MODES OF EXTINGUISHMENT OF OBLIGATIONS fulfilment of the entire obligation.
But if this is JOINT, BASIS:
CLASS DISCUSSIONS
Illustrations:
1. All kinds of obligations as to prestations may be extinguished by payment? NOT ALL.
2. Who are persons who pays, being called? PAYOR or PAYER because person who pays is NOT
ALWAYS the debtor.
3. A –debtor, B –creditor; if A is a minor and he paid B, may that amount be recovered from B?
YES, because one of the requisites is that there must be capacity to pay and the minor being a
minor doesn’t have the capacity to alienate his property and cannot therefore be considered as a
valid payment. A is a minor – may a minor have a valid obligation? YES. What could be the
source of the obligation? Common is: in Quasi-delict or if there is a law which requires a minor
to pay a sum of money, say, to PAY TAX and also from Delict (12-14 years old) = criminal
liability.
4. What if A this time is under receivership and A paid B, may that amount paid to B may be
recovered from B? Yes, because aside from the requirement that the payor should have the
capacity to pay, he must also have the capacity to freely dispose of his property. In what instance
where a person doesn’t have the freedom to dispose his property?
 Under receivership
 Civil interdiction
 Those ordered by the court to retain the property – by way of attachment/ garnishment –
Custodia Legis
5. X offered to pay B. He offered to pay the debt of A to B, A borrowed 1 year ago from B for the
amount of 100k, and this is secured by a guaranty executed by G, may this obligation be
extinguished upon the payment of X to B? When? It DEPENDS if B would accept. Can B be
compelled to accept payment by X? General Rule: Creditor may not be compelled to accept
payment from a third person. EXCEPTIONS:
a. If there is a STIPULATION that a 3rd person would perform or pay the obligation.
b. 3rd party has an interest in the fulfilment of the obligation.
6. DIFFERENCE between 3rd person who has INTEREST IN THE FULFILMENT of the
obligation vs. 3rd person who has interest IN THE EXTINGUISHMENT of the obligation?
Because payment or performance is just one mode or form of extinguishment – law is very
specific that it said performance as there are other modes of extinguishment– this provision
pertains to the right of the 3 rd person to seek reimbursement from the principal debtor – if you
think this is a condonation, there is a right to seek reimbursement? No – that’s why the law is
very specific: he has an interest in the fulfilment of the obligation and not extinguishment in
general.
7. How come the law expressly provides as a rule that the creditor cannot be compelled to accept
payment? Because here if the creditor refuses to accept and when compelled, there will be
breach of consent due to the supposed consideration to the personal qualification of the debtor.
In the OLD CIVIL CODE  the provision only pertains to obligations To Do – like let’s say to
repair a car, so why would the creditor accepts performance of the 3 rd person will repair his car,
maybe because that person isn’t good at repairing cars. In NEW CIVIL CODE  there is no
more distinction as to what obligation – e.g. why would the creditor not compelled to accept?
These days money can easily be counterfeited. That is why creditor may not want to accept
payment from a 3rd person.
8. Example of 3rd person who would have an interest in the fulfilment of the obligation:
Mortgagor, Pledgor, or a Guarantor. Guarantor vs. Surety – surety: bonds but is just like
guarantor, it is subsidiarily liable with the debtor. Executor – he represents the estate, if it
pertains to a Right owing to the estate, the executor is? They are called CREDITORS but they
are NOT creditors in THEIR OWN RIGHT. Why are they called creditors? Because they have
the power to demand fulfilment but they are only representing somebody else.
9. If there are 5 debtors in an obligation, one of them has an interest in the fulfilment of the
obligation? It DEPENDS. If it is a JOINT or SOLIDARY Obligations but regardless of whether
the obligation is Joint or Solidary each of the debtors has an interest in the fulfilment of the
entire obligation. It is easy to understand if the obligation is Solidary, because any one of them
may be responsible or liable for the entire obligation so each one would have an interest in the
a. If it is a divisible obligation like to pay a sum of money, he would not have an
interest. Each debtor has an interest in the fulfilment of the entire obligation? YES.
SC ruled that even if the obligation is joint then 4 of them cannot pay or refuse to
pay, the 5th one will be affected by the refusal or inability to pay – his credit standing
and reputation would be affected as the creditor can easily tell the whole world that
this person doesn’t know how to pay his debt and is a swindler in a way.
10. X paid B, like 100k, scenario: A borrowed from B a year ago 100k and this was secured by a
guaranty by G, and X today paid B 100k.
a. How much can X validly demand from A? You have to qualify. If A did not give his
consent to the payment, X would only have the right to demand to the extent that A
was benefited from the payment made. Is it possible that A did give consent to the
payment but still would have the right to demand from X for reimbursement to the
extent of 100k? YES, as long as A has benefited thereto. If X paid B without A’s
consent, X can only demand to the extent that A was benefited from the payment
made, only if accepted by B.
b. If A refuses to pay the reimbursement to X, can X run after the guarantor G?
Whether or not X will have a right of action against the guarantor will depend on
whether it is subrogated in the rights of the creditor. Does it matter if A gave
consent to the payment? When X paid B, the obligation of A to B was extinguish,
does it matter if A consented to the payment or not as to the extinguishment of the
obligation? The obligation is extinguished because there is payment, and payment
is a mode of extinguishment. The consent of A would only matter as to the rights of
the payor. In other words, if X paid with the consent of A, first he would have the
right to seek reimbursement as to the entire amount and second, X will be
subrogated in the rights of the creditor, does it matter that the guaranty was not
constituted in favour of X? It doesn’t matter, by the word “subrogation” this person
who is subrogated will acquire all the rights of the creditor, could have exercised not
only against the debtor but also against anyone who are subsidiarily obliged, just like
guarantors. Otherwise, if X paid B without the knowledge or against the will of A,
he will not be subrogated. Following the rule, when he paid, the obligation was
extinguished, and this being a principal obligation and accessory is that of the
guaranty, the accessory was also extinguished due to the principle of subrogation
being applicable; hence, he cannot run after the guarantor.
c. What if X and B had an agreement, that instead of A, X will be the one to pay B,
with the agreement thereafter X paid B and this is without the knowledge of A, it was
also agreed upon by X and B that upon payment that X will be subrogated in the
right of the creditor. X then paid B but A failed to reimburse X. Can X run after the
guarantor? As far as extinguishment is concerned, A’s consent is NOT REQUIRED
because as long as there is payment there is extinguishment. In the facts, there was
nothing said that B was compelled. It was by agreement. Was B subrogated by X by
reason of the agreement between X and B? Article appears not to be well formulated
and that there is an implication that if there is an agreement that the 3 rd person will be
subrogated to the rights of the creditor then he can be subrogated because he was
not compelled, therefore 3rd person can subrogate the creditor. THIS IS A WRONG
INTERPRETATION considering the fact that this provision is intended to protect
debtors. In other words, REGARDLESS of the agreement between the creditor and
the 3rd person, as long as the payment was without the knowledge or against the will
of the debtor, B will never be subrogated by X or 3rd person will never be subrogated
in the rights of the creditor. This will only be true if X doesn’t have an interest in
the fulfilment of the obligation.
11. If X is a guarantor and he paid B, will he be subrogated in the rights of B even if the payment
was made without the knowledge of A? YES. And the basis is under Article 1302. Under
certain circumstances there would be legal subrogation and one of the three scenarios there is
that when a person has an interest in the fulfilment of the obligation pays with or without the
consent of the debtor. This is also true in guaranty, except?
a. General Rule: If he pays, he is subrogated.
Amen | Compiled Notes
 b. EXCEPTION: Under the law on guaranty
12. If X paid B without the intention of seeking reimbursement from A, but 2 weeks thereafter X
demanded that B return the amount he paid for A, claiming that A did not give consent to the
payment. Can B be compelled to pay the amount or to return the amount to X? What appears to
be the argument of X? Why would he have the right to demand the return in this scenario? What
is his theory? NO because the law expressly provides that the creditor has the right to retain
even if it was without the consent of the donee or even if the donee did not accept the donation.
So there was a valid payment. When X paid B, it was like a donation to A, and therefore A is a
donee known as indirect donation. Why the donor did not give the money to the donee?
Because the donor has no confidence or trust in the donee because the donee may just spend the
money and not pay his debts. If this is a valid payment even without the consent of the donee,
what is the relevance of the acceptance by the donee? It is relevant because in donation,
acceptance is needed. And if the donation will accordingly be void, upon the death of the donor,
that amount may still be considered part of the estate.
13. The person to whom payment is made is known as? PAYEE, again not necessarily the creditor.
For a payment to be a valid payment, to whom should it be made? Who is the payee? Under
Article 1240, the persons are enumerated thereto.
