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EXTINGUISHMENT OF OBLIGATIONS departure therefrom • The non-performance of a material

PAYMENT OR PERFORMANCE part of a contract will prevent the performance from
ART 1232 – “Payment means not only the delivery of amounting to a substantial compliance • A party who
money but also the performance, in any other manner of knowingly and willfully fails to perform his contract in
an obligation” any respect, or omits to perform a material part of it
• It is the fulfillment of the prestation due that cannot be permitted under the protection of this rule to
extinguishes the obligation by the realization of the compel the other party to perform; and the trend of the
purposes for which it was constituted • It is a juridical act more recent decisions is to hold that the percentage of
which is voluntary, licit and made with the intent to omitted or irregular performance may in and of itself be
extinguish an obligation • Requisites: sufficient to show that there has not been a substantial
a.) person who pays performance • The party who has substantially
b.) the person to whom payment is made performed may enforce specific performance of the
c.) the thing to be paid obligation of the other party or may recover damages for
d.) the manner, time and place of payment etc their breach upon an allegation of performance, without
• The paying as well as the one receiving should have the proof of complete fulfillment.
requisite capacity • Kinds: • The other party, on the other hand, may by an
a.) normal –when the debtor voluntarily performs the independent action before he is sued, or by a
prestation counterclaim after commencement of a suit against him,
stipulated recover from the first party the damages which he has
b.)abnormal – when he is forced by means of a judicial sustained by the latter’s failure to completely fulfill his
proceeding either to comply with prestation or to pay obligation
indemnity ART 1235 – “When the oblige accepts the performance,
ART 1233 – “A debt shall not be understood to have knowing its incompleteness or irregularity, and without
been paid unless the thing or service in which the expressing any protest or objection, the obligation is
oligatoin consists has been completely delivered or deemed fully complied with”
rendered, as the case may be” • A person entering into a contract has a right to insist on
• States 2 requisites of payment: its performance in all particulars, according to its
a.) identity of prestation - the very thing or service due meaning and spirit. But if he chooses to waive any of the
must terms introduced for his own benefit, he may do so. • But
be delivered or released he is not obliged to accept anything else in place of that
b.) integrity – prestation must be fulfilled completely which he has contracted for and if he does not waive this
• Time of payment – the payment or performance must right, the other party cannot recover against him without
be on the date stipulated (may be made even on Sundays performing all the stipulations on is part • To constitute a
or on any holiday, although some states like the waiver, there must be an intentional relinquishment of a
Negotiable Instruments Law states that payment in such known right. A waiver will not result from a mere failure
case may be made on the next succeeding business day) • to assert a claim for defective performance/payment.
The burden of proving that the obligation has been There must have been acceptance of the defective
extinguished by payment devolves upon the debtor who performance with actual knowledge if the
offers such a defense to the claim of the plaintiff creditor incompleteness or defect, under circumstances that
• The issuance of a receipt is a consequence of usage and would indicate an intention to consider the performance
good faith which must be observed (although our Code as complete and renounce any claim arising from the
has no provision on this) and the refusal of the creditor to defect • A creditor cannot object because of defects in
issue a receipt without just cause is a ground for performance resulting from his own acts or directions
consignation under Art 1256 ( if a receipt has been issued ART 1236. The creditor is not bound to accept payment
by payee, the testimony alone of payer would be or performance by a third person who has no interest in
insufficient to prove alleged payments) the fulfillment of the obligation, unless there is a
ART 1234 – “If the obligation has been substantially stipulation to the contrary. Whoever pays for another
performed in good faith, the obligor may recover as may demand from the debtor what he has paid, except
though there had been a strict and complete fulfillment, that if he paid without the knowledge or against the will
less damages suffered by the obligee” of the debtor, he can recover only insofar as the payment
• In order that there may be substantial performance of has been beneficial to the debtor
an obligation, there must have been an attempt in good • Reason for this article: whenever a third person pays
faith to perform, without any willful or intentional there is a modification of the prestation that is due. •
Generally, the 3rd person who paid another’s debt is It does not prejudice the creditor and the accrual of
entitled to recover the full amount he paid. The law, interest is not suspended by it
however limits his recovery to the amount by which the Art. 1241. Payment to a person who is incapacitated to
debtor has been benefited, if the debtor has no administer his property shall be valid if he has kept the
knowledge of, or has expressed his opposition to such thing delivered, or insofar as the payment has been
payment beneficial to him. Payment made to a third person shall
• If the debt has been remitted, paid compensated or also be valid insofar as it has redounded to the benefit of
prescribed, a payment by a third person would constitute the creditor. Such benefit to the creditor need not be
a payment of what is not due; his remedy would be proved in the following cases:
against the person who received the payment under such (1) If after the payment, the third person acquires the
conditions and not against the debtor who did not benefit creditor's rights;
from the payment • payment against debtor’s will – even (2) If the creditor ratifies the payment to the third person;
if payment of the third party is against the will of the (3) If by the creditor's conduct, the debtor has been led to
debtor, upon payment by the third party, the obligation believe that the third person had authority to receive the
between the debtor and creditor is already extinguished payment. (1163a)
ART 1237. Whoever pays on behalf of the debtor • payment shall be considered as having benefited the
without the knowledge or against the will of the latter, incapacitated person if he made an intelligent and
cannot compel the creditor to subrogate him in his rights, reasonable use thereof, for purposes necessary or useful
such as those arising from a mortgage, guaranty or to him, such as that which his legal representative would
penalty have or could have done under similar circumstances,
• This article gives to the third person who paid only a even if at the time of the complaint the effect of such use
simple personal action for reimbursement, without the no longer exists (e.g., taxes on creditor’s property,
securities, guaranties and other rights recognized in the money to extinguish a mortgage on creditor’s property) •
creditor, which are extinguished by the payment the debtor is not released from liability by a payment to
ART 1238. Payment made by a third person who does one who is not the creditor nor one authorized to receive
not intend to be reimbursed by the debtor is deemed to the payment, even if the debtor believed in good faith
be a donation, which requires the debtor’s consent/ but that he is the creditor, except to the extent that the
the payment is in any case valid as to the creditor who payment inured to the benefit of the creditor • in addition
has accepted it to those mentioned above, payment to a third person
ART 1239. In obligations to give, payment made by one releases the debtor:
who does not have the free disposal of the thing due and a.) when, without notice of the assignment of credit, he
capacity to alienate it shall not be valied, without pays to the original creditor
prejudice to the provisions of article 1427 under the Title b.) when in good faith he pays to one in possession of the
on “Natural Obligations” credit
• consignation will not be proper here. In case the • even when the creditor receives no benefit from the
creditor accepts the payment, the payment will not be payment to a third person, he cannot demand payment
valid except in the case provided in article 1427 anew, if the mistake of the debtor was due to the fault of
ART 1240. Payment shall be made to the person in the creditor
whose favor the obligation has been constituted, or his Art. 1242. Payment made in good faith to any person in
successor in interest, or any person authorized to receive possession of the credit shall release the debtor. (1164)
it • the person in possession of the credit is neither the
• the authority of a person to receive payment for the creditor nor one authorized by him to receive payment,
creditor may be but appears under the circumstances of the case, to be the
a.) legal – conferred by law (e.g.,guardian of the creditor. He appears to be the owner of the credit,
incapacitated, administrator of the estate of the deceased) although in reality, he may not be the owner (e.g., an heir
b.) conventional – when the authority has been given by who enters upon the hereditary estate and collects the
the creditor himself (e.g., agent who is appointed to credits thereof, but who is later deprived of the
collect from the debtor inheritance because of incapacity to succeed) • it is
• payment made by the debtor to a wrong party does not necessary not only that the possession of the credit be
extinguish the obligation as to the creditor (void), if there legal, but also that the payment be in good faith
is no fault or negligence which can be imputed to the Art. 1243. Payment made to the creditor by the debtor
latter (even when the debtor acted in utmost good faith, after the latter has been judicially ordered to retain the
or through error induced by the fraud of the 3rd person). debt shall not be valid. (1165)
• the payment to the creditor after the credit has been burden of the obligation
attached or garnished is void as to the party who • Art. 1248. Unless there is an express stipulation to that
obtained the attachment or garnishment, to the extent of effect, the creditor cannot be compelled partially to
the amount of the judgment in his favor. • The debtor receive the prestations in which the obligation consists.
upon whom garnishment order is served can always Neither may the debtor be required to make partial
deposit the money in court by way of consignation and payments. • However, when the debt is in part liquidated
thus relieve himself from further liability and in part unliquidated, the creditor may demand and
Art. 1244. The debtor of a thing cannot compel the the debtor may effect the payment of the former without
creditor to receive a different one, although the latter waiting for the liquidation of the latter. (1169a)
may be of the same value as, or more valuable than that • The creditor who refuses to accept partial prestations
which is due. In obligations to do or not to do, an act or does not incur delay except when there is abuse of right
forbearance cannot be substituted by another act or or if good faith requires acceptance
forbearance against the obligee's will. (1166a) • This article does not apply to obligations where there
• Upon agreement of consent of the creditor, the debtor are several subjects or where the various parties are
may deliver a different thing or perform a different bound under different terms and conditions
prestation in Art. 1249. The payment of debts in money shall be made
lieu of that stipulated. In this case there may be dation in in the currency stipulated, and if it is not possible to
payment or novation • The defects of the thing delivered deliver such currency, then in the currency which is legal
may be waived by the creditor, if he expressly so tender in the Philippines. The delivery of promissory
declares or if, with knowledge thereof, he accepts the notes payable to order, or bills of exchange or other
thing without protest or disposes of it or consumes it mercantile documents shall produce the effect of
Art. 1245. Dation in payment, whereby property is payment only when they have been cashed, or when
alienated to the creditor in satisfaction of a debt in through the fault of the creditor they have been impaired.
