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71

72

CASE
TITLE
Arrieta vs
NARIC

Kalalo vs.
Luz

BRIEF

DOCTRINE

PROVISIONS APPLIED

Arrieta won a bid called by NARIC for

the supply of 20k metric tons of
Burmese rice. Arietta told NARIC to
open the letter of credit, which NARIC
failed to do, leading to the forfeiture of
the space on the ship for the rice.
NARIC was held liable for contravention
of tenor because it shouldn't have
contracted with Arrieta knowing its
financial incapacity.

Any agreement to pay an

obligation in a currency
other than Philippine legal
tender is null and void as
contrary to public policy,
and the most that could
demanded is to pay said
obligation in Philippine
currency "to be measured
in the prevailing rate of
exchange at the time the
obligation was incurred.

RA 529 - Under this Act, payments

of all monetary obligations should
be made in currency which is legal
tender in the Philippines. A
stipulation providing payment in a
foreign currency is null and void
but does not invalidate the entire
contract.

RA 529 states that all

obligations in dollars or
other currencies should be
paid in Pesos, based on
the currency exchange

RA 529 - All obligations after June

16, 1950 (the date of the
enactment of the RA), which
require payment in a particular
kind of coin or currency other than

The RTC awarded the amount of

$286,000 as damages to plaintiffs for
breach of contract. However, in view of
RA 529, the dispositive portion of the
decision appeal insofar as it expresses
the amount of damages in US currency
and not in Philippine peso. The question
is what rate of exchange should apply
in the conversion: the rate at the time
of the breach, or the rate prevailing on
the promulgation of the decision. Citing
Eastboard Navidation, Ltd. v. Juan
Ysmael & Co., Inc., any agreement to
pay an obligation in a currency other
than Philippine legal tender is null and
void as contrary to public policy, and
the most that could demanded is to pay
said obligation in Philippine currency
""to be measured in the prevailing rate
of exchange at the time the obligation
was incurred."
Engr. Kalalo had an agreement with
Architect Luz that he would render
some engineering services to the said
architect in exchange for a certain fee
(per project). After the completion of

73

St. Paul Fire

v.
Macondray

the projects, Kalalo sent the sum for

payment to Luz. However, Luz claimed
that it should be another amount
(lower), so he sent a check with his
claimed amount, and Kalalo promptly
rejected this check. The court said that
Luz should pay Kalalo the agreed 20%
of his $ 140,000 paid by the
International Rice Inst. (for one of their
projects). However, this should be paid
in Pesos and not in Dollars, as per RA
529.
"Winthrop Products, Inc. in New York
shipped aboard the SS ""Tai Ping"",
owned and operated by Wilhelm
Wilhelmsen (carrier) 218 cartons and
drums of drugs and medicine, with the
freight prepaid, to Winthrop-Stearns
Inc. Manila (consignee).
When the shipment was discharged,
one drum and several cartons were in
bad condition. Winthrop-Searns
demanded P1,109.67 representing the
C.I.F. value of the damaged drum and
cartons of medicine with the carrier,
Macondray and the Manila Port Service.
Since the shipment was insured by the
shipper against loss and/or damage
with the St. Paul Fire & Marine
Insurance Company, said company paid
the value of the damaged goods. Now
St. Paul fire instituted action against
Macondray for the said amount. Court
held that the liability of the carrier to
the consignee is limited to the C.I.F.
value of the goods which were lost or
damaged and the insurer should be
reimbursed on the date of the
discharge. "

rate prevailing at the time

of the payment of
contracts.

the Philippine currency, shall be

discharged in Philippine currency
measured at the prevailing rate of
exchange at the time the
obligation was incurred.

A stipulation fixing or
limiting the sum that may
be recovered from the
carrier on the loss or
deterioration of the goods
is valid, provided it is: (1)
reasonable and just under
the circumstances; and
(2) has been fairly and
freely agreed upon.

"[Pertinent contract terms in the

bill of lading]
Whenever the value of the goods
is less than $500 per package or
other freight unit, their value in
the calculation and adjustment of
claims for which the Carrier may
be liable shall for the purpose of
avoiding uncertainties and
difficulties in fixing value be
deemed to be the invoice value,
plus frieght and insurance if paid,
irrespective of whether any other
value is greater or less. The
limitation of liability and other
provisions herein shall inure not
only to the benefit of the carrier,
its agents, servants and
employees, but also to the benefit
of any independent contractor
performing services including
stevedoring in connection with the
goods covered hereunder.
->The plaintiff-appellant, as
insurer, after paying the claim of
the insured for damages under
the insurance, is subrogated

74

Papa v AU
Valencia

Myron Papa is the administrator of the

estate of Angela Butte. In 1973, he sold
a portion of said estate to Felix
Pearroyo through A.U. Valencia and
Co., Inc. Pearroyo gave Papa
P5,000.00 plus a check worth
P40,000.00. However, Papa was not
able to deliver the certificate of title to
Pearroyo. A litigation ensued and ten
years after, Papa argued that the sale
between him and Pearroyo was never
consummated because he did not
encash the P40,000.00 check and that
the P5,000.00 cash was merely earnest
money.
The Court denied the petition ruling
that after more than 10 years from the
payment in part by cash and in part by
check, the presumption is that the
check had been encashed. Granting
that Papa had never encashed the
check, his failure to do so for more than
10 years undoubtedly resulted in the
impairment of the check through his
unreasonable and unexplained delay.
Considering that respondents Valencia
and Pearroyo had fulfilled their part of
the contract of sale by delivering the
payment of the purchase price, said

While it is true that the

delivery of a check
produces the effect of
payment only when it is
cashed, pursuant to
Article 1249 of the Civil
Code, the rule is
otherwise if the debtor is
prejudiced by the
creditors unreasonable
delay in presentment. The
acceptance of a check
implies an undertaking of
due diligence in
presenting it for payment,
and if he from whom it is
received sustains loss by
want of such diligence, it
will be held to operate as
actual payment of the
debt or obligation for
which it was given.

merely to the rights of the

assured. As subrogee, it can
recover only the amount that is
recoverable by the latter. Since
the right of the assured, in
case of loss or damage to the
goods, is limited or restricted by
the provisions in the bill of lading.
"
CC 1249 The payment of debts in
money shall be made in the
currency stipulated, and if it is not
possible to deliver such currency,
then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes
payable to order, or bills of
exchange or other mercantile
documents shall produce the
effect of payment only when
they have been cashed, or
when through the fault of the
creditor they have been impaired.
In the meantime, the action
derived from the original
obligation shall be held in the
abeyance.
*The Court said that although
encashment is required as a
general rule, the exception is if
the creditor unreasonably delays
in presentment. The payee of a
check would be a creditor under
this provision and if its nonpayment is caused by his
negligence, payment will be

75

PAL v. CA

respondents, therefore, had the right to

compel petitioner to deliver to them the
peaceful possession and enjoyment of
the lot in question.
In the case of Amelia Tan, et al v PAL,
the trial court ruled in favor of Tan and
ordered PAL to pay indemnities to
respondent. Tan filed a motion for the
issuance of a writ of execution of the
judgment. The trial court issued the
writ and was referred to Deputy Sheriff
Emilio Z. Reyes for enforcement. 4
months later Amelia Tan moved for the
issuance of an alias writ of execution
because the judgment was still
unsatisfied. PAL filed an opposition to
the motion because they had already
paid its obligation through Emilio Z.
Reyes, evidenced by cash vouchers
properly signed and receipted. Court
denied the writ for being premature
and asked Emilio Reyes to appear and
explain the reason why he failed to
surrender the payment. He however
has absconded or disappeared. Amelia
Tan filed for Alias Writ of Execution
which was granted by the courts. The
money was collected by a new Sheriff,
over the protest of PAL and hence this
petition to the SC.

A judgment cannot be
rendered nugatory by the
unreasonable application
of a strict rule of
procedure. The absence of
an executing officer's
return will not preclude a
judgment from being
treated as discharged or
being executed through
an alias writ of execution
as the case may be. So
long as a judgment is not
satisfied, a plaintiff is
entitled to other writs of
execution. It is a well
known legal maxim that
he who cannot prosecute
his judgment with effect,
sues his case vainly.

deemed effected and the

obligation for which the check was
given as conditional payment will
be discharged.
"CC 1240 Payment must be made
to the obligee himself or to an
agent having authority, express or
implied, to receive the particular
payment.
In this case the payment was
made to an absconding officer,
not even through cash but
through checks which were not
issued to the name of the
respondent Amila Tan but to the
name of the sheriff himself, Emilio
Z. Reyes.
CC 1249 The payment of debts in
money shall be made in the
currency stipulated, and if it is not
possible to deliver such currency,
then in the currency which is legal
tender in the Philippines. The
delivery of promissory notes
payable to order, or bills of
exchange or other mercantile
documents shall produce the
effect of payment only when they
have been cashed, or when
through the fault of the creditor
they have been impaired. In the
meantime, the action derived
from the original obligation shall
be held in abeyance.
Payments made to public officers
in order to satisfy debts are only

76

Reparations
Commission
v Universal
Deep Sea
Fishing

"Reparations committee awarded

Universal six trawl-boats and delivered
these two at a time (3 deliveries). For
each delivery, Reparations and
Universal executed a contract for the
latter to first pay 10% of the pairs price
as the deliverys initial payment (due
1961) Universal will then pay the rest
of the balance in 10 equal yearly
installments (beginning 1962).
Universal enlisted Manila Surety as its
surety, the two signing an indemnity
agreement stating that the former will
indemnify the latter for any loss,
damage etc. it may incur as Universals
surety.
Universal failed to pay the 10%
installment. In 1962, Reparations
instituted an action for collection.
Universal argued that there was
confusion in the contract: that there
were two first installments and there
were differences in the amount asked
from them (sabi ni Universal, alin ba
talaga ang first installment? Yung 10%
downpayment, or yung una sa 10
yearly installments? Also, bakit magkaiba ang amount asked for in the first

"When it is expressly
stated that an amount is
the first installment, all
other installments after it
(obviously) are
subsequent installments.
The rules contained in
Articles 1252 to 1254 of
the Civil Code apply to a
person owing several
debts of same kind to a
single creditor. They
cannot be made
applicable to a person
whose obligation as a
mere surety is both
contingent and singular,."

valid if there has been authority

vested in him by law or by
judgment or by consent of the
obligee. In the case at bar, the
officer was duly authorized to do
so but it was through the fault of
PAL, by signing the checks to the
absconding officer, that Tan was
unable to receive the satisfaction
of payment."
"Art. 1252. He who has various
debts of the same kind in favor of
one and the same creditor, may
declare at the time of making the
payment, to which of them the
same must be applied. Unless the
parties so stipulate, or when the
application of payment is made by
the party for whose benefit the
term has been constituted,
application shall not be made as
to debts which are not yet due.
If the debtor accepts from the
creditor a receipt in which an
application of the payment is
made, the former cannot complain
of the same, unless there is a
cause for invalidating the
contract. (1172a)
Art. 1253. If the debt produces
interest, payment of the principal
shall not be deemed to have been
made until the interests have
been covered. (1173)
Art. 1254. When the payment
cannot be applied in accordance
with the preceding rules, or if

10% instalment from the amount asked

in the 10 other installments? - example:
in the first pair the initial 10%was P53k,
but the 10 yearly instalments were
P56k each)

application can not be inferred

from other circumstances, the
debt which is most onerous to the
debtor, among those due, shall be
deemed to have been satisfied.