14. What if the payment was made not to the person whom the obligation was constituted in favour
to does it mean that it was a payment to the wrong party? Therefore will it not extinguish the
obligation? NOT NECESSARILY. It could be successor in interest. E.g. heir, assignee  but is
he a creditor? YES at the TIME of the FULFILMENT OF THE OBLIGATION. For payment
to be valid he doesn’t have to be the creditor at the time of the constitution. Finally if the payee
is not in whose favour the person authorizes to receive it nor a successor in interest, then it is a
payment made to a wrong person? NOT NECESSARILY. He may be a proper party. The
authority as to where it came from was not specified by the law. So it may be from the law or
from the creditor.
15. ARANAS CASE: Obligation involved is to pay cash dividends. ISSUE: whether the payment
by UTEX to Castaneda did extinguish the obligation to spouses Aranas? The creditor here is
Aranas and the basis of the claim that they are creditors: Judgment of the court but still UTEX
paid it to a 3rd party. If you were the counsel of UTEX, what would be your advice? Instead of
paying to the 3rd person, Castaneda, you should have availed of consignation which is to deposit
the money to the court until a party will be claimed as the rightful creditor. General rule was
applied in this case that payment made to a wrong party did not extinguish obligation.
Exception: when the payment redounded to the benefit of the creditor even when it was paid to
a wrong party.
16. When the payment redounded to the benefit of the creditor – who has the burden of proof?
PAYOR or DEBTOR. Will the payor always have the burden of proof? NO. When would the
payor not have the burden? Article 1241.
a. If after payment, 3rd person acquires the creditor’s rights. Why after? If before it will
be a payment to the right or proper party – successor in interest.
b. If the creditor ratifies the payment to the 3 rd person. This raises a conclusive
presumption that it redounded to the benefit of the creditor.
c. If by the creditor’s conduct, the debtor has been led to believe that the 3 rd person had
authority to receive the payment also known as Estoppel in pais.
d. When without notice of the assignment of the credit he pays to the original debtor
(Article 1626)
e. When in good faith he pays to one on possession of the credit (Article 1242)
17. A debtor of B, A borrowed 100k and it was evidenced by a PN which A executed and delivered
to B, but before obligation became due and demandable, PN was already in the possession of X
and premise here is that X doesn’t have the right to credit. So when PN became due and
demandable, X demanded for the payment, then A paid X. Who is the creditor? B is the creditor.
Because A paid X, A’s obligation has already been extinguished? It DEPENDS. If X was in
possession of the credit and payment was made in good faith, then the obligation is
extinguished. When would X be considered in possession of the credit?
a. If it is a bearer instrument. Possession of credit means that this person only appears
to have the right to the credit but in truth and in fact he really doesn’t have the right.
b. Had this been, when would X be in not possession of the credit? If it was said in the
bearer instrument that it was payable to a certain person and that person is not X. –
not necessarily also. No if it is a negotiable instrument. Yes if this is a non-
negotiable instrument because there is no endorsement.
c. For the payment to be considered made in Good Faith, it must be required that? The
debtor does not know or is not aware of any defect.
d. If X was in possession of the PN, why would there be a defect is it is in the
possession of X? If it may be stolen.
18. A debtor of B, then B assigned his credit to X, normally when would B assign the right to 3 rd
person? Before. Why would assign to other? Maybe because the creditor also has an outstanding
debt to the 3rd person or he owes to X. Say, in Sale or donation or creditor needs money but such
obligation is not yet due or lastly, in checks – “rediscounting”.
19. If B assigned the credit to X but after assignment A paid B. Who is creditor here? X is now the
creditor because he is the successor in interest. If thereafter A paid B, would that extinguish the
obligation of B? If payment was made without the knowledge of the assignment. This matters as
to the time, because before he may not have the knowledge but after the assignment, he may
already have the knowledge.
Illustrations:
1. Special forms of payment:
a. Dation
b. Application – Before the courts do not consider application as special form of payment.
c. Tender of payment and consignation – Tender of payment is not a form of payment
consignation is a special form of payment.
d. Cession
2. Distinguish one from the other or the rest:
a. Consent: is consent of both parties required in this special form of payment? There is
no question that as to debtors consent is obviously there because he is the one offering to
pay, so if he is the one offering to pay then there must be consent, but as to creditor?
i. Dation in payment – the creditor has to accept the delivery of a thing instead
of the other prestation for the satisfaction of the debt, if there is no consent on
the part of the creditor, there can be no dation in payment. CASE: Filinvest v.
Phil. Acetelyn
ii. Application of payment – As a rule the consent of the creditor is not required,
it is only under certain circumstances that the consent of the creditor will be
present.
iii. Payment by cession – Definitely the consent of the creditor is required, if the
creditor would not agree that the debtor would abandon the properties for the
creditors to sell, there can be no payment by cession.
iv. Consignation – The consent of the creditor is not required even if the creditor
refuses to accept the thing delivered by the debtor to the court by way of
consignation, the court may declare the consignation to be valid.
b. As to the effect of the delivery of the thing from the debtor to the creditor or from the
debtor to the court is there transfer of ownership?
i. Dation in payment – yes there is transfer of ownership, because that thing is
being delivered and the ownership thereof is being transferred in satisfaction of
his debt.
ii. Application of payment – Yes there is transfer of ownership. If money is
delivered by the debtor to the creditor ownership passes to the creditor. The
only question here in this form of payment is to which debt the payment will
apply? This is the issue in this kind of payment, but as to ownership it passes
immediately to the creditor.
iii. Cession - Ownership does not pass because the creditor upon delivery because
the creditors just accept the things or those things to be sold and the proceeds
thereof to be applied to the indebtedness.
Amen | Compiled Notes
 iv. Consignation – Upon the delivery of the thing to the court ownership does not
automatically pass to the creditors because the consignation may be void, if it is
void, then ownership does not pass to the creditor. However, if the creditor will
accept thereafter, may be months or years thereafter, or maybe the court
declares the consignation valid, then the ownership passes, however, by law
the effect of acceptance or the declaration by the court that the
consignation is valid retroacts to the time of the delivery of the court as if
the creditor is already the owner of the thing at the time of the delivery.
c. Extent of Extinguishment: May there be total extinguishment of the debt?
i. Application of payment – No, there can never be total extinguishment,
precisely because there is a need to determine to which debt the payment is to
be applied. Because the amount paid is not sufficient to cover all the debts,
because you will no longer have a problem is the amount is sufficient to cover
all the debts you just have to invoke the rules on application on payments.
Necessarily there is no total extinguishment of the debts under the rules on
application of payment.
ii. Cession – the extinguishment will only be to the extent of the net profits of the
sale, unless the parties agree that the abandonment will result to the
extinguishment of the entire debt. So here, the net proceeds is the basis of the
extent of the extinguishment of the debt.
iii. Consignation – Because this is a special form of payment it follows the rule in
payment, thus as a rule “partial performance is non performance” therefore if
the debtor delivers only a portion of his debt, then the consignation is null and
void. The exception will only be if the creditor would agree to the delivery
of partial amount, then to that extent there will be partial extinguishment.
iv. Dation in payment – There are authors who will take the position that if there
is Dation in payment then the obligation is totally extinguished unless it is clear
in the intention of the parties that it will result only to partial extinguishment.
But is this the better rule? For example if A is the debtor of B in the amount of
1M and A delivered to B a car stating that it is to be applied to the amount that
B owes A, the value of the car is 150K, if the creditor accepted the car, does
that mean that the entire obligation is extinguished? This rule does not seem
to be equitable, the BETTER RULE: As a rule the extinguishment is only
to the extent of the value of the thing delivered unless it is clear from the
agreement of the parties that the delivery of a thing, no matter the value, is
equivalent to the amount of the obligation.
3. Specific Rules:
a. Dation in payment – Again in Dation a thing is delivered and ownership thereof is
delivered by the debtor to the creditor in satisfaction of his debt. Dation apparently will
only apply to the delivery of the thing. THIS IS NOT TRUE. The SC has ruled that
even rights can be the subject of Dation for example: if hereditary right is already
vested to the debtor, the debtor can deliver his rights to his creditor for the
satisfaction of his debt. Also, in one case, a credit owing to the debtor may be
delivered by him to his creditor for the satisfaction of his debt. But just like the other
modes of payment, in order that there be Dation there has to be an obligation to be
extinguished (CASE: Citizen’s Surety v. CA: Perez was claiming that with the execution
of deed of assignment that practically extinguishes his obligation under the indemnity
agreement by way of Dation, the scenario here was: a contract of sale was entered into,
payable by installment, the buyer is Pascual enterprises, to secure the fulfillment of his
obligation, a surety bond was executed in favor of the seller, not citizen’s surety executed
an indemnity agreement just in case it will be held liable under the bond, Pascual Perez
and his wife being the party thereto, Citizen’s also had Perez execute a deed of assignment
over certain stocks. The surety obviously was held liable under the bond, the surety went
after Perez under the indemnity agreement. Perez claimed that the execution of deed of
assignment was a form of Dation, but the facts showed that at the time the deed of
assignment was executed there was no obligation under the indemnity agreement nor
under the surety bond. Why? Because the contracts were all dated earlier than the
time he was made liable, therefore there was no obligation yet. So what is really the
nature of deed of assignment? It was a form of security arrangement. Other facts
relied upon by the SC in ruling that the deed of assignment was not Dation in
payment was that after the deed of assignment was executed, Perez also executed a
real estate mortgage, so why would he execute a real estate mortgage if his obligation
was already extinguished by Dation. Also, in deed of assignment, there were partial
payments made, if there was Dation then he would not have made the payments.)