money, shall be governed by the law of sales. (n) In the meantime, the action derived from the original
• This is the delivery and transmission of ownership of a obligation shall be held in the abeyance. (1170)
thing by the debtor to the creditor as an accepted • legal tender means such currency which in a given
equivalent of the performance of the obligation. • jurisdiction can be used for the payment of debts, public
The property given may consist not only of a thing but and private, and which cannot be refused by the creditor
also of a real right (such as a usufruct) • so long as the notes were legal tender at the time they
• Considered as a novation by change of the object were paid or delivered, the person accepting them must
• Where the debt is money, the law on sale shall govern; suffer the loss if thereafter they became valueless
in this case, the act is deemed to be a sale with the • the provisions of the present article have been modified
amount of the obligation to the extent that it is by RA No. 529 which states that payments of all
extinguished being considered as price monetary obligations should now be made in currency
Art. 1246. When the obligation consists in the delivery of which is legal tender in the Phils. A stipulation providing
an indeterminate or generic thing, whose quality and payment in a foreign currency is null and void but it does
circumstances have not been stated, the creditor cannot not invalidate the entire contract
demand a thing of superior quality. Neither can the • A check, whether a manager’s check or an ordinary
debtor deliver a thing of inferior quality. The purpose of check is not legal tender and an offer of the check in
the obligation and other circumstances shall be taken into payment of debt is not a valid tender of payment
consideration. (1167a) Art. 1250. In case an extraordinary inflation or deflation
• If there is disagreement between the debtor and the of the currency stipulated should supervene, the value of
creditor as to the quality of the thing delivered, the court the currency at the time of the establishment of the
should decide whether it complies with the obligation, obligation
taking into consideration the purpose and other shall be the basis of payment, unless there is an
circumstances of the obligation • Both the creditor and agreement to the contrary. (n)
the debtor may waive the benefit of this article • Applies only where a contract or agreement is
Art. 1247. Unless it is otherwise stipulated, the involved. It does not apply where the obligation to pay
extrajudicial expenses required by the payment shall be arises from law, independent of contracts • Extraordinary
for the account of the debtor. With regard to judicial inflation of deflation may be said to be that which is
costs, the Rules of Court shall govern. (1168a) unusual or beyond the common fluctuations in the value
• This is because the payment is the debtor’s duty and it of the currency, which parties could not have reasonably
inures to his benefit in that he is discharged from the foreseen or which was manifestly beyond their
contemplation at the time when the obligation was his right to apply it to any of his debts, the application
constituted shall be understood as provided by law, unless the
Art. 1251. Payment shall be made in the place designated creditor makes the application and his decision is
in the obligation. There being no express stipulation and accepted by the debtor. This application of payment can
if the undertaking is to deliver a determinate thing, the be made by the creditor only in the receipt issued at the
payment shall be made wherever the thing might be at time of payment (although the application made by
the moment the obligation was constituted. In any other creditor may be contested by the debtor if the latter’s
case the place of payment shall be the domicile of the assent to such application was vitiated by such causes as
debtor. mistake, violence, intimidation, fraud, etc) • The debtor
• If the debtor changes his domicile in bad faith or after and the creditor by agreement, can validly change the
he has incurred in delay, the additional expenses shall be application of payment already made without prejudice
borne by him. These provisions are without prejudice to to the rights of third persons acquired before such
venue under the Rules of Court.(1171a) agreement
• Since the law fixes the place of payment at the domicile Art. 1253. If the debt produces interest, payment of the
of the debtor, it is the duty of the creditor to go there and principal shall not be deemed to have been made until
receive payment; he should bear the expenses in this case the interests have been covered. (1173)
because the debtor cannot be made to shoulder the • Applies both to compensatory interest (that stipulated
expenses which the creditor incurs in performing a duty as earnings of the amount due under the obligation) and
imposed by law and which is for his benefit. to interest due because of delay or mora on the part of
• But if the debtor changes his domicile in bad faith or the debtor
after he has incurred in delay, then the additional Art. 1254. When the payment cannot be applied in
expenses shall be borne by him accordance with the preceding rules, or if application can
• When the debtor has been required to remit money to not be inferred from other circumstances, the debt which
the creditor, the latter bears the risks and the expenses of is most onerous to the debtor, among those due, shall be
the transmission. In cases however where the debtor deemed to have been satisfied. If the debts due are of the
chooses this means of payment, he bears the risk of loss. same nature and burden, the payment shall be applied to
APPLICATION OF PAYMENTS all of them proportionately. (1174a)
Art. 1252. He who has various debts of the same kind in • As to which of 2 debts is more onerous is
favor of one and the same creditor, may declare at the fundamentally a question of fact, which courts must
time of making the payment, to which of them the same determine on the basis of the circumstances of each case
must be applied. Unless the parties so stipulate, or when • Example:
the application of payment is made by the party for PAYMENT BY CESSION
whose benefit the term has been constituted, application Art. 1255. The debtor may cede or assign his property to
shall not be made as to debts which are not yet due. his creditors in payment of his debts. This cession, unless
If the debtor accepts from the creditor a receipt in which there is stipulation to the contrary, shall only release the
an application of the payment is made, the former cannot debtor from responsibility for the net proceeds of the
complain of the same, unless there is a cause for thing assigned. The agreements which, on the effect of
invalidating the contract. (1172a) the cession, are made between the debtor and his
• It is necessary that the obligations must all be due. It is creditors shall be governed by special laws. (1175a)
only in case of mutual agreement of the parties or upon • Consists of the abandonment of the universality of the
the consent of the party in whose favor the term was property of the debtor for the benefit of his creditors in
established that payments may be applied to obligations order that such property may be applied to the payment
which have not yet matured of the credits
• It is also necessary that all the debts be for the same • Must be initiated by debtors
kind, generally of a monetary character. This includes • Such assignment does not have the effect of making the
obligations which were not originally of a monetary creditors the owners of the property of the debtor unless
character, but at the time of application of payment, had there is an agreement to that effect
been converted into an obligation to pay damages by TENDER OF PAYMENT AND CONSIGNATION
reason of breach or nonperformance. Art. 1256. If the creditor to whom tender of payment has
• If the debtor makes a proper application of payment but been made refuses without just cause to accept it, the
the creditor refuses to accept it because he wants to apply debtor shall be released from responsibility by the
it to another debt, such creditor will incur in delay consignation of the thing or sum due.
• If at the time of payment, the debtor does not exercise Consignation alone shall produce the same effect in the
following cases: which the
(1) When the creditor is absent or unknown, or does not consignation is ineffective
appear at the place of payment; 2.) That the tender of payment was of the very thing due,
(2) When he is incapacitated to receive the payment at or in
the time it is due; case of money obligations that legal tender currency was
(3) When, without just cause, he refuses to give a receipt; offered
(4) When two or more persons claim the same right to 3.) That the tender of payment was unconditional and
collect; 4.) That the creditor refused to accept payment without
(5) When the title of the obligation has been lost. (1176a) just
• Tender of payment : manifestation made by the debtor cause
to the creditor of his desire to comply with his Art. 1257. In order that the consignation of the thing due
obligation, with the offer of immediate performance; may release the obligor, it must first be announced to the
preparatory act which precedes consignation persons interested in the fulfillment of the obligation.
• Consignation : the deposit of the object of the The consignation shall be ineffectual if it is not made
obligation in a competent court in accordance with the strictly in consonance with the provisions which regulate
rules prescribed by law, after the tender of payment has payment. (1177)
been refused or because of circumstances which render • The lack of notice does not invalidate the consignation
direct payment to creditor impossible or inadvisable; but simply makes the debtor liable for the expenses
constitutes payment; must follow, supplement or • The tender of payment and the notice of consignation
complete the tender of payment in order to discharge the sent to the creditor may be made in the same act. In case
obligation of absent or unknown creditors, the notice may be made
• Tender of payment by certified check is valid; a mere by publication
check would also be valid for tender of payment if the Art. 1258. Consignation shall be made by depositing the
creditor makes no prompt objection, but this does not things due at the disposal of judicial authority, before
stop the latter from later demanding payment in cash whom the tender of payment shall be proved, in a proper
• When a tender of payment is made in such a form that case, and the announcement of the consignation in other
the creditor could have immediately realized payment if cases.
he had accepted the tender, followed by a prompt attempt The consignation having been made, the interested
of the debtor to deposit the means of payment in court by parties shall also be notified thereof. (1178)
way of consignation, the accrual of interest on the Art. 1259. The expenses of consignation, when properly
obligation will be suspended from the date of such made, shall be charged against the creditor. (1179)
tender. But when the tender of payment is not • The consignation is properly made when:
accompanied by the means of payment, and the debtor 1.) after the thing has been deposited in court, the
did not take any immediate step to make a consignation, creditor accepts the consignation without objection and
then the interest is not suspended from the time of such without any reservation of his right to contest it because
tender. of failure to comply with any of the requisites for
• Requisites of consignation: consignation and
1.) There was a debt due 2.) when the creditor objects to the consignation but the
2.) The consignation of the obligation was made because court, after proper hearing, declares that the consignation
of has been validly made *in these cases, the creditor bears
some legal cause provided in the present article the expenses of the consignation
3.) That previous notice of the consignation has been Art. 1260. Once the consignation has been duly made,
given to the debtor may ask the judge to order the cancellation of
persons interested in the performance of the obligation the obligation. Before the creditor has accepted the
4.) The amount or thing due was placed at the disposal of consignation, or before a judicial declaration that the
the consignation has been properly made, the debtor may
court withdraw the thing or the sum deposited, allowing the
5.) After the consignation had been made the persons obligation to remain in force. (1180)
interested • Consignation has a retroactive effect and the payment
were not notified thereof is deemed to have been made at the time of the deposit
• If the reason for consignation is the unjust refusal of the of the thing in court or when it was placed at the disposal
creditor to accept payment, it must be shown: of the judicial authority
1.) That there was previous tender of payment, without • The effects of consignation are: 1.) the debtor is
released in the same manner as if he had performed the the fact that its supplier has a deadline to meet which is
obligation at the time of the consignation because this on August 4, 1952.
produces the same effect as a valid payment, On August 4 1952, PNB informed appellant NARIC that
2.) the accrual of interest on the obligation is suspended its application for LOC has been approved with the
from the moment of consignation, condition that 50% marginal cash deposit be paid and
3.) the deteriorations or loss of the thing or amount that drafts are to be paid upon presentment. However,
consigned occurring without fault of the debtor must be NARIC is not in any financial position to meet the
borne by the creditor, because the risks of the thing are condition. Consequently, the credit instrument applied
transferred to the creditor from the moment of for was opened only on September 8 1952 (more than 2
deposit mos from the execution of the contract – after the 15 day
4.) any increment or increase in value of the thing after grace period). As a result of the delay, the allocation of
the consignation inures to the benefit of the creditor. • appllee’s supplier in Rangoon was cancelled and the 5%
When the amount consigned does not cover the entire deposit or P200K was forfeited.
obligation, the creditor may accept it, reserving his right ISSUE: WON NARIC is liable to pay plaintiff damages
to the balance. If no reservations are made, the HELD:
acceptance by the creditor of the amount consigned may What singularly delayed the opening the stipulated LOC
be regarded as a waiver of further claims under the which in turn, caused the cancellation of the allocation in
contract Burma (and the forfeiture of the 5% deposit) was the
Art. 1261. If, the consignation having been made, the inability of the appellant corporation to meet the
creditor should authorize the debtor to withdraw the condition imposed by the Bank for granting the same.
same, he shall lose every preference which he may have Also, its culpability arises from its willful and deliberate
over the thing. The co-debtors, guarantors and sureties assumption of contractual obligations even as it was well
shall be released. (1181a) aware of its financial incapacity to undertake the
• When the consignation has already been made and the prestation (manifested in its letter of application with
creditor has accepted it or it has been judicially declared PNB) Article 1170 provides that those who in the
as proper, the debtor cannot withdraw the thing or performance of their obligations are guilty of fraud,
amount deposited unless the creditor consents thereto. If negligence, or delay and those who in any manner
the creditor authorizes the debtor to withdraw the same, contravene the tenor thereof are liable for damages.
there is a revival of the obligation, which has already *In view of RA 527 which specifically requires the
been extinguished by the consignation, and the discharge of obligations only “in any coun or currency
relationship of debtor and creditor is restored to the which at the time of payment is legal tender for public
condition in which it was before the consignation. But and private debt”, the award of damages in US dollars
third persons, solidary co-debtors, guarantors and made by the lower court is modified by converting it into
sureties who are benefited by the consignation are not Philippine pesos at the rate of exchange prevailing at the
prejudiced by the revival of the obligation between the time the obligation was incurred or when the contract in
debtor and the creditor question was executed.
ARRIETA v NATIONAL RICE AND CORN CORP On November 17 1959, plaintiff-appellee Octavio
(NARIC) Kalalo, a licensed civil engineer entered into an
Plaintiff participated in a public bidding called by agreement with defendant-appellant Alfredo Luz, a
NARIC for the supply of 20k metric tons of Burmese licensed architect whereby the former was to render
rice and was awarded the contract. Subsequently, engineering design services to the latter for fees, as
plaintiff and NARIC entered into a Contract of Sale of stipulated in the agreement, Kalalo sent to Luz a
Rice (in which the defendant in turn would commit itself statement of account to which was attached an itemized
to pay by means of a letter of credit in US currency in statement of architect’s account according to which the
favor of the plaintiff and/or supplier in Burma. Despite total engineering fee asked by engineer amounted to
its commitment to pay immediately, the defendant took P116,565 from which sum was to be deducted the
the first step to open the letter of credit one month after previous payments made in the amount of P57K. Luz
the execution of the contract (July 30 1952). It was stated then sent a resume of fees to Kalalo (May 18 1962). Said
in the application (for the LOC) that they do not have a fees, according to appellant amounted to P10,861.08
sufficient deposit with PNB to cover the amount required instead of the amount claimed
as a condition for the opening of LOC and they were by appellee. On June 14 1962, appellant sent appellee a
asking to be treated as a special case in consideration to check for said amount which appellee refused to accept
as full payment of the balance of the fees due him. auction sale, petitioner deposited with the Clerk of Court
Luz contends that some of Kalalo’s services were not in the sum of P63,130 consisting of P50k in Cashier’s
accordance with the agreement and his claims were not check and P13,130 in cash. Respondent judge declined
justified by the services actually rendered. Luz also petitioner’s motion for issuance of certificate of
claims that the statement of account given to him by satisfaction of judgment, relying on Sec 63 of the Central
Kalalo barred the latter from asserting any claim contrary Bank Act stating that checks representing deposit money
to what was stated therein. On the other hand, Kalalo do not have legal tender power
asserts that when he prepared the said statement of ISSUE: WON petitioner’s check payment was a valid
account, he was laboring an innocent mistake. Second, tender so as to extinguish his obligation with the private
Luz was aware of the services actually rendered by respondent
Kalalo and the fees due to the latter under the original HELD: SC ordered private respondent to accept the sum
agreement and third, appellant did not rely on the data of P63,130 under deposit as payment of the judgment
appearing in the said statement of account obligation in his favor
ISSUES: RATIO: Since the check deposited had been certified by
1.) WON Kalalo is barred from soliciting a fee different the drawee bank, by the certification, the funds
than that indicated in the statement of account by means represented by the check are transferred from the credit
of estoppel (no) of the maker to that of the payee (the latter becomes the
2.) WON the lower court erred in holding that the depositor of the drawee bank with rights and duties of
balance from LUZ on the IRRI project should be paid on one in such situation). The object of certifying a check,
the basis of the rate of exchange of the US dollar to the as regards both parties is to enable the holder to use it as
Phil peso at the time of payment of the judgment (no) money.
