Obli

OBLIGATIONS and CONTRACTS
St. Thomas More

Midterm Exam
Case Doctrines
ARTICLE. 1226-PENAL CLAUSE
LIGUTAN VS CA
*A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the obligation
and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would
then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of
damages caused by the breach.
*a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable
or if the principal obligation has been partly or irregularly
complied with.
*The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the
sound discretion of the court.
PRYCE CORP. VS PAGCOR
*In obligations with a penal clause, the general rule is that
the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
contrary, in which case proof of actual damages is not
necessary for the penalty to be demanded.
*There are exceptions to the aforementioned rule,
however, as enumerated in paragraph 1 of Article 1226 of
the Civil Code:
1) when there is a stipulation to the contrary,
2) when the obligor is sued for refusal to pay the agreed
penalty, and
3) when the obligor is guilty of fraud.
*In these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. --Hence, the obligee can
recover from the former not only the penalty, but also
other damages resulting from the nonfulfillment of the
principal obligation.
*In the present case, the first exception applies because
Article XX (c) provides that, aside from the payment of the
rentals corresponding to the remaining term of the lease,
the lessee shall also be liable "for any and all damages,
actual or consequential, resulting from such default and
termination of this contract." Having entered into the
Contract voluntarily and with full knowledge of its
provisions, PAGCOR must be held bound to its obligations.
It cannot evade further liability for liquidated damages.
RCBC VS CA
FRANKLIN L. FLORES
-852-
The Fraternal Order of

Ateneo de Davao Univeristy
COLLEGE OF LAW
*Court is constrained to rule in favor of RCBC, who, in good
faith, relied upon the endorsement documents sent to it as
this was pursuant to the stipulation in the mortgage
contracts.
*Regarding the payment of additional interest, penalties,
and charges, the Court ruled that the essence for the
payment of interest is separate & distinct from that of
surcharges & penalties. What may justify a court in not
allowing the creditor to charge surcharges & penalties
despite express stipulation may not equally justify nonpayment of interest. The charging of interest for loans
forms a very essential & fundamental element of the
banking business. It is inconceivable for a bank to grant
loans for which it will not charge any interest at all.
*There being written stipulations as to the rate of interest
owing on each specific promissory note, such agreed
interest rates must be followed.
*Surcharges & penalties agreed to be paid by the debtor
shall be determined by the Court whether such would be
iniquitous & unconscionable. Given the circumstances
under which GOYU found itself after the occurrence of the
fire, the Court rules the surcharge rate ranging from 9%27% plus penalty of 36% to be iniquitous &
unconscionable. In light of GOYUs offer to pay the amount
to RCBC, which RCBC refused, the Court finds it more in
keeping with justice & equity for RCBC not to charge
additional interest, surcharges & penalties.
AGNER VS BPI
*Replevin; Prior demand is not a condition precedent to
an action for a writ of replevin, since there is nothing in
Section 2, Rule 60 of the Rules of Court that requires the
applicant to make a demand on the possessor of the
property before an action for a writ of replevin could be
filed.A provision on waiver of notice or demand has been
recognized as legal and valid in Bank of the Philippine
Islands v. Court of Appeals, 490 SCRA 168 (2006), wherein
We held: The Civil Code in Article 1169 provides that one
incurs in delay or is in default from the time the obligor
demands the fulfillment of the obligation from the obligee.
However, the law expressly provides that demand is not
necessary under certain circumstances, and one of these
circumstances is when the parties expressly waive
demand. Hence, since the co-signors expressly waived
demand in the promissory notes, demand was
unnecessary for them to be in default. Further, the Court
even ruled in Navarro v. Escobido, 606 SCRA 1 (2009), that
prior demand is not a condition precedent to an action for
a writ of replevin, since there is nothing in Section 2, Rule
60 of the Rules of Court that requires the applicant to
make a demand on the possessor of the property before
an action for a writ of replevin could be filed.
* Settled is the principle which this Court has affirmed in a
number of cases that stipulated interest rates of three
percent (3%) per month and higher are excessive,
iniquitous, unconscionable, and exorbitant. While Central
Bank Circular No. 905-82, which took effect on January 1,
1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity,
nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise
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St. Thomas More
Midterm Exam
Case Doctrines
interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets. Since
the stipulation on the interest rate is void for being
contrary to morals, if not against the law, it is as if there
was no express contract on said interest rate; thus, the
interest rate may be reduced as reason and equity
demand.
MULTI-INTL BUS VS MARTINEZ
* Payment; Burden of Proof; The debtor has the burden of
showing with legal certainty that the obligation has been
discharged by payment.It is established that the one
who pleads payment has the burden of proving it. Even
where the creditor alleges nonpayment, the general rule is
that the debtor has the burden to prove payment, rather
than the creditor. The debtor has the burden of showing
with legal certainty that the obligation has been
discharged by payment. Where the debtor introduces
some evidence of payment, the burden of going forward
with the evidence as distinct from the general burden
of proof shifts to the creditor, who is then under a duty
of producing some evidence to show nonpayment.

