DEATH OF A DEBTOR STRONGHOLD INSURANCE VS REPUBLIC ASAHI Facts: On May 24, 1989, respondent Republic Asahi Glass Corporation

entered into a contract with Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in Republic Asahis compound, where respondent was to pay JDS P5,300,000 for said construction, which was supposed to be completed within a period of 240 days beginning May 8, 1989. In order to guarantee the faithful and satisfactory performance of its undertakings, JDS, shall post a performance bond of P795,000.00. JDS executed jointly and severally with petitioner Stronghold Insurance Co. Inc. (SICI) the performance bond. Two progress billings dated August 14, 1989 and September 15, 1989 were submitted by JDS to respondent. According to respondent, the two progress billings accounted for only 7.301% of the work supposed to be undertaken by JDS under the terms of the contract. Several timers prior to November of 1989, respondents engineers called the attention of JDS to the alleged alarmingly slow pace of the construction, but said reminder were unheeded by JDS. On November 24, 1989, dissatisfied with the work undertaken by JDS, Republic Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract. Respondent alleged that, as a result of JDSs failure to comply with the provisions of the contract, it had to hire another contractor to finish the project, for which it incurred an additional expense of P3,256,874.00. Respondent then sent two letters to SICI filing its claim under the bond for not less than P795,000.00, which letters were both unheeded. Respondent then filed a complaint against JDS and SICI. Summons were duly served by the Sheriff on SICI. However, Jose D. Santos, Jr. died on 1990 and JDS Construction was no longer at its address and its whereabouts were unknown. Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety bond, and is automatically released from any liability under the bond. Issue: W/N the petitioners liability under the performance bond was automatically extinguished by the death of Santos, the principal. No. Held: As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the

nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. A surety companys liability under the performance bond it issues is solidary. The death of the principal obligor, does not, as a rule, extinguish the obligation and the solidary nature of that liability. In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. The liability of petitioner is contractual in nature, because it executed a performance bond. Petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides: Art 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand 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. In Garcia vs CA, the court stated: The suretys obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promise of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.

ARTICLE 1240 TO WHOM PAYMENT SHALL BE MADE PNB VS CA AND TAN Facts: Private respondent Loreto Tan is the owner of a parcel of land abutting the national highway in Mandalangan, Bacolod City. Expropriation proceedings were instituted by the government against private respondent Tan and other property owners before the CFI of Negros Occidental. Tan then filed a motion requesting the issuance of an order for the release to him of the expropriation price of P32,480.00. On May 22, 1978, petitioner PNB was required by the trial court to release to Tan the said amount. On May 24, 1978, petitioner, through its Assistant Branch Manager Juan Tagamolilia, issued a managers check for P32,480.00 and delivered the same to one Sonia Gonzaga without Tans knowledge, consent or authority. Sonia Gonzaga deposited it in her account with Far East Bank and Trust Co. (FEBTC) and later on withdrew the said amount. Private respondent Tan subsequently demanded payment of the amount from petitioner, but the same was refused on the ground that petitioner had already paid and delivered the amount to Sonia Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly executed in her favor by Tan. Tan then executed an affidavit stating that he had never executed an SPA in favor of Sonia Gonzaga and he had never authorized her to receive the sum from petitioner. After failing to recover the amount from PNB, private respondent filed a motion with the court to require PNB to pay the same to him. Held: There is no question that no payment had ever been made to private respondent as the check was never delivered to him. When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. The burden of proof of such payment lies with the debtor. In the instant case, neither the SPA nor the check issued by petitioner was ever presented in court. The testimonies of petitioners own witnesses regarding the check were conflicting. Tagamolila testified that the check was issued to the order of Sonia Gonzaga as attorney -in-fact of Loreto Tan, while Elvira Tibon, assistant cash ier of PNB (Bacolod Branch), stated that the check was issued to the order of Loreto Tan. Furthermore, contrary to petitioners contention that all that is needed to be proved is the existence of the SPA, it is also

necessary for evidence to be presented regarding the nature and extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to determine whether the document indeed authorized her to receive payment intended for private respondent. However, no such evidence was ever presented.

CULABA VS CA Facts: The spouses Francisco and Demetria Culaba were engaged in the sale and distribution of San Miguel Corporations (SMC) beer products. SMC sold beer products on credit to the Culaba spouses in the amount of P28,650.00. thereafter, the Culaba spouses made a partial payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they failed to pay despite repeated demands, SMC filed an action for collection of a sum of money against them before the RTC. The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on four separate occasions. To substantiate this claim, the defendants presented 4 Temporary Charge Sales (TCS) Liquidation Receipts: 27331, 27318, 27339, 27346. Defendant Francisco Culaba testified that he made payments to an SMC supervisor who came in an SMC van. The defendant, in good faith, then paid to the said supervisor, and he was, in turn, issued genuine SMC liquidation receipts. SMC, for its part, submitted a publishers affidavit to prove that the entire booklet of TCSL Receipts bearing Nos. 2730127350 were reported lost by it, and that it caused the publication of the notice of loss. Issue: W/N petitioners obligation is extinguished. No Held: Payment is a mode of extinguishing an obligation. Article 1240 of the Civil Code provides that payment shall be made to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized to receive it. In this case, the payments were purportedly made to a supervisor of the private respondent, who was clan in an SMC uniform and drove an SMC van. He appeared to be authorized to accept payment as he showed a list of customers accountabilities and issued SMC liquidation receipts which looked genuine. Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and authority of the said supervisor, nor did he ask to be shown any identification to prove that the latter was, indeed, an SMC supervisor. The petitioners relied solely on the mans representation that he was collecting payments for SMC. Thus, the payments the petitioners claimed they made were not the payments that discharged their obligation to private respondents. The basis of agency is representation. A person dealing with an agent is put upon an inquiry and must discover upon his peril the authority of the agent. In the instant case, the petitioners loss could have been avoided if they had simply exercised due diligence in ascertaining the identity of the person to whom they allegedly made the payments. The fact that they were parting with valuable consideration should have made them more circumspect in handling their business

transactions. Persons dealing with an assumed agent are bound at their peril to ascertain not only the fact agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. the petitioners in this case failed to discharge this burden, considering that the private respondent vehemently denied that the payments were accepted by it, and were made to its authorized representative.

ALLIED BANKING VS LIM SIO WAN Facts: On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) a money market placement of P1,152,597.35 for a term of 31 days to mature on December 15, 1983. On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wans money market placement, to issue a managers check representing the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check. Later, Santos arrived at the bank and signed the application form for a managers check to be issued. The Bank issued a managers check and it was deposited in the accountof Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim Sio Wan as indorser. To clear the check and in compliance with the requirements of the Philippines Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the check, which reads: All prior endorsements and/or lack of endorsement guaranteed. The check was then sent to Allied and upon presentment, it funded the check without even checking the authenticity of Lim Sio Wans purported indorsement. The amoun t on the check was credited to the account of FCC. On December 14, 1983, upon the maturity date of the money market placement, Lim Sio Wan went to withdraw it. She was then informed that the placement had been pre-terminated upon her instructions. She denied giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she was assured by the banks manager that her money would be recovered. On January 24, 1984, Lim Sio Wan, realizing that the promise that her money would be recovered would not materialize, sent a demand letter to Allied asking for payment. Allied refused to pay, claiming that she had authorized the pre-termination of the placement and its subsequent release to Santos. Consequently, Lim Sio Wan filed a complaint for the recovery of the proceeds of her money placement. Issue: W/N the obligation of Allied to Lim Sio Wan was extinguished. No. Held: Allied is liable to Lim Sio Wan. Fundamental and familiar is the doctrine that the relationship between a bank and a client is one of debtor-creditor. In a line of cases, the Court ruled that a bank deposit is in the nature of a simple loan or mutuum. In Citibank vs Sabeniano,

the Court ruled that a money market placement is a simple loan or mutuum. Further, a money market is defined in Cebu International Finance Corporation vs Court of Appeals as: A money market is a market dealing in standardized shortterm credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a loan. Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished. Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus: Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her money market placement to Santos and the bank had been negligent in so doing, there is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that payment shall be made to th e person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. As commented by Arturo Tolentino: Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in utmost good faith and by mistake as to the person of his creditor, or through error induced by the fraud of a third person, the payment to one who is not in fact his creditor, or authorized to receive such payment, is void, except as provided in Article 1241. Such payment does not prejudice the creditor, and accrual of interest is not suspended by it. Since there was no effective payment of Lim Sio Wans money market placement, the bank still has an obligation to pay her at 6% interest from March 16, 1984 until the payment thereof.