COURT: there is only ONE first

installment - the initial 10%, the other
10 yearly instalments were subsequent
payments for the remaining balance. So
yung #1 sa 10 yearly installments is
NOT part of the first instalment, but a
part of the subsequent payment.

If the debts due are of the same

nature and burden, the payment
shall be applied to all of them
proportionately"

Manila Surety: The Trial Court erred in

not awarding us premiums for the
bonds we have released in behalf of
Universal to answer their debt.
COURT: RTC did err, as the indemnity
agreement expressly states that Manila
Surety will be paid premiums for the
bonds it executes for Universal.
Manila Surety: Universal had paid
P10,000 for the first two boats. Based
on NCC Art. 1254, if hindi sure kung
saan ibabawas ang payment, ibabawas
na lang ito sa most onerous in this
case the most immediate, which is the
10% instalment sa first two boats. So
instead of needing to pay Reparations
P53k, P43k na lang ang ilalabas ni
Manila Surety.
COURT: No. Universals debts as
regards the first two boats is no longer
limited to the first installment but now
covers the first of the 10 as well (kasi

77

Paculdo v
Regalado

78

DBP v CA

past due na rin ito) so the P10k cannot

simply be deducted from the first.
ALSO, Articles 1252 1254 applies only
to persons owing several debts of
judgment NOT to those whose
obligation is a mere surety."
Paculdo and Regalado entered into a
contract of lease over a parcel of land
with a wet market. Aside from this,
Regalado also leased property and sold
equipment to Paculdo. Regalado filed
an ejectment complaint against
Paculdo, saying that the latter failed to
pay for 3 months' worth of rent (on the
wet market land) despite him sending
two letters of demand. Paculdo asserts
that he sent the rental payments, but
Regalado used them for his two other
obligations. Regalado sent Paculdo two
letters, informing him of the application
of the money sent to those two other
obligations, and Paculdo did not object.
SC ruled in favor of Paculdo. At the time
of the payments, he made it clear that
they were for the wet market property.
Furthermore, the payment for the
equipment was not yet due. Art. 1252
grants the right to specify which among
various obligations is to be satisfied
first to the debtor. Only with the
consent of the debtor can the creditor
choose.
Lydia Cuba is a grantee of Fishpond
Lease Agreement from the government.
She obtained a loan from DBP, for
which she executed a promissory note
and two Deeds of Assignment of her
Leasehold Rights. She failed to pay her
loan so DBP, without foreclosure

The right to specify which

among various obligations
to satisfy first belongs to
the debtor. Only with the
consent of the debtor can
the creditor choose. (Also,
application of payments
shall not be made as to
debts which are not yet
due.)

CC 1252. At the time Paculdo

made the payments, he made it
clear to Regalado that they were
to be applied to his rental
obligations on the Fairview wet
market property.

Difference between
Dation in payment and
Cession

CC 1245: Dation in payment,

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

1. Whereas dation in
payment transfers the
ownership over the thing

proceedings, appropriated the

Leasehold Rights over the fishpond.
Cuba, wanting to get back the fishpond,
negotiated with DBP for a Deed of
Conditional Sale of the Leasehold
Rights. However, she was unable to pay
the amortization. DBP then sold the
Leasehold Rights to a third person,
Caperal.
Cuba argued that the Deed of
Assignment of Leasehold Rights was a
mortgage, and not a dation in payment
nor a cession. Therefore, according to
Art 2088 of CC, DBP as the creditor
cannot appropriate the mortgage. DBP
argued that it was a dation in payment
(if not, a cession), whose appropriation
was allowed. SC held that it was not
dation nor cession (based on some
provisions in Deed of Assignment of
Leasehold Rights). These provisions
are:
1. ""In the event of foreclosure of the
MORTGAGE securing this note, I/We
further bind ourselves to pay...""
2. ""Failure to comply with the terms
and condition of any of the loans shall
cause other loans to become due and
demandable and all other MORTGAGES
shall be foreclosed.""

alienated to the creditor,

in assignment under
cession, only the
possession and
administration are
transferred to the
creditors
2. While dation in
payment may totally
extinguish the obligation
and release the debtor,
the assignment only
extinguishes the credits to
the extent of the amount
realized from the
properties assigned,
unless otherwise agreed
upon
3. While dation in
payment is the cession of
only some specific thing,
the assignment involves
all the property of the
debtor
4. While in former, the
transfer is only in favor of
one creditor to satisfy a
debt, in the latter there
are various creditors
Mortgage and Dation
The essence of mortgage
is security, while for
dation it is the satisfaction
of indebtedness.

79

Filinvest
Credit Corp
vs Phil
Acetylene
Co. Inc.

Phil. Acetylene purchased a Chevrolet

from Alexander Lim payable in
installment. As a security for the
payment, Phil. Acetylene executed a
chattel mortgage over the same motor
vehicle.
Alexander Lim subsequently executed a
Deed of Assignment in favor of Filinvest
assigning all his rights, title and
interests in the chattel mortgage.

80

De Guzman
v. CA (and
Singh)

Phil. Acetylene, however, defaulted in

the payment of nine successive
installments which prompted Filinvest
to send a demand letter ordering
petitioner to return the mortgaged
property. This was done by petitioner
together with the document ""Voluntary
Surrender with Special Power to Sell.""
However, since the Chevrolet still had
unpaid taxes, Filinvest can't sell the
motor and requested Phil. Acetylene to
update its account. Phil. Acetylene
refused and argues that its obligation is
already extinguised by virtue of his
Voluntary surrender.
On February 17, 1971, petitioners
(together with Sps. Gestuvo) executed
a contract to sell with Singh covering
two parcels of land in Pasay. Repondent
was to pay P133,640 on or before
February 17, 1975. Two days before the
due date, Singh requested several
documents (statement of accounts of
balance due, copies of Certificates of
Land Title, and Special Power of
Attorney executed by Rolando Gestuvo
in favor of Pilar De Guzman). Petitioners

"Mere return of the

mortgaged Chevrolet
does not constitute dation
in payment in the
absence of an express or
implied intention of the
parties. Filinvest, in this
case, merely acts as an
agent to sell the property
because his power to
dispose the property is
limited by the Special
Power of Attorney.

"Art 1245. Dation in payment,

whereby property is alienated to
the creditor in satisfaction of a
debt in money, shall be governed
by the law on sales.
**Common consent is an essential
prerequisite for there to a be a
valid dation in payment."

Delivery of possession of
the mortgaged property
to the mortgagee can only
extinguish liability if the
mortgagee had actually
caused the foreclosure
sale of the mortgaged
property."

The Court, in this case,

focused only on the
substantial fulfillment of
the compromise
agreement and did not
pass upon the validity of
the consignation made by
the private respondents.
The court held that there
was fulfillment on the part
of the Singhs when they
went to the sala of Judge

NA

did not respond to the request which

led to a filing of a complaint for specific
performance with damages against the
them. Thereafter, the parties entered
into a compromise agreement which
the Court approved. On January 28,
1978, petitioners filed a motion for the
issuance of a writ of execution, claiming
that respondents failed to abide by the
terms of the compromise agreement.
The Court However, ordered the release
of the deposited P250,000 for the
petitioners and the transfer of the land
titles in favor of the private
respondents.

81

TLG Intl
Continental
Enterprising
Inc. vs
Flores
(1972)

"Respondent Judge Flores granted

petitioner TLGs motion to intervene in
Beacon Trading Co. vs Fabella (about
rights as lessees of property) with the
purpose of protecting its rights as
sublessee of Bearcon and to enable it
to make a consignation of monthly
rentals since they do not know who is
lawfully entitled to receive their
monthly rentals. TLG deposited with the
CFI Rizal P3,750 by way of
consignation. When the Bearcon case
was later dismissed, TLG filed to

Bautista on the set due

date when the payment
should have been made.
However, the petitioners
were not thereto receive
it. It was only their legal
counsel who was there,
who was not even
authorized to receive the
payment. They went to
the house of the
petitioners, and still they
weren;t there to receive
payment. When they went
to the court to deposit the
balance, it they were
unable to do so since it
was a Saturday. The Court
held that the deposit was
done in good faith and
that respondent had no
fault for their failure to
pay on the specifeied date
and that there was
substantial fulfillment on
their end.
In cases of consignation,
the debtor is entitled as a
matter of a right to
withdraw the deposit
made with the court,
before the consignation is
accepted by the creditor
or prior to the judicial
approval of such
consignation.

"Art. 1260 (2), CC states that

""Before the creditor has accepted
the consignation, or before a
judicial declaration that the
consignation has been properly
made, the debtor may withdraw
the thing or the sum deposited,
allowing the obligation to remain
in force"".
In this case, since the Bearcon
case was dismissed before the
amount deposited was either

withdraw its deposit. Flores denied their

motion stating that his court has not
ordered TLG to make any deposit and is
thus not authorized to order the
withdrawal of deposits.
The issue in this case is WON the
respondent judge could authorize the
withdrawal of deposits. SC: YES.
According to Art. 1260, CC, in
consignation, the debtor is entitled as a
matter of a right to withdraw the
deposit made with the court."

82

McLaughlin
vs CA

Petitioneer and respondent Flores

entered into a contract of conditional
sale of real property. When respondent
couldn't pay, they entered into a
compromise agreement with a penal
clause that says if the respondent fails
to pay all his obligations, and a writ of
execution is granted, all previous
payments paid will be forfeited to the
petitioner as liquidated damages. When
respondent didn't pay, petitioner filed
for a Writ of Execution, which made
respondent tender a Pacific Banking
Corporation certified manager's check.
But petitioner refused it. The SC held
that it would be inequitable to cancel
the contract and forfeit all payments
made by respondent and that the
tender made by private respondent of a
certified bank manager's check payable
to petitioner was a valid tender of

Where an obligor fails to

follow a valid tender of
payment with a court
consignation, the court
may allow him time to pay
his obligation without
rescinding the deed of
sale.

accepted by the creditor or a

declaration made by court, the
consignation is rendered
ineffectual. It is then incumbent
for the respondent judge to allow
the withdrawal by TLG. Morevoer,
according to Art. 1258, CC:
""Consignation shall be made by
depositing the things due at the
disposal of judicial authority,
before whom the tender of
payment shall be proved, in a
proper case, ..."". The amount was
officially received by the clerk of
court and thus the money was
under the control and jurisdiction
of the court. Hence, Flores can
order its return."
Art. 1259 according to syllabus
but it wasn't mentioned in the
case. It did cite Articles 1256-58.
Although respondent had
preserved his rights as a vendee
in the contract of conditional sale
of real property by a timely valid
tender of payment of the balance
of his obligation which was not
accepted by petitioner, he
remains liable for the payment of
his obligation because of his
failure to deposit the amount due
with the court. Since respondent
did not consign with the court, his
obligation was not paid and he is
liable in addition for the payment
of the monthly rentals.