COLLEGE OF LAW
escape its monetary obligation under its performance
bond.
*Although the contract of surety is in essence secondary
only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct,
primary and absolutehe is directly and equally bound
with the principal.As a surety, petitioner is solidarily
liable with Santos in accordance with the Civil Code, which
provides as follows: Art. 2047. By guaranty a person,
called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter
should fail to do so. If a person binds himself solidarily
with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such
case the contract is called a suretyship. x xxxxxxxx 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.
TO WHOM PAYMENT SHALL BE MADE
* The fact of payment may be established not only by

documentary evidence but also by parol evidence.
Although not exclusive, a receipt of payment is the best
evidence of the fact of payment. We held that the fact of
payment may be established not only by documentary
evidence but also by parol evidence. Except for
respondents bare allegations that he has fully paid the
P648,288.00 car loan, there is nothing in the records
which shows that full payment has indeed been made.
Respondent did not present any receipt other than
the certification dated September 10, 1996 which
only proves that respondent has already paid
P337,650.00 of the car loan. A balance of
P310,638.00 still remained.
PNB VS CA
*Debts; 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.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.
EFFECT OF DEATH
STRONGHOLD INS. VS REP. ASAHI
* Death of a PartyAs 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.
Section 5 of Rule 86 of the Rules of Court expressly allows
the prosecution of money claims arising from a contract
against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished. What is extinguished
is only the obligees action or suit filed before the court,
which is not then acting as a probate court.
*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
FRANKLIN L. FLORES
-852-
*Evidence; Burden of Proof.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.
*Agency; Where payment has been made to an agent,
aside from proving the existence of a Special Power of
Attorney, it is also necessary for evidence to be presented
regarding the nature and extent of the alleged powers and
authority granted to the agent.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.
*Best Evidence Rule; Only the original document is
the best evidence of the fact as to whether the
creditor authorized a third person to receive the
check from the debtor, and in the absence of such
document, the debtors arguments regarding due
payment must fail.Considering that the contents of
the SPA are also in issue here, the best evidence rule
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St. Thomas More
Midterm Exam
Case Doctrines
applies. Hence, only the original document (which has not
been presented at all) is the best evidence of the fact as
to whether or not private respondent indeed authorized
Sonia Gonzaga to receive the check from petitioner. In the
absence of such document, petitioners arguments
regarding due payment must fail.
CULABA VS CA
*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 clad in an SMC uniform and drove an
SMC van. He appeared to be authorized to accept
payments as he showed a list of custom-ers
accountabilities and even 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 the private respondent.
* The basis of agency is representation. A person dealing
with an agent is put upon 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 of 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.

COLLEGE OF LAW
creditor.As to the liability of the parties, we find that
Allied is liable to Lim Sio Wan.
*A money market is a market dealing in standardized
short-term 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
marketin a money market transaction, the investor is a
lender who loans his money to a borrower through a
middleman or dealer; The creditor of the bank for her
money market placement is entitled to payment upon her
request, or upon the maturity of the placement, or until
the bank is released from its obligation as debtor. 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.
* 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.
*Negligence is the omission to do something which a

reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do,
or the doing of something, which a prudent and
reasonable man would not do. In the case at bar, the most
prudent thing the petitioners should have done was to
ascertain the identity and authority of the person who
collected their payments. Failing this, the petitioners
cannot claim that they acted in good faith when they
made such payments. Their claim therefor is negated by
their negligence, and they are bound by its consequences.
Being negligent in this regard, the petitioners cannot seek
relief on the basis of a supposed agency.
* In the instant case, the trial court correctly found Allied

negligent in issuing the managers check and in
transmitting it to Santos without even a written
authorization. In fact, Allied did not even ask for the
certificate evidencing the money market placement or call
up Lim Sio Wan at her residence or office to confirm her
instructions. Both actions could have prevented the whole
fraudulent transaction from unfolding. Allieds negligence
must be considered as the proximate cause of the
resulting loss. To reiterate, had Allied exercised the
diligence due from a financial institution, the check would
not have been issued and no loss of funds would have
resulted. In fact, there would have been no issuance of
indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent with that of
Metrobank as the last indorser of the check. When
Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations without verifying the
authenticity of Lim Sio Wans indorsement and when it
accepted the check despite the fact that it was crosschecked payable to payees account only, its negligent
and cavalier indorsement contributed to the easier release
of Lim SioWans money and perpetuation of the fraud.
Given the relative participation of Allied and Metrobank to
the instant case, both banks cannot be adjudged as
equally liable. Hence, the 60:40 ratio of the liabilities of
Allied and Metrobank, as ruled by the CA, must be upheld.
ALLIED BANKING VS LIM SIO WAN
DELA CRUZ VS. CONCEPCION
* Fundamental and familiar is the doctrine that the

relationship between a bank and a client is one of debtor-
* On March 25, 1996, petitioners entered into a Contract