ARTICLE 1245 DATION IN PAYMENT ESTANISLAO VS EAST WEST BANK Facts: On July 24, 1987, petitioners obtained a loan from the respondent in the amount of P3,925,000.00 evidenced by a promissory note and secured by 2 deeds of chattel mortgage: one covering 2 dump trucks and a bulldozer to secure the loan amount of P2,375,000.00, and another covering bulldozer and a wheel loader to secure the loan amount of P1,550,000.00. Petitioners defaulted in the amortizations and the entire obligation became due and demandable. On April 10, 2000, respondent bank filed a suit for replevin with damages praying that the equipment covered by the first deed of chattel mortgage be seized and delivered to it. After the trial court suspended the proceedings, on a moved by the respondent, a deed of assignment date August 16, 2000 was drafted by the respondent which provides in part: ASSIGNOR does hereby ASSIGN, TRANSFER and CONVEY unto the ASIGNEE those motor vehicles, with all their tools and accessories. That the ASSIGNEE hereby accepts the assignment in full payment of the above-mentioned debt. Petitioners affixed their signatures on the deed of assignment. However, for some unknown reason, respondent banks duly authorized representative failed to sign the deed. On October 6, 2000 and March 8, 2001, petitioner completed the delivery of the heavy equipment mentioned in the deed of assignment to respondent, which accepted the same without protest or objection. However, on June 20, 2001, respondent filed a manifestation and motion to admit an amended complaint for the seizure and delivery of two more heavy equipment which are covered under the 2nd deed of chattel mortgage. Respondent claimed that its representative inadvertently failed to include the 2nd deed of chattel mortgage among the documents forwarded to its counsel when the original complaint was being drafted. Petitioners sought to dismiss the amended complaint. They alleged that their previous payment on loan amortizations, the execution of the deed of assignment on August 16, 200, and respondents acceptance of the 3 units of heavy equipment, had the effect of full payment or satisfaction of their total outstanding obligation which is a bar on respondent bank from recovering any more amounts from them.

Issue: W/N the deed of assignment which expressly provides that the transfer and conveyance to respondent of the 3 units of heavy equipment, and its acceptance thereof, shall be in full payment of the petitioners total outstanding obligation to the latter operate to extinguish petitioners debt to respondent such that the replevin suit could no longer prosper. Yes. Held: The deed of assignment was a perfected agreement which extinguished petitioners total outstanding obligation to the respondent. The deed explicitly provides that the assignor (petitioners), in full payment of its obligation shall deliver the 3 units of heavy equipment to the assignee (respondent), which accepts the assignment in full payment of the above mentioned debt. This could only mean that should petitioners complete the delivery of the 3 units of heavy equipment covered by the deed, respondents credit would have been satisfied in full, and petitioners aggregate indebtedness would then be considered to have been paid in full as well. The nature of the assignment was a dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money. Such transaction is governed by the law on sales. Even if we were to consider the agreement as a compromise agreement, there was no need for respondents signature on the same, because with the delivery of the heavy equipment which the latter accepted, the agreement was consummated. Respondents approval may be inferred from its unqualified acceptance of the heavy equipment. With years of banking experience, resources and manpower, respondent bank is presumed to be familiar with the implications of entering into the deed of assignment, whose terms are categorical and left nothing for interpretation. The alleged non-inclusion in the deed of certain units of heavy equipment due to inadvertence, plain oversight or mistake, is tantamount to inexcusable manifest negligence, which should not invalidate the juridical tie that was created. Since the agreement was consummated by the delivery on March 8, 2001 of the last unit of heavy equipment under the deed, petitioners are deemed to have been released from all their obligations to respondent. Since there is no more credit to collect, no principal obligation to speak of, then there is no more 2nd deed of chattel mortgage that may susbsist. A chattel mortgage cannot exist as an independent contract since its consideration is the same as that of the principal contract. Being a mere accessory contract, its validity would depend on the validity of the loan secured by it. this being so, the amended complaint for replevin should be dismissed, because the chattel mortgage agreement upon which it is based had been rendered ineffectual.

ONG VS ROBAN LENDING Facts: On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Ong obtained several loans from Roban Lending Corporation (respondent). These loans were secured by a real estate mortgage on petitioners parcels of land. On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate Mortgage consolidating their loans. On even date, the parties executed a Dacion in Payment Agreement wherein petitioners assigned their properties to respondent in settlement of their total obligation and a Memorandum of Agreement reading: With a promise to pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their DACION IN PAYMENT agreement, which they have executed and signed today in favor of the FIRST PARTY be enforced. In April 2002, petitioners filed a complaint alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium. Respondent maintained its legality alleging that if the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on. Issue: W/N the Memorandum of Agreement and the Dacion in Pago constitutes pactum commissorium. Yes. Held: The Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. The elements of pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to

enforce the Dacion in Payment transferring to it ownership of the properties. Respondent, in effect, automatically acquires ownership of the properties upon petitioners failure to pay their debt within the stipulated period. Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation. This does not persuade. In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt. The Dacion in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as Dacion in Payment, petitioners had to execute a promissory note, which they were to pay within one year.

ROCKVILLE VS CULLA Facts: The spouses Culla are the registered owners of a parcel of land. They mortgaged this property to PS Bank to secure a loan of P1,400,000.00 Sometime in 1993, a notice of sale for the extrajudicial foreclosure of the property was issued. To prevent the foreclosure, Oligation approached Rockville represented by its president and chairman, Diana Young for financial assistance. Rockville accommodated Oligarios request and extended him a loan of P1,400,000.00. This amount was increased for cash advances for a total loan amount of P2,000,000.00. According to Rockville, when Oligarion failed to pay the loan after repeated demands and promises to pay, the Sps. Culla agreed to pay their indebtedness by selling to Rockvilled another property the spouses owned. Rockville accepted the offer for a dacion en pago; on June 25, 1994, Rockvilled and Oligario executed a Deed of Absolute Sale over the property. While the property was a conjugal property, only Oligario signed the deed. Bernardita continued to refuse to sign the Deed of Absolute Sale. Rockville then cause the annotation of an adverse claim on the TCT. Furthermore, Rockville tried to transfer the title of the property in its name but the Registry of Deeds refused to carry out the transfer, given the absence of Bernarditas signature in the Deed of Absolute Sale. Rockville then filed a complaint for Specific Performance and Damages. In their Answer, the Sps. Culla alleged that the purported Deed of Absolute Sale failed to reflect their true intentions, as the deed was meant only to guarantee the debt to Young, not to Rockville. When neither Rockvilled nor Young paid, the Sps. Culla volunteered to pay and opted to rescind the sale. Rockville mainly contends that the Sps. Culla sold their property to pay their due and demandable debt; the transaction therefore is a dacion en pago. Issue: W/N the parites agreement is an absolute sale or an equitable mortgage of real property. Equitable Mortgage. Held: Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of an existing obligation. It is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent to the payment of an outstanding debt. For dacion en pago to exist, the following elements must concur: (a) existence of a money obligation; (b) the alientation to the creditor of a property by

the debtor with the consent of the former; and (c) satisfaction of the money obligation of the debtor. Rockvilles arguments would have been telling and convincing were it not for the undisputed fact that even after the execution of the Deed of Absolute Sale, Rockville still granted Oligario time to repat his P2,000,000.00 indebtedness. In fact, as Young admitted in her testimony, Rockville gave Oligario the chance to pay off the loan on the same day that the deed was executed. If the parties had truly intended a dacion en pago transaction to extinguish the Sps. Cullas P2,000,000.00 loan and Oligario had sold the property in payment for his debt, it made no sense for him to continue to ask for extensions of the time to pay the loan. More importantly, Rockville would not have granted the requested extensions to Oligario if payment through a dacion en pago had taken place. That Rockville granted the extensions simply belied its contention that they had intended a dacion en pago. An equitable mortgage has been defined as one which although lacking in some formality, or form or words or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, there being no impossibility nor anything contrary to law in this intent.

TYPINGCO VS LIM Facts: Sometime between December 1996 and February 1997, respondent spouses Lina and Johnson borrowed from petitioner Typingco the sum of US$600,000 which was later restructured, payable on or before December 31, 1997, under a promissory note executed by the spouses and co-signed by their children co-respondents Jerry and Jackson as sureties. Following their default in payment, Lina, Jerry and Jackson conveyed on January 29, 1998 to Typingco via dacion en pago their house and lot. Because of Typingcos repeated demands for the delivery of the owners duplicate copy of the title having unheeded, he filed a complaint for specific performance and recovery of the title against the respondent. Respondents Sychinghos averred that it was FEBTC that was unlawfully withholding delivery of the owners duplicate copy of the title despite the full payment of the mortgage loan with it. FEBTC contended that spouses Lina and Johnson had unsettled obligations as sureties. At the pre-trial, the parties clarified that the subject matter of the case was only 1/3 inchoate portion of the subject property or that pertaining to Lina as co-owner as the 2/3 belongs to her sons Jerry and Jackson. Issue: W/N the Sychingcos had the right to sell or convey title to the subject property at the time of the dacion en pago. Yes. Held: Dacion en pago is the delivery and transmission of ownership of another thing by the debtor to the creditor as an accepted equivalent of performance of an obligation. It partakes of the nature of a contract of sale, where the thing offered by the debtor is the object of the contract, while the debt is the consideration or purchase price. There having been no previous foreclosure of the Real Estate Mortgage on the subject property, respondent Sychingcos ownership thereof remained intact. Indeed, a mortgage does not affect the ownership of the property as it is nothing more than a lien thereon serving as security for the debt. The mortgagee does not acquire title to the mortgaged real estate unless he purchases it at a public auction, and it is not redeemed within the period provided for by the Rules of Court. This applies a fortiori to the present case where only 1/3, not the whole, of the subject property was actually encumbered to FEBTC. Since petitioner agreed to the full extinguishment of respondent spouses then outstanding obligation in view of the unconditional conveyance to him of the subject property, there is a perfected and enforceable

dacion en pago. He should thus enjoy full entitlement to the subject property. Surrender of the certificate of title will not impair any existing mortgage on the subject property. It is an elementary principle in civil law that a real estate mortgage subsists notwithstanding changes in ownership, and all subsequent purchasers of the property must respect the mortgage.