83

Soco v
Militante

payment.
Soco (lessor+plaintiff) and Francisco
(lessee+defendant) entered into a
contract of lease covering a commercial
building and the lot on which it stands
(P800 monthly rental over a period of
10 years). Some time before the civil
case occurred, Soco stopped sending
the collector of rental payments to
Francisco, prompting the latter to write
the former a letter and thereafter send
him payment for the rentals through
checks. Soco admitted having received
these checks, except for the ones
covering payments for the months of
May to August 1977. Soon after, Soco
learned that Francisco sub-leased a
portion of the building to NACIDA, at a
monthly rental of more than P3K (way
higher than the lease). Lugi sya so she
sought a way to terminate the contract
leading her to file an illegal detainer
case with the City Court of Cebu, which
ruled in her favor, but which ruling was
thereafter reversed by the CFI. The
reversal by the CFI was due to its
conclusion that there was in fact a
tender of payment of the rentals
covering the dues for May to August
1977 made by Francisco to Soco only
that Soco refused them impelling
Francisco to DEPOSIT THE RENTALS
with the Clerk of Court of the City Court
of Cebu. SC ruled that the
consignation was invalid as it is amiss
of the requirements of a valid
consignation (proof of both notification
and tender of payment). Francisco has
violated the terms of the lease contract

Failure in the full and

strict compliance in any of
the requirements for a
valid consignation enough
ground to render a such
ineffective.

"Requisites for a valid

consignation:
(1) that there was a debt due;
(2) that the consignation of the
obligation had been made
because the creditor to whom
tender payment was made
refused to accept it, or because
he was absent or incapacitated, or
because several persons claimed
to be entitled to receive the
amount due (Art. 1176, CC);
(3) that previous notice of the
consignation had been given to
the person interested in the
performance of the obligation (Art.
1177, CC);
(4) that the amount due was
placed at the disposal of the court
(Art. 1178, CC); and
(5) that after the consignation had
been made the person interested
was notified thereof (Art. 1178,
CC).
Further, the Court ruled that the
essential requisites of a valid
consignation must be complied
with fully and strictly in
accordance with the law.
Substantial compliance, which
prompted the CFI to rule in
Franciscos favour, is not enough."

84

Sotto vs
Mijares

85

Reisenbeck
v CA

and may thus be judicially ejected from

the premises of Socos building.
This is an appeal taken by defendants
from a portion of the order of the Court
of First Instance of Negros Occidental
which requires them to deposit with the
Clerk of Court the amount of P5,106.00
within ten (10) days from receipt of said
order. Originally appealed to the Court
of Appeals, this case was subsequently
certified to this Court, the only issue
being one of law.

Riesenbeck filed a complaint for

consignation and damages against
respondent Juergen Maile. He
consigned and deposited with the Clerk
of Court of the Regional Trial Court of
Cebu the sum of P113,750. The private
respondent subsequently filed a
Manifestation Accepting Consignation
and Motion to Dismiss wherein he
stated, that "without necessarily
admitting the correctness of obligation
of plaintiff to defendant, the latter
hereby manifests to accept the said
amount of P113,750 which is consigned
by plaintiff, provided that the present
complaint be dismissed outright with
cost against plaintiff." The petitioner
opposed the manifestation. The court
ruled that as respondent-creditor's
acceptance of the amount consigned
was with reservations, it did not

Whether or not to deposit

at all the amount of an
admitted indebtedness, or
to do so under certain
conditions, is a right
which belongs to the
debtor exclusively. If he
refuses he may not be
compelled to do so, and
the creditor must fall back
on the proper coercive
processes provided by law
to secure or satisfy his
credit, as by attachment,
judgment and execution.
A sensu contrario, when
the creditor's acceptance
of the money consigned is
conditional and with
reservations, he is not
deemed to have waived
the claims he reserved
against his debtor. Thus,
when the amount
consigned does not cover
the entire obligation, the
creditor may accept it,
reserving his right to the
balance

CC 1260. The law says that

"before the creditor has accepted
the consignation or before a
judicial declaration that the
consignation has been properly
made, the debtor may withdraw
the thing or the sum deposited,
allowing the obligation to remain
in force." If the debtor has such
right of withdrawal, he surely has
the right to refuse to make the
deposit in the first place. For the
court to compel him to do so was
a grave abuse of discretion
amounting to excess of
jurisdiction.
Private respondent's acceptance
of the amount consigned by the
petitioner-debtor with a
reservation or qualification as to
the correctness of the petitioner's
obligation, is legally permissible.
There is authority for the view
that before a consignation can be
judicially declared proper, the
creditor may prevent the
withdrawal of the amount
consigned by the debtor, by
accepting the consignation, even
with reservations.

86

Rural Bank
of Caloocan
Inc. (and
Jose
Desiderio
Jr.) vs CA
(and
Maxima
Castro)

completely extinguish the entire

indebtedness of the petitioner-debtor. It
is apposite to note here that
consignation is completed at the time
the creditor accepts the same without
objections, or, if he objects, at the time
the court declares that it has been
validly made in accordance with law.
Respondent Maxima Castro (aged 70),
accompanied by Severino Valencia,
went to the Rural Bank of Caloocan to
apply for an industrial loan. It was
Severino who arranged everything
about the loan with the bank. Castro
signed a promissory note corresponding
to her 3k loan in favor of the bank. On
the same day, the Valencias also
obtained from the bank a 3k loan and
they had Castro affixed thereon her
signature as co-maker in their
promissory note. The two loans were
secured by a real-estate mortgage on
Castro's house and lot. The sheriff of
Manila sold the property at a public
auction sale to satisfy the obligation
covering the two promissory notes plus
interest and attorney's fees after
sending a letter to Castro. Castro
alleged that it was only when she
received the letter that she learned for
the first time that the mortgage
contract which was an encumbrance on
her property was for 6k and not for 3k
and that she was made to sign as comaker of the promissory note without
her being informed of this and was just
made to sign without her
understanding the already prepared
forms. Castro filed a case alleging that

Consignation the deposit

of the object of obligation
in a competent court in
accordance with the rules
prescribed by law after
refusal or inability of the
creditor to accept the
tender of payment.

"Art. 1256. If the creditor to whom

tender of payment has been made
refuses without just cause to
accept it, the debtor shall be
released from responsibility by the
consignation of the thing or sum
due...
--->The Court held Castro's
consignation valid. The Bank had
long foreclosed the mortgage
extrajudicially and the sale of the
mortgage property had already
been scheduled for non-payment
of the obligation, and that despite
the fact that the Bank already
knew of the deposit made by
Castro because the receipt of the
deposit was attached to the
record of the case, said Bank had
not made any claim of such
deposit, and therefore, Castro was
right in thinking that it was futile
to pay directly to the bank.
Art. 1342. Misrepresentation by a
third person does not vitiate
consent, unless such
misrepresentation has created
substantial mistake and the same
is mutual. --> As a result of the
fraud upon Castro and the

87

88

Leonila
Licuanan vs
Hon.
Ricardo
Diaz, Judge
of Court of
First
Instance of
Manila and
Aida
Pineda,
private
respondent.

Chan vs. CA

thru mistake on her part or fraud on the

part of Valencias she was induced to
sign as co-maker of a promissory note
and to constitute a mortgage on her
house. At the time of filing her
complaint, respondent Castro deposited
the amount of P3,383 with the court a
quo in full payment of her personal loan
plus interest. The CA affirmed the lower
court in declaring the promissory note
invalid insofar as they affect
respondent Castro vis-a-vis petitioner
bank, and the mortgage contract valid
up to the amount of 3k only. SC
affirmed the CA decision in toto.
Petitioner owned an apartment in
Manila which was rented out to private
respondent Pineda. The lease contract
stipulated that P180 be paid during the
first 5 days of every month. After
alleging that Pineda was occupying her
garage which was not part of the lease
contract, petitioner demanded she
vacate the premises. Both parties
appeared before the AFP Hearing
Officer on Civil Relations but no
compromise agreement was reached.
Pineda filed a case for unlawful
detainer. Petitioner alleged that Pineda
had not paid her rentals from April 1978
to September 1978. Respondent
answered that she had deposited her
rentals at the Civil Office of the AFP.
Lower Court ruled in favor of
respondent. SC reverses and rules for
petitioner as they find the respondent's
deposit with the AFP is not a valid
consignation.
Chan and Cu entered into a contract of

misrepresentation to the bank

inflicted by the Valencias, both
Castro and the bank committed
mistake in giving their consents to
the contracts. In other words,
substantial mistake vitiated their
consents given. "

Articles 1252-1261 on
consignation must be
given mandatory
construction. (Soco v.
Militante) THEY MUST BE
STRICTLY FOLLOWED.
In Landicho V. Tensuan, it
was stated that
consignation must be
done with the Court or
under Batas Pambansa
Blg. 25. AFP Office of Civil
Relations is not one of the
allowed offices.

A consignation is valid if it

Article 1178 which says that after

consignation has been made, the
person interested was notified
thereof. Private respondent failed
to do this. Granting both
petitioner and respondent were
present when the AFP officer on
civil relations instructed
respondent to deposit rentals,
respondent never actually
informed petitioner after he had
actually deposited the rentals.
The reason for this provision is so
that the petitioner can withdraw
the money of the deposits. It
would be unjust for him to risk
deteroriation, depreciation of loss
for lack of knowledge of
consignation.

"Requisites of a Consignation:

lease whereby the latter will occupy

(for residential purposes) Room 401
and the rooftop of Room 442 of a
building in Urbiztondo, Manila. After
some time there was no longer a
contract between the two parties, but
Cu still occupied the premises
mentioned. There was difficulty for
Chan collecting rent because a dispute
arose between the two. Cu tendered a
check but Chan refused to accept it. Cu
filed a civil case for consignation which
won but was reversed du to lack of
merit hence this appeal

89

Meat
Packing
Corporation
of the
Philippines
vs
Sandiganba
yan 2001

Meat Packing Corp of Phil (MPCP)

entered into a lease to purchase
agreement (28 years) with PIMECO

stipulates that the contract is

automatically deemed cancelled and
forfeited upon default in payments of
rental equivalent to the cumulative
total of 3 annual payments. (at P3.3M
per year)
In 1986, PCGG sequestered all assets of
PIMECO including the leased property

complies
with
the
requisites laid down; (1)
that there was a debt due;
(2) that the consignation
of the obligation had been
made
because
the
creditor to whom tender
of payment was made
refused to accept it, or
because he was absent
for
incapacitated,
or
because several persons
claimed to be entitled to
receive the amount due;
(3) that previous notice of
the consignation have
been given to the person
interested
in
the
performance
of
the
obligation; (4) that the
amount due was placed at
the disposal of the court;
and (5) that after the
consignation had been
made
the
person
interested was notified
thereof.
Consignation

act of depositing
the thing due with the
court
or
judicial
authorities whenever the
creditor cannot accept
or refuses to accept
payment

generally requires
a
prior
tender
of
payment

necessarily judicial

(1) that there was a debt due; (2)

that the consignation of the
obligation had been made
because the creditor to whom
tender of payment was made
refused to accept it, or because
he was absent for incapacitated,
or because several persons
claimed to be entitled to receive
the amount due (Art. 1176, Civil
Code); (3) that previous notice of
the consignation have been given
to the person interested in the
performance of the obligation (Art.
1177, Civil Code); (4) that the
amount due was placed at the
disposal of the court (Art 1178,
Civil Code); and (5) that after the
consignation had been made the
person interested was notified
thereof (Art. 1178, Civil Code)."

