, by voluntary compensation.
A owes B a sum of money due in 1992, B owes A a sum of money due 1999, both debts valued at 1 million. A filed an action against B and invoke compensation, A however said that B cannot invoke compensation because Bs credit had already prescribed. Is A correct?
No. In 1999 even without the parties knowledge, when the debts become due and demandable, compensation took place by operation of law.
W h a t a r e t h e r e q u i r e m e n t s o f l e g a l compensation?
1. They must be mutual creditors and debtors
2. Both debts must be in sums of money or if they pertain to goods, they must be of the same kind and quality.
3. Both parties must be principally bound.
4. They must be creditors and debtors of each other in their own right.
Is it correct to say reciprocal creditors?
No, this is because this would pertain to reciprocal obligations, which would necessarily require that the same arose from the same transaction. Therefore in reciprocal obligations, there can no no legal compensation even if they are said to be mutual creditors and debtors of each other.
Francia's property was expropriated by the Republic of the Philippines. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. May compensation take place?
No. There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes.
Government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx (3) that the two debts be due.
PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. 11 So that when ISABELA itself subsequently came to be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their j u d g m e n t a g a i n s t I S A B E L A . I s t h e r e compensation by operation of law between PNB and ISABELA?
No. The court ruled in PNB vs. Acero, that even though that PNB was a debtor of ISABELA under the latters savings deposit in the bank, which is considered a simple loan, there was no proof shown by PNB in the case that ISABELA was also indebted to PNB, the only evidence present by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of.
May there be obligations both in sums of money in reciprocal obligations?
It cannot happen. In reciprocal obligation there are different prestations, one is delivery of a thing and the other is monetary.
Will there be legal compensation only if the debt in money arose from contract?
No, there are cases where compensation by operation of law took place when there was award of attorneys fees and the court ruled that legal compensation may take place.
May all monetary obligation be the subject of legal compensation?
No. Legal compensation cannot take place in certain monetary obligations such as taxes, customs duties, tariff etc.
Where A is indebted to B and this obligation is secured by a guarantor G, on the other hand B is also a debtor of G, if G demands payment from B, can B claim that since G is a guarantor on As debt to be, compensation may take place on As debt and Bs debt to G?
No because the guarantor is not principally bound, but the moment A defaults and his properties are already exhausted, the guarantor will not be p r i m a r i l y l i a b l e t o B , a n d f r o m t h e n o n compensation may take place.
The owner of a share of stock authorized L to sell the same, L on the other hand authorized S to sell it, the latter was able to sell the share of stock, however, despite demand of A from S to remit the proceeds of the sale he refused to do so. S was charged for estafa and was convicted, on appeal S claimed that L owed him also, so compensation took place, therefore he cannot be liable for estafa. Is Ss contention correct?
No, even assuming that L is indebted to S, the latter is really not indebted to L in his own right. The real creditor of L is the buyer of the shares. L and S should be debtors and creditors of each other.
Is it required that when both debts are due and demandable means that they are due at the same time?
No. What is required is that both debts are due. So if one of the debts became due 3 years ago, and the debt became due today, compensation will only take place today because it is only today that both debts became due.
A borrowed from B, B bought a car from A on credit, can there be legal compensation?
There can be legal compensation because when B bought the car from A on credit, the buyer B is also going to pay the price in money, so there can be legal compensation.
Fajardo borrowed money from ICB in the sum of 50M, the bank released 20M, to secure this obligation Fajardo mortgaged properties amounting 110M, thereafter she also delivered 1M to the bank for money market investment, so like just other investments it matured, so Fajardo demanded for the return of the 1M, the
bank claimed that Fajardo has nothing to recover from the bank because as to her loan which Fajardo failed to pay, upon foreclosure of the mortgage Fajardo still has a deficiency of 6 million, so compensation took place. Fajardo questioned the mortgage. Can there be legal compensation?
No. There can be no legal compensation while the claim of Fajardo questioning the mortgage is being litigated. As one of the requirement of legal compensation, the debts must be liquidated and demandable. Here, the amounts of the debt is not yet identified or liquidated, the foreclosure being subjected to litigation.
M a y l e g a l c o m p e n s a t i o n t a k e p l a c e i n depositum or commodatum?