to Sell with respondent involving a house and lot in
Antipolo City for a 2 million consideration.
FRANKLIN L. FLORES
-852-
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St. Thomas More
Midterm Exam
Case Doctrines
Respondent made the following payments, to wit:
(1) 500,000 by way of downpayment;
(2) 500,000 on May 30, 1996;
(3) 500,000 paid on January 22, 1997; and
(4) 500,000 bounced check dated June 30, 1997 which
was replaced.
Thus, Respondent was able to pay the 2 million total
obligation.
Before respondent issued the 500,000 replacement check,
she told petitioners that based on the computation of her
accountant as of July 6, 1997, her unpaid obligation which
includes interests and penalties was only 200,000.
Petitioners agreed with respondent. Despite repeated
demands, petitioners failed to collect the amounts they
claimed. Hence, the complaint for sum of money with
damages filed with the RTC of Antipolo Rizal. In her answer
with Compulsory counterclaim and during the presentation
of evidence, respondent presented a receipt purportedly
indicating payment of the remaining balance of 200,000 to
Losloso who allegedly received the same on behalf of
petitioners.
On March 8, 2014, the RTC rendered a decision in favor of
respondent. On appeal, the CA affirmed the decision with
modification by deleting the award of moral damages and
attorney's fees in favor of respondent. Aggrieved,
petitioners come before the Court in this petition for
review on certiorari under Rule 45.

COLLEGE OF LAW
himself or to an agent having authority, express or
implied, to receive the particular payment. Payment made
to one having apparent authority to receive the money
will, as a rule, be treated as though actual authority had
been given for its receipt. Likewise, if payment is made to
one who by law is authorized to act for the creditor, it will
work a discharge. The receipt of money due on a
judgment by an officer authorized by law to accept it will,
therefore, satisfy the debt.
Admittedly, payment of the remaining balance of
P200,000.00 was not made to the creditors themselves.
Rather, it was allegedly made to a certain Losloso.
Respondent claims that Losloso was the authorized agent
of petitioners, but the latter dispute it.
*Loslosos authority to receive payment was embodied in
petitioners Letter addressed to respondent, dated August
7, 1997, where they informed respondent of the amounts
they advanced for the payment of the 1997 real estate
taxes. In said letter, petitioners reminded respondent of
her remaining balance, together with the amount of taxes
paid. Taking into consideration the busy schedule of
respondent, petitioners advised the latter to leave the
payment to a certain "Dori" who admittedly is Losloso, or
to her trusted helper. This is an express authority given to
Losloso to receive payment.
Moreover, as correctly held by the CA:
*Respondents obligation consists of payment of a sum of

money. In order to extinguish said obligation, payment
should be made to the proper person as set forth in Article
1240 of the Civil Code, to wit:
Article 1240. 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. (Emphasis supplied)
Furthermore, that Adoracion Losloso was indeed an agent

of the appellant spouses is borne out by the following
admissions of plaintiff-appellant Atty. Miniano dela Cruz, to
wit:
Q: You would agree with me that you have authorized this
Doiry Losloso to receive payment of whatever balance is
due you coming from Ana Marie Concepcion, that is
correct?
A: In one or two times but not total authority, sir.
The Court explained in Cambroon v. City of Butuan, cited

in Republic v. De Guzman,to whom payment should be
made in order to extinguish an obligation:
Payment made by the debtor to the person of the creditor
or to one authorized by him or by the law to receive it
extinguishes the obligation. When payment is made to the
wrong party, however, the obligation is not extinguished
as to the creditor who is without fault or negligence even if
the debtor acted in utmost good faith and by mistake as to
the person of the creditor or through error induced by
fraud of a third person.
*In general, a payment in order to be effective to

discharge an obligation, must be made to the proper
person. Thus, payment must be made to the obligee
FRANKLIN L. FLORES
-852-
Q: Yes, but you have authorized her to receive payment?

A: One or two times, yes x x x. (TSN, June 28, 1999, pp.
16-17)
Thus, as shown in the receipt signed by petitioners agent
and pursuant to the authority granted by petitioners to
Losloso, payment made to the latter is deemed payment
to petitioners. We find no reason to depart from the RTC
and the CA conclusion that payment had already been
made and that it extinguished respondent's obligations.
WHEREFORE, premises considered, the petition is DENIED
for lack of merit.
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St. Thomas More
Midterm Exam
Case Doctrines
ARTICLE 1242 PAYMENT MADE IN GOOD FAITH
NATL. POWER CORP. VS IBRAHIM
* Bad Faith-A finding of bad faith usually assumes the

