Oblicon Extinguishment of Obligation

IN MEMORY OF THE

OBLIGATION

PAYMENT OR PERFORMANCE

Payment does not consist only of payment through money.

Payment also refers to the delivery of money, giving of a thing, doing of an act and not doing of an act.

PAYMENT OR

PERFORMANCE

1232 DEFINITION OF PAYMENT

1. Persons/Parties2. Object/Thing3. Cause4. Mode of Payment5. Place and time that payment should be made6. Imputation of expenses7. Other parts to modify the same

PAYMENT OR

PERFORMANCE

Elements of Payment/Performance:

General rule: DEBTOR

Exception: Once the debtor introduces the fact of extinguishment, it is shifted to the CREDITOR

PAYMENT OR

PERFORMANCE

BURDEN OF PROOF:

Complete delivery is required to effect payment/performance.

General rule: Delivery alone cannot effect payment/performance.

Exception: Those provided by the this Code (1234 and 1235)

PAYMENT OR

PERFORMANCE

1233 COMPLETENESS OF PAYMENT

1. Identity of the prestation, which is the complete fulfillment (contemplated in this article), and;2. Identity of prestation – the very prestation must be delivered or performed

PAYMENT OR

PERFORMANCE

Things to be considered for an obligation to be considered to be paid:

This is the first exception to Art. 1233. PAYMENT OR

PERFORMANCE

1234 SUBSTANTIAL PERFORMANCE IN GOOD FAITH

Requisites: 1. There must be substantial performance (breach is not compelling enough for creditor to rescind the contract; the oblige has benefited)2. Good faith of the obligor

The damages contemplated in this article are compensation for the relative breach suffered by the oblige.

This is the second exception to Art. 1234.PAYMENT

OR PERFORMANCE

1235 ACCEPTANCE OF IRREGULARITY or INCOMPLETENESS

Requisites: 1.  Knowledge of incompleteness in the

performance/payment

2.  Acceptance of such without objection or protest *no form/time for the protest

General rule: The creditor is not bound to accept the payment of a third personException: If it is stated in the agreement that he can make payment

Persons from whom the creditor must accept payment:1. Debtor2. Persons with interest in the obligation3. Third persons, if allowed by stipulation, even without interest

PAYMENT OR

PERFORMANCE

1236 PAYMENT BY A THIRD PERSON

The third person who paid for the debt of the original debtor can demand such debtor to pay him, except when the debtor has no knowledge or against his will. The presence of this condition would entitle the third person the reimbursement only insofar to the payment that has been beneficial to the debtor. If there is knowledge, the third person shall have the rights of reimbursement and subrogation.

There must be an existing creditor-debtor relationship between the person on whose behalf the payment was made and the payee.

PAYMENT OR

PERFORMANCE

1236 PAYMENT BY A THIRD PERSON Second Paragraph

If paid without the knowledge or against the will of the debtor, the third person is not entitled to subrogation and therefore, cannot compel the creditor to subrogate him his accessory rights of mortgage, guaranty or penalty, even with the consent of the creditor.If paid with knowledge, he is entitled to subrogation.

Subrogation can only take place with the consent of the debtor.

There must be an existing creditor-debtor relationship between the person on whose behalf the payment was made and the payee.

PAYMENT OR

PERFORMANCE

1237 NON-SUBROGATION OF RIGHTS

The payment of a third person who does not intend to be reimbursed is considered as donation and shall require the consent of the DEBTOR.

HOWEVER, such payment, even without the consent of the DEBTOR, shall be valid as to the creditor who received the payment and would extinguish the obligation.

PAYMENT OR

PERFORMANCE

1238 PAYMENT MADE AS A DONATION

General rule: Payments made by persons who do not have (1) FREE DISPOSAL OF THE THING (must not have any lien or encumbrance attached to it) and; (2) CAPACITY TO ALIENATE (capacity to enter into contracts) shall be invalid

Exception: Article 1427; the creditor cannot be compelled to accept payment where the person paying has no capacity to make it

PAYMENT OR

PERFORMANCE

1239 PAYMENT BY AN INCAPACITATED PERSON

(a) To the person in whose favor the obligation has been constituted (the creditor);

[NOTE: This refers to the creditors at the time of payment]

(b) To the successor-in-interest (Ex. the heirs);

(c) To any person authorized to receive it. (NOTE: The authorization may be by agreement or by law.)[NOTE: If the recipient was not authorized, the payment generally is NOT valid]

PAYMENT OR

PERFORMANCE

1240 TO WHOM PAYMENT MUST BE MADE

General rule : Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor.

Exception: 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.

PAYMENT OR

PERFORMANCE

1241 EFFECT OF PAYMENT TO AN INCAPACITATED PERSON

First Paragraph — Payment to an Incapacitated Person

Payment is valid to a person incapacitated to manage or administer his property 1.  If the incapacitated person has kept the thing

delivered; or

2.  Insofar as the payment has been beneficial to him.

PAYMENT OR

PERFORMANCE


Second Paragraph — Payment to a Third Party Not Duly Authorized

Effect in general of payment to third party: The payment is valid BUT only to the extent of benefit (financial, moral, or intellectual) to the creditor. The payment must be proved (Panganiban v. Cuevas, 7 Phil. 477), and is, therefore, not presumed except in the three instances provided for in the second paragraph of Art. 1241.