TAN SHUY VS MAULAWIN Facts: Petitioner Tan Shuy is engaged in the business of buying copra and corn. Whenever he would buy copra from sellers, he would prepare and issue a pesada in their favor. A pesada is a document containing details of the transaction, including the date of sale, the weight of the crop delivered, the trucking cost, and the net price of the crop. He then explained that when a pesada contained the annotation pd on the total amount of the purchase price, it meant that the crop delivered had already been paid for by petitioner. Guillermo Maulawin, respondent, is a farmer-businessman engaged in the buying and selling of copra and corn. On 10 July 1997, Tan Shuy extended a loan to Guillermo in the amountof P420,000. In consideration thereof, Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner. Petitioner alleged that despite repeated demands, Guillermo remitted only P23,000 in August 1998 and P5,500 in October 1998, or a total of P28,500. He claimed that respondent had an outstanding balance of P391,500. Thus, convinced that Guillermo no longer had the intention to pay the loan, petitioner brought the controversy to the Lupon Tagapamayapa. When no settlement was reached, petitioner filed a complaint before the RTC. Respondent Guillermo countered that he had already paid the subject loan in full. He continuously delivered and sold copra to petitioner. He said that they had an oral arrangement that the net proceeds thereof shall be applied as installment payments for the loan. Petitioner argues that since their written agreement did not specifically provide for the application of the net proceeds from the deliveries of the copra for the loan, he cannot be compelled to accept copra as payment for the loan. Issue: W/N the delivery of copra amounted to installment payments for the loan obtained by respondent from petitioner. Yes. Held: The pesadas served as proof that the net proceeds from the copra deliveries were used as installment payments for the debts of respondents. Pursuant to Article 1232 of the Civil Code, an obligation is extinguished by payment or performance. There is payment when there is delivery of money or performance of an obligation. Article 1245 provides for a special mode of payment called dation in payment. There is dation in payment when property is alienated to the creditor in satisfaction of a debt in money. Here, the debtor deliveres and transmits to the creditor the formers ownership over a thing as an accepted equivalent of the payment or performance of an outstanding debt. In such cases, Article

1245 provides that the law on sales shall apply since the undertaking really partakes in one sense of the nature of sale; that is, the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtors obligation. Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement express or implied, or by their silence consider the thing as equivalent to the obligation, in which ase the obligation is totally extinguished. But not all amounts should be applied as payments to the subject loan since several of which clearly indicated mais deliveries on the part of defendant-appelle Guillermo instead of copras. The subsequent arrangement between Tan Shuy and Guillermo can thus be considered as one in the nature of dation in payment. There was partial payment every time Guillermo delivered copra to petitioner, chose not to collect the net proceeds of his copra deliveries, and instead applied the collectible as installment payments for his loan from Tan Shuy.

ARTICLE 1250 EXTRAORDINARY INFLATION/DEFLATION EQUITABLE PCI VS NG SHEU NGOR Facts: On October 7, 2001, respondents Ng Sheung Ngor filed an action for annulment and/or reformation of documents and contracts against petitioner Equitable PCI and its employees. They claimed that Equitable induced them to avail of its peso and dollar credit facilities by offering low interest rates so they accepted Equitables proposal and signed the banks preprinted promissory notes. They, however, were unaware that the documents contained indentical escalation clauses granting Equitable authority to increase interest rates without their consent. Equitable asserted that respondents knowingly accepted all the terms and conditions contained in the promissory notes. In fact, they continuously availed of and benefited from Equitables credit facilities for 5 years. After trial, the RTC upheld the validity of the promissory notes. It took judicial notice of the steep depreciation of the peso during the intervening period and declared the existence of extraordinary deflation. Consequently, it ordered the use of the 1996 dollar exchange rate in computing respondents dollar denominated loans. Issue: W/N there was extraordinary deflation. No. Held: Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary deflation, on the other hand, involves as inverse situation. Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven: 1. That there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas (BSP); 2. That the obligation was contractual in nature; and 3. That the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation (or deflation). The RTC never mentioned that there was such a stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their dollardenominated loan at the exchange rate fixed by the BSP on the date of maturity.

ALMEDA VS BATHALA MARKETING Facts: Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee, renewed its Contract of Lease with Ponciano Almeda, as lessor, husband of petitioner Eufemia and father of petitioner Romel Almeda. The contract of lease contained the following pertinent provisions which gave rise to the instant case: SEVENTH In case an extraordinary inflation or devaluation of Philippines Currency should supervene, the value of Philippine peso at the time of the establishment of the obligation shall be the basis of payment. On January 26, 1998, respondent received a letter from petitioners informing the former that its monthly rental should be increased by 73% pursuant to condition No. 7 of the contract and Article 1250 of the Civil Code. Respondent opposed petitioners demand and insisted that there was no extraordinary inflation to warrant the application of Article 1250. Issue: W/N the amount of rentals due the petitioners should be adjusted by reason of extraordinary inflation or devaluation. No. Held: While condition No. 7 of the contract speaks of extraordinary inflation or devaluation as compared to Article 1250s extraordinary inflation or deflation, we find that when the parties used the term devaluation, they really did not intend to depart from Article 1250 of the Civil Code. Condition No. 7 of the contract should, thus, be read in harmony with the Civil Code provision. That this is the intention of the parties is evident from petitioners letter dated January 26, 1998, where, in demanding rental adjustment ostensibly based on condition No. 7, petitioners made explicit reference to Article 1250 of the Civil Code, even quoting the law verbatim. The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation or devaluation as would justify the application of Article 1250 of the Civil Code. The erosion of the value of the Philippines peso in the past three or four decades, starting in the mid-sixties, is characteristic of most currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine currency in that span of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied.

ARTICLE 1252 APPLICATION OF PAYMENTS PREMIERE DEVELOPMENT BANK VS CENTRAL SURETY Facts:

apply payments when the debtor does not elect to do so that make this right waivable. A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who may make such application as he chooses. But if neither party has exercised its option, the court will apply the payment according to the justice and equity of the case, taking into consideration all its circumstances. The following are some limitations on the right of the debtor to apply his payment: 5.) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary this agreement. In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts of loan, securities by way of pledges, and suretyship agreements. In at least 2 promissory notes between the parties, Central Surety expressly agreed to grant Premiere Bank the authority to apply any and all of Central Suretys payments, thus:

Issue: In case I/We have several obligations with Premiere Bank, I/We hereby empower Premiere Bank to apply whithout notice and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due or not. Any such application of deposits or payments shall be conclusive and binding upon us. This proviso is representative of all other Promissory Notes involved in this case. It is in the exercise of this express authority under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank applied payments made by Central Surety, as it deemed fit, to the several debts of the latter. All debts were due, There was no waiver on the part of petitioner. Undoubtedly, at the time of conflict between the parties material to this case, the Promissory Note in the amount of P6,000,000 and secured by the pledge of the Wack Wack membership was past due and demand stage. By its terms, Premiere Bank was entitled to declare said Note and all sums payable thereunder immediately due and payable, without need of presentment, demand, protest or notice of any kind. The subsequent demand made by Premiere Bank was, therefore, merely a superfluity, which cannot be equated with a waiver of the right to demand payment of all the matured obligations of Central surety to Premiere Bank. Any inference of a waiver of Premiere Bank, as creditor, right to apply payments is eschewed by the express provision of the Promissory Note that: no failure on the part of Premiere Bank to exercise, and no delay in exercising any right hereunder, shall operate as a waiver thereof.