HELD: Court affirmed decision of the lower court MCLAUGHLIN v CA
stating that the amount due to Kalalo was $28k as his fee Petitioner Mclaughlin and respondent Flores entered into
in IRRI Institute Project (to be converted into Phil peso a contract of conditional sale of real property. The
on the basis of the current rate of exchange at the time of contract fixed the total price of the property to P140K
the payment of the judgment payable as follows: a.) 26,550 upon execution of the
RATIO: deed and b.) 113,450 due not later than May 31 1977. for
1.) Estoppel did not rise in this case because the act of failure of private respondent to pay the balance due on
the party sought to be estopped is due to ignorance May 31, 1977, petitioner filed a complaint for the
founded on innocent mistake. Also, none of the elements rescission of the deed of conditional sale. Subsequently,
in relation to party claiming estoppel are present the parties entered a compromise agreement stating that
(elements: 1.) lack of knowledge to the facts in question, the indebtedness of private respondent to petitioner
2.) reliance in good faith upon the conduct or statements amounts to P119,050.71 payable as follows: a.) 50k upon
of the party to be estopped 3.) action or inaction based the signing of agreement and b.) 69k+ in 2 equal
thereon installments (one on June and one on December). As
2.) RA 529 (requiring payment in foreign currency must agreed upon, private respondent paid P50k upon signing
be discharged in Phil currency) does not provide for the the agreement Pursuant to the compromise agreement
rate of exchange for the payment of obligation incurred also, private respondent
after the enactment of said Act. The logical conclusion is agreed to pay P1k monthly rental beginning December 5
that the rate of exchange should be that prevailing at the 1979 until the obligation is duly paid. The compromise
time of payment for such contracts. agreement also stipulates that in the event the private
NEW PACIFIC TIMBER & SUPPLY CO INC v respondent fails to comply with his obligation, plaintiff
SENERIS will be entitled to rescission of the contract.
Petitioner is the defendant in a complaint for collection Petitioner filed a motion for rescission alleging that
of money filed by the private respondent. Subsequently, private respondent failed to pay the installment due on
a compromise judgment was rendered in accordance June 1980 and since June 1980 he had failed to pay a
with an amicable settlement entered into by the parties. monthly rental of P1k.TC granted the motion. On Nov
However, petitioner failed to comply with his obligation. 1980, private respondent filed a motion for
Because of this, the respondent judge, upon motion of reconsideration tendering at the same time a Pacific
private respondent, issued an order for the issuance of a banking Corp certified manager’s check worth
writ of execution for the amount of P63,130. Pursuant to P76,059.71. CA nullified orders of the TC
that, personal properties of petitioner were also levied ISSUES:
upon and set for auction sale. Prior to the day of the WON private respondent’s default in payment
constitutes a substantial breach of the contract so as to of this, respondent’s mother, Segunda de Guzman
warrant its rescission (no) executed in favor of the esguerras a promissory note for
WON private responden’ts offer of payment by certified P2,100 (P1000 due on August 12 1962 and P1100 not
check is a valid tender (yes) later than Augus 31 1962, upon default of the first
HELD: decision of CA was affirmed. However, since installment, the entire value becomes due and
private respondent did not deposit said amount with the demandable). De Guzman failed to pay both
court, his obligation was not paid and he is liable in installmnents so the Esguerras commenced a civil case
addition for the payment of the monthly rental of P1k against Mrs. De Guzman. They also instituted a civil
from Jan 1,1981 until said obligation is duly paid case against de Guzman and writs of attachment were
RATIO: Since private respondent as purchaser by issued. Thereafter, the parties reached a compromise
installment has already paid a substantial portion of the agreement wherein defendants admit their indebtedness
purchase price, it would be inequitable to have the worth P2,260 . This sum was not paid to the Esguerras
amount paid forfeited as liquidated damages (as on or before November 26 1962 as stipulated in the
stipulated in the contract), particularly if tender of compromise agreement. De Guzman however alleges
payment was made. Also, private respondent’s tender of that he had delivered to Esguerra through his counsel
payment of the amount of P76,059.71 was within the 30- P800 on December 1962 and P1460 on January 5 1963
day period granted by law (RA 6552 – a lot installment so he filed a motion for the release of the properties
buyer is given a grace period to pay installments in seized. De Guzman maintain and the lower court held
arrears) that the receipt of said sums P800 and P1400 by the
Also, the offer of payment by certified check is a valid Esguerras constituted “acceptance” of the incomplete
tender of payment. and irregular performance of their obligation, having
TIBAJIA JR v CA been made without any protest or objection.
A suit for collection of a sum of money was filed by ISSUE: WON Esguerra’s issuance of receipt constituted
Eden Tan against the Tibajia spouses. A writ of acceptance so as to release de Guzman from completing
attachment was issued by the trial court on the deposit his obligation (no)
made by the Tibajia spouses in HELD: decision of lower court was reversed
another case in RTC Caloocan amounting to P442,750 RATIO: The day immediately following the first
had been garnished. The RTC rendered its decision in payment of P800, the Esguerras asked Judge Villanueva
favor of plaintiff Tan ordering the Tibajia spouses to pay to issue the corresponding writs of execution in the 2
her P300K. Eden Tan filed the correspondeing motion cases. Thus, the Esguerras patently manifested their
for execution and the garnished funds at RTC were dissatisfaction with – which necessarily implied an
levied upon. The Tibajia spouses then delivered to the objection or protest to- said partial payment
deputy sheriff the total money judgment in the ff form: *the law does not require the protest or objection of the
P262k+ in cashier’s check and P135k+ in cash. Private creditor to be made in a particular manner or at a
respondent Tan refused to accept the payment made by particular time. So long as the acts of the creditor at the
the Tibajia spouses and instead insisted that the time of the incomplete or irregular payment by the
garnished funds at RTC be withdrawn to satisfy the debtor, or within a reasonable time thereafter, evince that
judgment obligation. the former is not satisfied with or agreeable to said
ISSUE: WON the BPI cashier’s check (P262k+) payment or performance, the obligation shall not be
tendered by petitioners for payment of the judgment debt deemed fully extinguished.
is legal tender TOLENTINO v CA
HELD: Pursuant to RA 529, a check is not legal tender Ceferino dela Cruz died and left his heirs a parcel of
and a creditor may validly refuse payment by check land. The dela Cruzes sold the homestead land to the
whether it be a manager’s cashier’s or personal check. Tolentino spouses. The Tolentino spouses constituted a
ESGUERRA v VILLANUEVA mortgage over the land together with 2 other parcels of
Petitioner Esguerra and respondent de Guzman entered land in favor of BPI for a loan of P40k. Another
into a contract whereby Esguerra leased to de Guzman a mortgage was constituted over the said properties in
portion of his building for a term of 10 years beginning favor of BPI. The Tolentinos failed to pay their mortgage
from July 12 1961 for a monthly rental of P300 up to indebtedness to BPI upon maturity. So a judicial
July 11 1962 and P400 thereafter. De Guzman failed to foreclosure sale was held wherein BPI was the highest
pay the rental from February to August 1962 aggregating bidder. Meanwhile, on February 4, 1967, the dela Cruzes
P1800, in addition to the sum of P300 (purchase price of filed an action against the Tolentinos for the repurchase
equipment bought by him from the Esguerras. Because of the homestead land on the ground that they tried to
repurchase said land extrajudicially but the Tolentinos of its decision to return the mortgaged property.
would not heed their request. The lower court rendered a Accordingly, the mortgaged vehicle was returned.
decision allowing the dela Cruzes to repurchase the land Appellee informed appellant that the former cannot sell
and the possession thereof was delivered to the dela the vehicle as there were unpaid taxes so he offered to
Cruzes upon payment. When Tolentino went to BPI to deliver back the motor to the appellant but the latter
redeem the homestead property, she was informed that refused to accept it. CFI and CA adjudged that the
she can no longer do so because the property was already appellant (Phil Acetylene) should accept back the motor
conveyed to the dela Cruzes. The branch manager of BPI vehicle.
sent a letter to Tolentino stating that they can stil redeem ISSUE: WON the mere return of the motor vehicle by
the 2 other properties before the expiration of the appellant extinguished his obligation for the unpaid price
redemption period upon payment of the balance HELD: Judgment of CA was affirmed
remaining (P75,995.07). However, instead of complyinh RATIO: Mere delivery of mortgaged motor vehicle by
with BPI’s advice Tolentino consigned with the Office of mortgagor does not mean transfer of ownership to
the City Sheriff a crozzed PNB check for P91,995.07. mortgagee without his
However, she then issued a stop payment order against consent under the principle of dacion en pago. What is
the said crossed check to protect her rights and prevent transferred is merely possession of the property. The
BPI from cashing said check without returning all her evidence on record fails to show that the mortgagee, the
properties. Simultaneously with the consignation of the herein appellee, consented or at least intended that the
crossed check, she also filed a complaint mere delivery to and acceptance by him of the
(redemption case) against BPI) for refusing to allow mortgaged motor vehicle be construed as actual
them to redeem all 3 lots and praying that BPI be ordered payment, more specifically dation in payment. In the
to allow the Tolentinos to redeem their properties and to absence of clear consent of appellee to the proferred
accept the payment consigned by them. Upon appeal, CA special mode of payment, there can be mo transfer of
stated that the manner of the tender of payment made by ownership of the mortgaged motor vehicle from
them through consignation by crossed check does not appellant to appellee.
satisfy the requirement that payment of debts in money LEGASPI v CA
should be made in the currency stipulated (father vs. son-in-law)
ISSUE: WON BPI was legally justified in refusing the Nature: Action for reconveyance of properties pursuant
Tolentinos’ demand to be allowed to redeem the lands in to a sale with pacto de retro
question Facts:
HELD: The right of redemption is not an obligation but Bernardo B. Legaspi is the registered owner of two
an absolute privilege. A bona fide tender of the parcels of land which he sold to his son-in-law, Leonardo
redemption price and formal offer to redeem is not B. Salcedo on October 15, 1965 for the sum of
essential where the redemption is being exercised by way Php25,000 with the right to repurchase the same within 5
of judicial action. A redemption is not rendered invalid years from the execution of the deed of sale. Before the
by the fact that the sheriff accepted check rather than expiry date of the repurchase period Legaspi offered and
cash. The exercise of this right being optional no tendered to Salcedo the amount of Php25,000 for the
importance can be attached to the fact that a stop repurchase of the two parcels of land; that the tender of
payment order was issued against the check. payment was refused by Salcedo on the ground that the
FILINVEST CREDIT CORP v PHIL ACETYLENE CO repurchase price should have been Php42,250 due to
INC extraordinary inflation. Salcedo, furthermore; refused to
Philippine Acetylene Co. Inc purchased from Alexander convey the property to Legaspi. As a result of his refusal,
Lim a motor vehicle. As security for the payment, the Legaspi consigned with the CFI of Cavite the amount of
appellant executed a chattel mortgage over the same Php25,000.
motor vehicle in favor of Lim Subsequently, Lim Issue: WON the prior offer and tender of payment of the
assigned to Filinvest all his rights, title and interest in the amount of Php25,000 is valid as to warrant reconveyance
promissory note and chattel mortgage. Appellant failed of the parcels of land
to comply with the terms and conditions set forth in the Held: YES. Legaspi offered and tendered the amount to
promissory note since it had defaulted in the payment of Salcedo within the five year period that he is allowed to
9 successive installments. Appelee sent a demand letter repurchase the property. The court held that the argument
demanding that appellant either remit the aforesaid of Salcedo in refusing the payment of Legaspi within the
amount in full or return the mortgaged property. period allowed for him to repurchase the property is
Replying thereto, appellant wrote back advising appellee untenable. The case involves the exercise of the right to
repurchase and a showing that petitioner made a valid instituted.
tender of payment is sufficient. It is enough that a sincere Subsequently, as a consequence of the extra-judicial
or genuine tender of payment and not a mock and settlement of the matter negotiated by the petitioners and
deceptive one was made. The fact that he deposited the the bus insurer Phlippine First Insurance Company
amount to the clerk of court is merely a security for the (PFICI)—Bienvinido Nacario’s widow, Alicia received
petitioner is was not an essential act that had to be P18500. In consideration of the amount she executed a
performed after the tender of “Release of Claim” in favor of the petitioners and PFICI
payment was refused although it may serve to indicate releasing and forever discharging them from all actions,
the veracity of the desire to comply with the obligation. claims, and demands arising from the accident. She
Doctrine: likewise executed an affidavit of desistance in which she
In a sale with pacto de retro a showing that a valid tender formally manifested her lack of interest in instituting any
of payment was made within the period allowed for case, either civil or criminal against petitioners.
repurchase is sufficient consignation after the tender was A year and ten months after the accident the parents of
refused is not necessary. Nacario, filed a complaint for damages against the
HAHN v CA petitioners. They alleged that petitioners failed to fulfill
(Diamonds are a girl’s bestfriend) their promise that as extra-judicial settlement, they shall
Nature: Action for recovery of two diamond rings or be indemnified for the death of their son and for the
their value. damage to the tricycle the purchase price of which they
Facts: only loaned to the victim.