presence of two
(2) elements:
1.)
that the actor knew or should have known that a
particular course of action is wrong or illegal.
2.)
that despite such actual or imputable knowledge,
the actor, voluntarily, consciously and out of his own free
will, proceeds with such course of action.
Verily, the clear denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists
in the deliberate commission of a wrong.
Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from
the mere unintentional wrongs resulting from mere simple
negligence or oversight.
*Only with the concurrence of these two elements can we
begin to consider that the wrong committed had been
done deliberately and, thus, in bad faith.
POSSESSOR OF CREDIT
- The law considers the payment to the possessor of
credit as valid even as against the real creditor taking
into account the good faith of the debtor.Should the
Ibrahims and Maruhoms turn out to be the real owners of
the subject land, petitioners previous payment to
Mangondato pursuant to Civil Case No. 605-92 and Civil
Case No. 610-92
given the absence of bad faith on petitioners part as
previously discussed may nonetheless be considered as
akin to a payment made in good faith to a person in
possession of credit per Article 1242 of the Civil Code
that, just the same, extinguishes its obligation to pay for
the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
Payment made in good faith to any person in possession
of the credit shall release the debtor.
*It contemplates a situation where a debtor pays a:
possessor of credit i.e.,- someone who is not the
real creditor but appears, under the circumstances,
to be the real creditor.
In such scenario, the law considers the payment to the
possessor of credit - valid even as against the real
creditor taking into account the good faith of the debtor.
ARTICLE 1245 DATION IN PAYMEN
ESTANISLAO VS EASTWEST BANKING
* Dation in Payment; In a deed of assignment in the nature
of a dation in payment, property is alienated to the
creditor in satisfaction of a debt in money; Consent to
contracts is manifested by the meeting of the offer and
the acceptance of the thing and the cause which are to
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
constitute the contractupon due acceptance, the
contract is perfected, and from that moment the parties
are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences of
the same.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. Consent
to contracts is manifested by the meeting of the offer and
the acceptance of the thing and the cause which are to
constitute the contract; the offer must be certain and the
acceptance absolute. The acceptance of an offer must be
made known to the offeror, and unless the offeror knows
of the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance. Upon
due acceptance, the contract is perfected, and from that
moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law.
* Since there is no more credit to collect, no principal
obligation to speak of, then there is no more second deed
of chattel mortgage that may subsist. 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
*Pactum
Commissorium; Court finds that the
Memorandum of Agreement and Dation in Payment
constitute pactum commissorium, which is prohibited
under Article 2088 of the Civil Code. 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.
*Elements of Pactum Commissorium.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.
* Dation In Payment; Dacion En Pago; In a true dacion
en pago, the assignment of the property extinguishes the
monetary debt.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
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Case Doctrines

COLLEGE OF LAW
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 the Dacion in
Payment, petitioners had to execute a promissory note for
P5,916,117.50 which they were to pay within one year.
* The questioned contracts were freely and voluntarily
executed by petitioners and respondent is of no moment,
pactum commissorium being void for being prohibited by
law.Respondent cites Solid Homes, Inc. v. Court of
Appeals, 271 SCRA 157 (1997), where this Court upheld a
Memorandum of Agreement/Dacion en Pago. That case did
not involve the issue of pactumcommissorium. That the
questioned contracts were freely and voluntarily executed
by petitioners and respondent is of no moment, pactum
commissorium being void for being prohibited by law.
Guillermos copra deliveries amounted to P378,952.43.

With this partial payment, respondent remains liable for
the balance totaling P1,047.57.
TAN SHUY VS MAULAWIN
*As a dation in payment, the assignment of credit

operates as a mode of extinguishing the obligation; the
delivery and transmission of ownership of a thing (in this
case, the credit due from a third person) by the debtor to
the creditor is accepted as the equivalent of the
performance of the obligation.
*Dation in Payment; There is dation in payment when

property is alienated to the creditor in satisfaction of a
debt in money; 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 agreementexpress or implied, or
by their silenceconsider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.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 of the Civil
Code provides for a special mode of payment called dation
in payment (dacin en pago). There is dation in payment
when property is alienated to the creditor in satisfaction of
a debt in money. Here, the debtor delivers 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
partakesin one senseof 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 agreementexpress or implied, or
by their silenceconsider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.
* Dation in payment exists when 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.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. We therefore uphold the findings of the trial court,
as affirmed by the CA, that the net proceeds from
FRANKLIN L. FLORES
-852-
SERFINO VS FAR EAST BANK

*An assignment of credit 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. It may be in the form of sale, but at times it
may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt,
assigns to his creditor a credit he has against a
third person."
*The terms of the compromise judgment, however, did not

convey an intent to equate the assignment of Magdalenas
retirement benefits (the credit) as the equivalent of the
payment of the debt due the spouses Serfino (the
obligation). There was actually no assignment of credit; if
at all, the compromise judgment merely identified the
fund from which payment for the judgment debt would be
sourced.
*In the present case, the judgment debt was not
extinguished by the mere designation in the compromise
judgment of Magdalenas retirement benefits as the fund
from which payment shall be sourced. That the
compromise agreement authorizes recourse in case of
default on other executable properties of the spouses
Cortez, to satisfy the judgment debt, further supports our
conclusion that there was no assignment of Magdalenas
credit with the GSIS that would have extinguished the
obligation.
The compromise judgment in this case also did not give
the supposed assignees, the spouses Serfino, the power to
enforce Magdalenas credit against the GSIS. In fact, the
spouses Serfino are prohibited from enforcing their claim
until after the lapse of one (1) week from Magdalenas
receipt of her retirement benefits
*Since no valid assignment of credit took place, the
spouses Serfino cannot validly claim ownership of the
retirement benefits that were deposited with FEBTC.
Without ownership rights over the amount, they suffered
no pecuniary loss that has to be compensated by actual
damages. The grant of actual damages presupposes that
the claimant suffered a duly proven pecuniary loss.
PEN VS JULIAN
*Court adopted CAs conclusion that the Deed of Sale is a
prohibited pactum commissorium.
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St. Thomas More
Midterm Exam
Case Doctrines
Elements of PACTUM COMMISSORIUM:
1- There must be a thing pledged/mortgaged by way
of security for the payment of the prin. Obli.
This element is present in this case when
respondents mortgaged their property in favour
of Pen.
2-
There should be stipulation of the automatic