What is the law governing Dation? Others would say that this is governed by the
law of sales. If you will read Article 1245, it would appear that Dation is governed by law
of sales, but reading it more closely; the law on sales will only apply if the obligation is
in money. For instance, A owes B 20K, instead of paying cash, A offered his cell phone to
B in satisfaction of the obligation, there is here Dation and this will be governed by the
law on sales as provided for in Article 1245. Tolentino criticized this provision,
considering that the trend worldwide is to consider this as a form of novation because
practically there is a change in the object, from money to a thing. REMEMBER!
1245 will not apply if the pre-existing obligation is not in money. For example: A is
obliged to deliver to B a horse, so instead of delivering a horse he delivered a car to B.
1245 will not apply here because the pre-existing obligation is not in money, but it is to
deliver a horse. So in this case Novation shall apply because there was a changed in the
object of the obligation, from horse to car. Again, going back to Tolentino’s criticism, he
said that regardless of pre-existing obligation whether money or thing, still the law that
will apply is the law of novation. Atty. Uribe: I find wisdom in Article 1245 because,
instead of paying in cash, (refer to the cell phone example) the debtor paid by giving his
phone to the creditor, but is this not almost similar to the scenario where the debtor paid in
cash and the creditor used the cash to buy the cell phone of the debtor. And therefore the
law on sales will govern.
b. Application of payment – the only question relevant in this rule is “to which debt will
the payment be applied?” the premise of this question is a debtor has two or more debts
to one creditor but may the rules on application of payments be invoked if the debtor
has two or more creditors? Yes. As long as to one creditor he has two or more debts.
The law does not require that the debtor should only have one creditor. For example: A’s
creditors are XYZ, for the rules to be invoked, he must have two debts to one creditor. Let
us say A owes X 100K, 50K, and 20K, now if A delivers to X 30K, the question here is to
which debt will the payment apply?
i. AS A RULE: The debt designated by the debtor, under the law, the
debtor has the right to designate to which debt the payment will apply. So
here, A can designate the 30K to apply to 100K or to 50K or to 20K or 30K.
But having said that, if A instructed the creditor to apply the 30K to 50K, can
the creditor be compelled to apply the payment to the 50K debt? AS A RULE
THE ANSWER IS NO because this is a special form of payment, the rules of
payment shall apply, the creditor cannot be compelled to accept partial
payment, nor the debtor be compelled to perform partial payment. Therefore,
unless there is a stipulation giving the debtor a right to designate to a debt that
will constitute partial payment, he cannot designate payment to which the
payment should be applied. What are the limitations on the right of the debtor
to designate the application for payment?
1. Partial Payment- In the first place why would he designate it to the
50K? The 50K may be interest bearing. THEREFORE, THE
RIGHT OF THE DEBTOR TO DESIGNATE TO WHICH
PAYMENT SHALL APPLY IS NOT ABSOLUTE, ONE OF
THE EXCEPTIONS IS AS TO PARTIAL PAYMENT.
2. Payment of Interest first- A delivered the 30K, he designated it for
the payment of the 30K debt, however, the 30K debt is interest
bearing, can he compel the creditor to apply the payment to the
principal first, then he will just pay the interest later? NO BY
Amen | Compiled Notes
 EXPRESS PROVISION OF THE LAW, PAYMENT SHOULD
ALWAYS BE APPLIED TO INTEREST FIRST, IF THERE
ARE EXCESS THEN THAT WILL BE THE AMOUNT
APPLIED TO THE PRINCIPAL.
3. Debts already due and demandable- A designated the 30K for the
payment of the 30K debt, but the 30K debt is not yet due. THE
LAW REQUIRES THAT THE DEBT IS ALREADY DUE IN
ORDER THAT THE DEBTOR WOULD HAVE THE RIGHT
TO DESGINATE SUCH PAYMENT TO THE DEBT. What is
the meaning of due here? The period must be fixed for the benefit
of the creditor or for both of them. If it is not yet due, but the period
is fixed solely for the benefit of the debtor it does not matter the
debtor can designate such debt because the period is for his
benefit. But also he cannot vary an agreement which they had as
to which debt the payment to be applied.
PROBLEM: What if A entrusted X to apply the 30K to 30K debt, but the debt is secured
by a mortgage, as instructed, X applied the payment, he issued a receipt stating that the
30K is applied to the 30K debt, however, days thereafter, A asked X to apply the amount to
another debt, the 50K, though the creditor cannot be compelled to accept, he may accept
if he wants to. So, if X agrees, and he applied the payment of the 50K debt instead of the
30K, thereafter A was not able to pay X as to the 30K debt, can X foreclose the
mortgage? NOT ANYMORE! A already paid the 30K, although it was revived (when he
chose that the payment be applied to 50K instead) the mortgage was not revived
(mortgage is not revived without the consent of the mortgagor).
ii. SECOND RULE: What if the debtor did not designate the debt to which the
payment shall apply? The debt designated by the creditor. He would have the
right to designate to which debt the payment shall apply. However, is the
debtor’s consent required in the designation made by the creditor? Yes! By
express provision of the law, if in the receipt the debtor sees that the payment
was applied to a particular debt, and the debtor does not agree to such
application, he may refuse to accept the application.
iii. THIRD RULE: Neither the debtor nor the creditor made the designation.
Scenario: the debtor made payment; the creditor accepted and issued a receipt
without designating the particular debt, so to which debt the payment shall
apply? IT WILL DEPEND ON WHETHER THE DEBT OF THE SAME
NATURE AND BURDEN OR WHETHER THE DEBT IS MOST
ONEROUS OF THEM ALL. If all the debts are of the same nature and
burden, the law requires proportional application. As regards to the most
onerous debt, apply the payment to the most onerous obligation. TAKE
NOTE! That you should only go into these rules if the law would not guide
you as to which debt the payment should be applied, there are guides like
partial payment, interest bearing, and the circumstances which may show the
intention of the parties, if these guides are not present, then that is the time
you go into the rules considering the nature and burden of the debts. IN
DETERMINING WHICH DEBT IS THE MOST ONEROUS: is there a
particular rule? None. The SC held that there is no hard and fast rule! This is
because each debt has its own features, for example, there are debts which
consist of bigger amount the other smaller amount but interest bearing, the
other one secured. For example one debt is secured by real estate mortgage and
another debt is secured by pledge, what is more burdensome? The debt
secured by a real estate mortgage. However, real estate mortgage may be
constituted by one real estate, so consider if the real estate mortgage constitutes
a small lot and the pledge constitutes ships, which is more onerous?
Obviously the debt secured by pledge constituting ships. TAKE NOTE THAT
ALL FACTORS ARE CONSIDERED IN DETERMINING WHICH IS
MORE ONEROUS. If for instance in one debt the debtor is merely the
guarantor and other debt he is the principal, apparently the debt in which he is
the principal debtor is more onerous, but the common reason given by few
authors is because in this debt where he is a guarantor, his liability is only
subsidiary, in fact inchoate, he may or may not be held liable because the
principal debtor should first be held in default then his properties dissolved
before the guarantor may be held liable, BUT THIS IS A WRONG REASON
WHY? If the rules on applications of payment are to be invoked, it
presupposes as to the two debts he is already liable, his liability is not merely
inchoate, and even if it is only subsidiary, he is already liable, in other words in
this scenario for the rules to be applied, the principal debtor should have
defaulted and his properties exhausted that is why the guarantor is liable, if he
is not yet liable there is no reason to apply the rules on application of payment
because there is only one debt, which is the debt to which he is the
principal debtor. But even considering that in the contract of guaranty the
guarantor is already liable, which is more onerous, Atty. Uribe: the debt more
onerous is the debt to which the debtor is a principal, because in guaranty the
guarantor may be able to recover what he paid to the creditor from the debtor,
in the debt to which he is a principal, he cannot recover anything by way of
reimbursement. One author would claim: bigger amount is more onerous
than smaller amount. Is there any basis for this claim? Atty. Uribe: I beg to
disagree to this claim, first, if the debt is one peso or two pesos or even one
thousand pesos bigger in amount, does that really matter in this country? But if
you go by the rules, if you follow this claim, then what will happen to the rule
that there are debts of the same nature and burden because if the debts would
have 1 peso difference, then that debt is already more onerous, since the law
provides that proportional application to debts, presupposes that the debts
are of different amounts. Example this is 1M the other debt is 10K, you
think 1M is more onerous, not necessarily, let’s say the debt is only 10K but
it is interest bearing, what should I pay first? Of course the 10K interest
bearing. Who cares about the 1M, after 2 years it is still 1M! Again the amount
is irrelevant. Another, OLDER DEBT IS MORE ONEROUS. There is no
basis to this claim. In fact, older debts may be less onerous why? Because it is
about to prescribe.