Article 1256. If the creditor to

whom tender of payment has
been made refuses without just
cause to accept it, the debtor shall
be
released from responsibility by the
consignation of the thing or sum
due.
Consignation alone shall produce
the same effect in the following
cases:
(1) When the creditor is absent or

MPCP sent PIMECO a notice of

rescission for non-payment of rentals.
PCGG tendered to MPCP checks
amounting to P5M which the MPCP
refused arguing that the agreement
already rescinded since the outstanding
debt of more than P12M is already
more than 3 years worth of
installments.

90

Occena vs
CA

Held: MPCPs ground for refusal of

tender of payment is the rescission
clause. However, since PCGGs tender
and consignation of P5M was approved
by Sandiganbayan and is therefore a
valid tender, the accumulated back
rental were reduced to around P7M,
which is less than 3 years worth of
installments. As such rescission cannot
lie.

Tender of Payment

antecedent
of
consignation, that is, an
act preparatory to the
consignation, which
is
the principal, and from
which are derived the
immediate consequences
which the debtor desires
or seeks to obtain.

may
be
extrajudicial

priority
of
the
tender is the attempt to
make a

private settlement
before proceeding to the
solemnities
of
consignation

Private Respondent Tropical Homes Inc.

filed a complaint for modification of the
terms and conditions of its subdivision
contract with petitioners (landowners of
a 55,330 square meter parcel of land in
Davao City) alleging that increase in oil
price and its derivatives and the rising
prices of all commodities were not
within contemplation of parties at the
time of agreement. Under the
subdivision contract, respondent
guaranteed (petitioners as
landowners) as the latters fixed and

Tender and consignation,

where
validly
made,
produces the effect of
payment and extinguishes
the obligation
Difficulty of service
authorizes release of
obligor but does not
authorizes courts to
modify or revise contract
between the parties, in
case a party desires to be
excused from
performance in the event
of such contingencies
arising, it is his duty to
provide therefore in the
contract.

unknown, or does not appear at

the place of payment;
(2) When he is incapacitated to
receive the payment at the time it
is due;
(3) When, without just cause, he
refuses to give a receipt;
(4) When two or more persons
claim the same right to collect;
(5) When the title of the obligation
has been lost. (1176a)

"ART. 1267. When the service has

become so difficult as to be
manifestly beyond the
contemplation of the parties, the
obligor
may also be released therefrom,
in whole or in part.
Respondent in the Case seeks not
the release from the contract but
modifying the terms and
conditions of the contract."

91

92

Naga Tel
Co. v. CA

PNCC v. CA

sole share and participation an amount

equivalent to forty (40%) per cent of all
cash receipts from the sale of the
subdivision lots." CFI Rizal rendered
judgment modifying terms and
conditions of contract. The Court held
however that worldwide increases in
prices do not constitute a sufficient
cause of action for modification of
subdivision contract.
Natelco (telephone company in Naga)
and Casureco (provides electricity)
entered into a contact, where Natelco
would use Casurecos electric light
posts in Naga City, and Natelco would
provide free use of 10 telephone
connections. The contact provided,
That the term or period of this contract
shall be as long as the party of the 1st
party (Natelco) has need for the electric
light posts of the party of the 2nd part
(Casureco), it being understood that
this contract shall terminate when for
any reason whatsoever, the party of the
second part is forced to stop,
abandoned its operation as a public
service and it becomes necessary to
remove the electric light post." After 10
years, Casureco filed against Natelco
for reformation of the contract with
damages on the ground that the
contact had become too one-sided for
Natelco. RTC: in favor of Casureco. CA
and SC affirmed.
Respondents (lessors) entered into a
lease contract with petitioners (lessee).
Petitioners were supposed to conduct
rock crushing projects on the land
leased. When respondents came to

Art. 1267 says it all; when

the performance of a
service or delivery of a
thing becomes so difficult
to fulfill or deliver as to go
beyond what the parties
contemplated it to entail,
the debtor can be
released from
performance, either
partially or completely.

"Art. 1267. When the service has

become so difficult as to be
manifestly beyond the
contemplation of the parties, the
obligor may also be released
therefrom, in whole or in part.

"(Relevant to impossibility
of performance) Petitioner
used two defenses: Art.
1266 and the principle of
rebus sic stantibus.

"CC 1266 ""The debtor in

obligations to do shall also be
released when the prestation
becomes legally or physically
impossible without the fault of the

The provision of the service had

become so grossly
disadvantageous for Casureco to
the point that Natelco was being
unjustly enriched, making it a
service which ""has become so
difficult"". ""Beyond the
contemplation"" applies to the
fact that neither party could've
foreseen that Natelco would've
been able to expand its thenlimited operations."

collect on the 1st annual payment,

petitioners refused to do so on the
basis that the payment of rentals would
commence on the date of the issuance
of an industrial clearance by the
Ministry of Human Settlements, and not
from the date of signing of the contract.
They also wished to terminate the
contract because of financial and
technical reasons. Respondent refused
to terminate the contract and
subsequently initiated a suit for specific
performance and damages.

obligor.""
Art. 1266 does not apply
to this case. It is an
exception to the principle
of the obligatory force of
contracts. The principle
only applies to obligations
to do. Since this case
involves an obligation to
pay rentals, thus an
obligation to give, the
article does not apply.
The principle of rebus sic
stantibus neither fits in
with the facts of the case.
Under this theory, the
parties stipulate in the
light of certain prevailing
conditions, and once
these conditions cease to
exist the contract also
ceases to exist.This
theory is said to be the
basis of Article 1267 of
the Civil Code.
The article, which
enunciates the doctrine of
unforeseen events, is not,
however, an absolute
application of the
principle of rebus sic
stantibus, which would
endanger the security of
contractual relations. The
parties to the contract
must be presumed to
have assumed the risks of

CC 1267 ""When the service has

become so difficult as to be
manifestly beyond the
contemplation of the parties, the
obligor may also be released
therefrom, in whole or in part."""

unfavorable
developments. It is
therefore only in
absolutely exceptional
changes of circumstances
that equity demands
assistance for the debtor.

93

YAM v. CA

Loan Agreement whereby petitioners

were given a loan of P500,000 by
private respondent. Loan was secured
by a chattel mortgage on the printing
machinery in petitioners
establishment. Petitioners acquired a
second loan of P300,000 as evidenced
by two promissory notes. They fully
paid their first loan of P500,000 on Apr.
2, 1985. As of February 11, 1999,
petitioners paid a total of P410,854.47,
comprised of the principal
(P295,469.47) and the interest
(P165,385.00) less the partial payment
of P50,000. This payment was made by
mean of a Pilipinas Bank Check bearing
the notation full payment of IGLF
loan. Petitioners claimed that they had

In this case, petitioner's

excuse was the abrupt
change in the political
climate of the country
after the EDSA Revolution.
The Court did not
appreciate this defrnse,
since it was established
that petitioners entered
into the contract with
open eyes of the
deteriorating conditions of
the country. "
In order for condonation
to take effect (conditional
offer made by private
respondent to reduce
penalty), such
donation/acceptance of a
movable property (second
loan) must be made in
writing.

"Art. 1270, par. 2 of CC provides

that express condonation must
comply with the forms of
donation.
Art. 748, par. 3 provides that the
donation and acceptance of a
movable, the value of which
exceeds P5,000, must be made in
writing.
According to the court, if private
respondent really condoned the
amount in question, petitioners
should have asked for a certificate
of full payment from respondent
corporation, as they did on their
first loan. Also, Desejo, by
countersigning the voucher, did

fully paid their obligation; that

sometime after receiving private
respondents letter concerning the
conditional offer to reduce the penalty
charges, the petitioner and his wife met
with Carlos Sobrepenas, president of
the respondent corporation. The latter
agreed to waive the penalties and
service charges, provided that
petitioners pay the principal and
interest.

94

Gan Tion v.
CA and Ong
Wan Sieng

Gan Tion has property in which Ong

Wan Sieng was the tenant. In 1961,
Gan filed an ejectment case against
Ong for alleged failure to pay rental
fees. Ong asserted that Gan's demand
for Php180 a month was in fact not
what they had agreed upon which was
only Php160. Ong obtained a favorable
judgment upon appeal to the CFI. Thus
Gan was ordered to pay Ong Php500 in
attorney's fees. Gan later properly
increased the fee to Php180. In 1963,
he sought to demand the rents in
arrears from Ong for a total of
Php4,320. Ong, on the other hand,
obtained the writ of execution for the
judgment order in the previous case.
Thus, Gan went to the Court of Appeals
to plead legal compensation to set off
the award of atty's fees against Ong's
debt to him. CA denied as the requisites
for legal compensation in CC Art. 127879 were absent (the creditor is the atty,
not Ong). SC reversed the CA. CC Art
2208 shows that the award of

It is the litigant, not his

counsel, who is the
judgment creditor and
who may enforce the
judgment by execution.
The judgment credit,
therefore, may properly
be the subject of legal
compensation.

no more than acknowledge receipt

of payment. It was obvious that
she had no authority to condone
any indebtedness, her duties
being limited to issuing official
receipts, preparing check
vouchers and documentation.
Sobrepenas had no authority to
condone the debt. In fact, Mrs.
Yam herself testified that they
were told that only the Central
Bank may authorize the release of
the chattel mortgage over their
property
"Article 1278. Compensation shall
take place when two persons, in
their own right, are creditors and
debtors of each other.
Article 1279. In order that
compensation may be proper, it is
necessary:
(1) That each one of the obligors
be bound principally, and that he
be at the same time a principal
creditor of the other;
(2) That both debts consist in a
sum of money, or if the things due
are consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;

attorney's fees is made in favor of the

litigant, not of the attorney. Thus, the
credit may properly be set off as legal
compensation.

(5) That over neither of them

there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.