Held: Creditor given the right to apply payments Article 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. The debtors right to apply payment is not mandatory. This is clear from the use of the word may rather than the word shall. Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he tenders to the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in case the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: If the debtor accepts from the creditor a receipt in which an application of payment is made, the former cannot complain of the same. It is the directory nature of this right and the subsidiary right of the creditor to

ARTICLE 1256 TO 1261 TENDER OF PAYMENT AND CONSIGNATION PABUGAIS VS SAHJWANI Facts: Pursuant to an Agreement and Undertaking dated December 3, 1993, petitioner Teddy G. Pabugais, in consideration of the amount P15,487,500, agreed to sell to respondent Dave P. Sahijwani a lot. Respondent paid petitioner the amount of P600,000 as option/reservation fee and the balance of P14,887,500 to be paid within 60 days from the execution of the contract, simultaneous with delivery of the owners duplicate Transfer Certificate of Title in respondents name. The parties further agreed that failure on the part of respondent to pay the balance of the purchase price entities petitioner to forfeit the P600,000 option/reservation fee; while non-delivery by the latter of the necessary documents obliges him to return to respondent the said option/reservation fee with interest at 18% per annum. Petitioner failed to deliver the required documents. In compliance with their agreement, he returned to respondent the latters P600,000 option/reservation fee by way of Far East Bank & Trust Company Check, which was dishonored. Petitioner claimed that he twice tendered to respondent, through his counsel, but said counsel refused to accept the same. His first attempt to tender payment was allegedly made on August 3, 1994 through his messenger; while the second one was on August 8, 1994, when he sent via DHL Worldwide Services, the man agers check attached to a letter date August 5, 1994. On August 11, 1994, petitioner wrote a letter to respondent saying that he is consigning the amount tendered with the RTC. On August 15, 1994, petitioner filed a complaint for consignation. Respondents counsel averred that there was no valid tender of payment because no check was tendered and the computation of the amount to be tendered was insufficient. The trial court rendered a decision declaring the consignation invalid for failure to prove that petitioner tendered payment to respondent and that the latter refused to receive the same. On appeal to the CA, petitioner then filed a motion to withdraw the amount consigned but was denied by the Court of Appeals. Petitioner now contends that he can withdraw the amount deposited with the trial court as a matter of right because at the time he moved for the withdrawal thereof, the CA has yet to rule on the consignations validity and the respondent had not yet accepted the same. Issue/s: W/N there was a valid consignation. Yes.

W/N petitioner can withdraw the amount consigned as a matter of right. No. Held: Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. In order that consignation may be effective, the debtor must show that: (1) there was a debt due; (2) 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 or incapacitated, or because several persons claimed to be entitled to receive the amount due or because the title to the obligation has been lost; (3) previous notice of the consignation had been given to the person interested in the performance of the obligation; (4) the amount due was placed at the disposal of the court; and (5) after the consignation had been made the person interested was notified thereof. Failure in any of these requirements is enough ground to render a consignation ineffective. The issues to be resolved in the instant case concerns one of the important requisites of consignation, i.e, the existence of a valid tender of payment. As testified by the counsel for respondent, the reasons why his client did not accept petitioners tender of payment were (1) the check mentioned in the August 5, 1994 letter of petitioner manifesting that he is settling the obligation was not attached to the said letter; and (2) the amount tendered was insufficient to cover the obligation. It is obvious that the reason for respondents non-acceptance of the tender of payment was the alleged insufficiency thereof and not because the said check was not tendered to respondent, or because it was in form of managers check. While it is true that in general, a managers check is not a legal tender, the creditor has the option of refusing or accepting it. Payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made. Consequently, petitioners tender of payment in the form of managers check is valid. The managers check in the amount of P672,900 which was tendered but refused by respondent and thereafter consigned with the court, was enough to satisfy the obligation. There being a valid tender of payment in an amount sufficient to extinguish the obligation, the consignation is valid. As regards petitioners right to withdraw the amount consigned, reliance on Article 1260 is misplaced. The amount consigned with the trial court can no longer be withdrawn by petitioner because respondents prayer in his answer that the amount consigned be awarded to him is equivalent to an acceptance of the consignation, which has the effect of extinguishing petitioners obligation.

LLOBRERA VS FERNANDEZ Facts: Respondent Josefina V. Fernandez, who is one of the registered co-owners of a parcel of land, served a written demand letter upon petitioners Spouses Llobrera, et al., to vacate the premises within fifteen (15) days from notice. Notwithstanding the receipt of the demand letter, petitioners refused to vacate, which led to the filing by the respondent of a formal complaint against them before the Barangay Captain. Upon failure of the parties to reach any settlement, the Barangay Captain issued the necessary certification to file action. Respondent then filed a complaint for ejectment and damages the petitioners before the MTCC of Dagupan City. Petitioners alleged in their answer that they had been occupying the property in question beginning the year 1945 onwards, when their predecessors-in-interest, with the permission of Gualberto de Venecia, one of the other coowners of said land, developed and occupied the same on the condition that they will pay their monthly rental of P20.00 each. From then on, they have continuously paid their monthly rentals to de Venecia or their representatives, such payments being duly acknowledged by receipts. But sometime in June 1996, the representatives of de Venecia refused to accept their rentals, prompting them to consign the same to Banco San Juan, which bank deposit they continued to maintain and update with their monthly rental payments. Issue: W/N petitioners possession of the subject property is founded on contract. No. Held: Petitioners failed to present any written memorandum of the alleged lease arrangements between them and Gualberto De Venecia. From the absence of proof of any contractual basis for petitioners possession of the subject premises, the only legal implication is that their possession thereof is by mere tolerance. In Roxas vs CA, the court ruled: A person who occupies the land of another at the latters tolerance or permission, without any contract between them, is necessarily bound by an implied promise that he will vacate upon demand, failing which, a summary action for ejectment is the proper remedy against him. The judgment favoring the ejectment of petitioners being consistent with law and jurisprudence can only be affirmed. The alleged consignation of the P20.00 monthly rental to a bank account in respondents name cannot save the day for

petitioners simply because of the absence of any contractual basis for their claim to rightful possession of the subject property. Consignation based on Article 1256 of the Civil Code indispensably requires a creditor-debtor relationship between the parties, in the absence of which, the legal effects thereof cannot be availed of. 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. Unless there is unjust refusal by a creditor to accept payment, Article 1256 cannot apply. In the present case, the possession of the property by the petitioners being by mere tolerance as they failed establish through competent evidence the existence of any contractual relations between them and the respondent, the latter has no obligation to receive any payment from them. Since respondent is not a creditor to petitioners as far as the alleged P20.00 monthly rental payment is concerned, respondent cannot be compelled to receive such payment even through consignation and such has no legal effect insofar as the respondent is concerned.

B.E. SAN DIEGO VS ALZUL Facts: On February 10, 1975 respondent Rosario Alzul purchased from petitioner B.E. San Diego 4 subdivision lots. These lots were bought through installment under Contract to Sell. On July 25, 1977, respondent signed a Conditional Deed of Assignment and Transfer of Rights which assigned to a certain Wilson P. Yu her rights under the Contract to Sell. Due to Yus failure to pay the amounts due, respondent commenced an action for rescission and caused the annotation of notices of lis pendens on the titles covering the subject lots. The trial court ruled in favor of respondent. On April 28, 1989, the subject lots were sold to Sps. Ventura who were allegedly surprise to find the annotation in their owners duplicate title. The spouses filed an action for Quieting of Title in the RTC. The RTC ruled in favor of the spouses. On appeal to the CA, it was reversed and it declared null and void the title of the spouses and ownership was reinstated in the name of petitioner B.E. San Diego. On appeal to the SC, it ordered that respondent should be given a non-extendible period of 30 days to make full payment for the properties. In an attempt to comply with the Supreme Court directive, respondent tried to serve payment upon petitioner on August 29, 1996, August 30, 1996 and September 28, 1996. On all these dates, petitioner allegedly refused to accept payment. Petitioner now stresses the fact that respondent Alzul did not comply with the Courts resolution which gave a non extendible period of 30 days within which to make full payment for the subject properties. After 3 unsuccesful tenders, it was only on March 12, 1998 or about a year and half later that respondent offered to consign said amount in action for consignment before the HLURB. Issue: W/N there was a valid consignation. No. Held: It must be borne in mind that a mere tender of payment is not enough to extinguish an obligation. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender of payment. Tender is the 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 desire or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. There is no dispute that a valid tender of payment had been made by respondent. Absent however a valid consignation, mere tender will not suffice to extinguish her obligation and consummate the acquisition of the subject properties. In St. Dominic Corporation, the court held that a valid consignation is made when the amount is consigned with the court within the required period or within a reasonable time thereafter. In the case at bar, in respondents complaint for consignation and specific performance, respondent only prayed that she be allowed to make the consignation without placing or depositing that amount due at the disposal of the court of origin. Verily, respondent made no valid consignation.