c. Payment by Cession or Assignment – Here the debtor would abandon or assign all his
properties to the creditor which properties will have to be sold by the creditor the net
proceeds shall be applied to the credit.
i. FIRST ISSUE: All the properties of the debtor shall be delivered? No, there
are properties which are exempt from execution. But can the debtor deliver
to the creditor properties which are exempt from execution? Yes! Because that
is a right which the debtor can waive, though he cannot be compelled he may
abandon those properties to the creditor. However, there are certain
properties which cannot be the subject of the claim of the creditor even
with the consent of the debtor LIKE THE FAMILY HOME, of course
there are beneficiaries of the family home who can object to the sale
thereof.
ii. What if the debtor is willing to abandon all his properties and the
creditors would refuse, what is the remedy of the debtor? Authors would
say that the best remedy of the debtor is to file an action for insolvency. In a
way insolvency proceeding has its advantages, however, here in the Philippines
businessmen are really not keen on filing an insolvency proceedings.
iii. What if the creditors did agree for this kind of payment but they failed to
agree as to how they will partition/distribution the proceeds? Atty. Uribe
agrees that the rules on concurrence and preference of credits because in these
rules there are preferred debts and those debts which are not preferred they
shall be paid proportionately.
iv. Alleged requirement of few authors that in this form of payment, the
debtor is insolvent. In other words, there can be no cession if the debtor is
Amen | Compiled Notes
 not insolvent. Atty. Uribe CANNOT AGREE TO THIS REQUIREMENT
because if you read Article 1265 there is no requirement that the debtor must be
insolvent for payment of cession to take place. Another important reason is the
fact that this is by agreement of parties, there can only be payment of cession
because the creditor agreed, as long as the debtor is willing to abandon the
properties and the creditors agree and the proceeds shall be applied to the debt,
there is cession.
v. Other authors claim that the debtor should be partially insolvent, is there
any basis to this? NONE! Once a debtor failed to comply with his obligations,
he is in delay, is likewise insolvent. There is no such thing as partial
insolvent. The statement of Professor Sta. Maria is a better statement “this
mode of extinguishing obligation would normally be resorted to by debtors
who are in a financially difficult position.”
d. Tender of payment and consignation – Fist, let us go to the claim of Prof. Jurado, as a
rule tender of payment is necessary for consignation to be valid, correct? Reading
Article 1256, there are how many grounds or causes for consignation wherein the law
expressly provides that tender of payment is not required. In 1256 there are about 5
grounds, where the law provides that in those grounds tender of payment is not required,
obvious because in those grounds the creditor is not present. So in those causes, there is no
tender of payment but the consignation is valid. What are the grounds or causes for
consignation where tender of payment is necessary under the law? Where the creditor
refuses to accept without just cause. Therefore going back to the statement tender of
payment is required for consignation to be valid, it seems wrong. AS A RULE
TENDER OF PAYMENT IS NOT REQUIRED, THE ONLY EXCEPTION TO
THAT RULE IS WHEN THE GROUND FOR CONSIGNATION IS THAT THE
CREDITOR REFUSES TO ACCEPT WITHOUT JUST CAUSE.
i. On the other hand, Jurado is very much correct in his statement that
“tender of payment by its very nature is extrajudicial” as you have read in the
case of Soco v. Milintante, tender of payment is made during the pendency of
the action, that consignation is void. Tender of payment should be made prior
to consignation not during the pendency of the action. SO IT IS BY ITS
VERY NATURE EXTRAJUDICIAL IN CHARACTER.
ii. Now, if the ground for consignation requires tender of payment and the
debtor sent probably three letters to the creditor informing the creditor
that “I am willing to pay my debt xxx” is this a valid tender of payment?
NO! In order for tender of payment to be a valid tender of payment, you have
to actually offer the amount to the creditor; IT IS THE ACT OF OFFERING
THE AMOUNT WHICH CONSTITUTES A VALID TENDER OF
PAYMENT.
iii. Into the requisites of a valid consignation:
1. There must be a debt to be extinguished – a sum of money is
delivered not to extinguish a debt but to exercise a right, like the
right of redemption, if the other party refuses to accept the money,
then the person who has the right is not required to deliver to the
court the amount by way of consignation because he is not
intending to extinguish an obligation. Example: A had the right to
redeem, he offered to redeem, the other party refused to accept,
when the action was filed the defendant claimed that the action
should be dismissed because the redemptioner was not sincere
in redeeming the property because if the redemptioner was
sincere, when I refused to accept the money he should have
deliver the money to the court by way of consignation. The SC:
the claim is erroneous, because the redemptioner is exercising a
right, and in the exercise thereof there was refusal without just
cause, there is no need for consignation. But if the intention is to
extinguish an obligation and the money was refused, that is
when the debtor has to go to the court and deliver the money by
way of consignation.
2. The consignation must be based on a ground provided by law –
Is the enumeration under 1256 an exclusive enumeration? Atty.
Uribe agrees with the position that the enumeration does not have to
be exclusive because as long as it would be more burdensome to the
debtor if he will not be allowed to deliver the thing or the money to
the court, consignation should be allowed. Some of the grounds
are:
a. When without just cause the creditor refuses to issue
a receipt – is the issuance of the receipt the operative
fact which extinguishes the obligation? NO! In our
jurisdiction PAYMENT IS THE MODE OF
EXTINGUISHMENT, THE RECEIPT IS MERELY AN
EVIDENCE. But if the creditor refuses to issue a receipt
or does not want to issue a receipt, it is better that the
debtor does not give the payment to him, because he can
easily deny that the debtor did not pay. Actually, in other
jurisdiction, it is the issuance of the receipt that
extinguishes the obligation, this rule seems to have an
advantage because it would minimize the litigation
involving issues as to payment.
b. When two or more persons claim the same right to
collect – A good example is an obligation to deliver a
carabao, in this obligations three creditors are claiming
from the debtor, because three persons are claiming to
the carabao that will give the person a right to deliver
the carabao to the court by way of consignation? Not
necessarily. The SC held that the debtor should
determine for himself the person who has the right
over the thing or the money.
3. Notices required for consignation to be valid: AT LEAST TWO:
Why? Because if the obligation pertain to an obligation to pay on a
monthly basis, like rental, the SC as rule in the case of SOCO,
THERE MUST BE AT LEAST TWO NOTICES FOR EACH
AMOUNT WHICH BECAME DUE (so every month that the
payment is not accepted sent notice prior the consignation). But if
there is only one debt, there should be two notices required, is it
required that both notices should come from the debtor? NO! But
the first notice should come from the debtor prior the consignation
and the second notice may come into the form of summons. Is
notice really an essential requisite for the validity? TOLENTINO
DOES NOT AGREE WITH THIS VIEW, he thinks that even
without such notice the consignation may still be considered as
valid. But it can be the basis of holding the debtor liable, this rule is
better but THIS IS NOT THE RULE LAID DOWN BY THE
SUPREME COURT. SECOND: if the payment is monthly and the
creditor already refused to accept the payment in the first month the
defendant will question the necessity of second notices, since the
creditor already knows that the debtor will again deliver to the court
the payment by way of consignation RATIONALE: THIS IS TO
GIVE THE CREDITOR THE OPPORTUNITY TO CHANGE
HIS MIND. Which is very true, the bigger the amount the more
difficult to refuse.
iv. There are only two questions in consignation: After the delivery of the
money or the thing with the court, what if thereafter the money was
withdrawn from the court, thereafter the debtor failed to pay the creditor,
Amen | Compiled Notes
 can the creditor still go after those who are subsidiarily liable for the debt
(like the mortgagor)? PREMISE HERE IS: A is indebted to B, A delivered
a sum of money to the court by way of consignation however, A withdrew
the money, the debt is secured by a mortgage, thereafter A failed to pay the
creditor, can the creditor foreclose the mortgage? It depend on the manner
how A was able to withdraw the money from the court.