Santos received two diamond rings with a total value of Issue: WON, the parents of the victim can sue for
Php47,000 in 1966 from the petitioner. The rings were damages notwithstanding the release of claim and
delivered to her for sale on commission and that they affidavit of desistance executed by the victim’s wife.
would be returned upon demand if unsold. The rings Held: NO. Obligations are extinguished by various
were not sold nor were they returned when demanded by modes among them by payment. There is no denying that
Hahn. the petitioner had paid their obligation arising from the
Issue: WON an offer of payment on installment made by accident. The only question now is whether or not Alicia,
Santos can be validly rejected? the surviving spouse and the one who received the
Held: Yes. Petitioner can validly reject he offer to pay for petitioner’s payment is entitled to it. Article 1240 of the
the rings on installment because Hahn was entitled to civil code enumerates the persons to whom payment to
payment in full. If such payment could not be made she extinguish an obligation should be made. The
is obligated to return the rings. According to Article 1233 enumeration in Article 1240 includes a successor in
of the Civil Code, “a debt shall not be understood to have interest as the person authorized to receive payment. It is
been paid unless the thing or service in which the patently clear from a reading of Articles 1240 and 884
obligation consists has been completely delivered or that the parents of the deceased succeed only when the
rendered as the case may be.” latter dies without a legitimate descendant. Petitioner
As for the private respondent’s offer to return the therefore acted correctly in settling their
solitaire ring, which was also refused, the pertinent rule obligation with Alicia as the widow of Bienvinido and as
is Article 1244, providing that “the debtor of a thing the natural guardian of their lone child.
cannot compel the creditor to receive a different one, Neither can respondents seek relief and compensation
although the latter may be of the same value as, or more from the petitioners as creditors of Bienvinido. The said
valuable than that which is due.” More so in this case purchase price of the tricycle and the funeral expenses
where the ring offered ws less valuable than that which is are but money claims against the estate of their son.
due. Doctrine: Mere estrangement is not a legal ground for
BARITUA v CA the disqualification of a surviving spouse as an heir of
(Estranged wife benefits from dead hubby) the deceased spouse.
Nature: Complaint for damages. AQUINO v CA
Facts: Nature: Criminal Case for Illegal Recruitment
Bienvinido Nacario, tricycle driver, was driving along Facts:
the national Highway in Camarines Sur when he met an Rodrigo Nicolas, Braulio Sapitula, Aurelio Costales and
accident with a bus driven by petitioner Bitancor and Benito Vertudez filed the instanct case against Aurora
owned and operated by petitioner Jose Baritua. Nacario Aquino for illegal recruitment.
and his passenger died and the tricycle was damaged. No Rodrigo Nicolasa laborer applied at Aquino’s travel
criminal case arising from the incident was ever agency for the position of carpenter. As part of his
application he paid the amount of Php1500, of which manifestation Accepting Consignation and Motion to
Php1000 was refunded directly to him by defendant and Dismiss on August 1, 1988. In the manifestation he
the balance of Php500 was included in0 0an alleged stated, inter alia, that”without necessarily admitting the
“group refund check” for Php5720 which could not be correctness of obligation of plaintiff to defendant, the
cashed for lack of funds. latter hereby manifests to accept the said amount of
Braulio Sapitula on the other hand is also a farmer who Php113750 which is consigned by plaintiff, provided that
likewise applied for the position of carpenter. He also the present complaint be dismissed outright with costs
paid the amount of Php1500 for his application. against plaintiff.
Aurelio Costales likewise applied for a job in Guam and Issue: WON the acceptance with reservation made by
also paid Php1500. Diappointed for not being able to go plaintiff in his manifestation of the consignation is valid?
to Guam he asked for a refund. He as paid Php700 and Held: YES. Private respondent’s acceptance of the
the remaining balance was part of the alleged “group amount consigned by the petitioner-debtor with a
refund check” for Php5270 issued by appellant. reservation or qualification as to the correctness of the
Benito Vertudez also applied for a job in Guam. He was petitioner’s obligation is legally permissible. Citing
able to advance the amount of Php1070 the refund of Tolentino (cited 3Llerena 263), the court said that before
which was also part of the alleged group refund check. a consignation can be judicially declared proper, the
Issue: WON the obligation of Aquino was discharged creditor may prevent the withdrawal of the amount
through the “group refund check” consigned by the debtor, by accepting the consignation,
Held: NO. The charges for illegal recruitment filed even with reservations.
against Aquino was dismissed and therefore what A creditor could accept a valid consignation even with
remains to be discussed is whether or not her liability to reservation as to his right to damages and other claims
refund the amounts paid to her by the petitioners was (Sing Juco v. Cuaycong, 46 Phil. 81 ).
likewise discharged. On the contrary, when the creditor’s acceptance of the
The petitioner issued a check to reimburse the money consigned is conditional and with reservations, he
complainants for the sums of money paid by the latter by is not deemed to have waived he claims he reserved
virtue of the “failed” overseas contract. The controversy against his debtor. Thus, when the amount consigned
arose when the check was dishonored by the drawee does not cover the entire obligation, the creditor may
bank due to lack of funds. The petitioner claims full accept it, reserving his right to the balance.
satisfaction of the sum owed by her since she already Doctrine: Acceptance of consignation with reservation to
issued a check in favor of complainants. Her position is other claims arising from the obligation is valid.
untenable. The issuing of a check is not payment until Acceptance of money consigned unconditionally and
the check has been encashed. Although a check, as a without reservation stands as a waiver of the creditor’s
negotiable instrument, is regarded as a substitute or other claims under the contract.
money, it is not money. Hence, its mere delivery does CALTEX v IAC
not, by itself, operate as payment. It was therefore, de Nature: Action for the collection of sum of money.
rigueur for the petitioner to have presented the check she Facts:
issued to the complainants which had been honored by On January 12, 1978, private respondent Asia Pacific
the drawee bank in order to show that the amount Airways Inc. entered into an agreement with petitioner
covered by the check has been received evidencing, Caltex whereby the latter agreed to supply private
therefore, full satisfaction of the sums of money owed to respondent’s aviation fuel requirements for two years
the complainants. The honored check was never from January 1, 1978 until December 31, 1979. Pursuant
presented. thereto, Caltex supplied respondent’s fuel requirements.
Doctrine: The issuing of a check is not payment until the As of June 30, 1980 Asia Pacific had a balance of
check has been encashed. Php4,072,682.13 representing the unpaid price of the
To be considered as payment, the check which was fuel supplied. To settle this obligation respondent
subsequently honored by the drawee bank should be executed a Deed of Assignment on June 30, 1980
presented as evidence. wherein it assigned to Caltex its receivables or refunds of
RIESENBACK v CA Special Fund Import Payments from the National
Nature: Complaint for consignation and damages. Treasury of the Philippines to be applied as payment for
Facts: its balance with Caltex. On February 12, 1981, pursuant
On July 27, 1988 petitioner consigned and deposited to the Deed of Assignment a treasury warrant in the
with the Clerk of Court of RTC Cebu the sum of amount of Php5,475,24 was issued to Caltex. Four days
Php113,750. Respondent subsequently filed a later, respondent having learned that the amount covered
by the Deed of obtain a P1M loan putting up the previously mortgaged
Assignment exceeded the amount of his obligation with property to Asencio as security. The loan is evidenced by
Caltex asked for a refund of the excess. Caltex made a a promissory note providing for the payment of P1.4M.
refund pf Php900,000 plus in favor of private Furthermore, the promissory note also includes a
respondent. The latter believing itself to be entitled to a stipulation that should an extraordinary inflation should
larger amount by way of refund demanded the refund of supervene the value of the peso at the time of the
the remaining amount which petitioner explained in its establishment of the obligation shall be the basis for
letter response that the remaining amount not returned payment.
Php510,550.63 represented interest and service charges Issue: WON the stipulation providing for the payment of
at the rate of 18% per annum on the unpaid and overdue P1.4M is valid anent evidence showing that the Sps
account of respondent from June 1, 1980 to July 31, Valderrama received only P1M?
1981. Held: NO. The disputed amount was a hidden interest
Issue: WON the deed of assignment is in fact a dation in that the petitioners had required the respondents to pay at
payment which totally extinguished the obligation of the maturity of the loan As can be gleaned from the
Asia Pacific and therefore Caltex will no longer have any evidence, the said amount was not received or delivered
right to interests accruing after the assignment? to the respondents. This conclusion is strengthened by
Held: NO. The deed of assignment executed by the the fact that the promissory note and the deed of real
parties on July 31, 1980 is not a dation in payment which estate mortgage did not have any stipulation as to the
totally extinguished respondent’s obligations as stated rate of interest.
therein. The rate of interest for loans or forbearance of money, in
Dation in payment does not necessarily mean total the absence of express contract as to such rate of interest
extinguishment of the obligation. The obligation is shall be at 12% per annum. Thus, since no express
totally extinguished only when the parties, by agreement stipulation as to the rate of interest the Court fixed the
express of implied, or by their silence, consider the thing amount at 12% (of P1M) per annum.
as equivalent to the obligation. As regards the stipulation providing for a case when an
In the Deed of Assignment three obligation were extraordinary inflation should supervene in the instant
contemplated— (1) the outstanding obligation; (2) the case no showing that such inflation occurred. Petitioners
applicable interest charges on overdue accounts; and (3) failed to prove the supervening extraordinary inflation,
the other avturbo fuel lifting and deliveries that assignor as contemplated in Article 1250 of the Civil Code,
may from time to time receive from assignee. between April 6, 1984 and December 7, 1984
Furthermore, charges for interest were made ever month LOSS OF THE THING DUE
and not once did respondent question such. Thus, a Arts 1262-1269
reading of the deed of assignment and the subsequent Art 1262 CC: An obligation which consists in the
acts of the parties clearly show that they did not intend delivery of a determinate thing shall be extinguished if it
for the assignment to have the effect of totally should be lost or destroyed without the fault of the
extinguishing the obligations of private respondent debtor, and before he has incurred in delay.
without payment of the applicable interest charges on the When by law or stipulation, the obligor is liable even for
overdue account. fortuitous events, the loss of the thing does not
Doctrine: extinguish the obligation and he shall be responsible for
Dation in payment does not necessarily mean total damages. The same rule applies when the nature of the
extinguishment of the obligation. obligation requires the assumption of risk.
SANGRADOR v VALDERRAMA Art 1263 CC: In an obligation to deliver a generic thing,
(Spouses gone broke by a loan broker) the loss or destruction of anything of the same kind does
Nature: Action for collection of a sum of money. not extinguish the obligation. (n)
Facts: Art. 1264. The courts shall determine whether, under the
On April 11, 1983 defendant spouses Valderrama circumstances, the partial loss of the object of the
obtained a P500k loan from Manuel Asencio payable on obligation is so important as to extinguish the obligation.
or before April 12, 1984 secured by a real estate (n)
mortgage. Foreseeing that they would not be able to Art. 1265. Whenever the thing is lost in the possession of
redeem their property upon maturity of the loan they the debtor, it shall be presumed that the loss was due to
scouted for money lenders. Through the help of a loan his fault, unless there is proof to the contrary, and
broker who was able to refer them to his aunt plaintiff without prejudice to the provisions of article 1165. This
Teresita Sangrador. The sps. Valderama were able to presumption does not apply in case of earthquake, flood,
storm, or other natural calamity. (1183a) annually (in advance) at the rate of P20,000 per month
Art. 1266. The debtor in obligations to do shall also be on the first year plus 5% every year after (i.e. P21k 2nd
released when the prestation becomes legally or yr, P22k 3rd yr).
physically impossible without the fault of the obligor. It was also stipulated the the termination of the lease
Art. 1267. When the service has become so difficult as to would only be by “mutual agreement of the parties”
be manifestly beyond the contemplation of the parties, On January 1986, PNCC got a Temporary Use Permit,
the obligor may also be released therefrom, in whole or and so the Raymundos wrote a letter demanding for the
in part. (n) first annual rent which since the clearance has arrived,
Art. 1268. When the debt of a thing certain and commenced the lease contract.
determinate proceeds from a criminal offense, the debtor PNCC requested to cancel the lease and discontinue the
shall not be exempted from the payment of its price, project “due to financial, as well as technical
whatever may be the cause for the loss, unless the thing difficulties.”
having been offered by him to the person who should The Raymundos filed a complaint for specific
receive it, the latter refused without justification to performance, and the lower court granted them P492,000
accept it. (1185) rental for 2 years, which CA affirmed.