SOLID HOMES VS LASERNA Facts: Respondents entered into a contract to sell with petitioner. When the respondents had allegedly paid 90% of the purchase price, they demanded the execution and delivery of the Deed of Sale and TCT of the subject property upon the final payment of the balance. But the petitioner did not comply with the demands of respondents. In view of the said non-payment, the petitioner considered the Contract to Sell abandoned by the respondents and rescinded in accordance with the provisions of the same contract. Issue: W/N there was a valid tender of payment. No Held: Based on the records of the case, respondents have tendered payment of the balance of the purchase price of the subject property. However, the petitioner, without any justifiable reason, refused to accept the same. In Ramos vs Sarao, the Court held that tender of payment is the manifestation by the debtors of their desire to comply with or to pay their obligation. If the creditor refuses the tender of payment without just cause, the debtors are discharged from the obligation by the consignation of the sum due. In the case at bar, after the petitioner refused to accept the tender of payment made by the respondents, the latter failed to make any consignation of the sum due. Consequently, there was no valid tender of payment and the respondents are not yet discharged from the obligation to pay the outstanding balance of the purchase price of the subject property. Since petitioner did not rescind the Contract to Sell it executed with the respondents by a notarial act, the said Contract still stands. Both parties must comply with their obligations.

ARTICLE 1267 DOCTINE OF UNFORESEEN EVENTS PHIL. NATIONAL CONSTRUCTION VS CA Facts: Subject in this case is the parcel of land owned by private respondents. They executed then a lease contract. On January 7, 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use Permit for the proposed rock crushing project. On January 16, 1986, private respondents wrote petitioner requesting payment of the first annual rental which was due and payable upon the execution of the contract. In its reply, petitioner argued that under paragraph 1 of the lease contract, payment of rental 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. It then expressed its intention to terminate the contract, as it had decided to cancel or discontinue with the rock crushing project due to financial, as well as technical difficulties. Private respondents refused to accede to petitioners request for the pretermination of the lease contract. They insisted on the performance of petitioners obligation and reiterated their demand for the payment of the first annual rental. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that is should be released from the obligatory force of the contract of lease because the purpose of the contract did not materialize due to unforeseen events and causes beyond its control, i.e, due to the abrupt change in political climate after EDSA Revolution and financial difficulties. Issue: W/N petitioner should be released from the obligatory force of the contract. No. Held: It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law between the parties and should be complied with in good faith. But the law recognizes exceptions to the principle of the obligatory force of the contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations to do, and not to obligations to give. An obligation to do includes all kinds of work or service; while an obligatio n to give is a prestation which consists in the delivery of a

movable or an immovable thing in order to create a real right, or for the use of the recipient or for its simple possession, or in order to return it to its owner. The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation to give; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner failed to state specifically the circumstances brought about by the abrupt change in the political climate in the country except the alleged prevailing uncertainties in government policies on infrastructure projects. The principle of rebus sic stantibus neither firs 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. Article 1267, 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 unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. In this case, the petitioner wants the Court to believe that the abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner. The Court cannot subscribe to the argument. As pointed out by private respondents: It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of Senator Aquino on August 21, 1983, the country has experience political upheavals, turmoils, almost daily mass demonstrations, unprecedented inflation, peace and order deterioration, the Aquino trial and many other things that brought about the hatred of people even against crony corporations. On November 18, 1985, petitioner PNCC entered into the contract of lease with private respondents with open eyes of the deteriorating conditions of the country. Anent petitioners alleged poor financial condition, the same will neither release petitioner from the binding effect of the contract of lease. As held in Central Bank vs CA, mere pecuniary inability to fulfill an engagement does not

discharge a contractual obligation, nor does it constitute a defense to an action for specific performance. With regard to the non-materialization of petitioners particular purpose in entering into the contract of lease, i.e, to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, the motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The exception does not apply here.

SO VS FOOD FEST LAND Facts: Food Fest Land entered into a Contract of Lease with Daniel So over a commercial space for a period of 3 years (19992002). Before forging the lease contract, the parties entered into a preliminary agreement dated July 1, 1999. While Food Fest was able to secure the necessary licenses and permits for the year 1999, it failed to commence business operations. For the year 2000, Food Fests application for renewal of barangay business clearance was held in abeyance until further study of its kitchen facilities. Fearing business losses, Food Fest communicated its intent to terminate the lease contract to So who, however, did not accede and instead offered to help Food Fest. In August 2000, Food Fest, for the second time, informed So of its intent to terminate the lease, and in fact stopped paying rent. So demanded payment of the rentals. Food Fest, however, denied any liability, and started to remove its fixtures and equipment from the premises. Food Fest invokes the principle of rebus sic stantibus as enunciated in Article 1267 to render the lease contract functus officio, and consequently release it from responsibility to pay rentals. It claims that its failure to secure the necessary business permits and licenses rendered the impossibility and non-materialization of its purpose in entering into the contract of lease. Held: The Court is not persuaded. Article 1267, which enunciates the doctrine of unforeseen events, is not 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 unfavorable developments. It is, therefore, only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. A partys motive or particular purpose in entering into a contract does not affect the validity or existence of the contract; an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The exception does not apply here. It is clear that the condition set forth in the preliminary agreement pertains to the initial application of Food fest for

the permits, licenses and authority to operate. It should not be construed to apply to Food Fests subsequent applications. Food Fest was able to secure the permits, licenses and authority to operate when the lease contract was executed. Its failure to renew these permits, licenses and authority for the succeeding year does not suffice to declare the lease functus officio nor can it be construed as an unforeseen event to warrant the application of Article 1267.

ARTICLE 1278 TO 1290 COMPENSATION BPI VS CA Facts: On September 25, 1985, private respondent Edvin Reyes opened a joint savings account with his wife Sonia Reyes at petitioner Bank of the Philippines Islands (BPI). Private respondent also held a joint savings account with his grandmother, Emeteria Fernandez, on February 11, 1986 at the same BPI branch. He regularly deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria Fernandez as her monthly pension. Emeteria Fernandez died on December 28, 1989 without the knowledge of the US Treasury Department. She was still sent US Treasury warrant. On January 4, 1990, private respondent deposited the said US treasury check of Fernandez in their savings account. 2 months after, private respondent closed the Savings account with her mother and transferred its funds to the joint account with his wife. On January 16, 1991, a US Treasury Warrant was dishonored as it was discovered that Fernandez died. The US Department of Treasury requested petitioner bank for a refund. For the first time, petitioner bank came to know of the death of Fernandez. On February 19, 1991, private respondent received a telegram from petitioner bank requesting him to contact them. When he called up the bank, he was informed of treasury check. He then verbally authorized the petitioners to debit from his other account the amount stated in the dishonored US Treasury Warrant. On the same day, petitioner bank debited the amount from private respondents Savings account. On February 21, 1991, private respondent visited the petitioner bank and surprisingly demanded restitution of the debited amount. Issue: W/N petitioner bank has legal right to apply the deposit of respondent Reyes to his outstanding obligation to petitioner bank brought about by the return of the US Treasury Warrant he earlier deposited under the principle of Legal Compensation. Yes. Held: Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Article 1290 of the Civil Code 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. The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the same time, said bank is the creditor of the private respondent with respect to the dishonored US Treasury Warrant which the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a third person. It is true that the joint account of private respondent and his wife was debited in the case at bar. We hold that the presence of private respondents wife does not negate the element of mutuality of parties, i.e., that they must be creditors and debtors of each other in their own right. The wife of private respondent is not a party in the case at bar. She never asserted any right to the debited US Treasury Warrant.

PNB VS CA Facts: The petitioner applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the private respondents principal abroad, NCB of Jeddah. There were 2 instances in the past, in 1980 and 1981 when the private respondents account was doubly credited. Issue: W/N the petitioner was legally justified in making the compensation or set-off against the two remittances coursed through it in favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the principle of solution indebiti. No. Held: The parties were not bound principally and were not a debtor and creditor of the other at the same time. With respect to the private respondent being a depositor of petitioner bank, they are creditor and debtor respectively. As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local bank asking the latter to pay an amount to a beneficiary is a stipulation pour atrui. A stipulation pour atrui is a stipulation in favor of a third person. Thus, between petitioner bank and the plaintiff as beneficiary, there is created an implied trust. Therefore, as matters stand, the parties obligations are not subject to compensation or set-off under Article 1279 if the Civil Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount $2,627.11 is concerned. They are debtor and creditor only with respect to the double payments; but are trusteebeneficiary as to the fund transfer.

EGV REALTY VS CA Facts: Petitioner EGV is the owner of a 7-storey condominium known as Cristina Condominium. Cristina Condominium Corporation holds title to all common areas of Cristina Condominium and is in charge of managing and providing for the buildings security. Respondent Unisphere is the owner of Unit 301 of said condominium. On several occasions, respondent was allegedly robbed bringing the total value of items lost at P12,295.00. Respondent then demanded compensation and reimbursement from petitioner for the losses incurred as a result of the robbery. Petitioner denied any liability for the losses stating that the goods lost belonged to Amtrade, a third party. As a consequence of the denial, respondent withheld payment of its monthly dues. Respondent then received a letter from petitioner demanding payment of past dues. Petitioner then executed a Deed of Absolute Sale over Unit 301 in favor of respondent. Thereafter, a condominium certificate was issued in respondents name bearing the annotation of a lien in favor of petitioner for the unpaid condominium dues in the amount of P13,142.67. Petitioners then filed a petition with SEC for the collection of unpaid monthly dues against respondents. In its answer, respondent alleged that it could not be deemed in default of said unpaid dues because its tardiness was occasioned by petitioners failure to comply with what is incumbent upon them. On appeal to the CA, it declared that the amount of P13,142.67, the unpaid monthly dues of respondent should be offset by the losses it suffered in the amount of P12,295.00. Petitioner now asserts that the ruling of the CA to offset the alleged losses in unfounded because respondent is not the owner of the goods lost, but a third party, Amtrade. Issue: W/N compensation is proper. No. Held: Compensation or offset under the New Civil Code takes place only when two persons or entities in their own rights, are creditors and debtors of each other.