1. IF A WITHDREW THE MONEY AS A MATTER OF RIGHT
(when even the court cannot refuse the withdrawal, and this can
happen if the creditor has not yet accepted and the court has not
yet declared the consignation to be valid, in this scenario, the
debtor can still withdraw the money as a matter of right at
anytime), THUS, NO DEBT HAS BEEN EXTINGUISHED,
BECAUSE IN CONSIGNATION THE DEBT WILL ONLY BE
EXTINGUISHED EITHER BECAUSE THE CREDITOR HAS
ALREADY ACCEPTED OR THE COURT HAS ALREADY
DECLARED THAT THE CONSIGNATION IS VALID, ABSENCE
OF THE TWO NO OBLIGATION IS EXTINGUISHED,
THEREFORE NO OBLIGATION IS REVIVED, THEREFORE
IF THE DEBTOR WITHDREW UNDER THIS SCENARIO AND
FAILED TO PAY, THE CREDITOR MAY STILL FORECLOSE
THE MORTGAGE, BECAUSE THE OBLIGATION WAS NEVER
EXTINGUISHED.
2. HOWEVER, IF THE WITHDRAWAL IS NOT AS A MATTER
OF RIGHT, THEREFORE HE WAS ONLY ABLE TO
WITHDRAW WITH THE CONSENT OF THE CREDITOR
(this may happen either when the withdrawal was made after
the acceptance or the withdrawal was made after the
declaration by the court that the consignation was valid.) IN
THIS CASE, THE CREDITOR CONSENTED TO THE
WITHDRAWAL. WHAT HAPPENS TO THE OBLIGATION,
UPON THE ACCEPTANCE BY THE CREDITOR OR
DECLARATION BY THE COURT THAT THE CONSIGNATION
IS VALID, THE OBLIGATION IS EXTINGUISHED, AND
THEREFORE, WHEN THE AMOUNT WAS WITHDREW BY
THE DEBTOR THE OBLIGAITON WAS REVIVED, UPON
REVIVAL THE DEBTOR FAILED TO PAY, THE CREDITOR
CAN NO LONGER FORECLOSE THE MORTGAGE, WITH
THE EXTINGUISHMENT OF PRINCIPAL OBLIGAITON
THE ACCESSORY CONTRACTS ARE ALSO
EXTINGUISHED.
v. Liability to pay interest: Let us assume these material dates and events to
have occurred:
1 |2002 (Due) 2 |2003 (Tender of Payment) 3 |2006 (Consignation)
4 |2008 (Decision)
QUESTION: Can the debtor be held liable from period 3 to period 4?
1. If the court declared the consignation to be VOID, there is no question that
the debtor is liable to pay interests, on the premise that there was demand
and that demand was necessary for the debtor to incur in delay.
2. However, what if the court declared the consignation to be valid, he is not
liable from period 3 to 4 because the effect of the declaration retroact to the
time of the delivery of the amount to the court as if the obligation was
extinguished at the time the consignation was made, therefore there will be
no obligation to pay the interest.
Question: Can he be liable from period 1 to 2?
1. Obviously he is liable because he made the tender of payment only period
number two and the obligation has long been due and demandable.
Question: The problem is in period of tender of payment to the consignation,
can he be made liable for payment of interest?
1. Juridically speaking, there is basis to the SC ruling that the debtor is still
liable because the effect of consignation will only be from the time the thing
is delivered to the court, so until the obligation is extinguished the debtor
should still be held liable for interest. However, in the recent cases of the
SC, it was held that from the time tender of payment was made the
debtor is no longer required to pay interest, here, the law requires that if
the creditor refuses acceptance, the debtor should immediately go to
court, otherwise the debtor will have no reason to go to the court
because he no longer has liability for interest. However, in the recent
ruling of the SC, it held that BY REASON OF JUSTICE AND EQUITY,
why? Because here as the consignation is valid it means that the creditor
refused to accept without just cause, if the creditor accepted it would
there be liability on the part of the debtor to pay interest? None! So,
under the principle of justice and equity the debtor should no longer be
held liable to pay interest from the time tender of payment was made up
to the time of consignation even if the consignation was made years
after. ATTY. URIBE: This is quite inconsistent with consignation, there is a
much better basis than justice and equity, if you remember our discussion
in period, in periods two to three the debtor is liable for interest, but
when the creditor refused to accept without just cause, is it not that he is
also in delay which is known as compensation morae if both parties are
already in delay, following the ruling of the SC in Agcaoili v. GSIS, in
contemplation of law, no one is in delay and if no one is in delay could
there be liability to pay interest? None. Without invoking justice and
equity, this decision seems to be more correct.
4. LOSS OF THE THING DUE – Can this mode of extinguishment be invoked in all kinds of
obligations meaning obligations to do? It does not seem like it because it says loss of the thing. If you
will read the provisions under this mode, loss of the thing due, there are provisions pertaining to
obligation to do, thus, authors would consider a better name for this mode, instead of loss of the thing
due a better name would be Impossibility of Performance. In impossibility of performance it would
already include even obligations to give or to deliver, in case of obligations to give it will be
impossible to perform because the thing to be delivered is lost.
a. May this mode apply to obligations to deliver generic thing? YES. If you remember the
doctrine genus non quam peruit this applies to a scenario where the loss or destruction of
anything of the same kind does not extinguish the obligation. EXAMPLE: there is an
obligation to deliver a brand new 2009 Toyota camry, just because the brand new
Toyota camry was lost does not mean that the obligation is extinguished under this
doctrine. GOING BACK TO THE ORIGINAL QUESTION: May an obligation to
deliver a generic thing be extinguished because the obligation became impossible to
perform? YES! As the law would define loss it is a scenario where the thing goes out of
commerce, so if the thing went out of commerce there is nothing to deliver. Another
scenario, is when it became legally impossible to perform, impossibility of performance
may either be physical impossibility or legal impossibility. Pesigan v. Angeles Delivery of
carabao from one province to another, along the way the carabaos were confiscated
because a law became effective during the pendency of the obligation, therefore the
obligation was considered legally impossible to perform. TAKE NOTE THAT when the
law became effective, there must already be an obligation which will become
impossible to perform because if the law became effective before the obligation was
instituted in the first place the obligation is void and there is nothing to be
extinguished.
Amen | Compiled Notes
 obligor may also be released in whole or in part. THE LAW GRANTS THE COURT
b. Obligations to deliver a determinate thing: if the thing to be delivered was lost or THE POWER TO RELEASE THE DEBTOR IN WHOLE OR IN PART BUT IT
destroyed, is the obligation extinguished? If you will read Article 1262 literally, it will DID NOT VEST THE COURT THE POWER TO CHANGE THE TERMS AND
depend on the cause of the loss. CONDITIONS AGREED UPON BY THE PARTIES. Requirements:
a. If the cause of the loss was due to the fault of the debtor then the obligation is i. The performance of the obligation has become so difficult. This should not
not extinguished 1263 provides that if the thing is lost or destroyed without the be confused with impossible; if the obligation has become impossible to
fault of the debtor, the obligation is extinguished, therefore, if the loss is caused perform then Article 1267 will not apply in fact as a rule the obligation will be
by the debtor the obligations is not extinguished. However, Prof. Tolentino considered extinguished.
opines even if the loss is due to the fault of the debtor, what will be ii. The difficulty to perform must be due to a fortuitous event or beyond the
delivered? None, so here, there is physical impossibility, and therefore the contemplation of the parties.
obligation should be deemed to be extinguished without prejudice to his f. Effect of partial loss. A scenario could be an obligation to deliver a cell phone with
liability to pay damages because the loss is due to his fault. Nonetheless if housing, what if the cell phone was lost but the housing is still available, is the obligation
you want stick with the opinion of Tolentino you can always cite 1262 as the totally extinguished, can the debtor still be compelled to deliver the housing? The answer
basis but this does not seem to be correct. BUT ULTIMATELY IN CASES depends on the intention of the parties as to really what was the principal motivation
DECIDED BY THE SUPREME COURT: As to the thing to be delivered is in entering the transaction. But is it possible that the housing is more valuable than
lost or destroyed, what is the issue that is always mentioned in the case, is the cell phone? Yes it is possible for instance it has diamonds. So if the delivery of the
it “WON the obligation was extinguished?” No, the ISSUE IS WHETHER housing was the intention, apparently the buyer cannot be compelled to accept the cell
THE DEBTOR CAN BE HELD FOR DAMAGES in other words it does not phone.
matter whether the obligation was extinguished or not, what matters is the
debtor liable for the damages caused by the loss of the thing. If the loss was
5. Condonation or Remission of the debt or a.k.a donation of credit – As to the kinds of
due to his fault he is liable for damages, otherwise he cannot be held liable
condonation:
for damages. In fact Sta. Maria also take this position, Sta. Maria will not state
a. Extent of extinguishment whether total or partial: Condonation may be partial.
whether the obligation is extinguished or not, the issue that will be posted is
PARTIAL: the principal amount may not even be reduced and the creditor will only
that whether or not the obligation to deliver a thing is converted to an
condone the interest or the principal amount nor the interest will not be condoned but the
obligation to pay a sum of money. However, if this is your position, you
accessory obligations will be condoned and therefore it will result to partial condonation.