Article 2208. In the absence of

stipulation, attorney's fees and
expenses of litigation, other than
judicial costs, cannot be
recovered, except:
(list of situations where such may
be recovered such as (2) When
the defendant's act or omission
has compelled the plaintiff to
litigate with third persons or to
incur expenses to protect his
interest;)

95

BPI v. Reyes

Edvin Reyes held two joint savings

Compensation shall take

--> CA held that in the award for

attorney's fees, the requisites in
Art. 1278-79 for legal
compensation are absent because
they are not creditors and debtors
of each other (1279 par 1). SC
reversed saying that this requisite
is complied with because the it is
the litigant who is awarded the
fees, not the counsel. The former
is the creditor. Art 2208 shows
that the award of attorney's fees
is granted to indemnify the party
himself.
"
"CC 1279 - in order that

accounts at BPI Cubao: (1) with his

wife, Sonia; and (2) with his
grandmother, Emeteria Fernandez. He
regularly deposited in the joint account
with Fernandez the US Treasury
Warrants payable to her order as her
monthly pension. Fernandez died on
Dec. 28, 1989, without the knowledge
of the US Treasury Department. She
was thus still sent a US Treasury
Warrant dated Jan. 1, 1990 in the
amount of P10,556. Reyes deposited
the said treasury check in the savings
account with Fernandez. Two months
later (March 8, 1990), Reyes closed the
savings account with Fernandez and
transferred its funds to the joint
account with his wife. On Jan. 16, 1991,
the Treasury Warrant was dishonored as
it was discovered that Fernandez had
died 3 days prior to its issuance. The US
Department of Treasury requested a
refund from BPI. This was the first time
BPI came to know of the death of
Fernandez. BPI sent Reyes a telegram
requesting that he contact the bank's
manager or assistant manager. Reyes
assured BPI he would drop by to look
into the matter, and verbally authorized
them to debit from his other joint
account (the account with his wife) the
amount stated in the dishonored US
Treasury Warrant. When Reyes visited
BPI with his lawyer and the refund
documents were shown to them, he
demanded from BPI the restitution of
the debited amount, claiming that he
failed to withdraw his money when he
needed it due to the debit.

place when two persons,

in their own right, are
creditors and debtors of
each other. CC 1290
provides that "when all
the requisites mentioned
in Article 1279 are
present, compensation
takes effect by operation
of law, and extinguishes
both debts to the
concurrent amount, even
though the creditors and
debtors are not aware of
the compensation." Legal
compensation operates
even against the will of
the interested parties and
even without the consent
of them. Since this
compensation takes place
ipso jure, its effects arise
on the very day on which
all its requisites concur.
When used as a defense,
it retroacts to the date
when its requisites are
fulfilled.

compensation may be proper, it is

necessary:
(1) That each one of the obligors
be bound principally, and that he
be at the same time a principal
creditor of the other;(2) That both
debts consist in a sum of money,
or if the things due are
consumable, they be of the same
kind, and also of the same quality
if the latter has been stated;
(3) That the two debts be due;(4)
That they be liquidated and
demandable; (5) That over neither
of them there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.
The elements of legal
compensation are all present in
this case. (1) The obligors bound
principally are at the same time
creditors of each other. BPI is a
debtor of Reyes, a depositor. At
the same time, BPI is the creditor
of Reyes with respect to the
dishonored U.S. Treasury Warrant.
(2) The debts involved consist of a
sum of money. (3-4) They are due,
liquidated, and demandable. (5)
They are not claimed by a third
person.
(Additionally: SC held that the
presence of Reyes' wife does not
negate the element of mutuality
of parties, i.e., that they must be
creditors and debtors of each

96

PNB v
Sapphire
Shipping

97

CKH vs CA

Sapphire's account with PNB was

doubly credited with the amounts of
$5,679.23 and $5,885.38. PNB, acting
as local correspondent bank,
intercepted funds telexed from Jeddah
and Libya to be credited to Sapphire's
Citibank account (Greenhills Branch).
PNB deducted the value of $2,627.11
claiming legal compensation. Court
held that there could be no legal
compensation as PNB and Sapphire are
not creditors and debtors of each other
(Art.1278) with respect to the telexed
funds. Such a relationship only exists
between them with respect to the
double payments. It is Citibank and
Sapphire that are creditor and debtor to
each other as regards the telexed
funds.
"CKH Industrial Devt owned by
deceased Cheng Kim Heng executed a
Deed of Absolute Sale in favor of

Requisite for legal

compensation: parties
must be creditors and
debtors to each other

other in their own right. Sonia

Reyes is not a party in the case at
bar. She never asserted any right
to the debited U.S. Treasury
Warrant. To frustrate the
application of legal compensation
on the ground that the parties are
not all mutually obligated would
result in unjust enrichment on the
part of Reyes and his wife who
herself out of honesty has not
objected to the debit. The rule as
to mutuality is strictly applied at
law. But not in equity, where to
allow the same would defeat a
clear right or permit irremediable
injustice.)"
Art. 1278. Compensation shall not
take place when two persons, in
their own right, are creditors and
debtors of each other.

Without the confluence of

the characters of mutual
debtors and creditors,

"CC Article 1279. In order that

compensation may be proper, it is
necessary:

Century-Well for two parcels of land at

the price of P800,000. After obtaining
the Deed from Ruby Saw, the
respondents failed to pay the P700,000
balance and claimed that they are not
obliged to pay the amount in money
since it is deemed legally compensated
with the debt owed by CKH to the sons
of Century-Well's owners. The parties
differ as to the events which occurred
leading to the execution of the Deed of
Sale.
CHK and Ruby Saw: Saw claims that
Lourdes Chong and Uy Chi Kim should
pay the P700,000 balance since there
was no stipulation in the Sale that the
balance was to be compensated with
another debt she had with CenturyWell.

Century-Well and Lourdes Chong: Other

circumstances not stated in the
contract should be taken into
consideration in its interpretation and
execution. The balance to be paid by
them should be legally compensated
with the debt owed to two of CenturyWell's stockholders (Chong Tak Choi
and Chong Tak Kei) by CKH.
The Court held that the balance may
not be legally compensated with the
debt owed by CKH to the Chong Tak
brothers. They are merely stockholders
of Century-Well and are not bound
principally, not even in a representative
capacity, in the contract of sale. Their

contracting parties cannot

stipulate to the
compensation of their
obligations, for then the
legal tie that binds
contracting parties to
their obligations would be
absent. At least one party
would be binding himself
under an authority he
does not possess. As
observed by a noted
author, the requirements
of conventional
compensation are (1) that
each of the parties can
dispose of the credit he
seeks to compensate, and
(2) that they agree to the
mutual extinguishment of
their credits.

(1) That each one of the obligors

be bound principally, and that he
be at the same time a principal
creditor of the other;
(2) That both debts consist in a
sum of money, or if the things due
are consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them
there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.
The SC held that the 1st requisite
is not present. CKH and CenturyWell are not both principally
creditors of each other. The debts
as acknowledged by their owners
are not the debts by the
corporations themselves hence
the debts may not be legally
compensated."

98

Mirasol v
CA

interest in the promissory notes cannot

be off-set against the obligations
between CKH and Century-Well arising
out of the deed of absolute sale.
Corporations, such as Century-Well,
have personalities separate and distinct
from their stockholders, except only
when the law sees it fit to pierce the
veil of corporate identity, particularly
when the corporate fiction is shown to
be used to defeat public convenience,
justify wrong, protect fraud or defend
crime, or where a corporation the mere
alter ego or business conduit of a
person. "
"Under a crop loan financing scheme
for crop years 1973-1974 and 19741975, the Mirasols signed a Chattel
Mortgage which empowered PNB to sell
their sugar and to apply the proceeds
as payment of their obligations to PNB.
Thereafter, petitioners continued to
avail of other loans from and make
unfunded withdrawals from their
accounts with PNB. PNB foreclosed their
mortgaged properties for their failure to
pay. Petitioners claim that the
foreclosure is invalid since their debt
has been fully paid by virtue of legal
compensation, that is, it should be
offset by the amount PNB owes them
from the sale of sugar. PNB contends
that under PD 579 issued by Marcos in
1974, all earnings from the export sales
of sugar pertained to the National
Government and were subject to the
Presidents disposition for public
purposes. The Court ruled that the CA
did not err in upholding the validity of

"[Requisites of Legal
Compensation]
Art. 1278. Compensation
shall take place when two
persons, in their own
right, are creditors and
debtors of each other.
Art. 1279. In order that
compensation may be
proper, it is necessary:
(1) That each one of the
obligors be bound
principally, and that he be
at the same time a
principal creditor of the
other;
(2) That both debts
consist in a sum of
money, or if the things
due are consumable, they
be of the same kind, and
also of the same quality if
the latter has been
stated;

see doctrine

the foreclosure on petitioners property.

Set-off or compensation cannot take
place because:
(1)
neither of the parties are
mutually creditors and debtors of each
other. (see Art 1279[1])
Under PD579, which provides that the
balance of the proceeds of sugar
trading operations shall be set aside by
the Philippine Exchange Company as
profits which shall be paid to a special
fund.., neither PNB nor PHILEX could
retain any difference claimed by the
Mirasols in the price of sugar sold. there
was nothing with which PNB was
supposed to have off-set the Mirasols
indebtedness.
(2)
Compensation cannot take place
where one claim, as in the instant case,
is still the subject of litigation as the
same cannot be deemed liquidated.
(see Art 1279[4])

99

Associated
Bank v. Tan

NOTE: The court could not rule on the

constitutionality of PD579 since it was
not the lis mota of the case. The case
was instituted for accounting and
specific performance. PNBs obligation
to render an accounting is an issue,
which can be determined, without
having to rule on the constitutionality
of PD579. In fact, PNBs refusing to give
an accounting is not governed by PD
579, but by the law on agency since
PNB acted as petitioners agent.
Respondent Tan deposited a postdated
UCPB check for Php101k in petitioner
Associated Bank making his current

(3) That the two debts are

due;
(4) That they be
liquidated and
demandable;
(5) That over neither of
them there be any
retention or controversy,
commenced by third
persons and
communicated in due
time to the debtor.
"

Though banks have the

right to setoff, which is
the right of a collecting

"Article 1278. Compensation shall

take place when two persons, in
their own right, are creditors and

balance Php297k. Upon advice by

petitioner Bank that the check has
cleared, petitioner withdrew Php240k
on the same day, making his balance
Php57k. The next day, respondent Tan
deposited Php50k because he issued
checks to his business partners in the
amount of Php47k. The checks bounced
because apparently, Tan's funds were
insufficient.
Turns out, petitioner Associated Bank
debited the Php101k initially deposited
because that check did not clear.
Respondent Tan is now suing for moral
and exemplary damages, because he
lost daw clients and sleep and there is
pain involved.
Trial Court, CA, and SC all ruled in favor
of Tan.

bank to debit a clients

account for the value of a
dishonored check that has
previously been credited
to the same client, the
issue in this case is not
the existence of such
right, but the manner of
exercising it. Did the bank
exercise the right
properly? The answer is
no.
First, a bank should
exercise diligence more
than that of a good father
of a family, because of its
fiduciary nature (meaning,
a bank prudently takes
care of the money of
creditors). In this case,
the bank did not even
give notice to respondent
Tan that the UCPB check
was dishonored and
therefore, they are
debiting Php101k to his
account. A notice of
dishonor is necessary
under the provisions of
the Negotiable
Instruments Law so that
the general indorser (Tan,
in this case) may be
charged.
An admission of the staff
of Associated Bank that it
breached bank policies

debtors of each other.