A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a claim which has been formally passed upon by the courts or quasijudicial bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of debt and must pass thru the process prescribed by law before it develops into what is properly called a debt. Absent, however, any such categorical admission by an obligor or final adjudication, no compensation or off-set can take place. Unless admitted by the a debtor himself, the conclusion that he is in truth indebted to another cannot be definitely and finally pronounce, no matter how convinced he may be from the examination of the pertinent records of the validity of that conclusion the indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court or in this case by the Commission. It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed claims arising from tort or breach of contract. While respondent Unisphere does not deny any liability for its unpaid dues to petitioners, the latter do not admit any responsibility for the loss suffered by the former occasioned by the burglary. At best, what respondent Unisphere has against petitioners is just a claim, not a debt. Such being the case, it is not enforceable in court. It is only the debts that are enforceable in court, there being no apparent defenses inherent in them. Respondent Unispheres claim for its losses has not been passed upon by any legal authority so as to elevate it to the level of a debt.

TRINIDAD VS ACAPULCO Facts: Sometime in February 1991, a certain Primitivo Canete requested respondent Estrella Acapulco to sell a Mercedes Benz for P580,000. Canete also said that if respondent herself will buy the car, Canete was willing to sell it for P500,000. Petitioner Hermenegildo Trinidad borrowed the car from respondent but instead of returning it, petitioner told respondent to buy the car from Canete and that petitioner would pay respondent after petitioner returns from Davao. Respondent thereafter executed a deed of sale in favor of petitioner. When petitioner returned from Davao, he refused to pay respondent. Respondent then prayed that the deed of sale be declared null and void and that the car be returned to her. In their pre-trial briefs, petitioner raised as issue whether or not there was a valid dation in payment while respondent put forth the questions: whether or not she is indebted to petitioner in the amount of P566,000, and whether the car was ceded by her to petitioner in order to partially pay off her obligation of P566,000 to petitioner as dation in payment. The RTC rendered a decision finding that no dacion en pago is present as common consent was not proven. Petitioner argues that legal compensation should be appreciated, though not expressly stated in his Answer to the Complaint before the trial court, as his allegations therein and the facts proven at the trial show the presence of legal compensation. He further argues that, in any case, legal compensation takes place by operation of law even without the consent of the interested parties. Respondent counters that Article 1279 of the Civil Code also states that for legal compensation to be proper both debts should consist of sum of money; in this case, one of the obligations does not entail payment of money but delivery of car. Issue: W/N compensation took place. Yes. Held: While it is true that petitioner failed to raise the issue of legal compensation at the earliest opportunity, this should not preclude the courts from appreciating the same especially in this case, where ignoring the same would only result to unnecessary and circuitous filing of cases. Compensation takes effect by operation of law even without the consent or knowledge of the parties concerned when all the requisites mentioned in Article 1279 are present. This is in consonance with Article 1290 of the Civil Code. Since it takes place ipso jure when used as a defense, it retroacts to the date when all its requisites are fulfilled.

Here, petitioners stance is that legal compensation has taken place and operates even against the will of the parties because: (a) respondent and petitioner were personally both creditor and debtor of each other; (b) the monetary obligation of respondent was P566,000.00 and that of the petitioner was P500,000.00 showing that both indebtedness were monetary obligations the amount of which were also both known and liquidated; (c) both monetary obligations had become due and demandablepetitioners obligation as shown in the deed of sale and respondents indebtedness as shown in the dishonored checks; and (d) neither of the debts or obligations are subject of a controversy commenced by a third person. While the proceedings in the RTC focused on ascertaining the presence of the elements of dacion en pago, it was likewise proven that petitioner owed respondent the amount of P500,000.00 while respondent owed petitionerP566,000.00; that both debts are due, liquidated and demandable, and; that neither of the debts or obligations are subject of a controversy commenced by a third person. Respondent in her cross-examination categorically admitted that she is indebted to petitioner. Compensations aim is to prevent unnecessary suits and payments through the mutual extinction of concurring debts by operation of law. The claim of respondent that there could be no legal compensation in this case as one of the obligations consists of delivery of a car and not a sum of money must also fail. Respondent sold the car to petitioner on March 4, 1991 for P500,000.00 while she filed her complaint for nullification of the sale only on May 6, 1991. As legal compensation takes place ipso jure, and retroacts to the date when its requisites are fulfilled, legal compensation has already taken place at the time of the sale. At such time, petitioner owed respondent the sum of P500,000.00 which is the price of the vehicle.

PHILIPPINE COMMERCIAL BANK INTERNATIONAL BANK VS BALMACEDA Facts: PCIB alleged that between 1991 and 1993, Balamaceda, by taking advantage of his position as bank manager, fraudulently obtained and encashed Managers check in the total amount o P10,782,150. PCIB then filed an action for recovery of sum of money against Balamaceda. It also impleaded Ramos as one of the recipients of a portion of the proceeds from Balmacedas allege fraud. PCIB maintains that it had the right to freeze and debit the amount of P251,910.96 from Ramos bank account, even without his consent, since legal compensation had taken place between them by operation of law. PCIB debited Ramos bank account, believing in good faith that Ramos was not entitled to the proceeds of the Managers checks and was actually privy to the fraud perpetrated by Balmaceda. Issue: W/N PCIB had the right to freeze and debit Ramos assets. No. Held: Ramos participation in Balmacedas scheme not proven. There is no merit in PCIBs claim that legal compensation took place between it and Ramos, thereby warranting the automatic deduction from Ramos bank account. For legal compensation to take place, two persons, in their own right, must first be creditors and debtors of each other. While PCIB, as the depositary bank, is Ramos debtor in the amount of his deposits, Ramos is not PCIBs debtor under the evidence the PCIB adduced. PCIB thus had no basis, in fact or in law, to automatically debit from Ramos bank account.

ARTICLE 1291 TO 1304 NOVATION LICAROS VS GATMAITAN Facts: Abelardo Licaros, decided to make a fund placement with Anglo-Asean Bank in the 1980s. Licaros, after having invested, encountered tremendous and unexplained difficulties in retrieving, not only the interest or profits, but even the very investments he had put in Anglo-Asean. Confronted with the dire prospect of not getting back any of his investments, Licaros then decide to seek the counsel of Antonio P. Gatmaitan. Gatmaitan voluntarily offered to assume the payment of Anglo-Aseans indebtedness to Licaros. In order to effectuate and formalize the parties respective commitments, the two executed a notarized MEMORANDUM OF AGREEMENT on July 29, 1988. Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement for the purpose of collecting the placement thereat of $150,000. No formal response was ever made by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not acted on Gatmaitans monetary claims. Evidently, because of his inability to collect from AngloAsean, Gatmaitan did not bother anymore to make good his promise to pay Licaros the amount stated in his promissory note. Licaros, however, felt that he had a right to collect on the basis of the promissory note regardless of the outcome of Gatmaitans recovery efforts. Thus, Licaros addressed successive demand letters to Gatmaitan. Gatmaitan, however, did not accede to these demands. Issue: W/N the Memorandum of Agreement between petitioner and respondent is one of assignment of credit or conventional subrogation. Conventional subrogation. Held: An assignment of credit has been defined as the process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale. On the other hand, subrogation has been defined as 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. Conventional subrogation is that which takes place by agreement of parties. Conventional subrogation is not identical to assignment of credit. In the former, the debtors consent is necessary; in the latter, it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to

the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedies by the assignment of the creditors right to another. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce legal effects. What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor, may, therefore, validly assign his credit and its accessories without the debtors consent. On the other hand, conventional subrogation requires an agreement among the 3 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 parties. Thus, Article 1301 of the Civil Code explicitly states that Conventional subrogation of a third person requires the consent of the original parties and of the third person. The Memorandum of Agreement dated July 29, 1988 was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity. Gatmaitan and Licaros intended their agreement as one of conventional subrogation as it is plainly borne by a stipulation in their memorandum, to wit: WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third parties concerned, which third party is admittedly Anglo-Asean Bank. Had the intention been merely to confer on appellant the status of a mere assignee of appellees credit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the express conformity thereto of Anglo-Asean Bank. It bears stressing that the subject Memorandum of Agreement expressly requires the consent of Anglo-Asean to the subrogation. Upon whom the task of securing such consent devolves, be it on Licaros or Gatmaitan, is of no significance. What counts most is the hard reality that there has been an abject failure to get Anglo-Aseans nod of approval over Gatmaitans being subrogated in the place of Licaros. The absence of such conformity on the part of AngloAsean, which is thereby made a party to the same Memorandum of Agreement, prevented the agreement from becoming effective, much less from being a source of any cause of action for the signatories thereto.