actually take the position that there was extinguishment. If you remember in
b. Whether Condonation is express or implied: if the condonation is EXPRESS you
prescription, prescription is a mode of extinguishing an obligation because it
should consider the rules as to formalities of donation.
converts the civil obligation to natural obligation, there is a change in the
i. BAR QUESTION: The son is indebted to his father 500K, the son paid 300K
obligation therefore there is extinguishment, in the same manner if the
through a check, thereafter the father died, the executor demanded for the
obligation to deliver is converted to a monetary obligation then there is an
payment of the balance 200K, the son claimed that the 200K was condoned by
extinguishment of an obligation.
his father as can be seen from the writing at the back of the check stating that
c. Who has the burden of proving as to the cause of the loss?
the check is for the full payment of the debt, was there extinguishment by
a. The creditor or the one claiming that it was the debtor’s fault who caused the
condonation? U.P. LAW CENTER: the effect of the writing on the check will
loss. Reasonable, because this follows the rule that whoever alleges the fact
depend on who wrote the same, if the son is the one who wrote the writing the
must prove the fact.
obligation was not totally extinguished, if the father was the one who wrote
b. However, in certain circumstances, the creditor or the plaintiff may not have
was there a valid condonation? Yes because this is a form of implied
the burden, because the law provides for a presumption that the cause of the
condonation and therefore the law does not require a particular form nor
loss was due to the debtor, when will this happen? If at the time of the loss the
acceptance is required, Do you agree to this? ATTY URIBE: I do not agree to
thing is in the possession of the debtor. But take note that the presumption
this answer, I agree more to the alternative answer that as can be seen from the
is not an absolute presumption because the debtor can always post a
facts, what could be more express than that? How express can this be? And
defense that even if the thing was in his possession the loss was due to the
therefore if this is an express condonation this has to comply to the
fault of somebody else.
formalities of law as to donation, this is a donation of credit and therefore
c. However, even if a thing is lost while in his possession is it possible that there
under the law, if the credit is more than 5K, the condonation must be in
is no presumption that it was due to his fault? Yes if the loss happened during
writing and that there must be acceptance in writing, so there was a
a calamity or on the occasion of a calamity. Because even if the thing was
condonation in writing, but there was no acceptance in writing, hence,
lost even if in the possession of the debtor but it was during a calamity, more
there was no valid condonation.
often than not, the calamity is the cause of the loss and not the fault of the
ii. IMPLIED CONDONATION, WHEN WILL THIS HAPPEN? If the debt
debtor, therefore the burden again will be shifted to the creditor or plaintiff if
is evidenced by a promissory note, and the promissory note after having
he would claim that the loss was caused by the debtor.
been delivered to the creditor was found in the possession of the debtor
d. We have already discussed that even if the loss was caused during fortuitous event that
was the obligation extinguished? At best there was only a presumption, a
will not necessarily exempt the debtor from liability. That may be the general rule under
presumption that the promissory note was voluntarily returned to the
1174 but there are EXCEPTIONS APPLICABLE TO OBLIGAITONS TO DELIVER A
debtor. If it is voluntarily returned the effect is that the obligation is
DETERMINATE THING: stipulation of the party that the debtor will be liable
extinguished. Then when would the presumption arise that the delivery
whatever may be the cause of the loss, or may be the law provides for liability even if
was a voluntary delivery? It will only arise if the document is a private
the loss was caused by a fortuitous event.
document, but if it is a public instrument, there is no such presumption because
e. Effect of Difficulty of Performance- Occenia v. Jobson when the performance has
a public document has several copies in custody of several people. At any rate,
become so difficult as to be manifestly beyond the contemplation of the parties, the
Amen | Compiled Notes
 the presumption here is only a disputable presumption. But ultimately if it
was voluntarily returned to the debtor, how was the obligation
extinguished? DE LEON: Not by condonation but by payment. Thus, it
was voluntarily returned because there was payment, however, if the
debtor cannot prove that payment, like for instance he does not have a
receipt, maybe he can invoke the presumption of the law that there was a
condonation, but again, the presumption is disputable.
iii. LAST RULE: A debtor of B, a ring was delivered to B as a security,
ordinarily this will be a pledge, now, after the perfection of the pledge, the
thing again was found in the possession of A the debtor, is the obligation of
A to B extinguished? NO! Is there a presumption that this obligation is
extinguished if there is a presumption under the law it will pertain to the
pledge. If the thing to be delivered by way of pledge is thereafter found in the
possession of the debtor there may arise a presumption that it was voluntarily
delivered and therefore the pledge was extinguished. “PRESUMPTION MAY
ARISE” because the presumption may not arise, why? The law requires that
after the perfection of the pledge, the thing must be found in the possession
of the owner of the thing pledged. Is the debtor necessarily the owner of
the thing pledged? No because pledge may be constituted by a third person, so
if it was found in the possession of the debtor, then no presumption will arise,
the presumption of voluntarily returned if thereafter it is found in the
possession of the owner of the thing pledged. Again, this presumption is
disputable presumption, because there are hundred and one reasons why the
debtor would return the thing to the owner, one of the reasons may be for safe
keeping. So again it is a DISPUTABLE PRESUMPTION.
6. CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just imagining
the merger of banks in the past few years. Now, it is common that before the merger, one of the banks
is indebted to the other banks and therefore instead of xxx the creditor may agree to just buy the
debtor bank. Obviously this is by agreement of the parties.
a. Can there be confusion by operation of law? Yes if the creditor for example died and
the only heir is the debtor, of course the heir will inherit the credit, the heir now who
is the debtor will now become the creditor, therefore there will be a meeting in one
person of the character of the debtor and creditor and therefore the obligation will be
extinguished.
b. What if the decedent is the debtor and the heir is the creditor, will the obligation be
extinguished? It seems like it will not be extinguished because the heir will not accept the
obligation. So the creditor will normally demand from the executor payment.
c. Can a guarantor invoke a merger or confusion? YES! But he may invoke merger and
confusion as to the character of debtor and creditor because if the principal obligation is
extinguished then the guaranty will also be extinguished, the guarantors will benefit with
the confusion of the character of the principal debtor and the creditor, but if the confusion
was between the guarantor and the debtor will the principal obligation be extinguished?
NO! What will happen here is that there will no longer be security because the debtor
and the guarantor will be one.
d. CAN THERE BE A PARTIAL EXTINGUISHMENT IN CONFUSION OR
MERGER? YES! By express provision of law, in joint obligations and there was a
confusion pertaining to one of the joint debtors in the person of the creditor, the
extinguishment will only be to the extent of the debt of the joint debtor. This is
different of course if the obligation is solidary, if there is confusion between the
creditor and one of the solidary creditor the obligation is totally extinguished. But
there is NO partial confusion.
1 |1999 (Due) 2 |2005 (Merger) 3 |2009 (Rescission) 4 |2012 (Action
filed for Collection)
e. PROBLEM: In the above illustration, the obligation of A to B was for the amount of 1
Million. In rescission the effect is restitution, the parties will be reverted back to their
status prior to the merger, so as if A owes B 1M, so B files an action today against A to
recover the 1M The defense of the debtor was that the action will no longer prosper
because it has already prescribed. Will the action prosper during 2012 filed by B? YES SC
HELD THAT IT YES IT WILL PROSPER, BECAUSE THE TIME OF THE
MERGER TO THE TIME OF RESCISSION SHOULD NOT BE INCLUDED IN
THE COMPUTATION OF THE PRESCRIPTIVE PERIOD. During those times, the
creditor will not file a case because it will be absurd given that he is also the creditor
of himself. This a very good decision because creditor and the debtor are one at that
time. Therefore only 9 years has lapsed so the action has not yet prescribed.
7. COMPENSATION – By express provision of law, compensation may be total or partial.
a. According to law, with partial compensation may there be two or ten debts
extinguished as partial compensation? Yes, there can be two or 100 debts extinguished
by compensation but it is still partial compensation why? As long as the debts of one are
not equal to the debts of the other the compensation will only be to the concurrent amount
and there will be no total extinguishment.
b. Total extinguishment will only take place when the debts are totally equal for
instance if the debt is 1M and the other is 1M. Scenario:
i. A owes B 100K, but B has several debts to A 20K, 10K, 50K but if you add it
all up it is only 80K, with compensation, all the debts will be totally
extinguished, because the extinguishment is for the concurrent amount, the 80K
will be totally extinguished, but A would still owe B 20K, why is this so
important? This is important as to the liability to pay interest or as to whether
or not there can be valid foreclosure
ii. EXAMPLE: A has obligation to B, B has obligation to A, A’s obligation is
interest bearing, after compensation can B still collect interest can A be held
liable for interest? It will depend on the amount involved, if B’s debt is
smaller may be 50K, A’s debt is 100K, can be collect interest? Not anymore
because the debt will be totally extinguished, the 100K will be reduced by 50K
to the concurrent amount.
iii. On the other hand what if the 100K is secured by a mortgage after
compensation may A foreclose the mortgage? Yes! Because there will still be
a balance of 50K, a mortgage is an indivisible contract, until the obligation is
not extinguished the mortgage will remain in force. And therefore if B failed to
pay A the fifty thousand, A can still foreclose the mortgage.
c. BAR EXAM QUESTION: A opened a savings account with Y bank in the amount of
1M, thereafter A borrowed money from the same bank 800K, then A wanted to withdraw
the 1M, the bank said no you cannot withdraw the 1M because your obligation to pay the
800K is already due we are invoking compensation, you can only withdraw 200K less the
charges, A claimed you cannot do that because under Article 1287 there can be no
compensation when one of the debts arises from a deposit. WHO IS CORRECT? The
bank was correct because a savings account deposit is not a deposit it is a contract of loan,
that is why 1287 (compensation will not be proper if one of the obligations arises from
depositum) will not apply. So if both are simple loan there can be compensation. Article
1287 provides that there can be no compensation when 1 of the obligations is arises from a
deposit, this is known as, as some authors would name it, a facultative compensation.
