Section 6 Obligations with a Penal Code

ART. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) Meaning of Penal Clause An obligation with a penal clause is one which contains an accessory undertaking to pay a previously stipulated indemnity incase of breach. It is attached to obligations in order to insure their performance. Purpose of a Penal Clause To insure the performance of the obligation. To substitute for indemnity for damages and the payment of interest in case of non-compliance of the principal obligation. To penalize the obligor in case of breach of the principal obligation. ART. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Debtor Cannot Substitute Penalty For the Principal Obligation The general rule is that the debtor is not allowed to just pay the penalty instead of fulfilling the obligation. He can do so if the right has been expressly reserved. The reason is that if he can just pay, fulfillment of the obligation will be considered an alternative one. The word expressly means that any implied reservation is not allowed. ART. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) When Penalty May be Reduced by the Court When the obligation has been partly complied with by the debtor; When the obligation has been irregularly complied with by the debtor When the penalty is iniquitous or unconscionable, even if there has been no performance at all. ART. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it the penal clause. (1155) Effect of Nullity of Penal Clause The general principle that the accessory follows the principal. If only the penal clause is void, the principal obligation remains valid and demandable. The penal clause may be disregarded. Example: A agreed to sell merchandise to B. it is provided in their agreement that in case of default, A will deliver a prohibited drug as penalty. Here, the obligation to sell merchandise is valid by the penalty to deliver the prohibited drug is void. For failure of A to comply with the obligation, B may recover damages

Meaning of Loss Of The Thing Due It means that he ting which constitutes the object of the obligation perishes or goes out of commerce or disappears. In such a way that its existence is unknown or it cannot be recovered. The general rule is that if the thing to be delivered is determinate and it is lost without the fault of the debtor or is lost through fortuitous even pending delivery, th obligation is extinguished and the debtor cannot be held liable. The exceptions to this rule are: 1. by stipulation or agreement of the parties; 2. by provision of law; 3. when the nature of the obligation requires the assumption of risk; 4. when the thing to be delivered is generic or indeterminate. 5. if the debtor is at fault; 6. when the debt or a thing certain and determinate proceeds from a crime. 7. when the debtor has promised to deliver the same thing to two or more pesons who do not have the same interest. Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a) Thing Lost In Possession Of Debtor If the thing is lost while in the possession of the debtor, the law presumes that he ting was lost through his fault. The presumption of fault, however, does not apply when the ting is lost due to earthquake, flood or other natural calamities. becomes legally or physically impossible without the fault of the obligor. (1184a) 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. (n) Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) Effect Of Obligation Arising From Felony Obligation arising from felony or crime or if a person who was convicted of the crime like of theft , was ordered by the court to return the object to its owner is liable for the payment of its value if such object is lost through whatever case. The only exception to this rules when the person who should receive the object unjustifiably refused to accept it and the object is subsequently lost due ot fortuitous event, in which case the obligation is extinguished. Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) When Creditor Acquires Debtors Right Of Action By reason of the loss of the thing, the creditor acquire all the rights of actions which a debtor may have against at third person.

SECTION 3. - Condonation or Remission of the Debt Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) Condonation or Remission Defined Remission is an act of liberality by which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result his right against the debtor. (4 Sanchez Roman 422) Requisites of Condonations OR Remissions it must be gratuitous; it must be accepted by the debtor; the parties must have capacity; must not be inofficious; and if made expressly, it must comply with the forms Effect of inofficious Remission While a person may make donations, no one can give more than that which he can give by a testamentary will, otherwise, the excess shall be inofficious and shall be reduced by the Court accordingly. Like for example, a part of the testators property called legitimate cannot be disposed of because the law has reserved it from certain heirs called the compulsory heirs. ART. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify the waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) ART. 1271. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) Presumption In Case Document Found In the Possession Of Debtor If the document is found in the hands of the debtor and it is not known how he came into possession of the same, the presumption is that there was payment by virtue of the payment of the debt. Or it was voluntarily delivered to the debtor, which gives rise to the remission of the obligation. Example, Gaya owes Tito P10, 000 evidenced by a promissory note. The note as signed by Gaya was given to Tito. If the promissory note is voluntarily delivered to Gaya, the presumption is that the debt must have been paid by Gaya. it is known that Gaya has not yet paid Tito, it must be presumed that the obligation has been remitted. Suppose it is not known how Gaya came into possession of the promissory note, the presumption is that it was voluntarily delivered by Tito unless Tito proves to the contrary. ART. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in forc. (1190). Of Effect Renunciation Of the Principal Debt The above provision follows the rule that the accessory follows the principal. The accessory cannot exist without the principal obligation. Example, Arvin owes Tito P10, 000 with Gaya as guarantor. The principal debt here is the P10, 000 while the accessory obligation is the