appropriation of the creditor of the thing
pledged/mortgaged in the event of non-payment
of the principal obli.
The authorization of Adelaide to appropriate the
property was implied through Lindas act of
signing the blank document.
Art. 2088 of CC prohibits creditor from

appropriating the thing pledge or mortgage.
The eventual transfer of the property in a manner
not in a valid dacion en pago confirmed the
nature
of
the
transaction
as
pactumcommissorium.
Elements of Dacion en pago:
1- There is a money obligation
2- The alienation of the creditor to the
property of the debtor with consent
3- The satisfaction of the money obligation
Therefore, in order for a valid dacion to transpire, the
alienation of the property should fully extinguish the
debt of the debtor. In the case at bar, the debt of the
respondents subsisted despite the transfer of the property
in favour of Adelaida. In light of this, the deed of sale was
void. Petitioners are ordered to reconvey the title of the
property to defendants.
ARTICLE 1250 EXTRAORDINARY

INFALTION/DEFLATION
EQUITABLE PCI VS NG SHEUNG NGOR
*Extraordinary Inflation or Deflation; Words and Phrases;
Extraordinary
Inflation
and
Extraordinary
Deflation, Defined.Extraordinary inflation exists when
there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the
value 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 an
inverse situation.
*Requisites; Despite the devaluation of the peso, the
BangkoSentralngPilipinas (BSP) never declared a situation
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COLLEGE OF LAW
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).
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 BangkoSentralngPilipinas
(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 a such stipulation either in the
promissory
note
or
loan
agreement.
Therefore,
respondents should pay their dollar-denominated loans at
the exchange rate fixed by the BSP on the date of
maturity.
ALMEDA v. BATHALA MARKETING
*Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, 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.
Inflation has been defined as the sharp increase of money
or credit, or both, without a corresponding increase in
business transaction. There is inflation when there is an
increase in the volume of money and credit relative to
available goods, resulting in a substantial and continuing
rise in the general price level. In a number of cases, this
Court had provided a discourse on what constitutes
extraordinary inflation, thus:
*[E]xtraordinary inflation exists when there is a
decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and
such increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation of
the parties at the time of the establishment of the
obligation.
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. We would like to stress that
the erosion of the value of the Philippine 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
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Midterm Exam
Case Doctrines
PREMIERE DEVT. BANK VS CENTRAL SURETY
* The debtors right to apply payment is not mandatory.
This is clear from the use of the word may rather than
the word shall in the provision which reads: 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 the same must be applied. Indeed,
the debtors right to apply payment has been considered
merely directory, and not mandatory, following this
Courts earlier pronouncement that the ordinary
acceptation of the terms may and shall may be resorted
to as guides in ascertaining the mandatory or directory
character of statutory provisions.
* 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 apply payments when
the debtor does not elect to do so that make this right, like
any other right, waivable. Rights may be waived, unless
the waiver is contrary to law, public order, public policy,
morals or good customs, or prejudicial to a third person
with a right recognized by law.
*If neither party has exercised its option, to apply the
payment, the court will apply the payment according to
the justice and equity of the case, taking into
consideration all its circumstances.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.
NOTE:
Even without this Courts prescription in Prudential, the
release of the WackWack Membership as the pledged
security for Promissory Note 714-Y cannot yet be done as
sought by Central Surety. The chain of contracts concluded
between Premiere Bank and Central Surety reveals that
the WackWack Membership, which stood as security for
Promissory Note 714-Y, and which also stands as security
for subsequent debts of Central Surety, is a security in the
form of a pledge. Its return to Central Surety upon the
pretext that Central Surety is entitled to pay only the
obligation in Promissory Note No. 714-Y, will result in the
extinguishment of the pledge, even with respect to the
subsequent obligations, because Article 2110 of the Civil
Code provides: (I)f the thing pledged is returned by the
pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary is void. This is contrary to the
express agreement of the parties, something which
Central Surety wants this Court to undo. We reiterate that,
as a rule, courts cannot intervene to save parties from
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COLLEGE OF LAW
disadvantageous provisions of their contracts if they
consented to the same freely and voluntarily.
YULIM VS INTL. BANK
* The assignment being in its essence a mortgage, it was
but a security and not a satisfaction of the petitioners
indebtedness.To stress, the assignment being in its
essence a mortgage, it was but a security and not a
satisfaction ofthe petitioners indebtedness. Article 1255
of the Civil Code invoked by the petitioners contemplates
the existence of two or more creditors and involves the
assignment of the entire debtors property, not a dacion
en pago. Under Article 1245 of the Civil Code, [d]ation in
payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the
law on sales. Nowhere in the Deed of Assignment can it
be remotely said that a sale of the condominium unit was
contemplated by the parties, the consideration for which
would consist of the amount of outstanding loan due to
iBank from the petitioners.
*Novation must be clearly proved since its existence is not
presumed. In this light, novation is never presumed; it
must be proven as a fact either by express stipulation of
the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or
contracts. Novation takes place only if the parties
expressly so provide, otherwise, the original contract
remains in force. In other words, the parties to a contract
must expressly agree that they are abrogating their old
contract in favor of a new one. Where there is no clear
agreement to create a new contract in place of the
existing one, novation cannot be presumed to take place,
unless the terms of the new contract are fully
incompatible with the former agreement on every point.
Thus, a deed of cession of the right to repurchase a piece
of land does not supersede a contract of lease over the
same property.
* Payment; Unless the application of payment is expressly
indicated, the payment shall be applied to the obligation
most onerous to the debtor.Now respondent contends
that the petitioners subsequent acceptance of such
payment effectively withdrew the cancellation of the
provisional sale. We do not agree. Unless the application
of payment is expressly indicated, the payment shall be
applied to the obligation most onerous to the debtor. In
this case, the unpaid rentals constituted the more onerous
obligation of the respondent to petitioner. As the payment
did not fully settle the unpaid rentals, petitioners cause of
action for ejectment survives. Thus, the Court of Appeals
erred in ruling that the payment was additional payment
for the purchase of the property.
MARQUEZ VS ELISAN CREDIT