PAYMENT OR

PERFORMANCE


Examples of when benefit to the creditor is presumed:1. If after 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 make the payment.4. Rule with reference to checks. The ruling in People v. Yabut is of doubtful validity because as long as the messenger was duly authorized by the payee, delivery to the messenger [and agent] should be considered as delivery to the payee.

PAYMENT OR

PERFORMANCE


a)  Payment by payor must be made in good faith (this is presumed) (but payee may be in good or bad faith).

b)  The payee must be in possession of the credit itself (not merely the document evidencing the credit).

(NOTE: When one possesses the credit, there is color of title to it.)

PAYMENT OR

PERFORMANCE

1242 PAYMENT OF THIRD PERSON IN POSSESSION OF CREDIT

Garnishment• The proceeding by which a debtor’s creditor is subjected to the payment of his own debt to another.

Interpleader• Action in which a certain person in possession of certain property wants claimants to litigate among themselves for the same.

Injunction• It is a judicial process by virtue of which a person is generally ordered to refrain from doing something.

PAYMENT OR

PERFORMANCE

1243 WHEN PAYMENT TO CREDITOR NOT VALID

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will.

PAYMENT OR

PERFORMANCE

1244 VERY PRESTATION DUE MUST BE COMPLIED WITH

General rule : Debtor Cannot Compel Creditor to Accept a Different Object

Exception: Instances When Art. 1244 Does Not Apply(a) In case of facultative obligations; (b) In case there is another agreement resulting in either:

1.  Dation in payment (Art. 1245, Civil Code); or2.  Novation (Art. 1291, Civil Code); (c) in case of waiver by

the creditor (expressly or impliedly).

(c) In case of waiver by the creditor (expressly or impliedly).

PAYMENT OR

PERFORMANCE

1244 VERY PRESTATION DUE MUST BE COMPLIED WITH

Dation in PaymentIt is that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor, property for the satisfaction of monetary debt.

Dation in payment is governed by the law of sales because it is a transfer of ownership.

PAYMENT OR

PERFORMANCE

1245 SPECIAL FORMS OF PAYMENT

Conditions Under Which a Dation in Payment Would Be Valid(a) If the creditor consents(b) If the dation in payment will not prejudice the other creditors,(c) If the debtor is not judicially declared insolvent[NOTE: In dation, it is not always necessary that all the property of the debtor will be given to satisfy the credit. (8 Manresa 232).]

PAYMENT OR

PERFORMANCE

1245 SPECIAL FORMS OF PAYMENT

Obligation to Give Generic ThingsThis Article gives a principle of equity in that it applies justice in a case where there is lack of precise declaration in the obligation.

WaiverIf the contract does not specify the quality(a)  The creditor cannot demand a thing of superior

quality(b)  The debtor cannot deliver a thing of inferior quality

PAYMENT OR

PERFORMANCE

1246 RULE ON MEDIUM QUALITY

General Rule:The debtor has to pay for the extrajudicial expenses incurred during the payment. Reason: By express provision of law. Reason for the law: It is the debtor who benefits primarily, since his obligation is thus extinguished.

Exception: When there is a stipulation to the contrary.Judicial Costs are determined by the discretion of the court unless otherwise provided in the rules.Generally No costs against the Government

PAYMENT OR

PERFORMANCE

1247 DEBTOR PAYS EXTRAJUDICIAL EXPENSES

Provision contemplates obligations where there is only one creditor and only one debtor.

General rule: Object of the obligation must be performed in one act, not in parts.Exception: Creditor may accept but he cannot be compelled to accept partial payment or performance.

PAYMENT OR

PERFORMANCE

1248 COMPLETE PERFORMANCE OF OBLIGATION NECESSARY

When partial performance of obligation allowed:1. By express stipulation to that effect2. Debt in in part liquidated and in part unliquidated3. Prestation are subject to different terms or conditions4. Obligation reasonably cannot be expected to be performed completely at one time5. Abuse of right or if good faith requires acceptance

PAYMENT OR

PERFORMANCE

1248 COMPLETE PERFORMANCE OF OBLIGATION NECESSARY

First Paragraph:General rule: Payment of debts in money payable in Philippine CurrencyException: Express stipulation in the contract

Definition of Legal TenderThe currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount.

PAYMENT OR

PERFORMANCE

1249 LEGAL TENDER

Legal tender in the PhilippinesAll coins and notes issued by the Bangko Sentral ng Pilipinas

Sec. 52, R.A. No. 7653P50 = Denominations P0.25 and aboveP20 = Denominations P0.10 or less

BSP Circular No. 537P1,000.00 = Denominations P1.00, P5.00, and P10.00 coinsP100.00 = Denominations of P0.01, P0.05, P0.10, and P0.25 coins

PAYMENT OR

PERFORMANCE

1249 LEGAL TENDER

1. Right of the creditor to refuse or accept• Promissory notes, checks, bills of exchange, and other commercial documents are not legal tender.• Creditor cannot be compelled to accept them.• Creditor may accept them, without the acceptance producing the effect of payment.• The creditor must cash the instrument.

2. Payment for the purpose of redemption• Right to redeem is not an obligation but the exercise of a right; nor is it intended to discharge a pre-existing debt.