However, other authors does not see this as independent obligation, this is just treated as a
modification of the other kinds of compensation recognized by law which is a voluntary
or conventional compensation the third one is judicial compensation the first
obviously is legal compensation.
Kinds of Compensation
i. Legal compensation is considered as the true kind of compensation. Hence,
if the examiner does not mention any kind of compensation he is referring to
LEGAL COMPENSATION.
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 ii. Voluntary/ Conventional compensation: the consent of both parties is
required.
1. In facultative: it is only the consent of one of the parties which is
required.
iii. Judicial: this would normally happen when a case is filed for a sum of money
but what would normally happen in cases, the defendant will have
counterclaim, usually the counterclaim is bigger, so in the end the plaintiff
becomes liable on the premise that the claim of plaintiff is valid and was
granted and the court also granted the counterclaim it is compensated up to the
concurrent amount. The obligations which are not yet liquidated at the time of
the filing of the action, they can be liquidated during the proceedings. In
compensation it is also called as set off or counterclaim but it seems that
this word is proper in judicial compensation because counterclaim is
usually used in the court.
d. VOLUNTARY COMPENSATION – this is by agreement of the parties, even if not all of
the requirements for legal compensation are present, it does not matter because the
obligations will be extinguished by agreement of the parties. For example: the debts are
not yet due and they want to compensate, what can we do? The parties already agreed.
Also, probably one of the debts pertain to a carabao and the other to a car, we cannot do
anything about it. In fact in lay man’s term we call this “quits”.
e. FACULTATIVE COMPENSATION it occurs in depositum, commodatum, gratuitous
support, and civil liability arising from crime-
i. This will arise if one of the debts arises from a depositum, in a depositum a
thing is delivered to the depositary for safekeeping, this can happen even also
with a bank. If a person for example would deliver 1M pesos to the bank only
for safekeeping, this will be a DEPOSITUM What if A deposited 1M not as a
savings account but in the safety deposit box, and A borrowed 800K, now if A
would want to withdraw the 1M from the safety deposit box can the bank
invoke compensation? The depositary cannot invoke compensation but the
DEPOSITOR CAN!
ii. Aside from depositum, mentioned COMMODATUM when one of the debts
arises from commodatum. In this obligation the thing has to be returned upon
demand however here, the bailor can invoke consignation but not the bailee.
iii. SUPPORT should be gratuitous support and not contractual support. Why?
Because if this is legal support, a person needs this to survive thus, it cannot be
subject to compensation. But if it is support in arrears compensation may take
place.
iv. CIVIL LIABILITY ARISING FROM CRIME – probably the scenario here
is A is indebted to B 100K when B tried to collect A cannot be so he stabbed A,
so B was held criminally liable, then there was a monetary award, what if the
award to A is 120K, if A demands for 100K from B can B invoke
compensation? NO! The convict cannot invoke compensation but the
aggrieved party can invoke compensation.
f. LEGAL COMPENSATION, THIS IS BY OPERATION BY LAW – From the moment
all the essential requisites are present compensation takes place even without the
knowledge of the parties, even before they invoke compensation.
i. SCENARIO: A owes B due 1992, B owes A due in 1999, possible that it’s
both 1M based on different transaction, A filed an action against B the defense
of B is compensation, however, A may claim that no, you cannot invoke
compensation because your credit has already prescribed since my debt has
become due in 1992. Is A correct? NO!!! In 1999 even without their
knowledge when the debts become due and demandable compensation took
place. REQUIREMENTS OF LEGAL COMPENSATION:
1. THEY MUST BE MUTUAL CREDITORS AND DEBTORS -
but if you have read one case and a few authors would consider this
instead of mutual they would use reciprocal creditors ATTY.
URIBE: I would not encourage you to use reciprocal creditors,
if reciprocal debtors and creditors it will imply reciprocal
obligations, if it is reciprocal obligations then this obligations arose
from the same transactions if this is the case one of the requisites for
legal compensation to take place will never be complied with. Here,
debtors and creditors must be principally bound to each other.
In a case, A is indebted to B secured with a guaranty of G. G paid
to B; hence B is indebted to G. Can B invoke legal compensation? If
the debtor is already in default, G will now be liable; thus, legal
compensation take place.
a. CASE: X as the owner of shares authorize Y to sell
shares of stock, Z bought it from Y, but the latter fail to
remit to X, hence, he was filed Estafa. Y is also liable to
Z. The trial court convicted Y. Z argued that Y is also
liable to him invoking compensation. SC ruled that
even if Y is indebted to Z, Z is not indebted to Y, the
latter being an agent to X. Hence, parties are not
mutually indebted to each other.
b. CASE: Francia vs. IAC, was there legal compensation?
NONE because in the case Francia was indebted to the
city government of pasay because of the expropriation of
the former’s property xxx however, Francia was
invoking legal compensation because he was the creditor
of an expropriation proceedings, it just so happen that
the city government did not expropriate his property the
national government did. Since the requirement no. 1 is
not present there is no legal compensation.
c. CASE: PNB v. ACERO: PNB was debtor of Isabela,
this is simple loan, so PNB owed Isabela, however
ACERO was the judgment debtor of Isabela who wants
to have the savings of Isabela garnished, however PNB
claimed that they invoked compensation because Isabela
was also their debtor, who is correct? No claim is
correct, although PNB is the debtor of Isabela, there was
no proof that Isabela is the debtor of PNB.
2. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY
PERTAIN TO GOODS THEY MUST BE OF THE SAME
KIND AND QUALITY – in other words may the obligations be
both in sums of money if they are reciprocal obligations? It cannot
happen. In reciprocal obligations there are different prestations
one is delivery and the other monetary, it can never be both
sums of money. Reading several cases it might appear that this
compensation may occur only when the obligation arises from
contracts, is this correct, will there be legal compensation only if
the debt in money arose from contract? NOT TRUE! Even if the
obligation arose from other sources there can be compensation.
a. In fact if you read the CASES: Mindanao Portland xxx
in these two cases the amounts which are the subject of
compensation were attorney’s fees, these fees did not
arise from contract. Mindanao Portland is unlikely,
company A filed a case against company B, one of them
won and the court awarded attorney’s fees, in another
case the other company won and attorney’s fees were
also awarded, so the award is of the same amount, the
obligation is of the same nature, COMPENSATION
TOOK PLACE. Ultimately the QUESTION HERE
IS: Does it mean that all monetary obligations may be
the subject of legal compensation? No! If you have
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 read the case of Francia v. IAC certain monetary the mortgage the SC HELD: there can be no legal
obligations cannot be subject of legal compensation like compensation because one of the claims is still being
payment of taxes, customs duties, tariff etc. litigated.
3. BOTH PARTIES MUST BE PRINCIPALLY BOUND – 7. ONE OF THE DEBTS MUST NOT ARISE FROM Article 1287
Principally bound because in a scenario where A is indebted to B AND Article 1288 because in such cases legal compensation will
and this obligation is secured by a guarantor G on the other hand B not take place since in depositum the depositor or the bailor must
is the debtor of G in this obligation, if G demands payment from G, invoke legal compensation.