No. As expressed in Art. 1287. In such cases legal compensation will not take place since in depositum the depositor or the bailor must invoke legal compensation?
May legal compensation take place in debts which consists of civil liability arising from a criminal offense?
No as expressed in Art. 1288. Only the the aggrieved party may invoke compensation.
Assignment of Credit as a right to invoke compensation
A was indebted to B for 50k, 30k, and 20k, B on the other hand is indebted to A for 100k, A assigned his credit to X, X demanded payment from B, how much can X demand from B?
It depends on when did this assignment occur, before or after the debt became due.
If the 50k was made on June 15, 2002, the 30k was made on Oct. 15, 2002, and the 20k was on Dec. 15, 2002, the deed of assignment was made on Jan. 15, 2003, and the 100k debt of B to A was due on Nov. 15, 2002. How much can X recover from B?
Since the debt became due on Nov. 15, 2002 which is prior to the debt incurred on Dec. 15, 2002 and the assignment was made long before the debt of 100k became due, compensation took place only to the extent of 80k. Hence, X can recover as much as 20k only, for the latter was made after the debt of 100k became due.
Assuming the 100k debt of B to A is due on Nov. 15, 2002 and A assigned his credit X on March 2002, how much can X recover from B?
Since the assignment was made before the debt became due, X can recover nothing. The obligation is not yet due until Nov. 15, 2002.
Assuming the due date of the 100k debt is on Nov. 15, 2002, and the assignment is in July 2002, how much can X (assignee) recover from B?
The only debt subject to compensation is the 50k and the 30k and 20k is not covered. Hence, only 50k is subject to compensation. The Oct and Dec. 2002 debts may be recovered by X subject to certain requirements required by law.
What are these requirements?
Determine if B had knowledge or without knowledge of the assignment. If B is with knowledge of the assignment, determine whether there is consent or none. If consent is given, determine whether he has made a reservation as to Bs right to the compensation at the time his consent is given.
What are the effects of reservation at the time of consent?
If the debtor reserves there is compensation. If there is no reservation, the debtor waived his right to compensation.
If B did not reserve his right to compensation, what is his remedy?
Demand the debts on the 50, 30 and 20k.
If B is without knowledge of the assignment, what is the effect?
There is compensation. 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 rights of the creditor. (1203)
- Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal condition, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor.
The effect of which is to extinguish the old.
What are the classifications of novation?
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co- surety.
It may be express (by agreement) or implied (incompatible).
It may be partial or total.
What are the requisites of novation?
1. A previous valid obligation 2. agreement f all the parties to the new contract 3. extinguishment of the old contract 4. validity of the new one
Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204)
Can novation be presumed?
It is never presumed.
What is the test of incompatibility between the old and the new obligation in order to effect novation?
The change must refer to the object, the cause, or the principal conditions of the obligation. In other words there must be an essential change.
Accidental modifications in an existing obligation do not extinguish it by novation. Mere modifications of the debt, agreed upon between the parties do not constitute novation. When the changes refer to secondary agreements, and not the the object or principal conditions of the contract, there is no novation; such changes will produce modifications of incidental facts, but will not extinguish the original obligation.
E.g. A mere extension of the term of payment does not result in novation, for the period affects only the performance, and NOT THE CREATION OF THE OBLIGATION.
Ultimately, the determination of whether the changes in any given contract or obligation are sufficient to bring about a novation, must depend upon the facts and circumstances of each case. The distinction between a principal and an accidental condition in the contract or obligation is relative. The legal effect of any change made by the parties will depend upon a sound appreciation of their importance. The courts should consider, in each particular case, not only the nature of the clause that is modified, but also the intention of the parties and the economic significance of the modification.
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. (1205a)
What are the two forms of substitution of debtor?
1. Expromission which the initiative for the change does not emanate from the debtor and may be made even without his knowledge, since it consists in a third person assuming the obligation.
2. Delegacion is by the debtor who offers and the creditor accepts a third person who consents to the substitution, so that the consent of these three are necessary.
Is the release of the old debtor required in order that a new debtor may be substituted?
It is required.
Is the consent of creditor required?
Whether expromission or delegacion, the consent of the creditor is required. This is so because substitution of one for another may delay or prevent the fulfillment of the obligation by reason of the inability or insolvency of the new debtor; hence the creditor should agree to accept the substitution in order that it may be binding on him.