3. Effect on obligation• General rule: Payment by means of mercantile document does not extinguish the obligation.• Exception:

i. Until they have been cashedii. Unless they have been impaired through the fault of the creditor.

1249 LEGAL TENDER - Payment by means of instruments of credits

InflationThe sharp and sudden increase of money or credit or both without a corresponding increase in business transactions.Inflation causes a drop in the value of money, resulting in rise of the general price level.

DeflationThe reduction and circulation of the available money or credit in a decline of the general price level; it is the opposite of inflation.

PAYMENT OR

PERFORMANCE

1250 MEANING OF INFLATION AND DEFLATION

Requisites: 1. Official declaration from the Banko Sentral ng Pilipinas2. The obligation is contractual in nature; and3. Parties expressly agreed to consider the effects of the extraordinary inflation or deflation.

PAYMENT OR

PERFORMANCE

1250 MEANING OF INFLATION AND DEFLATION

DevaluationInvolves an official reduction in the value of one currency from an officially fized level imposed by monetary authorities.

DepreciationDownward change in the value of one currency in terms of the currencies of other nations.

Note: Any lowering of the value of the peso as a result of foreign exchange market is a depreciation and not a devaluation.

PAYMENT OR

PERFORMANCE

1250 Devaluation and Depreciation distinguished

1. If there is a stipulation, payment shall be made in the place designated.

2. If there is no stipulation and the thing to be delivered is specific, payment shall be made at the place where the thing was, at the perfection of the contract.

3. If there is no stipulation and the thing to be delivered is generic, the place of payment shall be the domicile of the debtor. Creditor bears the expenses.

PAYMENT OR

PERFORMANCE

1251 PLACE WHERE OBLIGATION SHALL BE PAID

The designation od the debt to which should be applied the payment made by the debtor who has various debts of the same kind in favor of one and the same creditor.

PAYMENT OR

PERFORMANCE

SUBSECTION 1. -– Application of

Payment

1252 MEANING OF APPLICATION OF PAYMENT

1. One debtor and one creditor2. Two or more debts3. Debts must be of the same kind4. Debts to which payment made by the debtor has been applies must be due5. Payment must not be sufficient to cover all the debts

PAYMENT OR

PERFORMANCE


Payment

1252 REQUISITES:

General rule: Payment to debts not yet due cannot be made.

Exception: 1. There is a stipulation that the debtor may so apply2. It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted.

PAYMENT OR

PERFORMANCE


Payment

1252 Application as to debts not yet due:

1. Debtor has the first, he must indicate at the tome of making payment, and not afterwards, which particular debt is being paid.2. The right to make the application once exercised is irrevocable unless the creditor consents to change.3. Creditor has not also made the application, or if the application is not valid, the debt, which is most onerous to the debtor among those due, shall be deemed to have been satisfied.4. Debts due are of the same nature and burden,, the payment shall be applied to all of them proportionately5. If neither party has exercised its options and there is disagreement as to debts to which payment must be applied, the court will apply the payment according to the justice and equity of the case.

Rules on application of payments:

Debtor cannot choose to credit his payment to the principal before the interest is paid.

Payment must be first applied first to the interest and whatever balance is left, must be credited to the principal.

PAYMENT OR

PERFORMANCE


Payment

1253 INTEREST ERNED PAID AHEAD OF PRINCIPAL

1. Application to mot onerous debt or to all debts proportionately

• If there is no application of payment made, the payment shall be applied to the most onerous debt, and if the debts are of the same nature and burden, to all of them proportionately

2. When a debt more onerous than the other• A debt is more onerous than the other when it is more burdensome

PAYMENT OR

PERFORMANCE


Payment

1254 APPLICATIONS WHERE PRECEEDING RULES CANNOT BE APPLIED OR INFERRED

3. Instances• An interest-bearing debt is more onerous• A debt as a sole debtor is more onerous than as a solidary debtor• All things being equal, older debts are more onerous• Debts secured by a mortgage or pledge is more onerous than unsecured debts.

4. Where debts are subject to different burdens• Payment shall be applied proportionately

PAYMENT OR

PERFORMANCE


Payment

1254 APPLICATIONS WHERE PRECEEDING RULES CANNOT BE APPLIED OR INFERRED

It is another special form of payment.

It is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds as payment.

PAYMENT OR

PERFORMANCE

SUBSECTION 2. – Payment by Cession

1255 MEANING OF PAYMENT BY CESSION

Requisites:1. There must be two or more creditors2. The debtor must be (partially) insolvent3. The assignment must involve all the properties of the debtor4. Cessation must be accepted by the creditors

Effect of payment by CessionAssignment does not make the creditors the owners of the property of the debtor and the debtor is released from his obligation only up to the net proceeds. Hence, debtor is still liable if there is a balance.

PAYMENT OR

PERFORMANCE

SUBSECTION 2. – Payment by Cession

1255 MEANING OF PAYMENT BY CESSION

Dacion'en'pago! Cession!Only'one'creditor' Several!creditors!Does' not' presuppose' the' insolvency' of'the'debtor''

The! debtor! is! insolvent! at! the! time! of!assignment!