Art. 1269. The obligation having been extinguished by PNCC thus filed this petition for certiorari. This time,
the loss of the thing, the creditor shall have all the rights PNCC invokes Art. 1266 of the CC and the principle of
of action which the debtor may have against third rebus sic stantibus to be released from the obligatory
persons by reason of the loss. (1186) force of the contract of lease.
NOTE: Ar. 1266 CC: The debtor in obligations to do shall also
* There is no such thing as loss of a generic thing be released when the prestation becomes legally or
OCCENA v JABSON physically impossible without the fault of the obligor.
October 29, 1976 Rebus sic stantibus – a tacit condition, said to attach to
Tropical Homes Inc. agreed to develop a subdivision on all treaties, that they shall cease to be obligatory as soon
the land owned by Jesus and Efigenia Occeña, wherein as the state of facts and conditions upon which they were
Tropical Homes would be paid only 40% of the sale of founded has substantially changed. (said to be the basis
the subdivision lots. of Art 1267 of CC)
Tropical Homes seeks revision of the contract on the Held:
Basis of Art 1267 of the Civil Code (CC). They are PNCC cannot take refuge in the article, since it is
asking for modification of the terms and conditions of applicable only to obligations “to do”, and not
the subdivision contract, due to increase in costs. obligations “to give”.
Art. 1267 CC: When the service has become so difficult An obligation “to do” includes all kinds of work or
as to be manifestly beyond the contemplation of the service; while an obligation “to give” is a prestation
parties, the obligor may also be released therefrom, in which consists in the delivery of a movable or an
whole or in part. immovable thing in order to create a real right, or for the
Held: use of the recipient, or for its simple possession, or in
The CC authorizes the release of an obligor when the order to return it to its owner.
service has become so difficult as to be manifestly Rebus sic stantibus also does not apply because the
beyond the contemplation of the parties but does not assassination of Ninoy in 1983 and the announcement of
authorize the Courts to modify or revise the subdivision Pres. Marcos of the snap elections to be held in Feb 1986
contract between the parties or to fix a different sharing which already caused political turmoil in the country
ratio from that contractually stipulated with the force of preceded the contract. (i.e. PNCC signed the contract
law. knowing fully well these antecedent events)
Tropical Homes complaint for modification of the At any rate, the unforeseen event and causes mentioned
contract has no basis in law and must be dismissed. by the petitioner are not the legal or physical
PNCC v CA impossibilities contemplated by said article.
May 5, 1997 Disposition: Petition denied. CA affirmed.
Philippine National Construction Corporation (PNCC) CONDONATION OR REMISSION
signed a lease contract on the land owned by the Arts 1270-1274
Raymundos for a 5 year term, to commence when PNCC Art. 1270. Condonation or remission is essentially
gets the necessary industrial clearance to operate the rock gratuitous, and requires the acceptance by the obligor. It
crushing business PNCC intends to put up. may be made expressly or impliedly.
The contract stipulates that PNCC should pay the rental One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall, prima facie. Trans-Pacific failed to prove that it fully
furthermore, comply with the forms of donation. (1187) discharged its obligation. There is sufficient evidence to
Art. 1271. The delivery of a private document overthrow the presumption of payment generated by the
evidencing a credit, made voluntarily by the creditor to delivery of the documents such as Trans-Pacific’s
the debtor, implies the renunciation of the action which admission in their earlier letter.
the former had against the latter. CONFUSION OR MERGER
If in order to nullify this waiver it should be claimed to Art. 1275. The obligation is extinguished from the time
be inofficious, the debtor and his heirs may uphold it by the characters of creditor and debtor are merged in the
proving that the delivery of the document was made in same person. (1192a)
virtue of payment of the debt. (1188) • Merger or confusion is the meeting in one person of the
Art. 1272. Whenever the private document in which the qualities of creator and debtor with respect to the same
debt appears is found in the possession of the debtor, it obligation. It erases the plurality of subjects of the
shall be presumed that the creditor delivered it obligation. Further, the purposes for which the obligation
voluntarily, unless the contrary is proved. (1189) may have been created are considered as fully realized
Art. 1273. The renunciation of the principal debt shall by the merger of the qualities of debtor and creditor in
extinguish the accessory obligations; but the waiver of the same person.
the latter shall leave the former in force. (1190) • Requisites of merger or confusion are: (1) It must take
Art. 1274. It is presumed that the accessory obligation of place between the creditor and the principal debtor, (2)
pledge has been remitted when the thing pledged, after the very same obligation must be involved, for if the
its delivery to the creditor, is found in the possession of debtor acquires rights from the creditor, but not the
the debtor, or of a third person who owns the thing. particular obligation in question in question there will be
(1191a) no merger, (3) the confusion must be total or as regards
Trans-Pacific v CA the entire obligation.
August 19, 1994 • The effect of merger is to extinguish the obligation.
Trans- Pacific Industrial Supplies Inc. borrowed P1.3M Art. 1276. Merger which takes place in the person of the
from the Associated Bank, with promissory notes, a principal debtor or creditor benefits the guarantors.
chattel mortgage and land mortgaged as security. Confusion which takes place in the person of any of the
The mortgaged lands were sold, and the proceeds latter does not extinguish the obligation. (1193)
amounting to P1,386,614.20 was applied to the re- • The extinguishment of the principal obligation through
structured loan; and so the bank returned the duplicate confusion releases the guarantor’s because the obligation
original copies of the promissory notes with the word of the latter is merely accessory. When the merger takes
“PAID.” place in the person of a guarantor, the obligation is not
However, the bank demanded from Trans-Pacific extinguished.
payment of P492,100 representing accrued interest, did Art. 1277. Confusion does not extinguish a joint
not release the mortgage over 2 parcels of land and obligation except as regards the share corresponding to
claimed that the release of the promissory notes were the creditor or debtor in whom the two characters concur.
erroneous. (1194)
Initially Trans-Pacific expressed its willingness to pay, COMPENSATION
but later refused and instituted an action for specific Art. 1278. Compensation shall take place when two
performance against the bank to deliver the mortgaged persons, in their own right, are creditors and debtors of
land. Trial Court ruled in favor of Trans Pacific. CA each other. (1195)
reversed. • Compensation is a mode of extinguishing to the
Art 1271 CC: The delivery of a private document concurrent amount, the obligations of those persons who
evidencing a credit, made voluntarily by the creditor to in their own right are reciprocally debtors and creditors
the debtor implies the renunciation of the action which of each other. It is the offsetting of two obligations which
the former had against the latter. are reciprocally extinguished if they are of equal value.
If in order to nullify this waiver it should be claimed to Or extinguished to the concurrent amount if of different
be inofficious, the debtor and his heirs may uphold it by values.
proving that the delivery of the document was made in • Kinds of Compensation:
virtue of payment of the debt. (1188) • As to their effects • compensation may be total (when
Issue: WON Trans-Pacific’s obligation is fully paid? the two obligations are of the same amount); or • partial
Held: (when the amounts are not equal).
The presumption is art 1271 is not conclusive but merely • As to origin • it may be legal; • facultative; •
conventional; • or judicial. things which can be substituted for each other. • Both
• It is legal when it takes place by operation of law debts must be due to permit compensation. •
because all requisites are present. • It is facultative when Demandable means that the debts are enforceable in
it can be claimed by one of the parties, who, however, court, there being no apparent defenses inherent in them.
has the right to object to it, such as when one of the The obligations must be civil obligations, including
obligations has a period for the benefit of one party alone those that are purely natural. An obligation is not
and who renounces that period so as to make the demandable, therefore, and not subject to compensation,
obligation due. • It is conventional when the parties in the following cases: (1) when there is a period which
agree to compensate their mutual obligations even if has not yet arrived, including the cases when one party is
some requisite is lacking. • It is judicial when decreed by in a state of suspension of payments; (2) when there is a
the court in a case where there is a counterclaim. suspensive condition that has not yet happened; (3) when
From Dean Pineda: the obligation cannot be sued upon, as in natural
Compensation Distinguished From Payment. obligation. • A debt is liquidated when its existence and
In compensation, there can be partial extinguishment of amount is determined. Compensation can only take place
the obligation; in payment, the performance must be between certain and liquidated debts.
completer, unless waived by the creditor. Payment From Dean Pineda:
involves delivery of action, while compensation (legal The five requisites of a legal compensation are
compensation) takes place by operation of law without enumerated in the Article. All requisites must be present
simultaneous delivery. before compensation can be effectual.
Compensation Distinguished from Merger. • First Requisite—That each of the obligators be bound
In compensation, there are at least two persons who principally and that he be at the same time a principal
stand as principal creditors and debtor of each other, in creditor of the other. >>The parties must be mutual
merger, there is only one person involved in whom the creditor and debtor of each other and their relationship is
characters of creditor and debtor are merged. In merger, a principal one, that is, they are principal debtor and
there is only one obligation, while in compensation, there creditor of each other.
are two obligations involved. • Second Requisite—That both debts consist in such a
Art. 1279. In order that compensation may be proper, it sum of money, or if the things due are consumable, they
is necessary: be of the same kind, and also of the same quality if the
(1) That each one of the obligors be bound principally, latter has been stated. >>When the debts consist of
and that he be at the same time a principal creditor of the money, there is not much of a problem when it comes to
other; compensation to the concurrent amount. It is a matter of
(2) That both debts consist in a sum of money, or if the mathematical computation. When the debt consist of
things due are consumable, they be of the same kind, and things, it is necessary that the things are consumable
also of the same quality if the latter has been stated; which must be understood as ‘fungible’ and therefore
(3) That the two debts be due; susceptible of substitution. More than that they must be
(4) That they be liquidated and demandable; of the same kind. If the quality has been states, the things
(5) That over neither of them there be any retention or must be of the same quality.
controversy, commenced by third persons and • Third Requisite—That the two debts are due. >> A debt
communicated in due time to the debtor. (1196) is ‘due’ when its period of performance has arrived. If it
• For compensation to take place, the parties must be is a subject to a condition, the condition must have
mutually debtors and creditors (1) in their own right, and already been fulfilled. However, in voluntary
(2) as principals. Where there is no relationship of compensation, the parties may agree upon the
mutual creditors and debtors, there can be no compensation of debts which are not yet due.
compensation. Because the 1st requirement that the • Fourth Requisite—That they be liquidated and
parties be mutually debtors and creditors in their own demandable. >> A debt is considered ‘liquidated’ when
right, there can be no compensation when one party is its amount is clearly fixed. Of if it is not yet specially
occupying a representative capacity, such as a guardian fixed, a simple mathematical computation will determine
or an administrator. The 2nd requirement is that the its amount or value. It is ‘unliquidated’ when the amount
parties should be mutually debtors and creditors as is not fixed because it is still subject to a dispute or to
principals. This means that there can be no compensation certain condition.
when one party is a principal creditor in one obligation It is not enough that the debts be liquidated. It is also
but is only a surety or guarantor in the other. essential that the same be demandable. A debt is
• The things due in both obligations must be fungible, or demandable if it is not yet barred by prescription and it is
not illegal or invalid. • Although a rescissible or voidable debt can be
• Fifth Requisite—That over neither of them there be any compensated before it is rescinded or annulled, the
retention or controversy, commenced by third persons moment it is rescinded or annulled, the decree of
and communicated in due time to the debtor. >> A debt rescission or annulment is retroactive, and the
of a compensation must be considered as cancelled.
thing cannot be a subject of compensation if the same Recission of annulment requires mutual restitution; the
had been subject of a garnishment of which the debtor party whose obligation is annulled or rescinded can thus
was timely notified. When a credit or property had been recover to the extent that his credit was extinguished by
properly garnished of attached, it cannot be disposed of the compensation, because to that extent he is deemed to
without the approval of the court. have made a payment.
Art. 1280. Notwithstanding the provisions of the Art. 1285. The debtor who has consented to the
preceding article, the guarantor may set up compensation assignment of rights made by a creditor in favor of a
as regards what the creditor may owe the principal third person, cannot set up against the assignee the
debtor. (1197) compensation which would pertain to him against the
• The liability of the guarantor is only subsidiary; it is assignor, unless the assignor was notified by the debtor
accessory to the principal obligation of the debtor. If the at the time he gave his consent, that he reserved his right
principal debtor has a credit against the creditor, which to the compensation.
can be compensated, it would mean the extinguishment If the creditor communicated the cession to him but the
of the guaranteed debt, either totally or partially. This debtor did not consent thereto, the latter may set up the
extinguishment benefits the guarantor, for he can be held compensation of debts previous to the cession, but not of
liable only to the same extent as the debtor. subsequent ones.