It may be express or implied, simultaneous or not, nor is it required to be in any particular form.
Is the consent of the old debtor required?
In expromission the consent of the old debtor is not necessary, while in delegacion the old debtors consent is required for it shall be initiated in his instance. Is the consent of the new debtor necessary? Ofcourse, because he is to assume an obligation. To w h o m c a n t h e n e w d e b t o r d e m a n d reimbursement?
If the novation is by delegacion, and the new debtor pays the obligation, he could demand from the old debtor what he has paid.
If the novation is by expromission, and the new debtor pays the debt without the knowledge of the old debtor, the former can recover only insofar as the payment has been beneficial to the old debtor.
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 obligations shall not give rise to any liability on the part of the original debtor. (n)
In case the new debtor became insolvent, can the new debtors liability be enforced against the old debtor who has no knowledge of the novation?
If novation is by expromission, no liability for the new debtors insolvency can be enforced against the old debtor, because the latter did not have the initiative in making the change, which might have been made without his knowledge.
In case the new debtor became insolvent, can the new debtors liability be enforced against the old debtor who has knowledge of the novation?
It depends. In case of expromission he is also r e l e a s e d f r o m l i a b i l i t y n o t w i t h s t a n d i n g h i s knowledge because obvious intent of the code is the release the old debtor. To make the old debtor liable in expromission simply because he has knowledge of the assumption of his debt by another, or that he assented to it, would make his liability even greater that that of a debtor who took the initiative and offered a new debtor in his place; in the latter case, the liability of the old debtor would be limited to the two exceptions provided in art. 1295, while in the former, his liability in all cases on non fulfillment would be without limitation.
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 the delegated his debt. (1206a) (DELEGACION)
Other modes which does not exempt the old debtor from liability due to the new debtors insolvency?
a. if the new debtor is only secondarily liable
b. if the third person is only an agent of the debtor
c. where the new debtor is bound solidarily with the old debtor.
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. (1207)
Accessory obligation such as pledges, mortgages as well as guarantors and sureties, unless the latter agree to be bound under the new obligation.
The exception provided has reference to a stipulation in favor of the third person, which is
subordinated by the principal obligation. Although technically it is an accessory obligation, it in ins reality a distinct obligation in favor of a third person, and cannot be extinguished by novation without the consent of the latter.
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. (n)
What if the new obligation is voidable, or not entirely void, will the old obligation subsist?
The novation becomes effective, it is valid until annulled.
What if there is a conditional new obligation, is there novation?
It depends, if the condition is attached to the old obligation or not. Because if it is attached to the old obligation, there is no novation at all.
If the condition on the new obligation is intended to substitute the original pure obligation, the novation itself, and the consequent extinguishment of the original obligation, is subject to the condition, the novation itself did not take place, until the happening of the condition. Pending the happening of the condition, novation did not yet take place, the original obligation not extinguished.
Can the creditor demand from the object of the old obligation if the novated object is loss?
The creditor cannot demand from the original object, the latter is already extinguished by the new obligation.
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. (1208a)
May a void original obligation be validated?
No. It is void and cannot be ratified. What can be ratified is a voidable obligation. A void obligation cannot be a source or rights, or waivable by the parties.
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. (n)
What if both obligations are conditional, old and new?
They must all be fulfilled in order that novation may become effective and the new obligation be enforceable. If only the conditions affecting the old obligation are fulfilled, and those affecting the new obligation are not, then, there is no novation, and the old obligation subsists, because the requisite of a new valid obligation would be lacking.
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. (1209a)
Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n)
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a)
Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) 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. (1213)
What obligation may be novated? Is it required that an obligation must arise from a contract?
No, any obligation may be the subject of novation.
Is it required that there be agreement between the parties in order that novation will take place?
Yes. Agreement is required. There may only be a novation as a result of the agreement of the parties.
What is the effect of novation?
There will be extinguishment of the old obligation and a new one exist, except prescription. In prescription there is no existence of a new obligation. ??????
If there are changes in the original obligation does it mean that there is novation?
No. If the changes does not result in novation, there is no novation. Aside from the classification, it goes into the nature of the extinguishment.