Article 1279. In order that
compensation may be proper, it is
necessary:
(1) That each one of the obligors
be bound principally, and that he
be at the same time a principal
creditor of the other;
(2) That both debts consist in a
sum of money, or if the things due
are consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them
there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.
The relationship between the bank
and its depositors is that of
creditor and debtor, as per Art.
1980, which states [f]ixed,
savings, and current deposits of
money in banks and similar
institutions shall be governed by
the provisions concerning simple
loan.' Therefore, legal
compensation in Art 1278 may

when they allowed Tan to

withdraw Php240k prior to
the clearing of the check
was also taken against
the bank, with the Court
saying that the bank
should have exercised
diligence in choosing its
employees.

only take place if the requisites

mentioned in Art 1279 are
present. "

Lastly, Tan is suing for

moral and exempary
damages because the
checks he issued was
dishonored. The Court
ruled that the proximate
cause of such was the
bank's negligence in
telling Tan that the check
has cleared because if not
for the bank advising Tan
that the check has
cleared, Tan would not
have withdrawn Php240k,
and he would still have
enough funds for the
Php47k worth of checks
that he issued.

100

Villanueva v
Tantuico

Romulo Villanueva authorized the

disbursement of funds for the seminars
of the Bureau of Records Management

HELD: Petition wthout

merit. Moral damages of
Php100k, exemplary
damages of Php75k, and
attorney's fees of Php25k
against petitioner bank
retained.
(Legal Compensation)
Indebtedness (Sec. 624 of

"Art 1278, CC: Compensation shall

take place when two persons, in
their own right, are creditors and

even though the same were already

charged against the appropriations of
the participants' respective offices.
After its discovery, Emiliana Cruz, the
Auditor of the Bureau, disallowed the
disbursement and withheld Villanueva's
salaries and other allowances to apply
the same for the satisfaction of the
latter's indebtedness.
The Court ruled, however, that there is
no indebtedness as there is neither
admission by Villanueva nor final
adjudication by a competent court (see
Doctrine). The record also shows that
the disbursement was made in good
faith - that Villanueva had no idea that
some participants had already collected
funds for the expenses from their
agencies. The liability, therefore, should
be exacted from the participants
concerned, not from Villanueva.
101

Perez vs.
CA

CONGENERIC owed Mojica a sum of

money. MEVER owed CONGENERIC a
sum of money. CONGENERIC owed
money to Perez, and so CONGENERIC
transferred to Perez what was owed to
it (CONGENERIC) by MEVER, as
payment for its (CONGENERIC's) debt
to Perez. However, Mojica assigned his
credit against CONGENERIC, to MEVER,
and now MEVER is both a creditor and
debtor of CONGENERIC. MEVER
surrendered CONGENERIC's debt to it
(MEVER, by way of Mojica) as payment
for its (MEVER's) own debt to
CONGENERIC. But Perez went after

the Revised
Administrative Code)
must be one that is
admitted by the alleged
debtor or pronounced by
final judgment of a
competent court.
In such a case, the person
and the Government are
in their own right both
debtors and creditors of
each other, and
compensation takes place
by operation of law in
accordance with Article
1278 of the Civil Code.
Absent any such
categorical admission by
an obligor or final
adjudication, no legal
compensation can take
place.
The debts must both be
due and demandable,
otherwise there can be no
compensation. It was also
held that MEVER
necessarily consented to
the transferring of rights,
because of the nature of
the business that
CONGENERIC is involved
in, that of moneymarketing.

debtors of each other.

Sec. 624, RAC: When any person
is indebted to the Government of
the Philippine Islands, the Insular
Auditor may direct the proper
officer to withhold the payment of
any money due him or his estate,
the same to be applied in
satisfaction of such indebtedness.
*Villanueva is a creditor of the
government as he collects his
salaries and other allowances
from the government. If his
indebtedness by virtue of his
aforesaid act were upheld by the
Court, he would've become a
debtor of the government as well.
"

Art. 1279. In order that

compensation may be proper, it is
necessary:
(1) That each one of the obligors
be bound principally, and that he
be at the same time a principal
creditor of the other;
(2) That both debts consist in a
sum of money, or if the things due
are consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and

MEVER since she is supposed to claim

her payment from CONGENERIC,
through MEVER.

demandable; (5) That over neither

of them there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.

MEVER claimed that there was

compensation, however the debt of
CONGENERIC to Mojica was not yet due
and demandable because the payment
of the principal was rolled over to
October 4 and 11, and Mojica assigned
its rights to MEVER on September 9.

102

Silahis
Marketing
Corp. v IAC

De Leon (Mark Industrial Sales) sold

and delivered merchandise items
covered by several invoices (P 22
213.75) to Silahis payable within 30
days from invoice dates. Silahis did not
pay claiming: 1. a debit memo (P 22
200) as unrealized profit & that they
should have commission from De
Leon's DIRECT sale of sprockets (P 111

Compensation is not
proper where the claim of
the person asserting the
set-off against the other is
not clear nor liquidated;
compensation cannot
extend to unliquidated,
disputed claim existing
from breach of contract.

Article 1285. The debtor who has

consented to the assignment of
rights made by a creditor in favor
of a third person, cannot set up
against the assignee the
compensation which would
pertain to him against the
assignor, unless the assignor was
notified by the debtor at the time
he gave his consent, that he
reserved his right to the
compensation.
If the creditor communicated the
cession to him but the debtor did
not consent thereto, the latter
may set up the compensation of
debts previous to the cession, but
not of subsequent ones.
If the assignment is made without
the knowledge of the debtor, he
may set up the compensation of
all credits prior to the same and
also later ones until he had
knowledge of the assignment.
CC Art 1279: In order that
compensation may be proper, it is
necessary: [1] that each one of
the obligors be bound principally,
and that he be at the same time a
principal creditor of the other; [2]
that both debts consist in a sum of
money, or if the things due are
consumable, they be of the same

103

104

Millar vs CA

000) to Dole Philipppines, Inc. (without

coursing thorough Silahis), and 2.
cancellation of P 6 000 due to defective
stainless steel screen found by its
client. CFI: Silahis has liability but it is
partially offset by the counterclaim
contained in the debit memo for
unrealized profit and commission (P
13.75 with 12% interest). Stainless
steel screen claim too late. IAC:
Reversed CFI. No obligation prohibiting
direct sales. SC: Affirmed IAC. No
obligation to compensate the alleged
unrealized commission.

Art 1279 states the

requisites for (legal)
compensation.

Millar obtained a favorable judgment

condemning Antonio P. Gabriel to pay
him the sum of P1,746.98 with interest
at 12% per annum from the date of the
filing of the complaint, the sum of P400
as attorney's fees, and the costs of suit.
The lower court issued the writ of
execution, on the basis of which the
sheriff seized the respondent's Willy's
Ford jeep. The respondent, however,

The defense of implied

novation requires clear
and convincing proof of
complete incompatibility
between the two
obligations. The law
requires no specific form
for an effective novation
by implication. The test is
whether the two

kind, and also of the same quality

if the latter has been stated; [3]
that the two debts be due; [4] that
they be liquidated and
demandable; [5] that over neither
of them there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.
When all requisites are present,
compensation takes effect by
operation of law, even without the
consent or knowledge of the
creditors and debtors. Art 1279
requires, among others, that in
order that legal compensation
shall take place, ""the two debts
be due"" and ""they be liquidated
and demandable."" Compensation
is not proper where the claim of
the person asserting the set-off
against the other is not clear nor
liquidated; compensation cannot
extend to unliquidated, disputed
claim existing from breach of
contract.

"Art. 1292. In order that an

obligation may be extinguished by
another which substitutes the
same, it is imperative that it may
be so declared in unequivocal
terms, or that the old and the new
obligations be on every point
incompatible with each other.
There was no substantial

105

Dormitorio
vs.
Fernandez

pleaded with the petitioner to release

the jeep under an arrangement
whereby the respondent, to secure the
payment of the judgment debt, agreed
to mortgage the vehicle in favor of the
petitioner. The petitioner agreed to the
arrangement; thus, the parties
executed a chattel mortgage on the
jeep. Resolution of the controversy
posed by the petition at bar hinges
entirely on a determination of whether
or not the subsequent agreement of the
parties as embodied in the deed of
chattel mortgage impliedly novated the
judgment obligation.

obligations can stand

together. If they cannot,
incompatibility arises, and
the second obligation
novates the first. If they
can stand together, no
incompatibility results and
novation does not take
place.

Lazalita bought Lot No. 1 from the

Municipality of Victorias, Negros
Occidental, and he planted trees and
erected a house. Spouses Dormitorio
then bought Lot No. 2. It was later
found out through a surveyor that
Lazalita's lot was part of a municipal
road and that he was actually sitting on
Dormitorio's lot. The spouses filed an
ejectment case from which they won.

Execution of a final
judgment or order may be
stayed or precluded when
the said judgment has
been novated by the
parties.

incompatibility between the

mortgage obligation and the
judgment liability of the
respondent sufficient to justify a
conclusion of implied novation.
The stipulation for the payment of
the obligation under the terms of
the deed of chattel mortgage
serves only to provide an express
and specific method for its
extinguishment payment in two
equal installments. The chattel
mortgage simply gave the
respondent a method and more
time to enable him to fully satisfy
the judgment indebtedness. The
chattel mortgage agreement in no
manner introduced any
substantial modification or
alteration of the judgment.
Instead of extinguishing the
obligation of the respondent
arising from the judgment, the
deed of chattel mortgage
expressly ratified and confirmed
the existence of the same,
amplifying only the mode and
period for compliance by the
respondent."
Art. 1292, NCC. - In order that an
obligation may be extinguished by
another which substitute the
same, it is imperative that it be so
declared in unequivocal terms, or
that the old and the new
obligations be on every point
incompatible with each other.

106

Magdalena
v Rodriguez

107

Reyes v CA,
SoJ

However, the judge later set aside the

order of execution because the
spouses and Lazalita already had an
"Agreed stipulation of facts" wherein
the spouses would reimburse the
expenses of Lazalita when he transfers
to another place. The spouses
contested on the setting aside of the
order of execution. The SC laid down
that the "agreed stipulation of facts"
between the spouses and Lazalita
superseded the order of execution
(Novation).
Rodriguez bought from Magdalena
Estates, Inc. a parcel of land in Quezon
City, and executed a promissory note
for P5000 for the unpaid balance of
P5000. In the promissory note, the
appellants (Rodriguez) stated that they
would pay said amount with interest of
9% per annum. Luzon Surety Co.
executed a surety bond in favor of
Magdalena Estates, in which they would
pay only the P5000 balance (they won't
pay the interest). When the obligation
became due and demandable and
Luzon Surety paid to Magdalena the
P5000, Magdalena Estates demanded
the payment of the interest (P655,89),
to which the Rodriguezes refused,
saying that the acceptance of the
surety agreement novated their earlier
contract. The Court held that the
surety bond is not a new and separate
contract but an accessory of the
promissory note, hence the contract is
not novated.
Eurotrust and Bermic entered into a
loan agreement where Eurotrust

Novation is never
presumed, and must be
established by showing
either: 1) That the old
and new contracts are
incompatible in all points,
or 2) That the will to
novate appears by
express agreement of the
parties or in acts of
similar import.

"ART. 1235. When the obligee

accepts the performance knowing
its incompleteness or irregularity,
and without expressing any
protest or objection, the obligation
is deemed fully complied with.
- Rodriguezes misapplied this
provision. Court held that
Magdalena Estates did not object
when it accepted the payment of
P5000 because it knew that was
the complete amount undertaken
by the surety. The payment for the
accrued interest was provided for
in the original promissory note,
which the bond merely
supplemented."