From Dean Pineda: If the assignment is made without the knowledge of the
Exception to the Rule On Compensation; Right of debtor, he may set up the compensation of all credits
Guarantor to Invoke Compensation Against Creditor. The prior to the same and also later ones until he had
general rule is that for compensation to operate, the knowledge of the assignment. (1198a)
parties must be related reciprocally as principal creditors • Assignment after Compensation.
and debtors of each other. Under the present Article, the When compensation has already taken place before the
guarantor is allowed to set up compensation against the assignment, inasmuch as it takes place ipso jure, there
creditor. has already been an extinguishment of one of the other
Art. 1281. Compensation may be total or partial. When of the obligations.
the two debts are of the same amount, there is a total A subsequent assignment of an extinguished obligation
compensation. (n) cannot produce any effect against the debtor. The only
• Total Compensation—debts are of the same amount. • exception to this rule is when the debtor consents to the
Partial Compensation—Debts are not of the same assignment of the credit; his consent constitutes a waiver
amount; operative only up to the concurrent amount. of the compensation, unless at the time he gives consent,
Art. 1282. The parties may agree upon the compensation he informs the assignor that he reserved his right to the
of debts which are not yet due. (n) compensation.
• Voluntary compensation is not limited to obligations • Assignment before compensation.
which are not yet due. The parties may compensate by The assignment may be made before compensation has
agreement any obligations, in which the objective taken place, either because at the time of assignment one
requisites provided for legal compensation are not of the debts is not yet due or liquidated, or because of
present. It is necessary, however, that the parties should some other cause which impedes the compensation. As
have the capacity to dispose of the credits which they far as the debtor is concerned, the assignment does not
compensate, because the extinguishment of the take effect except from the time he is notified thereof.
obligations in this case arises from their wills and not If the notice of assignment is simultaneous to the
from law. transfer, he can set up compensation of debts prior to the
Art. 1283. If one of the parties to a suit over an assignment. If notice was given to him before the
obligation has a claim for damages against the other, the assignment, this takes effect at the time of the
former may set it off by proving his right to said assignment; therefore the same rule applies. If he
damages and the amount thereof. (n) consents to the assignment, he waives compensation
Art. 1284. When one or both debts are rescissible or even of debts already due, unless he makes a reservation.
voidable, they may be compensated against each other • But if the debtor was notified of the assignment, but he
before they are judicially rescinded or avoided. (n) did not consent, and the credit assigned to a third person
matures after that which pertains to the debtor, the latter the debts consists in civil liability arising from a penal
may set up compensation when the assignee attempts to offense. (n)
enforce the assigned credit, provided that the credit of • If one of the debts consists in civil liability arising from
the debtor became due before the assignment. But it f the a penal offense, compensation would be improper and
assigned credit matures earlier than that of the debtor, the inadvisable because the satisfaction of such obligation is
assignee may immediately enforce it, and the debtor imperative.
cannot set up compensation, because the credit is not yet • The person who has the civil liability arising from
due. crime is the only party who cannot set up the
• If the debtor did not have knowledge of the assignment, compensation; but the offended party entitled to the
he may set up by way of compensation all credits indemnity can set up his claim in compensation of his
maturing before he is notified thereof. Hence, if the debt.
assignment is concealed, and the assignor still contracts Art. 1289. If a person should have against him several
new obligation in favor of the debtor, such obligation debts which are susceptible of compensation, the rules
maturing before the latter learns of the assignment will on the application of payments shall apply to the order of
still be allowable by way of compensation. The assignee the compensation. (1201)
in such case would have a personal action against the • It can happen that a debtor may have several debts to a
assignor. creditor. And vice versa. Under these circumstances,
Art. 1286. Compensation takes place by operation of Articles 1252 to 1254 shall apply.
law, even though the debts may be payable at different Art. 1290. When all the requisites mentioned in Article
places, but there shall be an indemnity for expenses of 1279 are present, compensation takes effect by operation
exchange or transportation to the place of payment. of law, and extinguishes both debts to the concurrent
(1199a) amount, even though the creditors and debtors are not
• This article applies to legal compensation and not to aware of the compensation.
voluntary compensation. • Legal compensation takes place from the moment that
Art. 1287. Compensation shall not be proper when one the requisites of the articles 1278 and 1270 co-exist; its
of the debts arises from a depositum or from the effects arise on the very day which all its requisites
obligations of a depositary or of a bailee in concur. • Voluntary of conventional compensation takes
commodatum. Neither can compensation be set up effect upon the agreement of the parties. • Facultative
against a creditor who has a claim for support due by compensation takes place when the creditor declares his
gratuitous title, without prejudice to the provisions of option to set it up. • Judicial compensation takes place
paragraph 2 of Article 301. (1200a) upon final judgment. • Effects of Compensation.
• The prohibition of compensation when one of the debts (1) Both debts are extinguished to the concurrent
arises from a depositum (a contract by virtue of which a amount;
person [depositary] receives personal property belonging (2) interests stop accruing on the extinguished obligation
to another [depositor], with the obligation of safely of the part extinguished;
keeping it and returning the same) or commodatum (a (3) the period of prescription stops with respect to the
gratuitous contract by virtue of which one of the parties obligation or part extinguished;
delivers to the other a non-consumable personal property (4) all accessory obligations of the principal obligation
so that the latter may use it for a certain time and return which has been extinguished are also extinguished.
it) is based on justice. A deposit of commodatum is given • Renunciation of Compensation. Compensation can be
on the basis of confidence in the depositary of the renounces, either at the time an obligation is contracted
borrower. It is therefore, a matter of morality, the or afterwards. Compensation rests upon a potestative
depositary or borrower performs his obligation. right, and a unilateral decision of the debtor would be
•With respect to future support, to allow its sufficient renunciation. Compensation can be renounced
extinguishment by compensation would defeat its expressly of impliedly.
exemption from attachment and execution and may No Compensation. Even when all the requisites for
expose the recipient to misery and starvation. Common compensation occur, the compensation may not take
humanity and public policy forbid this consequence. place in the following cases:
Support under this provision should be understood, not (1) When there is renunciation of the effects of
only referring to legal support, to include all rights which compensation by a party; and (2) when the law prohibits
have for their purpose the subsistence of the debtor, such compensation.
as pensions and gratuities. (Unless otherwise indicated, commentaries are sourced
Art. 1288. Neither shall there be compensation if one of from the Civil Code book IV by Tolentino).
NOVATION incompatibility is whether they can stand together.
HOW OBLIGATIONS ARE MODIFIED • In order that there may be an implied novation arising
Art 1291. Obligations may be modified by: from the incompatibility of the old and the new
(1) Changing their object or principal condition obligations, the change must refer to the object, the cause
(2) Substituting the person of the debtor or the principal conditions of the obligation.
(3) Subrogating a third person in the rights of a creditor • An obligation is not novated by unimportant
• Novation is the extinguishment of an obligation by a modifications which do not alter its essence. • The
substitution or change of the obligation by a subsequent determination of whether the changes in any given
one which extinguishes or modifies the first either by: contract or obligation are sufficient to bring about a
changing the object or principal conditions novation, must depend upon the facts and circumstances
by substituting the person of the debtor of each case. The distinction between a principal and an
subrogating a third person in the rights of the creditor accidental condition in the contract or obligation is
• Novation is a juridical act of dual function. At the time relative.
it extinguishes an obligation it creates a new one in lieu NOVATION BY SUBSTITUTION OF DEBTOR
of the old Art 1293. Novation which consists in substituting a new
• Classification of Novation • as to nature 1. Subjective debtor in the place of the original one, may be made
or personal – either passive or active. Passive if there is even without the knowledge or against the will of the
substitution of the debtor. Active if a third person is latter, but not without the consent of the creditor.
subrogated in the rights of the creditor. 2. Objective or Payment by the new debtor gives him the rights
real – substitution of the object with another or changing mentioned in Arts 1236 and 1237.
the principal conditions 3. Mixed – Combination of • There are two forms of novation which consist in the
subjective and objective substitution of debtor: expromision and delegacion
• as to form • Expromision – change does not emanate from the
1. Express – parties declare that the old obligation is debtor and may be made even without his knowledge,
substituted by the new 2. Implied – an incompatibility since it consists in a third person assuming the
exists between the old and the new obligation that cannot obligation. Requires the consent of the third person and
stand together the creditor.
• as to effect • Delegacion – the debtor offers and the creditor accepts
1. Partial – when there is only a modification or change the third person who consents to the substitution. The
in some principal conditions of the obligation consent of these three is necessary.
1. Total – when the old obligation is completely • Release of old debtor. It is not enough to extend the
extinguished juridical relation to a third person. It is necessary that the
• Requisites of Novation: old debtor is released from the obligation and the third
• A previous valid obligation person (the new debtor) takes his place. Without such
• Agreement of all parties • Extinguishment of the old release, there is no novation.
contract – may be express of implied • Validity of the • Consent of creditor.
new one An indispensable element whether in expromision or in
NOVATION IS NOT PRESUMED delegacion. • Substitution of one debtor for another may
Art 1292. In order that an obligation may be delay or prevent the fulfillment of the obligation by
extinguished by another which substitutes the same, it is reason of the inability or insolvency of the new debtor.
imperative that it is so declared in unequivocal terms, or Hence, the creditor should agree to accept the
that the old and the new obligations be on every point substitution in order that it may be binding on him. • The
incompatible with each other consent of the creditor may be expressed or implied.
• Novation must be clearly proved since its existence • Consent of debtor.
cannot be presumed. Not necessary in case of expromision. Needed in
• In an express novation, contracting parties disclose that delegacion because the initiative comes from the old
their object in making the new contract is to extinguish debtor. In both cases, the consent of the new debtor is
the old contract. Otherwise, the old contract remains in necessary because he is to assume the obligation. • The
force and a new contract is added to it, and each gives consent of the new debtor is as essential as that of the
rise to an obligation still in force. creditor for the novation to become effective. • Effect on
•In implied novation, all that is required is debtors. The novation has the effect of releasing the
incompatibility between the original and the subsequent original debtor from the obligation and of making the
contracts. No specific form is required. The test of new debtor liable therefor.
• Payment by the new debtor gives him the rights the debtor, when he delegated his debt.
mentioned in 1236 and 1237. • Provides two exemptions by which the creditor is
• If the novation is by delegacion and the new debtor permitted to sue the old debtor:
pays the obligation, he could demand from the old debtor 1. When the insolvency was prior to the delegacion and
what he has paid. Subrogation may take place by virtue is publicly known;
of 1302. 1. When the old debtor knew of such insolvency at the
• If the novation is by expromision, the new debtor can time he delegated the obligation.
recover only insofar as the payment has been beneficial • The knowledge of the creditor that the new debtor was
to the old debtor. There can be no subrogation because of insolvent at the time of delegacion, will bar him from
the express provisions of 1237. recovering from the old debtor.
Art. 1236 The creditor is not bound to accept payment or OBLIGATIONS
performance by a third person who has no interest in the Art 1296. When the principal obligation is extinguished
fulfillment of the obligation, unless there is a stipulation in consequence of a novation, accessory obligations may
to the contrary. subsist only insofar as they may benefit third person who
Whoever pays for another may demand from the debtor did not give their consent.
what he has paid, except that if he paid without the • The extinguishment of the principal obligation by
knowledge or against the will of the debtor, he can novation extinguishes the obligation to pay interests,
recover only insofar as the payment has been beneficial unless otherwise stipulated. • This article is specially
to the debtor. applicable to substitution of debtors. • Exemption
Art 1237 Whoever pays on behalf of the debtor without provided in this article with respect to third persons.
the knowledge or against the will of the latter, cannot Although technically it is an accessory obligation, it is in
compel the creditor to subrogate him in his rights, such reality a distinct obligation in favor of a third person, and
as those arising from a mortgage, guaranty or penalty. cannot be extinguished by novation without the consent
Art 1302 It is presumed that there is legal subrogation: of the latter.