GARCIA VS LLAMAS Facts: On December 23, 1996, petitioner and De Jesus borrowed P400,00 from respondent. On the same day, they executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before January 23, 1997 with a 5% interest per month. After the loan has long been overdue and despite repeated demands, petitioner and De Jesus have failed and refused to pay it; and by reason of their unjustified refusal, respondent was compelled to engage the services of a counsel. Petitioner averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for De Jesus; and alternatively, he is relieved from any liability from the note inasmuch as the load had been paid by De Jesus by means of a check dated 17 April 1997 and the respondents acceptance novated or superseded the note. Respondent replied that the loan remained unpaid for the reason that the check issued by De Jesus bounced. Petitioner seeks to extricate himself from the obligation as joint and solidary debtor by insisting that novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the check. Issue: W/N there was novation of the obligation. No. Held: Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from and may even be made without the knowledge of the debtor, since it consists of a third persons assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation susbsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is

made either by changing the object or principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. For novation to take place, the following requisites must concur: 1. There must be a previous valid obligation. 2. The parties concerned must a agree to a new contract. 3. The old contract must be extinguished. 4. There must be a valid new contract. Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence. In the instant case, no novation took place. The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answerws for it. verily, the two can stand together. Neither could the payment of interests which, in petitioners view, also constitutes novation change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof. Also unmeritorious is petitioners argument that the obligation was novated by the substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the formers place in the relation. Well-settled is the rule that novation is never presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place. In the present case, petitioner has not shown expressly released from the obligation, that a was substituted in his place, or that the joint obligation was cancelled and substituted by undertaking of De Jesus. that he was third person and solidary the solitary

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor. De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary obligor of the P400,000 loan; thus he can be released from it only upon its extinguishment. Respondents acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to pay the entirety of the obligation.

CALIFORNIA BUS LINES, INC VS STATE INVESTMENT Facts: Sometime in 1979, Delta Motors Corporation M.A.N. Division (Delta) applied for financial assistance from respondent State Investment House, Inc. (hereafter SIHI). SIHI agreed to extend a credit line to Delta for P25,000,000. On several occasions, Delta availed of the credit line by discounting with SIHI some of its receivables, which evidence actual sales of Delta vehicles. Delta eventually became indebted to SIHI to the tune of P24,010,269.32. Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and 2 units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio Llamas, executed 16 promissory notes in favor of Delta. In each promissory note, CBLI promised to pay Delta. In addition to the notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor. When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on October 7, 1981, to cover its overdue obligations under the promissory notes. The restructuring agreement provided for a new scheduled of payments of CBLIs past due installments, extending the period to pay, and stipulating daily remittance instead of the previously agreed monthly remittance of payments. In case of default, Delta would have the authority to take over the management and operations of CBLI until CBLI and/or its president, Dionisio Llamas, remitted and/or updated CBLIs past due account. CBLI contends that the Restructuring Agreement did not merely change the incidental elements of the obligation under all 16 promissory notes, but it also increased the obligations of CBLI with the addition of new obligations that were incompatible with the old obligations in the said notes. CBLI adds that even if the restructuring agreement did not totally extinguish the obligations under the 16 promissory notes, the compromise agreement executed on July 24, 1984, which would allow Delta to exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units, did. Issue/s: 1. W/N the Restructuring Agreement novated the 5 promissory notes Delta assigned to respondent SIHI. No. 2. W/N the compromise agreement superseded and/or discharged the subject 5 promissory notes. No. Held: Novation has two functions: one to extinguish an existing obligation, the other to substitute a new one in its place. With respect to obligations to pay a sum of money, the Court has consistently applied the well-settled rule that the

obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the old one. In Tible vs Aquino and Pascual vs Lacsamana, the Court declared that it is well settled that a mere extension of payment and the addition of another obligation not incompatible with the old ones in not a novation thereof. In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding of novation by implication. However, a review of its terms yields no incompatibility between the promissory notes and the restructuring agreement. The restructuring agreement merely provided for a new schedule of payments and additional security in giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be no novation. The addition of other obligations likewise did not extinguish the promissory notes. In Young vs CA, the Court ruled that a change in the incidental elements of, or an addition of such element to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment. In fine, the restructuring agreement can stand together with the promissory notes. Neither is there merit in CBLIs argument that the compromise agreement superseded and/or discharged the 5 promissory notes. Having previously assigned the 5 promissory notes to SIHI, Delta had no more right to compromise the same.

AQUINTEY VS. TIBONG Facts: Agrifina Aquintey in this case alleges that Felicidad Tibong had secured loans from her on several occasions. Despite demands, the spouses Tibong failed to pay their outstanding loan. This prompted Aquintey to file a complaint for sum of money and damages against spouses Felicidad and Rico Tibong. In their Answer spouses Tibong admitted that they had secured loans from Agrifina. However, they alleged that they had executed deeds of assignment in favor of Agrifina, and that their debtors had executed promissory notes in Agrifina's favor. According to the spouses Tibong, this resulted in a novation of the original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina became the new collector of their debtors; and the obligation to pay the balance of their loans had been extinguished. The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment and the promissory notes executed by Felicidad's borrowers On appeal, the CA affirmed with modification the decision of the RTC and stated that though the deeds of assignment does not have the effect of novating the original obligation of Sps. Tibong, Aquinteys account was already partially extinguished as a part of it was covered by the deeds of assignment and has been in fact already collected by Aquintey. Issue: WON there was novation. NO. WON the assignment has the effect of partially extinguishing the respondents obligation. Yes. Ruling: We find in this case that the CA correctly found that respondents' obligation to pay the balance of their account with petitioner was partially extinguished, not by novation but by the deeds of assignment of credit. Novation may either be extinctive or modificatory. Extinctive novation is never presumed; there must be an express intention to novate. However in cases where novation is implied, novation in this case necessitates the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconciliable, the subsequent obligation would also extinguish the first. Novation which consists in substituting a new debtor (delegado) in the place of the original one (delegante) may be made even without the knowledge or against the will of the latter but not without the consent of the creditor. Substitution of the person of the debtor may be effected by

delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to the substitution and assumes the obligation. Thus, the consent of those three persons is necessary. In this kind of novation, it is not enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. An assignment of credit on the otherhand is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. In this case, all the requisites for a valid dation in payment are present. Respondent Felicidad assigned to petitioner her credits "to make good" the balance of her obligation. Felicidad testified that she executed the deeds to enable her to make partial payments of her account, since she could not comply with petitioner's frenetic demands to pay the account in cash. Petitioner and respondent Felicidad agreed to relieve the latter of her obligation to pay the balance of her account, and for petitioner to collect the same from respondent's debtors.

RICARZE VS. CA Facts: Eduardo G. Ricarze was employed as a collector-messenger by City Service Corporation, a domestic corporation engaged in messengerial services. He was assigned to the main office of Caltex where his primary task was to collect checks payable to Caltex and deliver them to the cashier. In 1997 Caltex filed a criminal complaint against Ricarze for estafa through falsification of commercial documents when Caltex discovered that several checks were missing and forged and have subsequently been cleared throught its depositary bank PCIB. Upon further investigation, it was found out that the cleared checks were deposited in an account opened by Ricarze. Meanwhile, the PCIB credited the amount of P581,229.00 to the account of Caltex without informing the City prosecutor. Hence 2 informations for estafa were filed against Ricarze with Caltex Philippines as the private complainant. Ricarze was then arraigned. During trial, SRMO Law Office presented evidence in behalf of PCIB, Ricarze then opposed such pleading contending that the private complainant is Caltex and not PCIB. SRMO then contended that when PCIB re-credited the amount to Caltex to the extent of the indemnity; PCIB had been subrogated to the rights and interests of Caltex as private complainant. Petitioner however argues that PCIB cannot be subrogated to the rights of Caltex, considering that he has no knowledge of the subrogation much less gave his consent to it. Issue: WON There is a valid subrogation between PCIBank and Caltex. Ruling: Petitioners argument on subrogation is misplaced. The Court agrees with respondent PCIBs comment that petitioner failed to make a distinction between legal and conventional subrogation. Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.28 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.29 Instances of legal subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties.31 Thus, petitioners acquiescence is not necessary for subrogation to take place because the instant case is one of legal subrogation that occurs by operation of law, and without need of the debtors knowledge. Thus, being subrogated to the right of Caltex, PCIB, through counsel, has the right to intervene in the proceedings, and under substantive laws is entitled to restitution of its properties or funds, reparation, or indemnification.