* Payments; Interest Rates; The rule under Article 1253
that payments shall first be applied to the interest and not
to the principal shall govern if two (2) facts exist:
(1) the debt produces interest (e.g., the payment of
interest is expressly stipulated) and
(2) the principal remains unpaid.
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St. Thomas More
Midterm Exam
Case Doctrines
*The exception is a situation covered under Article 1176,
i.e., when the creditor waives payment of the interest
despite the presence of (1) and (2) above.The
presumption under Article 1176 does not resolve the
question of whether the amount received by the creditor is
a payment for the principal or interest. Under this article
the amount received by the creditor is the payment for the
principal, but a doubt arises on whether or not the interest
is waived because the creditor accepts the payment for
the principal without reservation with respect to the
interest. Article 1176 resolves this doubt by presuming
that the creditor waives the payment of interest because
he accepts payment for the principal without any
reservation. On the other hand, the presumption under
Article 1253 resolves doubts involving payment of
interest-bearing debts. It is a given under this Article that
the debt produces interest. The doubt pertains to the
application of payment; the uncertainty is on whether the
amount received by the creditor is payment for the
principal or the interest.
*Article 1253 resolves this doubt by providing a hierarchy:
payments shall first be applied to the interest; payment
shall then be applied to the principal only after the interest
has been fully paid. Correlating the two provisions, the
rule under Article 1253 that payments shall first be
applied to the interest and not to the principal shall govern
if two facts exist: (1) the debt produces interest (e.g., the
payment of interest is expressly stipulated) and (2) the
principal remains unpaid. The exception is a situation
covered under Article 1176, i.e., when the creditor waives
payment of the interest despite the presence of (1) and
(2) above. In such case, the payments shall obviously be
credited to the principal.
*The fact that the official receipts did not indicate whether
the payments were made for the principal or the interest
does not prove that the respondent waived the interest.
We reiterate that the petitioner made the daily payments
after the second loan had already matured and a portion
of the principal remained unpaid. As stipulated, the
principal is subject to 26% annual interest. All these show
that the petitioner was already in default of the principal
when he started making the daily payments. The
stipulations providing for the 10% monthly penalty and the
additional 25% attorneys fees on the unpaid amount also
became effective as a result of the petitioners failure to
pay in full upon maturity. In other words, the so-called
interest for default (as distinguished from the stipulated
monetary interest of 26% per annum) in the form of the
10% monthly penalty accrued and became due and
demandable. Thus, when the petitioner started making the
daily payments, two types of interest were at the same
time accruing, the 26% stipulated monetary interest and
the interest for default in the form of the 10% monthly
penalty. Article 1253 covers both types of interest. As
noted by learned civilist, Arturo M. Tolentino, no distinction
should be made because the law makes no such
distinction. He explained: Furthermore, the interest for
default arises because of nonperformance by the debtor,
and to allow him to apply payment to the capital without
first satisfying such interest, would be to place him in a
better position than a debtor who has not incurred in
delay. The delay should worsen, not improve, the position
of a debtor. [Emphasis supplied] The petitioner failed to
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COLLEGE OF LAW
specify which of the two types of interest the respondent
allegedly waived. The respondent waived neither.
*In the present case, it was not proven that the
respondent accepted the payment of the principal. The
silence of the receipts on whether the daily payments
were credited against the unpaid balance of the principal
or the accrued interest does not mean that the respondent
waived the payment of interest. There is no presumption
of waiver of interest without any evidence showing that
the respondent accepted the daily instalments as
payments for the principal. Ideally, the respondent could
have been more specific by indicating on the receipts that
the daily payments were being credited against the
interest. Its failure to do so, however, should not be taken
against it. The respondent had the right to credit the daily
payments against the interest applying Article 1253. It
bears stressing that the petitioner was already in default.
Under the promissory note, the petitioner waived demand
in case of nonpayment upon due date. The stipulated
interest and interest for default have both accrued. The
only logical result, following Article 1253 of the Civil Code,
is that the daily payments were first applied against either
or both the stipulated interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory
character and not merely suppletory. It cannot be
dispensed with except by mutual agreement. The creditor