Does' not' involve' all' the' property' of' the'debtor'

Extends! to! all! the! property! of! the! debtor!subject!to!execution!

Creditor'becomes' the'owner'of' the' thing'given'by'the'debtor'

Creditors!only!require!the!right! to!sell! the!thing! and! apply! the! proceeds! to! their!credits!

Act'of'novation' Not!an!act!of!novation!!

Dation in payment and cession distinguished

Tender of payment:

•  Manifestation made by debtor to creditor of his desire to comply with his obligation, with offer of immediate performance

•  Preparatory act to consignation•  Extrajudicial in character

PAYMENT OR

PERFORMANCE

SUBSECTION 3. - Tender of Payment and Consignation

1256 Definition of Tender of Payment and Consignation

1.  Creditor is absent/unknown.2.  Creditor is incapacitate to receive at time it is due.3.  Creditor refused give a receipt, w/o just cause.4.  2 or more persons claim the right to collect.5.  Title of obligation lost.

PAYMENT OR

PERFORMANCE


1256 5 valid consignation without previous tender of payment

Absence of prior notice to the person interested in the fulfillment of the obligation, the consignation shall be void.The purpose of notice is to give the creditor a chance to reflect on his previous refusal to accept payment considering that the expenses of consignation shall be charged against him,

To amount to a valid payment, consignation must also comply with the provisions which regulate payment.

PAYMENT OR

PERFORMANCE


1257 Prior notice to persons interested required

Consignation, by depositing the thing or sum due with the proper judicial authority, is necessary to effect payment.

General Rule: It cannot be made elsewhere

Exception: Unless otherwise prescribed by special law.

PAYMENT OR

PERFORMANCE


1258 Consignation must be with proper judicial authority

Expenses of consignation shall be charged against the creditor only when consignation have been properly made1.  When the creditor accepts the thing or amount

deposited;2.  When the court decided that consignation have been

properly made or cancels the obligation at the instance of the debtor in accordance with Art. 1260 par. 1

PAYMENT OR

PERFORMANCE


1259 Liability of creditor for expenses of consignation

1.  Creditor accepts the thin or sum deposited, without objection, as payment;

2.  Creditor declares that it has been properly made;3.  Creditor neither accepts nor questions the validity of

consignation, and the court after hearing, orders the cancelation of the obligation.

PAYMENT OR

PERFORMANCE


1259 When consignation deemed properly made

Withdrawal as matter of right

The debtor may withdraw the thing or sum deposited:a)  Before the creditor has accepted the consignation; orb)  Before a judicial declaration

If withdrawal is with the consent of the creditor, Article 1261 applies.

PAYMENT OR

PERFORMANCE


1260 Withdrawal by debtor of thing or sum deposited

1.  Before approval of the court – Obligation remains in force.

2.  After approval of the court or acceptance by the creditor, with the consent of the latter - Obligation remains in force, but guarantors and co-debtors are liberated. Preference of the creditor over the thing is lost.

3.  After approval of the court or acceptance by the creditor, and without creditor’s consent - Obligation subsists, without change in the liability of guarantors and co-debtors, or the creditor’s right of preference.

PAYMENT OR

PERFORMANCE


1261 Effect of withdrawal with authority of creditor

Loss of the Thing Due


A thing is lost when it perishes, or goes out of commerce or disappears in such way that is existence is unknown

1262 WHEN A THING IS CONSIDERED LOST

Loss of DETERMINATE THING without fault of debtor and NO DELAY Obligation is extinguished

Requisites1. Loss or destroyed without the fault of the debtor2. Before the debtor incurs delay3. After the obligation is constituted

Impossibility is also equivalent to loss


1262 WHEN LOSS OF THING WILL NOT EXTINGUIS LIABILITY

1. When the law so provides;2. When the stipulation so provides;3. Nature of obligation requires assumption of risk4. In case the object arises from a crime (1268)


1263 EFFECT OF LOSS OF A GENERIC THING

Loss or destruction of GENERIC THING = obligation is not extinguished

Genus nunquam perit – “The genus never perishes”

Debtor can still be compelled to deliver a thing of the same kind. The creditor however cannot demand a thing of superior quality and neither can the debtor deliver a thing of inferior quality.


1264 EFFECT OF PARTIAL LOSS OF A SPECIFIC THING PARTIAL LOSS = court discretion to extinguish or not. Depends whether the obligation is so important as to extinguish the obligation.

Provided that partial loss is not imputable to the fault or negligence of the debtor but to fortuitous events or circumstances.

Partial loss: only a portion of the thing is lost or destroyed or when it suffers depreciation or deterioration.


1265 PRESUMPTION OF FAULT IN CASE LOSS OF THING IN POSSESION OF THE DEBTOR

Loss + Possession of debtor = debtor presumed liable

Exception1. Fortuitous events

Burden of proof of explaining the loss of the thing in the possession of the debtor rests upon him.


1266 EFFECT OF IMPOSSIBILITY OF PERFORMANCE IN OBLIGATIONS TO DO Personal obligations + legal/physical impossibility + debtor no fault = Extinguishment

Refers to SUBSEQUENT IMPOSSIBILITY – Arises after the obligation has been constituted. If existing before, the obligation constituted is under void contracts.