In order that a novation

can take place, the

CC 1300 Subrogation of a third

person in the rights of the creditor

extended to Bermic an amount to

finance the construction of the latters
condominium and park. In turn, Bermic
issued 21 postdated checks to cover
payments of the loan packages which
were dishonored by RCBC, due to stop
payment order made by Eleazar.
Despite Eurotrusts notices and
repeated demands to pay, Eleazar
failed to make good the dishonored
checks.

concurrence of the
following requisites is
indispensable:

Meanwhile, respondent AFP-MBAI which

invested its funds with Eurotrust, by
buying from it government securities,
found that after Eurotrust delivered to
AFP-MBAI the securities it purchased,
the former borrowed the same
securities but failed to return them to
AFP-MBAI; and that the amounts paid
by AFP-MBAI to Eurotrust for those
securities were in turn lent by Elsa
Reyes to Bermic and others.

3. there must be the

extinguishment of the old
contract, and

When Eleazar came to know that the

funds originally loaned by Eurotrust to
Bermic belonged to AFP-MBAI, as
President of Bermic, she requested a
meeting with Eurotrust representatives.
The representatives of Eurotrust and
Bermic agreed that Bermic would
directly settle its obligations with the
real owners of the fund-AFP-MBAI and
DECS-IMC. This agreement was
formalized in two letters dated March
19, 1991. Pursuant to this
understanding, Bermic negotiated with
AFP-MBAI and DECS-IMC and made
payments to the latter.

1. there must be a
previous valid obligation,

is either legal or conventional. The

former is not presumed, except in
cases expressly mentioned in this
Code; the latter must be clearly
established in order that it may
take effect.

2. there must be an
agreement of the parties
concerned to a new
contract,

CC 1301 Conventional subrogation

of a third person requires the
consent of the original parties and
of the third person.

4. there must be the

validity of the new
contract.
*2, 3, and 4 were lacking
in this case. No new
agreement for
substitution of creditor
was forged among the
parties concerned which
would take the place of
the preceding contract.*
Novation by substitution
of creditor requires an
agreement among the
three parties concerned the original creditor, the
debtor and the new
creditor. It is a new
contractual relation based
on the mutual agreement
among all the necessary

The Court ruled that there was no new

novation because the foregoing
elements to which are found wanting.
108

Conchingya
n vs. RB
Surety and
Insurance

"On November 1963, Pacific

Agricultural Suppliers (PAGRICO)
applied for and granted an increase in
line of credit with PNB. In compliance
with this requirement, PAGRICO
submitted a Surety Bond issued by R&B
Surety. Under the terms of the Surety
Bond, PAGRICO and R&B bound
themselves jointly and severally to
comply with the terms and conditions
of the advance line of credit established
by PNB; PNB had the right to proceed
directly v R&B without the necessity of
first exhausting assets of PAGRICO.
In consideration of R&B's issuance of
the Surety Bond, two identical
indemnity agreements were entered
into w/ R&B: one with Jose Cochingyan
and another with Jose Villanueva,
wherein they bound themselves jointly
and severally to R&B Surety.
2 years after that, a Trust Agreement
(TA) between Cochingyan as Trustors,
Tomas Besa of PNB as Trustee and PNB
as beneficiary.
PAGRICO failed to comply with Principal
Obligation to PNB -> PNB demanded
payment from R&B -> R&B made series
of payments to PNB. R&B in turn sent
formal demand letters to Conchingyan
and Villanueva for reimbursement of
the payments made by it to PNB as well
as the discharge of its liability to PNB
under surety bond. R&B thereafter

parties. Hence, there is

no novation if no new
contract was executed by
the parties.
"Novation is the
extinguishment of an
obligation by the
substitution or change of
the obligation by a
subsequent one which
terminates it, either by
changing its object or
principal conditions, or by
substituting a new debtor
in place of an old one, or
by subrogating a 3rd
person to the rights of the
creditor.
If objective novation is to
take place, it is imperative
that the new obligation
expressly declare that the
old obligation is thereby
extinguished, or that the
new obligation be on
every point incompatible
with the old one.
If subjective novation is to
occur, essential that the
old debtor be released
from the obligation, and
the new debtor take his
place in the new relation.
If not released, no
novation, new debtor
becomes merely codebtor or surety"

"CC 1292 In order that an

obligation may be extinguished by
another which substitute the
same, it is imperative that it be so
declared in unequivocal terms, or
that the old and the new
obligations be on every point
incompatible with each other.
In this case, under paragraph 9 of
the Trust Agreement is states that
""This agreement shall not in any
manner release the R&B..from
their respective liabilities under
the bonds mentioned above""
Applying CC 1292, the Trust
Agreement does not terminate
obligation of R&B under Surety
Bond
No implied novation as well:
parties to new obligation
expressly recognize the
continuing existence and validity
of the old obligation"

109

Broadway
Centrum
Condominiu
m Corp. v.
Tropical Hut
Food
Market

110

Molino v
Security
Diners
Internationa

brought suit against those who signed

the Indemnity Agreements."
Petitioner and private respondent
executed on 28 November 1980 a
contract of lease. Broadway, as lessor,
agreed to lease a 3,042.19 square
meter portion of the Broadway Centrum
Commercial Complex for a period of ten
(10) years, commencing from 1
February 1981 and expiring on 1
February 1991, "renewable for a like
period upon the mutual agreement of
both parties." Due to low sales volume,
Tropical proposed to reduce the rental
rates. A letter of agreement was
executed in April 1982 regarding the
reduction of the rates and it also stated
that any reduction in rental extended is
merely temporary suspension of the
original rate of rental stipulated in the
lease contract and not an amendment
thereto. However, in December 1982,
Tropical again proposed further rent
reductions but Broadway cannot afford
it anymore since it absorbed Tropical's
losses already in the prior months and
it now wants to raise back the rents to
what was originally stipulated. Tropical
opposed and so petitioner wanted to
implement penalty clause of the
contract (Sec. 5 - 2% penalty on
delayed payments). Issue - WON the
letter agreement (April 20, 1982) had
novated the contract of lease (Nov. 28,
1980).
"Danilo Alto applied for a Regular
(credit) Card with SDIC with his sisterin-law Jeanette Molino as surety. By
signing a Surety Undertaking, Molino

An essential requirement
for an objective novation
is the express declaration
that the old obligation is
extinguished, or that the
new obligation be
incompatible on every
point with the old one.
Novation is never
presumed.

Article 1292

"Novation, as a mode of
extinguishing obligations,
may be done in two ways:
by explicit declaration, or

"Art. 1216. The creditor may

proceed against any one of the
solidary debtors or some or all of
them simultaneously. The demand

l
Corporation
(SDIC)

bound herself jointly and severally with

Alto to pay whatever debts he may
incur against SDIC and that any
changes to the agreement shall not
release her from her obligation. After a
few months, Alto upgraded his credit
card into one without a limit, and asked
Molino for her approval which she gave.
After a few months, Alto incurred P160k
debt and defaulted. When he could not
pay SDIC filed an action for collection
against the two. Danilo moved to have
the case dismissed against him and left
Molino as the sole defendant.
Molino said that she was not liable as
her liability only extended up to
P10,000 (the limit of the regular card),
as such any liability under the Diamond
Card (the one without limit) and those
beyond P10k should not be charged
against her. Also, since Alto was no
longer a defendant, she should not be
held liable as well. SC said that the
upgrade was a form of a novation to
the contract as there was intent to
dissolve the old obligation (the regular
card) in favour of a new one (the
Diamond Card). Since the Surety
Undertaking expressly stated that any
novation will not release her from the
contract, Molino is still liable after the
upgrade. As she is solidarily bound, it
is deemed to be the same as being
bound as the debtor and SDIC was
correct in filing against her. "

by material
incompatibility (implied
novation).
xxx The test of
incompatibility is whether
the two obligations can
stand together, each one
having its independent
existence. If they cannot,
they are incompatible and
the latter obligation
novates the first.
Novation must be
established either by the
express terms of the new
agreement or by the acts
of the parties clearly
demonstrating the intent
to dissolve the old
obligation as a
consideration for the
emergence of the new
one. The will to novate,
whether totally or
partially, must appear by
express agreement of the
parties, or by their acts
which are too clear or
unequivocal to be
mistaken.
A surety is considered in
law as being the same
party as the debtor in
relation to whatever is
adjudged touching the
obligation of the latter,
and their liabilities are
interwoven as to be

made against one of them shall

not be an obstacle to those which
may subsequently be directed
against the others, so long as the
debt has not been fully collected.
Art. 1292. In order that an
obligation may be extinguished by
another which substitute the
same, it is imperative that it be so
declared in unequivocal terms, or
that the old and the new
obligations be on every point
incompatible with each other."

inseparable Although the

contract of a surety is in
essence secondary, his
liability to the creditor is
direct, primary and
absolute; he becomes
liable for the debt and
duty of another although
he possesses no direct or
personal interest over the
obligations nor does he
receive any benefit
therefrom

111

Romeo
Garcia v
Dionisio
Llamas

"Garcia and de Jesus borrowed P400k

from Llamas, and executed a
promissory note in which they bound
themselves to pay jointly and severally.
After the loan was long overdue, Garcia
and de Jesus still failed and refused to
pay Llamas, who then brought this suit
to recover the sum from the former. In
his resistance to the complaint, Garcia
says he only signed on as an
accommodation party, and that de
Jesus had already issued a check to
cover the loan (it bounced). According
to Garcia, the issuance and Llamas's
acceptance constituted a novation of
the original loan. The SC ruled that this
was not a novation.
Re: substitution of de Jesus as the sole
debtor (personal novation)
Changes in persons of the debtor must
be clear and express; in this case, there
was no express change. And besides,
the loan was binding on them solidarily

"
Novation cannot be
presumed; it must be
clearly shown either by
the express assent of the
parties or by the complete
incompatibility between
the old and the new
agreements.

"Art. 1293. There was no actual

substitution because there was no
unequivocal agreement to it; and
the loan was solidarily
undertaken.
(Novation which consists in
substituting a new debtor in the
place of the original one, may be
made even without the knowledge
or against the will of the latter,
but not without the consent of the
creditor.)"

(Llamas could demand satisfaction from

any of them).

112

California
Bus Line v
State
Investment
Inc

Re: check
This was not a novation. First, there is
no unequivocal declaration of the
original loan being extinguished by the
acceptance of the check. Second, the
check was issued precisely for the loan,
making it completely compatible with
the ""original"" obligation."
"In 1979, Delta Motors obtained a loan
of 25M from State Investment House
Inc (SIHI).
Subsequently, California Bus Line Inc
(CBLI) purchased on installment basis
35 buses from Delta. Sixteen
promissory notes as well as chattel
mortgages (over the 35 buses) were
executed in favor of Delta by CBLI.
CBLI defaulted on its loan, hence it
entered into a Restructuring Agreement
(RA) with Delta wherein a new schedule
of payment was agreed upon. A take
over clause was also included in the RA,
wherein upon default, Delta may
choose to take over the management of
CBLI.
Since Delta had obligations to SIHI, it
assigned five of the promissory notes
plus buses as payment in kind.
Delta and CBLI then entered into a
compromise agreemen (CA)t where
CBLI agreed that Delta would exercise
its rights to foreclose on the 35 buses.