may oppose an application of payment made by the
debtor contrary to this rule.
ARTICLE
1256
PAYMENT/CONSIGNATION
TENDER
OF
PABUGAIS VS SAHIJWANI
* Requisites :
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
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St. Thomas More
Midterm Exam
Case Doctrines
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 thereofand not
because the said check was not tendered to respondent,
or because it was in the form of managers check. While it
is true that in general, a managers check is not 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 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.
LLOBERERA VS FERNANDEZ
* 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 the 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.
*Where the possession of the property by certain persons
is by mere tolerance of the owner, the latter has no
obligation to receive any payment from themUnless there is an unjust refusal by a creditor to accept
payment from a debtor, Article 1256 cannot apply. In the
present case, the possession of the property by the
petitioners being by mere tolerance as they failed to
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 under
Article 1256. The bank deposit made by the petitioners
intended as consignation has no legal effect insofar as the
respondent is concerned.
BENOS VS LAWILAO
* Consignation; Words and Phrases; Consignation is
made by depositing the proper amount to the judicial
authority, before whom the tender of payment and the
announcement of the consignation shall be proved, and all
interested parties are to be notified of the consignation
and, compliance with these requisites is mandatory.
Compliance with the requirements of tender and
consignation to have the effect of payment are mandatory.
ThusTender of payment is the manifestation by 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. Consignation is made by
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COLLEGE OF LAW
depositing the proper amount to the judicial authority,
before whom the tender of payment and the
announcement of the consignation shall be proved. All
interested parties are to be notified of the consignation.
Compliance with these requisites is mandatory.
*Rescission; Pleadings and Practice; A counterclaim in the
answer satisfies the requisites for the judicial rescission of
a Pacto de Retro sale.In Iringan v. Court of Appeals, 366
SCRA 41 (2001), we ruled that even a crossclaim found in
the Answer could constitute a judicial demand for
rescission that satisfies the requirement of the law.
Similarly, the counterclaim of the Benos spouses in their
answer satisfied the requisites for the judicial rescission of
the subject Pacto de Retro Sale.
* Where the issue of rescission had been put in issue in
the answer and the same had been litigated upon without
objections of the other party on grounds of jurisdiction, the
trial court should rule on the same and write finis to the
controversy.The issue of rescission having been put in
issue in the answer and the same having been litigated
upon without objections by the Lawilao spouses on
grounds of jurisdiction, the Municipal Circuit Trial Court
should have ruled on the same and wrote finis to the
controversy. Thus, as a necessary consequence of its
ruling that the Lawilao spouses breached the terms of the
Pacto de Retro Sale, the Municipal Circuit Trial Court
should have rescinded the Pacto de Retro Sale and
directed the Benos spouses to return P150,000.00 to the
Lawilao spouses, pursuant to our ruling in Cannu v.
Galang.
CACAYORIN VS ARMED FORCES
* Under Article 1256 of the Civil Code, the debtor shall be
released from responsibility by the consignation of the
thing or sum due, without need of prior tender of
payment, when the creditor is absent or unknown, or
when he is incapacitated to receive the payment at the
time it is due, or when two or more persons claim the
same right to collect, or when the title to the obligation
has been lost. Applying Article 1256 to the petitioners
case as shaped by the allegations in their Complaint, the
Court finds that a case for consignation has been made
out, as it now appears that there are two entities which
petitioners must deal with in order to fully secure their
title to the property: 1) the Rural Bank (through PDIC),
which is the apparent creditor under the July 4, 1994 Loan
and Mortgage Agreement; and 2) AFPMBAI, which is
currently in possession of the loan documents and the
certificate of title, and the one making demands upon
petitioners to pay. Clearly, the allegations in the Complaint
present a situation where the creditor is unknown, or that
two or more entities appear to possess the same right to
collect from petitioners. Whatever transpired between the
Rural Bank or PDIC and AFPMBAI in respect of petitioners
loan account, if any, such that AFPMBAI came into
possession of the loan documents and TCT No. 37017, it
appears that petitioners were not informed thereof, nor
made privy thereto.
*The lack of prior tender of payment by the petitioners is
not fatal to their consignation case. They filed the case for
the exact reason that they were at a loss as to which
between the twothe Rural Bank or AFPMBAIwas
entitled to such a tender of payment. Besides, as earlier
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Case Doctrines