Requisites: 1. Obligation used to be possible at the construction of obligation2. Subsequent impossibility3. Without fault of the debtor

Loss of the Thing Due 1266

Two kinds of impossibility 1. Physical impossibility – Personal qualifications of debtor are involved.a.  Example – Death, physical incapacity

2. Legal impossibility – Rendered impossible by provision of law.a. Example – When a law makes something unlawful


1267 EFFEECT OF DIFFICULTY OF PERFORMANCE Service becomes difficult (as to be manifestly beyond contemplation of parties) = obligor may be released therefrom in whole or in part.

“Doctrine of unforeseen events”

Requisites: 1. Event or change in circumstances could not have been foreseen at the time of the execution of the contract2. Makes the performance of the contract extremely difficult but not impossible3. Event must not be due to the act of any of the parties4. Contract is for a future prestation


EFFEECT OF DIFFICULTY OF PERFORMANCE Service = performance of an obligation

Modification of contract not covered – court shall either release or not release the obligor from a contract and CANNOT MODIFY the terms


1268 EFFEECT OF FORTUITOUS EVENT WHERE OBLIGATION PROCEEDS FROM A CRIMINAL OFFENSE If the thing due proceeds from criminal offense; loss of thing, even if due to fortuitous event = debtor still liable

Exception:1. creditor refuses to accept the thing without justification after tendered. Creditor is in mora accipiendi.Debtor, however must still exercise due diligence.


RIGHT OF THE CREDITOR TO PROCEED AGAINST THIRD PERSONS

Extinguished obligation by loss = creditor has rights of action which debtor may have against third person responsible for loss

Condonation or Remission of Debt

Condonation or Remission Of Debt

CONDONATION OR REMISSION

1270 …is essential GRATUITOUS,…and requires the ACCEPTANCE BY THE OBLIGOR.It may be made EXPRESSLY or IMPLIEDLY.

One and the other kinds shall be subject to the RULES WHICH GOVERN INOFFICIOUS DONATIONS.

Express condonations shall, furthermore comply with the FORMS OF DONATIONS


RULES ON DONATION APPLIES TO CONDONATION OR REMISSION

VICTOR YAM & YEK SUN LENT vs. CA HELD: Express condonation follows rules on donation and donation of movables (i.e. in this case a credit) amounting to more than P5000 must be in writing [Article 784, par. 3]. IN this case, the condonation was not reduced in writing.


RULES ON DONATION APPLIES TO CONDONATION OR REMISSION

VICTOR YAM & YEK SUN LENT vs. CA NOTE: The appointment of a receiver operates to suspend the authority of a corporation and of its directors and officers over its property and effects, such authority being reposed in the receiver.


Kinds of Condonation or Remission As to extent:

Total – when it covers the entire obligationPartial – when it does not cover the entire obligation; may refer only to the accessory obligation


Kinds of Condonation or Remission As to date of effectivity:This must have the formalities of a will and the will must be probated

Inter vivos (during life)Mortis causa (after death)

Kinds of Condonation or Remission

As to form: Article 1270, par.1

•  Express – when it is made either verbally or in writing; if inter vivos, shall comply with the forms of donation [1271] and of a will or codicil, if mortis causa

•  Implied – or tacit; requires no formality; conduct is sufficient (ex. Destruction by the creditor of the instrument)

REQUISITES 1.  It must be gratuitous;2.  It must be accepted by the obligor;3.  The parties must have capacity;4.  It must not be inofficious; and5.  If made expressly, it must comply with the forms of

donation


1271 PRESUMPTION IN CASE DOCUMENT OF INDEBTEDNESS VOLUNTARILY DELIVERED BY CREDITOR A voluntary delivery of a PRIVATE DOCUMENTRemission is Rebuttable

The renunciation of the debt may be nullified by showing that the waiver is inofficious.

Remedy: Must prove the delivery of the private documents was made in virtue of payment of the debt and not remission.


1272 PRESUMPTION IN CASE DOCUMENT FOUND IN POSSESION OF THE DEBTOR The presumption is voluntary delivery•  Must be a private document•  Presumption is rebuttable

Type of Obliga.on Effect on the Debt

Joint Obliga,on Only the Debtor who has the private document

Solidary Obliga,on The obliga,on has been remi<ed


1273 EFFECT OF RENUNCIATION OF PRINCIPAL DEBT ON ACESSORY OBLIGATION

EXTINGUISHED EFFECT

Principal Obliga,on Accessory also Ex,nguished

Accessory Obliga,on Principal NOT Necessarily Ex,nguished.


1274 PRESUMPTION IN CASE THING PLEDGE FOUND IN POSSESSION OF DEBTOR Only the accessory obligation is presumed to be remitted, the principal obligation REMANS in force.

For the presumption to arise:In the possession of the debtorThe third person MUST OWN the thing

Confusion or Merger of Rights

CONFUSION/MERGER AS A MODE OF EXTINGUISHMENT

Requisites: 1)  It MUST take place between the principal debtor and the

creditor. 2)  Merger must be clear and definite.3)  The obligation must the same or incidental. (Testate Estate of Mota v. Serra)


Illustration

IN GENERAL

A Debtor

X Creditor

OWES 3,000

Z

3rd person


Debtor

Creditor

A X OWES 3,000 A X Z

Illustration

IN GENERAL


Debtor

Creditor

A OWES 3,000 X Z

3rd person

A

Illustration

IN GENERAL


IN CASE OF JOINT OBLIGATIONS (Article 1277)

A, B, C JOINTLY owes 3,000 to X.X endorses the promissory note to YY endorse the promissory note to A

Held:A’s shares is extinguished, but B and C’s shares remains.Thus, because the credit merges in A, B and C now owes A (1,000 pesos each).