"Novation extinguishment of an
obligation by the
substitution or change of
the obligation by a
subsequent one which
terminates the first.
Requisites:
1. Previous valid
obligation
2. An agreement of all
parties concerned to a
new contract
3. Extinguishment of the
old obligation
4. Birth of a valid new
obligation"

"Ratio
An agreement subsequently
executed between a seller and a
buyer that provides for a different
schedule and manner of payment,
to rstructure the mode of
payments by the buyer so that it
could settle its outstanding
obligation in spite of delinquency
in payment is not novation. The
RA shows that the parties did not
expressly stipulate novation.
Absent an unequivocal declaration
of extinguishment, only a showing
of complete incompatibility
between the old and the new
obligation would sustain a finding
of novation. A review of the terms
of this RA yields no
incompatibility.
"

When SIHI asked for the fulfillment of

the five promissory notes, CBLI refused
to pay contending that the RA and CA
novated the promissory notes.

113

Chester
Babst v CA

Issue is WON the RA/CA novated the

notes. Court held that NO, since there is
novation only by express agreement of
the parties, or the parties performed
acts that are too clear and unequivocal
to be mistaken. IN this case, there was
none. "
"Elizalde Steel Inc (ELISCON) obtained
from Commercial Bank and Trust Co.
(CBTC) a loan amounting to P8M. CBTC
on the other hand opened letters of
credit for ELISCON using the credit
facilities of Pacific Multi-Commercial
Corporation (MULTI). Subsequently,
Chester Babst and Antonio executed a
""Continuing Suretyship"" whereby they
bound themselves jointly and severally
liable to pay any existing debt of MULTI
to CBTC. Sometime laterm BPI and
CBTC entered into a ""MERGER"" where
BPI acquired all the assest and
assumed all the liabilities of CBTC.
ELISCON encountered financial
difficulties and became heavily
indebted to the DBP. In order to settle
its obligation, ELISCON proposed dation
in payment where it will convey all its
fixed assets mortgaged with DBP to
which the latter agreed (THIS IS
CALLED SUBJECTIVE NOVATION IN
PERSON OF DEBTOR).
When DBP took over, it proposed

"The creditor's consent in

subjective novation need
not be express. It may be
implied from the acts of
the creditor.
When BPI's account officer
who attended to the
meeting failed to object to
the substitution of
debtors, he did so in
behalf of the bank.
Besides, BPI failed to
subsequently register its
objection to the
substitution after it heard
of DBP's takeover of
ELISCON."

"Art. 1293. Novation which

consists in substituting a new
debtor in the place of the original
one, may be made even without
the knowledge or against the will
of the latter, but not without the
consent of the creditor. Payment
by the new debtor gives him the
rights mentioned in Articles 1236
and 1237. (1205a)
**consent of the creditor need not
be expressed. It may be implied."

114

Garcia v.
Llamas

formulas for the settlement of all of

ELISCON's obligations to its creditors,
but BPI rejected. Consequently, BPI filed
a complaint for sum of money against
ELISCON, MULTI and BABST as BPI
contended that it did not consent to the
novation."
Romeo Garcia and Eduardo de Jesus
borrowed from Dionision Llamas the
amount of P400,000 and executed a
promissory note wherein they bound
themselves jointly and severally to pay
the loan on or before January 23, 1997
with interests. The loan once it became
overdue and no payments were made
despite repeated demands, Llamas filed
a complaint for payment with damages.
Garcia claimed that the payments
made by de Jesus using a check
constituted a novation of the obligation
thereby releasing him from liability
under the promissory note because he
signed it as an accomodation party.
Llamas, on the other hand, claimed that
the check issued was a bum check. De
Jesus asserted that he had paid by way
of interests and that Llamas exhibited
bad faith in filing the case since he
requested an extension of time. The
RTC ruled in favor of the respondent,
ordering petitioners to pay the unpaid
amount less the amount paid by de
Jesus. Upon appeal to the CA, the Court
remanded the case to the RTC since de
Jesus raised contentious issues. As to
Garcia, the CA issued a summary
judgment since he has failed to raise a
genuine issue. The summary judgment
held that no novation had taken place

The Court held that there

was no novation that took
place. The issuance of the
check did not extinguish
the obligation since it
bounced and because a
check is only legal tender
when it is cashed. The
novation asserted was
that of a modification as
to the person of the
debtor. It can be done
either by expromision or
delegacion. In
expromision, the creditor
allows a consenting third
party to assume the debt
without the knowledge of
the debtor. In delegacion,
the debtor offers, the
creditor accepts and a
consenting third party
accepts the obligation. No
such substitution can take
place because de Jesus
was not a third party to
the obligation, and the
creditor did not express
any consent. Novation
should never be
presumed. The
respondent's acceptance

"CC 1293, Novation -- Requisites

of Novation: 1) There is a previous
valid obligation. 2) The parties
concerned must agree to a new
contract 3) The old contract must
be extinguished 4) There must be
a valid new contract
CC 1216 - Creditor may proceed
against solidary debtors or some
or all of them simultaneously."

and the obligation was not

extinguished.

115

Quinto vs
People
(1999)

Petitioner-appellant Quinto was

convicted of the crime of estafa. Quinto
received in trust from Cariaga three
pieces of jewelry valued at P36k for the
purpose of selling them on a
commission basis with an express
obligation of returning them if not sold
within 5 days. Quinto was not able to
return it after 6 months. Quinto is
appealing the conviction arguing that
there was a novation of their original
contract. She argues that the sale to

of a check did not release

Garcia because he was a
solidary debtor, whose
obligation cease upon
extinguishment of the
obligation. The payment
of interests neither does
constitute novation since
a requisite is that the
there be two obligations
that are incompatible with
each other. The payment
of interests was provided
in the promissory note
and was in accord with
the terms thereof.
(Additional Info: Under
NEGOTIABLE
INSTRUMENTS, the
promissory note entered
into by the parties is not a
negotiable instrument
since it was made payable
to a specific person. Even
if this is so, the liability of
an accomodation party
was that of a surety.)
Novation may either be
extinctive (old obligation
is terminated by the
creation of a new one) or
modificatory (old
obligation subsists to the
extent that it remains
compatible with the
amendatory agreement).
Novation is never
presumed and the animus
novandi, whether totally

"No CC provision mentioned in the

case but is under Arts 1293-1295
in the syllabus, topic: subjective
novation by change of debtor.
There are two forms of novation
by change of debtor: expromission
and delegacion. In expromission,
initiative for the change does not
come from the debtor and may
even be made without his
knowledge. Meanwhile, in
delegacion, the debtor must offer

116

Licaros vs
Gatmaitan

Camacho and Ramos modified the

contract because they agreed to a
different manner of payment (the
buyers cannot pay in full so both of
them agreed to pay Cariaga directly
through installments). The issue in this
case is WON Quinto and Cariaga
effectively novated their contract when
Cariaga accepted the terms of payment
of Camacho and Ramos. SC: NO. The
changes were only in the manner of
payment but there were no substitution
of debtors. Decisions of the lower
courts are affirmed.

or partially, must appear

by express agreement of
parties or by their acts
that are too clear and
unequivocal to be
mistaken.

Enticed by the lucrative prospects of

doing business with Anglo-Asean,
petitioner, a Filipino businessman,
decided to make a fund placement with
said bank. Fearing that he might not
get back nay of his investments,
petitioner decided to seek the counsel
of respondent. They executed a
notarized Memorandum of Agreement
where respondent executed a NONNEGOTIABLE PROMISSORY NOTE WITH
ASSIGNMENT OF CASH DIVIDENDS in
favor of petitioner. But because
respondent could not collect from the
bank, he did not pay the petitioner as
promised. Petitioner sent demand

Conventional subrogation
requires an agreement
among the three parties
concernedthe original
creditor, the debtor and
the new creditor.

and the creditor must accept that

a third person would assume the
obligation with the effect of the
original debtor being released
from the obligation. In both, the
consent of the creditor is an
indispensable requirement.
In this case, Cariagas acceptance
of Camacho and Ramos payment
cannot be construed as either
expromission or delegacion. While
stranger to a contract agrees to
assume an obligation, it does not
necessarily mean that the liability
of the original debtor
extinguishes. Neither would the
fact that the creditor received
payments from a third person
result in the same. Cariagas mere
acquiesce to the payment is not
equivalent to her consent.
"
Art. 1301. It is different from an
assignment of credit which
doesn't need the consent of the
debtor because the "express
conformity" of the bank was
stipulated in the MOA. The
absence of such conformity on the
part of Anglo-Asean, which is
thereby made a party to the same
Memorandum of Agreement,
prevented the agreement from
becoming effective. Conventional
subrogation has the effect of
extinguishing the old obligation
and giving rise to a new one. The
extinguishment of the old

117

Astro
Electronics
Corp v
Philguarant
ee

letters, then sued. SC held that the

MOA was not perfected because of lack
of consent of the bank.
Astro was granted several loans by
Philtrust P3M w/ interest. This was
secured by 3 promissory notes where
petitioner Roxas signed twice, as
President of Astro and in his personal
capacity. He also signed a Continuing
Surety ship Agreement in favor of
Philtrust Bank, as President of Astro and
as surety. Philguarantee, with the
consent of Astro, then guaranteed in
favor of Philtrust the payment of 70% of
Astros loan, subject to the condition
that upon payment by Philguanrantee
of said amount, it shall be
proportionally subrogated to the rights
of Philtrust against Astro. Astro failed to
pay its obligations; thus, Philguarantee
paid 70% of the guaranteed loan to
Philtrust. Subsequently, Philguarantee
filed against Astro and Roxas a
complaint for sum of money with the
RTC of Makati. In his Answer, Roxas
disclaims any liability on the
instruments, alleging that he merely
signed the same in blank and the
phrases in his personal capacity and
in his official capacity were
fraudulently inserted without his
knowledge. SC ruled in favor of
Philguarantee. Roxas should be jointly
and severally liable (solidary) with Astro
for the sum awarded by the RTC.

Subrogation is the
transfer of all the rights of
the creditor to a third
person, who substitutes
him in all his rights. It may
either be legal or
conventional. Legal
subrogation is that which
takes place without
agreement but by
operation of law because
of certain acts. Instances
of legal subrogation are
those provided in Art.
1302 of the Civil Code.

obligation is the effect of the

establishment of a contract for
conventional subrogation.
"Art. 1303. Subrogation transfers
to the persons subrogated the
credit with all the rights thereto
appertaining, either against the
debtor or against third persons, be
they guarantors or possessors of
mortgages, subject to stipulation
in a conventional subrogation.
Philguarantee has all the right to
proceed against Astro, it is
subrogated to the rights of
Philtrust to demand for and collect
payment from both Roxas and
Astro since it already paid the
value of 70% of Roxas and Astro
Electronics Corp.s loan obligation.
] Roxas acquiescence is not
necessary for subrogation to take
place because the instant case is
one of the legal subrogation that
occurs by operation of law (Art.
1302), and without need of the
debtors knowledge."