1. When a creditor pays another creditor who is ORIGINAL OBLIGATION SUBSISTS IF THE NEW
preferred, even without the debtor’s knowledge OBLIGATION IS VOID
2. When a third person, not interested in the obligation, Art 1297. If the new obligation is void, the original one
pays with the express or tacit approval of the debtor. shall subsist, unless the parties intended that the former
3. When, even without the knowledge of the debtor, a relations should be extinguished in any event.
person interested in the fulfillment of the obligation • If the new obligation is not entirely void but merely
pays, without prejudice to the effects of confusion as to voidable, the novation becomes effective. • BUT if the
the latter’s share. action to annul is brought, and the obligation is set aside,
SUBSTITUTION BY EXPROMISION it will be deemed as if there had been no novation. The
(Without the knowledge of the debtor) original obligation subsists, unless the parties intended to
Art 1294. If the substitution is without the knowledge or definitely extinguish it at all events.
against the will of the debtor, the new debtor’s • If the original obligation is pure and the new obligation
insolvency or non-fulfillment of the obligation shall not is subject to a suspensive condition
give rise to any liability on the part of the original debtor. • If the intention is merely to attach the condition to the
• Intent of the law is to release the old debtor from any original obligation, then there is no novation. • If the new
further liability in passive subjective novation, except in conditional obligation is intended to substitute the
the exceptional cases in art 1295 which applies to original pure obligation, the novation itself, and the
delegacion. • If the novation is by expromision, no consequent extinguishment of the original obligation, is
liability for the new debtor’s insolvency can be enforced subject to the condition. If the condition is not fulfilled
against the old debtor, because the latter did not have the before one of the parties withdraws from the proposed
initiative in making the change, which might have been conditional contract, there is no novation at all.
made without his knowledge. • After a novation has taken place, thru a change of the
SUBSTITUTION BY DELEGACION object of the obligation, the old obligation can no longer
Art 1295. The insolvency of the new debtor, who has be enforced. If the new obligation is extinguished by the
been proposed by the original debtor and accepted by the loss of the object, the creditor cannot demand the object
creditor, shall not revive the action of the latter against of the original obligation.
the original obligor, except when said insolvency was NOVATION IS VOID IF ORIGINAL OBLIGATION IS
already existing and of public knowledge, or known to VOID
Art 1298. The novation is void if the original obligation SUBROGATION
was void, except when annulment may be claimed only Art 1300. Subrogation of a third person in the rights of
by the debtor, or when ratification validates acts which the creditor is either legal or conventional. The former is
are voidable. not presumed, except in cases expressly mentioned in
• When the original obligation has been ratified before this Code; the latter must be clearly established in order
novation, the novation is effective. • Even if there has that it may take effect.
been no previous ratification at the time of novation, if • SUBROGATION is the transfer of all the rights of the
the nullity can be claimed only by the debtor, the consent creditor to a third person, who substitutes him in all his
of the debtor to the novation will render the novation rights. • Subrogation may either be conventional or legal.
effective because such consent is impliedly a waiver of • Conventional • Takes place by agreement of the parties
the action for nullity. • However, the defect is not • Requires the intervention and consent of three persons:
completely cured if the novation takes place by the original creditor, the new creditor and the debtor •
expromision, where the old debtor has not intervened or Legal subrogation • Takes place without agreement but
consented. • Prescription. When a debt is already barred by operation of law because of certain acts • This is the
by prescription, it cannot be enforced by the creditor. • subrogation referred to in art 1302
BUT a new contract, recognizing and assuming the CONVENTIONAL SUBROGATION
prescribed debt, would be valid and enforceable • The Art 1301. Conventional subrogation of a third person
prescription, being available only to the debtor, can be requires the consent of the original parties and of the
waived by him. He does so by voluntarily promising to third person
pay the prescribed debt. The novation of prescribed debt • Consent of all parties is essential • Original creditor –
is thus valid. because his right is extinguished • New creditor –
Art 1299. If the original obligation was subject to a because he becomes a party to a new relation • Debtor –
suspensive or resolutory condition, the new obligation because the old obligation is extinguished and he
shall be under the same condition, unless it is otherwise becomes liable under the new obligation
stipulated. • Under our Code, conventional subrogation is not
• If old obligation is conditional and new obligation is identical to assignment of credit. • Conventional
pure • If the intention is merely to suppress the condition, subrogation • Debtor’s consent is necessary •
there is no novation • If the intention is to extinguish the Extinguishes the obligation and gives rise to a new one •
original obligation itself by the creation of a new Nullity of the old obligation may be cured by
obligation, the latter does not arise except from the subrogation such that the new obligation may be
fulfillment of the condition of the original obligation. • If perfectly valid • Assignment of Credit • Debtor’s consent
the suspensive condition of the original obligation is not is not required • Refers to the same right which passes
performed, that obligation does not come into existence, from one to another • Nullity of an obligation is not
and the cause for the new obligation would then be remedied by the assignment of the creditor’s right to
wanting. • If the condition of the old obligation is another
resolutory, its happening would resolve the old LEGAL SUBROGATION
obligation and place it in the same category as a void Art 1302. It is presumed that there is legal subrogation:
obligation or one which has been extinguished. • Where (1) When a creditor pays another another creditor who is
the original obligation is conditional, the novation itself preferred, even without the debtor’s knowledge;
must be held to be conditional also. • Note: the parties (2) When a third person, not interested in the obligation,
may by their express will substitute a pure obligation for pays with the express or tacit approval of the debtor;
a conditional one. (3) When, even without the knowledge of the debtor, a
• If both obligations are conditional • If the conditions in person interested in the fulfillment of the obligation
the two obligations are not incompatible with each other, pays, without prejudice to the effects of confusion as to
and they can stand together, they must all be fulfilled in the latter’s share
order that the novation may become effective and the • Payment to Preferred Creditor • Example: X has two
new obligation be enforceable. • If only the conditions obligations: (1) a mortgage debt in favor of Pedro and
affecting the old obligation are fulfilled, those affecting (2) a simple unsecured obligation in favor of Jose. • If
the new obligation are not, or vice-versa, then there is no Jose pays the mortgage obligation to Pedro, even without
novation. • If the conditions of the old and new the knowledge of Juan, then Jose would be subrogated in
obligation are incompatible with each other, there is an the rights of Pedro • It is not material what amount Jose
obvious intention to substitute the new conditional actually pays to Pedro; so long as Pedro accepts such
obligation for the old conditional obligation. amount as full payment of the mortgage credit, there will
be subrogation. • However, the debtor in cases like this, CASES:
can still set up against the new creditor the defenses MILLAR v CA
which he could have used against the original creditor, Millar obtained a favorable judgment ordering
such as: • Compensation; • Payments already made; or • respondent Gabriel to pay him a certain sum. A writ of
Vice or defect of the original obligation execution was issued and the jeep of respondent Gabriel
• Payment with Debtor’s Approval • Example: (1) a third was seized. The parties entered into an agreement (a
person pays the creditor without the consent of the chattel mortgage) whereby, to secure the payment of the
debtor, he is only entitled to reimbursement from the judgment debt, agreed to mortgage the vehicle in favor
debtor for the amount paid by him. • If amount paid < of the petitioner. Respondent Gabriel failed to pay. The
credit : even if the creditor has accepted it as full CA ruled in favor of the respondent on the ground that
payment, the third person is entitled to the subsequent agreement of the parties impliedly
reimbursement only for what he actually paid. • The third novated the judgment obligation.
person cannot proceed against sureties, guarantors or ISSUE: WON the subsequent agreement of the parties
mortgages and pledges impliedly novated the judgment obligation.
• Example: (2) a third person pays with the consent RULING:
(expressly or tacitly) of the debtor, • There will be • NO. The subsequent agreement of the parties did not
subrogation and the payor can exercise all the rights of novate the judgment obligation by implication. • Implied
the creditor rising from the very obligation itself, novation entails incompatibility of the old and the new
whether against the debtor or against third persons. obligations. • The mere reduction of the amount due does
• Payment by Interested Party • Persons who have an not constitute sufficient incompatibility, especially in the
interest in the fulfillment of the obligation are those who light of the explanation of the petitioner that the reduced
would be benefited by the extinguishment of the indebtedness was result of the partial payments made by
obligation. Ex: • Co-debtors • Sureties • Guarantors • the respondent before the execution of the subsequent
Owners of property mortgaged or pledged to secure the agreement.
obligation • The stipulation for the payment of the obligation under
• Example: Solidary debtor pays the obligation, he is the terms of the chattel mortgage serves only to provide
subrogated in the rights of the creditor. • The scope of an express and specific method for its extinguishment,
this subrogation, however, should not be misunderstood. which is payment in two equal installments. The chattel
The payor cannot take advantage of the solidarity and mortgage simply gave a method and more time to enable
recover the amount in excess of his share of the him to fully satisfy the judgment indebtedness. • The
obligation from any of his codebtors. • The solidarity chattel mortgage agreement in no manner introduced any
terminates by his payment and the obligation among the substantial modification or alteration of the judgment. •
co-debtors becomes joint. Instead of extinguishing the obligation of the respondent
EFFECT OF SUBROGATION arising from the agreement, the deed of chattel mortgage
Art 1303. Subrogation transfers to the person subrogated expressly ratified and confirmed the existence of the
the credit with all the rights thereto appertaining, either same.
against the debtor or against third persons, be they Doctrine:
guarantors or possessors of mortgages, subject to • Only those essential and principal changes introduced
stipulation in a conventional subrogation by the new obligation producing an alteration or
• Subrogation transfers to the third person or new modification of the essence of the old obligation result in
creditor the entire credit, with all the corresponding implied novation. • When the new obligation merely
rights, either against the debtor or against third persons. • reiterates or ratifies the old obligation, such does not
If a suspensive condition is attached to the credit effectuate any substantial incompatibility between the
transferred, that condition must be fulfilled in order that two obligations.
the new creditor may exercise his right. BUT prestations DORMITORIO v FERNANDEZ
which could not have been required of the original The case involves two decisions rendered by the
creditor cannot be demanded of the new one. respondent Judge Fernandez. In dispute is a certain lot
PARTIAL SUBROGATION bought by Lazalita from the Municipality of Victorias.
Art 1304. A creditor, to whom partial payment has been Lazalita had been in continuous possession of the lot and
made, may exercise his right for the remainder, and he had introduced valuable improvements therein. It turned
shall be preferred to the person who has been subrogated out that the lot bought by Lazalita was converted into a
in his place in virtue of the partial payment of the same municipal road and that the lot in his possession is
credit. actually the lot bought by Dormitorio. The first order
issued by Respondent Judge was favorable to provisions for satisfying them.
Dormitorio. Lazalita appealed and brought an action • Court ruled in favor of defendant. When the plaintiff
against the Municipality of Victorias. The parties failed to comply with the conditions of said contract, the
executed an “Agreed Stipulation of Facts” which defendant had a right to resort to the methods provided
provides Lazalita the option to be paid a just amount to by law for the satisfaction of the obligations created by
acquire another lot or for Victorias to give Lazalita the judgment.
another lot. In his second order, respondent Judge set Doctrine:
aside the first order on the basis of the “Agreed • In order that an obligation be extinguished by novation,
Stipulation of Facts.” the law requires that the novation or extinguishment
Ruling: shall be expressly declared or that the old and new
• Court upheld the judgment of the respondent Judge in obligations shall be absolutely incompatible.
setting aside his first order in accordance with the TAN SIUCO v HABANA
Agreed Stipulation of Facts. The plaintiff Tan Siuco entered into a written contract
• The presence of animus novandi (intent) is undeniable with defendant Habana for the construction of a certain
for there is a later decision expressly superseding the building. At different times during the construction,
earlier one. • The later decision was the result of a modifications, alterations and changes were requested by
compromise, it had the effect of res judicata. The parties, the defendant. Before any change was made, the
therefore, were bound by it. question of plaintiff’s compensation was mentioned and
Doctrine: that in referring to such changes, the defendant said
When, after judgment has become final, facts and “pase cuenta” (bring in your bill). After the construction,
circumstances transpire which render its execution the plaintiff seeks to recover an amount over and above
impossible or unjust, the interested party may ask the the agreed original amount. The trial court ruled in favor
court to modify or alter the judgment to harmonize the of the plaintiff on the ground that, in legal effect, the
same with justice and the facts. written contract was annulled and set aside by the action
ZAPANTE v DE ROTAECHE and conduct of the parties. That the whole combined
Ramon Echevarria, as legal representative of a actions and conduct of the parties amounted to a
commercial firm, commenced an action against Zapanta novation. For such reason, plaintiff is entitled to recover
for the purpose of recovering a sum of money. Judgment on a quantum meruit.
was rendered in favor of plaintiff firm. Zapanta and the Issue: WON the actions and conduct of the parties had
firm entered into an agreement which contained a novated the written agreement entered by them
provision that “said commercial firm shall be at liberty to Ruling:
enter suit against him” with reference to the judgment. • The law states that there must be an express intention
By virtue of the agreement, Zapanta continued to make to novate – animus novandi. A novation is never
payments but left a certain amount of balance. For failure presumed. • When the defendant said “pase cuenta”
of Zapanta to comply with the provisions of the (bring in your bill), the court reasoned that defendant
agreement, the defendant sued for the purpose of intended that plaintiff should bring in his bill for the
recovering the balance. A writ of execution was issued. reasonable value of any alterations and changes which
The sheriff attached and sold practically all the property were made at his request. • There is no claim or pretense
which the plaintiff had. that anything was said by either party about terminating
Issue: WON the provision of the agreement “said or rescinding the contract. The statement “bring in your
commercial firm shall be at liberty to enter suit against bill” was never intended to apply to the original contract
him,” had the effect of extinguishing the rights of the and should be confined and
defendant which resulted from the judgment rendered limited to a bill for the amount of any changes,
against him. alterations, or modifications made at defendant’s request.