Illustration

IN CASE OF SOLIDARY OBLIGATIONS (Article 1215; par. 2 of 1217)

A, B, C SOLIDARILY owes 3,000 to X. X endorse the promissory note to YY endorse the promissory note to A

Held:Notice that A, who is a debtor becomes a creditor.There is merger or confusion of rights; hence, being a solidary obligation, it is extinguished, but A may claim reimbursement from B and C.


Illustration

1276 Confusion in principal or accessory obligation

Accessory follows the principal (the guaranty being considered the accessory obligation); hence, if there is merger with respect to the principal debt, the guaranty is extinguished

Note: Confusion which takes place in the person of any of the latter does not extinguish the obligation.


Illustra,on

Merger of Principal Debtor or Creditor

Debtor

Creditor

A X

Z

A OWES 3,000

Guarantor

G

Debtor

Creditor

OWES 3,000 X Z 3rd person

A A

Guarantor

Illustra,on


Debtor

Creditor

A X

Z

OWES 3,000

Guarantor G

Illustra,on


Debtor

Creditor

A OWES 3,000

Guarantor

X Z 3rd person

G

Illustra,on


Extinguishment of an accessory obligation The confusion of the creditor with the person of the guarantor does not extinguish the principal obligation.

A owes 3,000 to X with a guaranty of LOT A.LOT A was foreclosed and X bought in a public auction.

Thus, the guaranty is extinguished, but the principal obligation of paying 3,000 is not.


Sameness of the obligation •  A and B jointly owns LOT A.•  A set ups improvement to LOT A worth 100,000.•  Both A and B sells LOT A to C.

•  Held:•  Both A and B do not have any more right to the property,

but A may claim ½ reimbursement for the improvements he introduced. (Testate Estate of Mota v. Serra)


Compensation

Compensation Meaning of Compensation

It is the extinguishment to the concurrent amount of the debtors or obligations of two persons who, in their own right, are reciprocally principal debtors and creditors of each other.

Effect of compensation Involves simultaneous balancing of two obligations

(cum ponder - ‘to weigh together’) in order to totally extinguish them if they are of the same amount or to the extent in which the amount of one is covered by that of the other, if different amount.

WHAT IS COMPENSATION+ EFFECT OF COMPENSATION?

Compensation Prevention of unnecessary suits and payments thru mutual extinction by operation of law of concurring debts (Nadela vs Engineering and Construction Corporation)

1. Compensation as a specie of abbreviated payment (facility of 2. payment and guaranty for the effectiveness of credit);3. As a more convenient and less expensive realization of two payments (simplified payment)4. Economic utility for credit and for saving the use of money in transactions, simplifying accounting 5. Guaranty against fraud

WHY COMPENSATION?

Compensation Compensation shall take place when two persons, in their own right, are creditors and debtors of each other (Art. 1278)

According to cause or origin Legal — this takes place by opera,on of law, and need not be pleaded (1279, 1290). Voluntary or conven,onal — this is due to the agreement of the par,es EVEN IN THE ABSENCE OF SOME REQUIREMENTS (as stated in Art.1279) (Art. 1282)

According to its extent or effect Total — if both obliga,ons are completely ex,nguished because they are of the same or equal amounts (1281). Par,al — when a balance remains (hence, there is a par,al compensa,on in the larger of the two debts)

HOW WILL COMPENSATION TAKE PLACE?

Compensation (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 (Art. 1279).

REQUISITES OF LEGAL COMPENSATION:

Compensation That each of the obligors be bound principally, and that he be at the same time a principal creditor of the other.

(1)  That there must be a relationship of debtor and creditor(2)  There must be two debts and two credits(3)  They must be generally be bound as principals (not in their

representative capacity)

Example: G, as guardian for W, is a creditor of D. D in turn is a creditor of G who owes him a personal debt. There can be NO compensation because it is W who is the real creditor, not G (Escano v. Heirs of Escano) (PARAS 467)

FIRST REQUISITE:

Compensation That both debts consist in a SUM OF MONEY, or if the things due are CONSUMABLE (FUNGIBLE), they be of the same kind, and also of the same quality if the latter has been stated.

Consumable or Fungible The word “consumable” must be taken to mean “fungible” (susceptible of substitution, if such be the intention) (PARAS 468). A thing may be fungible (can be substituted) but not consumable.

Example: A owes B a fountain pen (generic) and B owes A also a fountain pen (generic). Here, compensation may happen since both items are fungible (although not consumable). Had the fountain pen of A be a specific thing, there can be no compensation. Similarly, 10 sacks of rice is not the same as 10 sacks of corn.

SECOND REQUISITE:

Compensation That both debts are due

Statutory Construction“Due” means that the period has arrived, or the condition has been fulfilled. On the other hand, “demandable” may refer to the fact that neither of the debts has prescribed, or that the obligation is not invalid or illegal. Natural obligations are not legally demandable

A debt that has prescribed is no longer demandable and consequently cannot be compensated (Montilla v. Augustinian Corp.)