LEDONIO VS. CAPITOL DEVELOPMENT Facts: Ledonio on a certain date obtained from a Ms. Picache two loans covered by promissory notes. Subsequently, Ms. Picache executed an Assignment of Credit in favor of Capitol Development Corporaiton. When the loans became due however, petitioner failed to settle his indebtedness despite Capitols demands. Hence, Capitol instituted a Complaint for the collection of a sum of money against herein petitioner Edgar Ledonio. Ledonio on the otherhand sought the dismissal of the complaint averring that Capitol had no cause of action against him as he never consented or agreed to the said assignment. It is his contention that consent of the debtor to the assignment of credit is a basic/essential element in order for the assignee to have a cause of action against the debtor. According to petitioner, the assignment of credit constitutes conventional subrogation which requires the consent of the original parties to the loan contract, namely, Ms. Picache (the creditor) and Ledonio (the debtor); and the third person, Capitol(the assignee). Since petitioner never gave his consent to the assignment of credit, then the subrogation of respondent in the rights of Ms. Picache as creditor by virtue of said assignment is without force and effect. In support of said argument, petitioner invokes the following provisions of the Civil Code ART. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. ART. 1301. Conventional subrogation of a third person requires the consent of the original parties and the third person. Issue: WON the consent of Ledonio to the assignment of credit is essential in order for Capitol to have a cause of action against Him? No. Ruling: The transaction between Ms. Picache and Capitol was an assignment of credit and not conventional subrogation(novation), and does not require Ledonios consent asdebtor for its validity and enforceability. An assignment of credit has been defined as an agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause - such as sale, dation in payment or exchange or donation - and without need of the debtor's consent, transfers that credit and its accessory rights to another (known as the assignee), who acquires the power to enforce

it, to the same extent as the assignor could have enforced it against the debtor. On the other hand, subrogation, by definition, 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. Conventional subrogation is that which takes place by agreement of parties. Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the rights of the original creditor, this Court still cannot definitively rule that assignment of credit and conventional subrogation are one and the same. Under our Code, conventional subrogation is not identical to assignment of credit. In the former, the debtor's consent is necessary; in the latter, it is not required. Subrogation extinguishes an obligation and gives rise to a new one; while assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that the new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor's right to another. (Emphasis supplied.) The Courts has consistently adhered to the foregoing distinction between an assignment of credit and a conventional subrogation. Such distinction is crucial because it would determine the necessity of the debtor's consent. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce the legal effects. What the law requires in an assignment of credit is not the consent of the debtor, but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories without the debtor's consent. On the other hand, conventional subrogation requires an agreement among the 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 parties.

VALENZUELA VS. KALAYAAN DEVELOPMENT Facts: Kalayaan is the owner of a parcel of land which was being illegally occupied by petitioner sps. Valenzuela. Upon discovery of such, Kalayaan demanded the petitioners to immediately vacate the premises. The petitionrs however negotiated with Kalayaan to purchase the portion of the lot that they were already occupying and by virtue of which, the parties executed a Contract to Sell. Petitioners commenced the paying of monthly installments, however, upon their payment of one-half of the purchase price,they manifested their inability to pay the remaining balance and proposed to Kalayaan, thate substitution of Juliet Flores Gilon who was willing to assume the payment of the remaining balance payable to Kalayaan. Thereafter, Juliet made payments of 10,000 per montht to Kalayaan, which the latter accepted for and in behalf of Gloria Valenzuela. Thereafter, Kalayaan demanded that Sps. Valenzuela pay their outstanding obligation but thesedemands remained unheeded thus Kalayaan filed a Complaint for Rescission of Contract and Damages against Sps. Valenzuela. Petitioners on the otherhand claim that there was already a valid novation in the present case. They aver that the CA failed to see that the original contract between the petitioners and Kalayaan was altered, changed, modified and restructured, as a consequence of the change in the person of the principal debtor and the monthly amortization to be paid for the subject property. When they agreed to a monthly amortization of P10,000.00 per month, the original contract was changed; and Kalayaan recognized Juliets capacity to pay, as well as her designation as the new debtor. The original contract was novated and the principal obligation to pay for the remaining half of the subject property was transferred from petitioners to Juliet. When Kalayaan accepted the payments made by the new debtor, Juliet, it waived its right to rescind the previous contract. Thus, the action for rescission filed by Kalayaan against them, was unfounded, since the contract sought to be rescinded was no longer in existence. Issue: WON there is novation in this case. No. Ruling: Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. Article 1292 of the Civil Code provides that "[i]n order that an obligation may be extinguished by another which substitutes 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." Novation is never presumed. Parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not 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. Thus, in order that a novation can take place, the concurrence of the following requisites are indispensable: 1) There must be a previous valid obligation; 2) There must be an agreement of the parties concerned to a new contract; 3) There must be the extinguishment of the old contract; and 4) There must be the validity of the new contract. In the instant case, none of the requisites are present. There is only one existing and binding contract between the parties, because Kalayaan never agreed to the creation of a new contract between them or Juliet. True, petitioners may have offered that they be substituted by Juliet as the new debtor to pay for the remaining obligation. Nonetheless, Kalayaan did not acquiesce to the proposal. Its acceptance of several payments after it demanded that petitioners pay their outstanding obligation did not modify their original contract. Petitioners, admittedly, have been in default; and Kalayaans acceptance of the late payments is, at best, an act of tolerance on the part of Kalayaan that could not have modified the contract.

TOMIMBANG VS. TOMIMBANG Facts: Petitioner and respondent are siblings. The petitioner in this case want3ed to renovate the property their parents has given him so he entered into a loan agreement with the respondent witht the agreement that the petitioner will only start paying after the completion of the renovation. However due to certain misunderstandings, the parties entered into a new agreement stating that the petitioner shall start paying off the loan in a monthly basis and this was initially complied with by the petitioner. However, when another misunderstand arouse between the parties, the petitioner stopped paying his monthly obligations thus prompting respondent to file the instand case for the payment of the loan plus interest from date of default. Petitioner does not deny that she obtained a loan from respondent. She, however, contends that the loan is not yet due and demandable because the suspensive condition the completion of the renovation of the apartment units - has not yet been fulfilled. Issue: WON the petitioner's obligation has already become due and demandable?Yes. Ruling: The evidence on record clearly shows that after renovation of seven out of the eight apartment units had been completed, petitioner and respondent agreed that the former shall already start making monthly payments on the loan even if renovation on the last unit was still pending. Evidently, by virtue of the subsequent agreement, the parties mutually dispensed with the condition that petitioner shall only begin paying after the completion of all renovations. There was, in effect, a modificatory or partial novation, of petitioner's obligation. Article 1291 of the Civil Code provides, thus: Art. 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (Emphasis supplied) In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,10 the Court expounded on the nature of novation, to wit: Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation

presupposes a confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a new valid obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions. As can be gleaned from the foregoing, the aforementioned four essential elements and the requirement that there be total incompatibility between the old and new obligation, apply only to extinctive novation. In partial novation, only the terms and conditions of the obligation are altered, thus, the main obligation is not changed and it remains in force. Petitioner stated in her Answer with Counterclaim that she agreed and complied with respondent's demand for her to begin paying her loan, since she believed this was in accordance with her commitment to pay whenever she was able. Her partial performance of her obligation is unmistakable proof that indeed the original agreement between her and respondent had been novated by the deletion of the condition that payments shall be made only after completion of renovations. Hence, by her very own admission and partial performance of her obligation, there can be no other conclusion but that under the novated agreement, petitioner's obligation is already due and demandable.

MILLA VS PEOPLE Facts: In this case, a criminal case was filed against Milla for having committed estafa through falsification of the notarized deed of absolute sale and TCT purportedly issued by the ROD of Makati. Milla by misrepresenting himself and through falsification of the said documents was ableto get the total amount of P2m from Carlo Lopez of Market Pursuits, Inc. When Lopez discovered Millas scheme however, Lopez demanded the return of the amount of P2m which Milla acquiesced into by issuing 2 checks for the said amount. These checks were later on dishonored and Milla for his part consistently ignored the demands made by Lopez. This led to the filing of the present case. Now Milla contends that his issuance of the 2 checks reprenting the amount of 2m before the institution of the criminal complaint against him novated his obligation to MPI, thereby enabling him to avoid any incipient criminal liability and converting his obligation into a purely civil one. Issue: So the issue in this cse is whether or not the payment of an obligation before the institution of a criminal complaint, in itself constitute novation that may prevent criminal liability or WON there is novation in this case. No. Ruling: In Quinto v. People, this Court exhaustively explained the concept of novation in relation to incipient criminal liability, viz: Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not 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. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. In the case at bar, the acceptance by MPI of the Equitable PCI checks tendered by Milla could not have novated the original transaction, as the checks were only intended to secure the

return of the P2 million the former had already given him. Even then, these checks bounced and were thus unable to satisfy his liability. Moreover, the estafa involved here was not for simple misappropriation or conversion, but was committed through Millas falsification of public documents, the liability for which cannot be extinguished by mere novation. In view of the foregoing, the petition of Milla was denied.