guaranty of Gaya. The remission of the debt of Arvin by Tito extinguishes the guaranty of Gaya. But if only the guaranty of Gaya is condoned, the obligation of Arvin shall remain in force. ART. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a) Pledged, Defined Pledged is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or instrument evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. Presumption In case Thing in Possession of Debtor If the thing pledged is found in the hands of debtor or the third person, only the accessory obligation of pledge is presumed remitted, not the obligation itself . Section 4. Confusion or Merger of Rights ART. 1275. The obligation is extinguished from the time the characters or creditor and debtor are merged in the same person. (1192a) Meaning of Confusion or Merger Confusion is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. (4Sanchez Roman 421) Requisites of A Valid Confusion 1. the merger of the qualities of creditor and debtor must be in the same person; 2. it must take place in the person of either the principal debtor and principal creditor; and 3. it must be complete, clear and definite; and 4. the very obligation must be the same. Example, Gaya issued a promissory note for P10, 000 in favor of Tito payable 30 days after sight. Before the maturity of the note, Tito indorsed it to Arvin; Arvin indorsed it to Mary; Mary indorsed it to Gaya. The obligation of Gaya to Tito is extinguished because there is here a merger of the qualities of the debtor and creditor in one and the same person with respect to one and the same obligation cannot demand and collect payment from himself. ART. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) Effect of Merger This article reiterates the principles established in Articles 1176, 1274, NCC, that accessory follows the principal. The extinguishment of the principal obligation extinguishes the accessory obligation; but the extinguishment of the accessory does not extinguish the principal obligation Example, Gaya obtains P10, 000 loan from Tito which loan was guaranteed by Arvin. Later, Tito assigned the credit to Mary, who in turn assigned it to Gaya. The principal debt is extinguished and Arvin is released from his obligation as guarantor. If, in this same example, the credit was assigned by Tito to Mary and Mary to Arvin. The contract of guaranty is extinguished but the principal obligations remains. Gaya has now the obligation to pay Arvin. ART. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) Effect of Merger in Joint Obligation In a joint obligation, the debts are distinct and separate from each other. In case there is merger in a joint obligation, it affects only the share corresponding to the creditor or debtor in whom the two characters concur. The co-debtor will not owe his

corresponding share to this former joint co-debtor. Example, Gaya, Mary and Arvin are jointly indebted to Tito in the amount of P15, 000. Tito assigns his credit to Ian who in turn assigned it to Gaya. There is here a merger between Gaya and Tito but Mary and Arvin would now owe Gaya P5, 000 each. 228. Section 5. Compensation ART. 1278. Compensation shall take place when two persons, in their own right are creditors and debtors of each other. (1195) Compensation,Defined Compensation shall take place when two persons, in their own rights are creditors and debtors of each other. Compensation Distinguished From Confusion as to number of persons in compensation there must be two persons; in confusion, there is only one person in whom the quality of creditor and debtor is merged; as to number of obligation in compensation thEre must be two obligations; in confusion there is only one obligation. Kinds of Compensation 1. as to cause a. Legal takes effect by operation of law provided all the requisites prescribed by law are present. b. Voluntarily takes place by virtue of the agreement of the parties. c. Judicial takes place only through court orders. 2. as to effect a. Total when both debts are completely extinguished because the debt are the same amount b. Partial the debts are not the same amount hence after compensation, a balance remains outstanding. Requisites of a Proper Compensation or Legal Compensation 1. the parties are principal creditor and principal debtor of each other; Example, Arvin owes Tito P10, 000 payable on Dec. 20, 1999. Tito on the other hand owes Arvin P10, 000 also due and payable on Dec. 30, 1999. These two obligation become due on Dec. 30, 1999 compensation takes place because both Arvin and Tito are principal creditor and principal debtor of each other. 2. both debts consists in a sum of money or of consumable things of the same kind and quality; Example, Arvin obliged himself to deliver to Tito 100 sacks of rice on October 30, 1999. Tito, on the other hand, has an obligation to deliver 100 sacks of rice to Arvin on October 20, 1999. There is compensation because they are consisting of consumable things. 3. the two debts are due and demandable; Example, Gaya owes Maya P10, 000 payable on October 30, 1999. Maya owes Gaya P10, 000 payable also on October 30, 1999. There is compensation when the obligation becomes due on October 30, 1999. the two debts liquidated; and The liquidated means that the amount of debt has already been fixed and determined, while the word demandable means when it is due; 5. there be no retention or controversy means a third person who is claiming to be a creditor. Example, Arvin woes Ian P10, 000 and Ian owes Arvin P10, 000 but Arvin credit of P10, 000 has been garnished by Gaya who claims to be an unpaid creditor of Arvin. Ian has been duly notified of the controversy. Any possible compensation is in the meantime suspended. If Gaya wins her claim, there can be no compensation. If she loses, the controversy is resolved, and then compensation can take place. ART. 1280. Notwithstanding the provision of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor Guarantor May Set Up Compensation This is an exception to Article 1279, part. 1 because the article allows setting up compensation as regard what the creditor may owe to the principal debtor. Example, Arvin owes Tito P10, 000. Maya is the guarantor of Arvin. Tito owes Arvin P10, 000. When Tito sues Arvin