THIRD REQUISITE:

Compensation That they be LIQUIDATED and DEMANDABLE

LiquidatedThese are debts where the exact amount has already been determined, though not necessarily in figures since capacity of being arrived at by simple arithmetical processes would be enough.

If damages are asked for, and the amount is disputed, the debt cannot be said to be already a “liquidated “one. Once liquidated by a judgment, however, a set-off asked for in a counterclaim would be properDamages cannot be recovered if one’s claim is still subject to litigation (Salinap v. Judge del Rosario) (PARAS 469)

FOURTH REQUISITE:

Compensation That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

FIFTH REQUISITE:

GENERAL RULE - taxes, being obligations of public interest, and governed by special laws, are not subject to set-off or compensation. The government and the tax payer are not creditors and debtors of each other. Debts are due to the government in its corporate capacity while taxes are due to its sovereign capacity.

EXCEPTION – where both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liquidated .

RULE ON TAXES:

Compensation (1) Neither of the debts must there be any retention or controversy commenced by third persons and communicated in due time to the debtor. Thus, there can be no legal compensation when one’s claim against another is still the subject of court litigation.

(2) There must have been NO waiver of the compensation. Although this does not mean that a waiver is precluded since this would not be contrary to public policy.

(3) The compensation of the debts must not have been prohibited by law. The compensation of the following are prohibited:

a. debts arising from a depositum (except bank deposits, which are by law considered as loans to the bank) (Art. 1287)

b. debts arising from the obligations of a depository (Art. 1287)

c. debts arising from the obligations of a bailee in commodatum (like the borrower of a bicycle wherein the borrowing is without compensation) (Art. 1287)d.debts arising from a claim for future support due by gratuitous title (Art. 1287)

e. debts consisting in civil liability arising from a penal offense (Art. 1287)

NEGATIVE REQUISITES:

Compensation

First Rule: The guarantor may set up compensation as regards what the creditor may owe the principal debtor (Article 1280)

• This is actually an exception to the general rule that only the principal debtor can set up against his creditor what the latter owes him.

Rules regarding actions and liabilities of creditor, debtor and other interested parties

Compensation Second Rule: 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 (1283)

• Judicial compensation (compensation when so declared by final judgment of a court in a suit).

It requires:• Both parties must prove their respective claims• All requisites under Art. 1279 must be present, except that at the time of the pleading, the need not yet be liquidated. The liquidation must take place during the proceedings. (Paras)


Compensation

Third Rule: Prior to rescission or annulment, debts may be compensated against each other (1284)1.  Rules on the three cases of compensation which take place

after an assignment of rights made by the creditor (1285)

a.  Assignment with the consent of debtor Debtor cannot set up against the assignee the

compensation which would pertain to him against the assignorUnless assignor was notified by the debtor at the time he

gave his consent, that he reserved his right to the compensation


Compensation



b. Assignment with the knowledge but without the consent of debtor

Debtor may set up the compensation to debts previous to the cession (assignment), but not of subsequent ones


Compensation



c. Assignment without the knowledge of the debtorDebtor may set up the compensation of all credits prior to

the same and also later ones until he had knowledge of the assignment.


Compensation FIRST:When one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in a commodatum (1287, par 1)

Depositum: when a person receives a thing belonging to another with the obligation of safely keeping it and of returning the same (Art. 1962)

Commodatum: a gratuitous contract whereby one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. (Art. 1933)

The purpose of the rule is to prevent breach of trust and confidence (in all cases: depositum, obligations of a depository or of a bailee in a commodatum)However, according to Paras, the depositor is allowed to claim compensation. This is a case of facultative compensation.

WHEN COMPENSATION CANNOT TAKE PLACE

Compensation SECOND:

Claim for support due by gratuitous title without prejudice to paragraph 2 of Article 301 (1287, par 2)-  The right to receive support cannot be compensated because it is

essential to the life of the recipient.

- Exception to this rule: support in arrears may be compensated because the support in arrears is no longer needed as the recipient was able to exist even without the support of the provider.


Compensation THIRD:

When debt consists in civil liability arising from a penal offense

Compensation would be improper and inadvisable because the satisfaction of such obligation is imperative. (Report of the Code Commission; Metropolitan Bank & Trust Company vs. Tonda, 338 SCRA 254 [2000].)


Compensation FOURTH:

Damages suffered by a partnership thru the fault of a partner cannot be compensated with profits and benefits which he may have earned for the partnership by his industry. (Art. 1794).

Here, the partner has the DUTY to obtain benefits for the firm, and a duty not to be at fault, there can be NO COMPENSATION BECAUSE BOTH ARE DUTIES, and the partner is the debtor in both instances.


Novation

Novation

It is the total or partial extinction of an obligation by the creation of a new obligation which substitutes it.

What sets it apart from other forms of extinguishment: juridical act with dual function

Remember: Novation is NEVER presumed.

DEFINITION

Novation

1. Expressly declaredEx. “This agreement will supersede the previous arrangements”

2.  Implied due to incompatibility of the old and new obligations on every point

- Test of incompatibility: The two contracts cannot stand together.