Ruling: • Thus, plaintiff was never released from the original
• The agreement does not expressly extinguish the contract. He was entitled to recover upon a quantum
obligations existing in said judgment. On the contrary, it meruit, and as to what was the reasonable value of the
expressly recognizes the obligations existing between the building as it was constructed.
parties in said judgment and expressly provides a method Doctrine:
by which the same shall be extinguished. • The contract, • The intention of the parties to novate must be very
instead of containing provisions “absolutely clear and expressed.
incompatible” with the obligations of the judgment, GUERRERO v CA
expressly ratifies such obligations and contains Jose Robles borrowed a sum of money from Chan Too,
to ensure payment of which the Alto Surety and with all its creditors. • While it is true that, as a general
Insurance Co. executed a bond, whereby it bound itself rule, no form of words or writing is necessary to give
jointly and severally with Robles for the payment of the effect to a novation. Nevertheless, since the parties
loan to Chan Too. In consideration of the issuance of the involved are corporations, it must first be proved that
bond, Robles, Vicente Legarda and herein petitioner that the contracts were executed by authorized persons.
Guerrero executed an “Agreement of Counter-Guaranty This point was not sufficiently proven. Thus, such
with Mortgage and Pledge,” undertaking jointly and communications cannot be considered to give rise to a
severally to indemnify ALTO for any damage, loss, valid new obligation.
payments. The agreement contains a provision which DOCTRINE:
states: “indemnities will be paid to the surety company • Novation requires the validity of a new obligation. • A
as soon as demand is received from the creditor or as valid new obligation is an essential requisite for the
soon as it becomes liable to make payment xxx.” Robles novation of a previous valid obligation. • In the case of
failed to pay his indebtedness to Chan Too. Judgment juridical persons particularly a corporation, a valid
was rendered by the lower court against Robles and obligation must be given effect through persons with
ALTO on the basis of a compromise agreement executed authority to enter into contract/agreement in behalf of the
by the parties. This case is instituted by ALTO against corporation.
petitioner Guerrero on the basis of the “Agreement of LIGUTAN v CA
Counter-Guaranty with Mortgage and Pledge.” Petitioners Ligutan obtained a loan from respondent
Issue: WON the petitioner was released from his Security Bank and Trust Company. The obligation
obligation under the counter-guaranty agreement by matured and petitioners failed to pay. Despite demands,
virtue of novation. petitioners still defaulted on their obligation. The bank
Ruling: filed a complaint for recovery of the due amount. During
• NO, the petitioner was not released under his obligation the pendency of the case, petitioners executed a real
by virtue of the counter-guaranty agreement. • A perusal estate mortgage to secure the existing indebtedness of
of the terms of the counter-guaranty agreement reveals petitioners with the bank.
that it is one of indemnity. • Based on the terms of said ISSUE: WON the subsequent execution of the real estate
agreement, the liability of the petitioner has likewise mortgage as security for the existing loan would have
matured upon demand. The release of his obligation by resulted in the extinguishment of the original contract
virtue of novation must be proved by clear and because of novation.
convincing evidence. • In the absence of an express RULING:
release, nothing less than a showing of complete • The subsequent execution of the real estate mortgage
incompatibility between the two did not result in the extinguishment of the original
obligations – “agreement of counter-guaranty” and the contract. • Petitioners acknowledge that the real estate
compromise agreement – would justify a finding of mortgage contract does not contain any express
novation by implication. • No such incompatibility exists stipulation by the parties intending it to supersede the
in this case between the two obligations that would existing loan agreement between the petitioners and the
sustain the defense of novation. bank. Respondent bank has correctly postulated that the
GARCIA JR. v CA mortgage is but an accessory contract to secure the loan.
Western Minolco Corporation (WMC) obtained from Doctrine:
Philippine Investments Systems Organization (PISO) An obligation to pay a sum of money is not extinctively
two loans. Garcia and Kahn executed a surety agreement novated by a new instrument which merely changes the
binding themselves jointly and severally for the payment terms of payment or adding compatible covenants or
of the loan. Upon failure of WMC to pay after repeated where the old contract is merely supplemented by the
demands, demand was made on Garcia pursuant to the new one.
surety agreement. Garcia likewise failed to pay. Lasal Additional information from the case
Development Corporation (to which the credit had been • Extinctive novation requires:
assigned by PISO) sued Garcia for the recovery of the 1. a previous valid obligation
debt. 1. the agreement of all parties to the new contract 2. the
RULING: extinguishment of the obligation 3. validity of the new
• The Court did not sustain the claim of petitioner that obligation
the various communications made by WMC with DBP, • In order that an obligation may be extinguished by
together with the memorandum of agreement, are another which substitutes the same, it is imperative that
sufficient to establish the new obligation made by WMC it be so declared in unequivocal terms or that the old and
the new obligation be on every point incompatible with • The provisional and temporary agreement did not
each other. extinguish or alter the obligations of Tropical and the
• The incompatibility should take place in any of the rights of Broadway under the lease contract.
essential elements of the obligation: 1. The agreement was by its own terms a “provisional
1. the juridical relation or tie and temporary agreement” conditioned upon good faith
• Ex: from a mere commodatum to a lease of things implementation of six suggestions made by Broadway to
1. the object or principal condition improve the operations of Tropical. The non-
• Ex: change of the nature of the prestation specification by Broadway of the period of time during
1. the subjects which the reduced rentals would remain in effect, only
• Ex: substitution of the debtor or the subrogation of the meant that Broadway retained for itself the discretionary
creditor right to return to the original contractual rates whenever
• Extinctive novation does not necessarily imply that the Broadway felt it appropriate to do so.
new agreement should be complete by itself; certain 1. The formal notarized lease contract made it clear that
terms and conditions may be carried, expressly or by a temporary and provisional reduction of rentals was not
implication, over to the new obligation. to be construed as alteration or waiver of any of the
BROADWAY CENTRUM v TROPICAL FOOD terms of the lease contract itself.
Petitioner Broadway Centrum and private respondent 2. The course of negotiations between Broadway and
Tropical Hut executed a contract of lease. Tropical Hut Tropical before the execution of the provisional and
was experiencing low sales volume and was proposing temporary agreement clearly indicated that what they
for a reduction in rentals. Broadway, recognizing that the were negotiating was a temporary and provisional
low sales volume was the result of the temporary closure reduction of rentals. 3. The agreement was bereft of any
of a major thoroughfare, executed a “provisional and sign of mutual recognition that the reduced rentals had so
temporary” agreement with Broadway which temporarily permanently replaced the contract stipulations on rentals.
reduced the rentals of Tropical conditioned upon good • Only evidence of the clearest and most explicit kind
faith implementation by Tropical of the six principal will suffice for the purpose of novation.
suggestions of Broadway to improve operations of OTHER CAUSES
Tropical. Months after, Broadway informed Tropical that 1. Prescription 2. Death – applied to purely personal
rental will be increased gradually. Tropical was adamant character, apart from its extinctive effect in some
that it cannot afford any increase in rentals. contract such as partnership and agency; in general,
Issue: WON the provisional and temporary agreement obligations are transmissible to heirs or to the estate. 3.
had novated the contract of lease. Renunciation on the part of the creditor – as a rule does
Ruling: not extinguish obligations, but in some contracts lack of
Basis in law interest of the creditor amounts to abuse of right; so the
• Novation is the extinguishment of an obligation by the debtor must be relieved. 4. Compromise 5. Fulfillment of
substitution of that obligation with a subsequent one, resolutory conditions 6. Arrival of resolutory periods 7.
which terminates it, either by: • changing its object or Rescission & Nullity of contracts 8. Mutual dissent of
principal conditions; or • by substituting a new debtor in the parties 9. Will of one of the parties/Unilateral Dissent
place of the old one; or • by subrogating a third person to – agency & partnership 10. Change of Civil Status 11.
the rights of the creditor. Force Majeure 12. Abandonment – under Art 662
• Novation through a change of the object or principal CASES:
conditions of an existing obligation is referred to as an INTERNATIONAL CORPORATE BANK v CA1
objective (or real) novation. Nature: Petition to review the decision of the Court of
• If objective novation is to take place, it is essential that Appeals
the new obligation expressly declare that the old Facts (as established by the CA):
obligation is to be extinguished or that the new VISCO & SIP mortgaged its machineries, plant and
obligation be on every point incompatible with the old equipment to 11 banks to continue its operation.
one. Unfortunately, they failed and defaulted in the payment.
• The rule that novation is never presumed is not to be In the meantime, Emeterio Ramos came in and took
avoided by merely referring to partial novation. The will control of the companies; still it was not viable. Hence,
to novate, whether totally or partially, must appear by the banks formed a consortium to take over the
express agreement of the parties, by their acts which are management. Mr. Ramos refused to transfer the
too clear and unequivocal to be mistaken. management until he is reimbursed for the cash advances
Applying the law to the case he made for the companies.
The banks and Mr. Ramos reached an agreement that Mr. pending labor case and desired to enter into a
Ramos shall be reimbursed with non-interest bearing compromise agreement for its losses for the inactivity.
notes and that the banks shall discount these notes up to Then, Ace-Agro filed a complaint with RTC for breach
1/3 of the total verified claim. The banks failed; hence a of contract and damages.
compromise agreement was entered into with the banks In the meantime, the labor case was resolved against
stating that Ramos shall be issued non-interest bearing Cosmos and Ace-Agro.
notes with the sum of P500,000 and will discount two- RTC, then, rendered its decision in favor of Ace-Agro;
thirds (2/3) of the said notes in 30 days after the signing Cosmos appealed. The CA reversed the decision finding
of the compromise agreement. Ramos complied with his favor for Cosmos.
obligations and the banks enabled Ramos to negotiate the Issue:
said notes in the sum of P350,000. However, two notes WON there was extinguishment of obligations due to the
were not discounted because the banks foreclosed and fire that occurred in the Cosmos plant.
acquired VISCO’s assets and sold them to National Steel Held:
Corp. • No, although force majeure may extinguish a contract,
Ramos filed a complaint before RTC for recovery of in this case it is not applicable. • SC held that the
P1,495,292.70 as the remaining balance. RTC favored termination of contract that Ace-Agro was speaking of
Ramos and ordered the banks to pay him. Banks was at most a temporary termination due to the fact that
appealed but CA affirmed the RTC ruling. there were still other bottles to be cleaned and boxes to
Issue: be repaired. • The Court found that Ace-Agro’s refusal of
WON there was constructive fulfillment of the condition the offer of Cosmos to resume operations because it
to grant 2/3 discount on the notes to Ramos of the wanted an extension of the contract to make up for the
compromise agreement. period of inactivity was unjustifiable. Incurrence of
Held: additional cost is no basis for its refusal.
• The SC ruled that the constructive fulfillment in the • Hence, the petition for review is DENIED and the
mind of the banks cannot stand as it was a last ditch decision of the CA is AFFIRMED.
effort to exculpate itself; that instead of rehabilitating the Doctrine:
company, they foreclosed its properties and sold it to A force majeure scenario can extinguish an obligation;
National Steel Corp. • The case is DISMISSED. however, this was not entirely true to the case due to the
ACE-AGRO DEVELOPMENT CORP. v CA abovementioned reason.
Nature: Petition for review on certiorari of a decision of
the Court of Appeals
Ace-Agro is engaged in the business of cleaning
softdrink bottles and repairing wooden shells of Cosmos
Bottling Corp. Ace-Agro
does this inside Cosmos’ plant in San Fernando,
Pampanga. They entered into a service contract which
they renewed every year.
Then, a fire broke out in Cosmos’ plant destroying, inter
alia, AceAgro’s area. Hence, Ace-Agro could not clean
bottles. On May 15, 1990, Ace-Agro asked Cosmos if it
could resume its service; but petitioner was advised that
on account of the fire, which had “practically burned
all...old softdrink bottles and wooden shells,” Cosmos
was terminating their contract.
Ace-Agro asked for reconsideration but received no
reply. Hence, Ace-Agro issued a memorandum to their
employees stating that their service with Cosmos is
terminated as well as the employment of its people. The
employees filed a complaint for illegal dismissal before
the Labor Arbitrator.
Cosmos, in a letter, agreed for the resumption of the
service. However, Ace-Agro refused to do so due to the