for P4, 000. When Tito sues Arvin and Arvin cannot pay, Maya will be liable for only P6, 000 because he can set the P4, 000 credit of Arvin as the basis of partial compensation. ART. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. Kinds of Compensation Total compensation is when the amount due are equal or of the same amount, hence both obligations are extinguished. Example, Gaya is indebted to Maya the amount of P10, 000 due on Dec. 19, 1999. Maya is likewise indebted to Gaya in the amount of P10, 000 due on Dec. 19, 1999. There is here a total compensation; hence both debts will be extinguished. Partial compensation is when the amount are not the same after compensation took place, there is a balance remains. Example, Gaya owes Maya P10, 000 due on Dec. 19, 2009. On the other hand, Maya owes the due date arrives because a balance of P4, 000 will remain after compensation takes place. ART. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) Compensation By Agreement Of the Parties This is a voluntary compensation as an execution to the general rule that only debts which are due and demandable can be compensated.(Art.1279) Example, Gaya owes Maya P10, 000 due on Nov. 30, 2001. On the other hand Maya owes Gaya P10, 000 due on Dec. 19, 2001. Generally compensation the parties there may be compensation cannot take place comes Nov. 30, 2001 because Mayas debt is not yet due. However, by voluntary agreement between ART. 1283. If one of the parties to a suit over an obligation has acclaim for damages against the other, the former may set it off by providing his right to said damages and the amount thereof. (N) Judicial Compensation A judicial compensation is one whereby a money debt of a person may be allowed by the court to be compensated with a claim of damages by another. Example, X owes Y P1, 000. When Y demanded payment, X failed to pay. In anger, Y damaged the property of X to the extend of P800. X can set off the obligation of Y to pay him damages in the amount of P800 against his debt of P1, 000. ART. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. Compensation Of Rescissible or Voidable Debts Rescissible and voidable obligations are valid until they are judicially rescinded or avoided and prior rescission or annulment, the debts may be compensated. Example, A owes B P 10, 000. Subsequently, A, through fraud was able to make B sign a promissory note that B is indebted to A for the same amount. The debt of A is valid, but that of B is voidable. Before the debt of B is nullified, both debts may be compensated against each other if all the requisites for legal compensation are present. If suppose the debt of B is later annulled by the court, A is still liable considering compensation had already taken place because the effect of annulment is retroactive, it is as if there was no compensation. ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserve 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. When Compensation Has Taken Place BEFORE Assignment If an extinguished obligation has been assigned by the creditor to third person, the debtor can raise the defense of compensation with respect to the debt. The remedy of the assignee is against the assignor. Example, A owes B P5, 000 due yesterday. B owes A P3, 000 due also yesterday. Both debts are extinguished up to amount of P3, 000. Hence, A still owes B P2, 000 today. If B assigns his right to C, latter can collect only P2, 000 from A. However, if A gave his consent to the assignment before it was made on will be liable to C for P5, 000 but he can still collect the P2, 000 owed by B. It is as if no compensation took place. Where Compensation Has Taken Place AFTER Assignment There are three cases of compensation which take place after an assignment of rights made by the creditor. They are: Assignment with consent of debtor Example, A owes B P5, 000 due Dec. 19. B owes A P3, 000 due Dec. 19. B assigned his right to C, the assignee, the compensation which would pertain to him against B, the assignor. A is still liable to C for P5, 000 but he can still collect the P2, 000 debt from B. However, if A while consenting to the assignment, reserved his right to the compensation, he would be liable only P2, 000 to C. Assignment with the knowledge but without the consent of debtor Example, A owes B P1, 000 due Dec. 1. B owes A P2, 000 Dec. 10. A owes B P1, 000 due Dec. 15. A assigned his right to C on Dec. 12. A notified B but the latter did not give his consent to the assignment, how much can C collect from B? B can set up the compensation of debts on Dec. 10 which was before the cession on Dec. 12. There being partial compensation, the assignment is valid only up to the amount of P1, 000 but B cannot raise the defense of compensation with respect to the debt of A due on Dec. 15 which has not yet matured. So, on Dec. 12, B is liable to C for P1, 000. Come Dec. 15, A will liable for his debt of P1, 000 to B. Assignment without the knowledge of the debtor Example, in the preceding example, let us suppose that the assignment was made without the knowledge of B who learned of the assignment only on Nov. 16. In this case, B can set up the compensation of credits before and after the assignment. The crucial time is when B acquired knowledge of the assignment and not the date of the assignment. If B learned of the assignment after the debts had already matured, he can raise the defense of compensation, otherwise, he cannot. ART. 1286. Compensation takes place by operation of law, even thought eh debts may be payable at different places, bu there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) Compensation Where Debts Payable At Different Places This legal compensation does not refer to the difference in the value of the things in their respective places but to the expenses of monetary exchange and expenses of monetary exchange and expenses in transportation. Once these expenses are liquidated, the debts also become compensated. The indemnity shall be paid by the person who raises the defense of compensation. Example, Gaya owes Maya $1, 000 payable in New York. Maya owes Gaya P38, 000(equivalent amount) payable in Manila. If A claim compensation, he must pay for the expenses of exchange.

ART. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provision of paragraph 2 of article 301. ART. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal clause.