- incompatibility exists in the juridical tie, object or principal conditions, or subjects of the obligation

Art. 1292 - It only takes effect if:

Novation

1.  Previous valid obligation2.  Intent to novate (debtor must be released

from the previous obligation)3.  Extinguishment of the old obligation4.  Validity of the new obligation

Requisites: [VIEN]

1.  If the original obligation was VOID, •  GR: new obligation is ALSO VOID.•  Exception:

•  when annulment may be claimed by the debtor, OR•  when ratification validates acts which are voidable (Art 1298)

2.  If original obligation was VOIDABLE, two possible scenarios:•  if the old obligation was RATIFIED BEFORE NOVATION, then the NEW obligation is VALID•  If the old obligation was VOIDABLE and there was novation, the NEW obligation is VALID even if NOT

RATIFIED, but VOIDABLE at the instance of the debtor.3.  If new obligation is VOID,

•  GR: then original obligation SUBSISTS.•  Exception: Unless parties intended the extinguishment of the old obligation in any event (Art 1297)

4.  If new obligation is VOIDABLE, •  GR: the new obligation is STILL VALID•  Exception: But if new obligation is ANNULLED and set aside, then the original obligation SUBSIST (Ratio:

valid until annulled) 5.  If the original obligation is subject to a SUSPENSIVE or RESOLUTORY condition

•  GR: new obligation will also be subject to the SAME suspensive or resolutory condition•  Exception: UNLESS otherwise stipulated (Art 1299)

RULES concerning the validity of the old or new obligation:

1.  Changing the OBJECT or PRINCIPAL Conditions2.  Substituting the person of the DEBTOR3.  Subrogating a third person to the rights of the

CREDITOR

Novation Modes of Novation: Art. 1291

Novation

Changing the OBJECT or PRINCIPAL Conditions

Novation Substituting the person of the DEBTOR

Expromisioni.  Initiated by a Third Person to replace the debtorii.  Consent of creditoriii.  Old debtor is released from obligation

Delegacioni.  Initiated by original Debtorii.  Consent of creditoriii.  Consent of new debtor

a.  If the old debtor did not initiate the novation - Art. 1294 - applies to Expromisioni.  Rule is the creditor CANNOT go after the old debtor in case of insolvency or non-fulfillment of

the new debtor if the substitution is without the knowledge or against the will of the debtorii.  If it was with the knowledge, the creditor still cannot be held liable for the insolvency or non-

fulfillment of the new debtor since he would be placed in a worse position than in delegacion (where the ground for his liability is only for insolvency of the new debtor).

b.  If the old debtor initiatied the novation - Art. 1295 - applies to Delegacioni.  GR: Creditor cannot hold the old debtor liable in case of insolvency of new debtorii.  Exception: If creditor can prove either:

i.  Insolvency was already existing and of public knowledge at the time of the substitution; OR

ii.  Insolvency was already existing and known to the debtor at the time of the substitution

Can the creditor go still go after the old debtor in certain cases?

Novation Subrogating a third person in the

rights of the CREDITOR > vs. Assignment of credit = transfer of right of assignor to an assignee who would have the right to proceed against the debtor. difference from subrogation: consent of debtor is not necessary and assignment takes effect upon the knowledge of the debtor. (Licaros vs. Gatmaitan)


rights of the CREDITOR A.  Conventional/voluntary – by agreement of all the

parties

i.  Consent of old creditorii.  Consent of debtoriii.  Consent of new creditor


rights of the CREDITOR B.  Legal – takes place by operation of law

i.  GR: Not presumedii.  Exception: Art. 1302

1. Creditor pays another preferred creditor without debtor’s knowledge2. Third person not interested in the obligation pays with the approval of the debtor3. Third person interested pays without knowledge of the debtor (without prejudice to the effects of confusion as to the latter’s share)

Novation General Effects:

1.  Extinguishment of old obligation and creation of a new one

2.  Extinguishment of accessory obligations,•  GR: Accessory follows the principal•  Exception: Art 1296 ...accessory obligations may subsist

only insofar as they may benefit third persons who did not give their consent.

3.  As to new debtor, he has a right to beneficial reimbursement from old debtor if made without the knowledge or against the will of the old debtor (Art. 1236) or reimbursement and subrogation if made with the consent of the old debtor (Art. 1237).

Novation Jurisprudence:

> Situations that RESULT to novation according to cases assigned:•  Compromise agreements after a final and executory

judgment of trial court (Dormitorio vs Fernandez)

Novation Jurisprudence: > Situations that DO NOT result to novation according to cases assigned:•  Acceptance of surety bond = change only in the terms of payment

(Magdalena Estate vs Rodriguez)•  Acceptance of partial payment without agreement to release the original

debtor from responsibility (Quinto vs People)•  Change in the manner of payment•  Payment by an accommodation party = accommodated party is still the

sole debtor (Garcia vs Llamas)•  If it is specifically stated as a temporary agreement (Broadway Centrum

Condo vs Tropical Hut)•  Restructuring agreements = change only the schedule of payments

(California Bus Line vs State Investment)•  If there was no consent from the creditor for the change in the person of

the debtor (Sime Darby Philippines vs Good Year)

Oblicon Extinguishment of Obligation

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