Can he claim that G is also indebted to him because he is a
guarantor in B’s obligation to A? In its face NO, because the
guarantor is not principally bound but take note the moment A
X is indebted to Y for 1 Million--------- Y assigned this credit to Z- (May 1, 2012)-------- Z
defaults and his properties are already exhausted, the demanded payment from X
GUARANTOR WILL NOW BE LIABLE TO B AND FROM
THEN ON COMPENSATION WILL TAKE PLACE. Y is also indebted to X
4. THEY MUST BE CREDITORS AND DEBTORS OF EACH
OTHER IN THEIR OWN RIGHT: SYCIP v. CA: the owner of 1. 50K (Due on March 1, 2012)
the shares of stocks authorized Lapuz to sell the shares of stock, 2. 20K (Due on May 15, 2012)
lapuz on then authorized Sycip to sell the shares of stock, the latter 3. 10K (Due on July 31, 2012)
was able to sell the shares of stock (5K), however, despite the
June 30, 2012------- Z demanded payment from X
demand to Sycip to remit the proceeds of the sale he refused to do
so. A complaint for estafa was filed against Sycip, he was convicted
in the lower court, on appeal Sycip claimed that Lapuz owed him g. EFFECT OF ASSIGNMENT OF A CREDIT AS TO THE RIGHT TO INVOKE
(5K) so compensation took place, therefore he cannot be liable for COMPENSATION –
estafa, is Sycip’s contention correct? NO, even assuming that i. Can X validly claim compensation for these 3 debts?
Lapuz is indebted to Sycip, the latter is really not indebted to 1. X cannot be compelled to pay Z if the obligation has not yet due and
Lapuz in his own right. The real creditor of Lapuz is the buyer demandable. If the assignment was made before debts became due,
of the shares. and you demand on that date, the person to whom payment should
5. BOTH DEBTS MUST ALREADY BE DUE AND be made cannot yet be compelled.
DEMANDABLE – The MOST COMMON MISTAKE WHEN 2. Hence, the first thing to look at is the DATE OF ASSIGNMENT!
ASKED WHY IS THERE NO LEGAL COMPENSATION IS 3. To answer the question raised above, the first factor you have to
BECAUSE THE OBLIGAITON HAS NOT YET BECOME DUE consider: WHETHER THE ASSIGNMENT WAS WITH THE
AT THE SAME TIME. REMEMBER: The requirement of the KNOWLEDGE OF X OR WITHOUT KNOWLEDGE:
law is that both debts are due and it is not required that the a. IF WITH KNOWLEDGE, YOU HAVE TO
debts are due at the same time. But if one debt became due 3 DETERMINE WHETHER OR NOT THERE WAS
years ago and the other debt became due today, compensation will CONSENT TO THE ASSIGMENT OR NONE:
only take place today, but there can be compensation. ANOTHER i. IF CONSENT IS GIVEN, YOU HAVE TO
COMMON MISTAKE: EXAMPLE: A borrowed money, the other DETERMINE WHETHER OR NOT HE
one bought on credit, so they are debtors and creditors of each MADE A RESERVATION OR NO
other, however, they say that there can be no legal compensation RESERVATION:
because the obligations do not pertain to sums of money, one is 1. (so the scenario here is Y and Z
money the other one car. HERE THE OBLIGATION OF THE advised X that Y is assigning the
BUYER IS TO PAY THE PRICE SO IT IS ALSO MONETARY credit to Z, X consented but he
LEGAL COMPENSATION WILL TAKE PLACE. reserved his right to invoke
6. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE compensation) IF X
– In other words there should be no claim by a third person over this RESERVED, HOW MUCH
right or credit, because if the claim is subject of legal proceeding, CAN Z COLLECT FROM X?
there can be no legal compensation. ONLY 50K BECAUSE AS OF
a. Example: International Corporate Bank v. IAC: THE DATE OF THE
Fajardo borrowed money from ICB 50M the bank ASSIGNMENT WHICH WAS
released only 20M to secure this obligation, Fajardo WITH THE KNOWLEDGE OF
mortgaged properties amounting to 110M, thereafter she X, THE DEBT IN March 1 IS
also delivered 1M to the bank for money market ALREADY DUE, AS TO DEBTS
investment, so just like any other investments it matured, OWING TO Y WHICH ARE
so she demanded for the return of the 1M, the bank ALREADY DUE, HE CAN
claimed that she has nothing to recover from the bank INVOKE COMPENSATION OR
because as to her loan which she failed to pay, when the AT LEAST RESERVE
foreclosed the mortgage she still has deficiency of 6M, COMPENSAITON BECAUSE
so compensation took place, however Fajardo questioned COMPENSATION WILL TAKE
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 PLACE ONLY June 30, SO AS b. In the scenario above, X demanded from A, is A bound
TO 20K AND 10K B CANNOT to reimburse X? Yes, insofar as A has been benefited
INVOKE COMPENSATION, AT under Article 1236. If A fails to reimburse, can X run
THE TIME OF ASSIGNMENT after the guarantor, if any? And if B demanded payment
June 30, THE CREDITS ARE from X, since X offered to pay him, but later on X
NOT YET DUE TO HIM. became insolvent, can he recover from A? You have to
2. NO RESERVATION HOW qualify if this is a case of EXPROMISSION OR
MUCH CAN Z DEMAND DELEGACION.
FROM X? 100K BECAUSE BY i. Expromission- if there is substitution of
AGREEING WITHOUT debtor without or against the original debtor’s
RESERVATION HE WAIVED will. If it is this kind, X cannot run after the
HIS RIGHT TO guarantor because it is not subrogated in the
COMPENSATION, Z’S rights of B. Here, if payment to B was with
REMEDY HERE IS TO consent of A, X is subrogated in the rights of
DEMAND THE PAYMENT OF B, hence, Article 1302 applies. In case of
THE DEBTS FROM X. insolvency, A here will never be liable
b. WITHOUT KNOWLEDGE: Z demanded from X in because the substitution was without his
June 30, how much can X be compelled to pay? Only consent.
10K because he can invoke compensation to those debts ii. Delegacion- the original debtor gave consent.
which became due if the assignment is without his If in this kind, X can run after the guarantor.
knowledge, 70K. B cannot demand from A because the
obligation has already been extinguished by
8. NOVATION- it is a peculiar mode of extinguishment because it creates an obligation. This is novation. However, if A is in bad faith, HE
somewhat the same as that of prescription, which the latter can extinguish civil obligations but can be CAN BE HELD LIABLE TO B. If
converted into natural obligation. insolvent after substitution, there is NO BAD
a. What is the relevance of determining whether there is novation or not? Because if there FAITH. And if A and B are aware of the
will be novation, it consequently required a new set of requirements to be complied with insolvency of X but still allows
since a new obligation arises. substitution, B cannot held A liable because
b. Will change of person amounts to novation? No, say in a case wherein A executed a PN both are in BAD FAITH.
dated 1996 to secure payment of loan to B. In 2001, A died. Heirs of A filed in 2007. The ii. Objective Novation/real- pertaining to subject-matter.
defense of A is prescription since it already lapsed as far as time is concerned. B argued 1. Change in the object- easiest kind
that there is novation. There is NO novation here. Hence, not all change of person a. In a case wherein A is the lessee and B is the lessor,
leads to novation since here the same obligation, hence, prescriptive period was not when A surreptitiously left the premises, he left along
tolled. with him the arrears in payment of telephone bills. Then,
c. In a case wherein A had a contract with B which was voidable, B thereafter assigned his the telephone company sued B for the unpaid bills. The
right to C. Can A invoke vitiation of consent? No, because there was the creation of new latter however argued that it should be A who will be
obligation between B and C, hence A cannot raise the defense he had against B. But if the held liable. Whether or not there is substitution in the
assignment was done without knowledge of A, can A invoke vitiation against C? Yes, person of debtor here? No, because substitution was
because this involved the same obligation; hence, A can raise his defense against C. without the consent of the creditor.
d. In Fua case, these are subjected to agreement of parties, (1) Reduction of amount, (2) b. The case of Japan Airlines.
Payment in installment; (3) Secured with Real Estate Mortgage; (4) With order of payment 2. Change in the principal conditions- most difficult.
of attorney’s fees. But despite those agreement, debtor still failed to pay. Hence, the a. There is no hard and fast rule. In Fua case which was
creditor continued with execution sale. Debtor questioned the execution sale arguing that followed by a recent case in Millare vs. CA, the SC
there WAS NOVATION. Hence, if there was, the sheriff must comply anew with the found that there was no NOVATION, by reason set forth.
requirements, because such will give rise to a new obligation. SC ruled that there was iii. Mixed- combination of the above two.
indeed novation. The Dissenting opinion of this case made classification of Novation e. If the original obligation is void, parties had an agreement which was also void, what
as follows: will be the result? THERE IS NO NOVATION because there is nothing to extinguish. Can
i. Subjective Novation/personal- pertaining to parties. new agreement be enforced? No, because the consideration is void.
1. Active subjective- Subrogation in the rights of creditor f. If original obligation is void, and new agreement valid, will there be novation? No.
a. The change of creditor may not necessarily extinguish
the obligation because third person might subrogate.
When? It could be express, that is with an agreement, or
implied under Article 1302, as an operation of a right.
2. Passive subjective- Substitution of the person of the debtor
a. In a scenario, A is indebted to B, X offers to pay B. Will
X subrogate in the rights of B? Not yet, because B did
not accept such offer.
Amen | Compiled Notes