COLLEGE OF LAW
stated, Article 1256 authorizes consignation alone, without

need of prior tender of payment, where the ground for
consignation is that the creditor is unknown, or does not
appear at the place of payment; or is incapacitated to
receive the payment at the time it is due; or when, without
just cause, he refuses to give a receipt; or when two or
more persons claim the same right to collect; or when the
title of the obligation has been lost.
*SC ruled that the consignation is proper without prior
tender of payment. The petitioners are in quandary on
where to pay their loan obligations. Under Article 1256,
prior tender of payment is not necessary for consignation
in cases
(1) where the creditor is unknown or absent,
(2) when the creditor is incapacitated to receive payment
when it is due,
(3) when there are two or more creditors claiming the
same right to collect,
(4) when the creditor unjustly refuses to issue a receipt,
and
(5) when the title of the obligation has been lost.
The SC said that the case falls on the first and third
exemption. Clearly, the allegations in the Complaint
present a situation where the creditor is unknown, or that
two or more entities appear to possess the same right to
collect from petitioners. Whatever transpired between the
Rural Bank or PDIC and AFPMBAI in respect of petitioners
loan account, if any, such that AFPMBAI came into
possession of the loan documents and TCT No. 37017, it
appears that petitioners were not informed thereof, nor
made privy thereto.
ARTICLE 1267
DIFFICULT
SERVICE
HAS
BECOME
SO
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 fits in with
the facts of the case. Under this theory, the parties
stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist, the contract also
ceases to exist. This theory is said to be the basis of
Article 1267 of the Civil Code, which provides: ART. 1267.
When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in
part.
*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 v. Court of
Appeals, cited by private respondents, 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.
PHIL. NATL. CONST. VS CA

MAGAT VS CA
* Article 1266 of the Civil Code is an exception to the
principle of the obligatory force of contracts.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
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 obligations to give. An obligation to do
includes all kinds of work or service; while an obligation
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 s
implepossession, 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 s cope of Article 1266.
At any rate, the unforeseen event and causes mentioned
by petitioner are not the legal or physical impossibilities
FRANKLIN L. FLORES
-852-
* The law provides that [w]hen the service (required by

the contract) has become so manifestly beyond the
contemplation of the parties, the obligor may also be
released therefrom, in whole or in part. Here, Guerreros
inability to secure a letter of credit and to comply with his
obligation was a direct consequence of the denial of the
permit to import. For this, he cannot be faulted.
*Guerrero borrowed equipment from the Subic Naval Base
authorities at zero cost. This does not automatically
translate to bad faith. Guerrero was faced with the danger
of the cancellation of his contract with Subic Naval Base.
He borrowed equipment as a prudent and swift
alternative. There was no proof that he resorted to this
option with a deliberate and malicious intent to dishonor
his contract with Victorino. An award of damages surely
cannot be based on mere hypotheses, conjectures and
surmises. Good faith is presumed; the burden of proving
bad faith rests on the one alleging it. Petitioners did not
effectively discharge the burden in this case.
*To recover moral damages in an action for breach of
contract, the breach must be palpably wanton, reckless,
malicious, in bad faith, oppressive or abusive. This is not
the case here.
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St. Thomas More
Midterm Exam
Case Doctrines
ARTICLE 1278 - COMPENSATION
BPI VS CA
* More importantly, the respondent court erred when it
failed to rule that legal compensation is proper.
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.
*Elements of legal compensation are all present in the
case at bar.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 U.S. 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.
*The rule as to mutuality is strictly applied at law but not
in equity.To frustrate the application of legal
compensation on the ground that the parties are not all
mutually obligated would result in unjust enrichment on
the part of the private respondent and his wife who herself
out of honesty has not objected to the debit. The rule as to
mutuality is strictly applied at law. But not in equity, where
to allow the same would defeat a clear right or permit
irremediable injustice.

COLLEGE OF LAW
hence, there is no need for petitioner bank to actually
return the amount, and finally, that petitioner bank ends
up in exactly the same position as when it first took the
improper and unwarranted shortcut by intercepting the
said money transfer, notwithstanding the assailed
Decision saying that this could not be done!
*We see in this petition a clever ploy to use this Court to
validate or legalize an improper act of the petitioner bank,
with the not impossible intention of using this case as a
precedent for similar acts of interception in the future.
This piratical attitude of the nations premier bank
deserves a warning that it should not abuse the justice
system in its collection efforts, particularly since we are
aware that if the petitioner bank had been in good faith, it
could have easily disposed of this controversy in ten
minutes flat by means of an exchange of checks with
private respondent for the same amount. The litigation
could have ended there, but it did not. Instead, this plainly
unmeritorious case had to clog our docket and take up the
valuable time of this Court.
*There is no valid compensation on the 1st remittance,
PNB holds the money in favor of Citibank. An implied trust
was created between NCB-Jeddah and PNB. PNB is
considered debtor to Citibank and not to Ramon Lapez.
Such transactions between NCB-Jeddah and PNB may be
treated as stipulation pour autri. For compensation to
apply, Article 1279 Civil Code provides:
In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy,
commenced
by
third
persons
and
communicated in due time to the debtor.
PNB VS CA AND RAMON LAPEZ

* Compensation; A local bank, while acting as local
correspondent bank, does not have the right to intercept
funds being coursed through it by its foreign counterpart
for transmittal and deposit to the account of an individual
with another local bank, and thereafter apply the said
funds to certain obligations owed to it by the said
individual.By this simplistic approach, petitioner in effect
seeks to render nugatory the decisions of the trial court
and the appellate Court, and have this Court validate its
original misdeed, thereby making a mockery of the entire
judicial process of this country. What the petitioner bank is
effectively saying is that since the respondent Court of
Appeals ruled that petitioner bank could not do a shortcut
and simply intercept funds being coursed through it, for
transmittal to another bank, and eventually to be
deposited to the account of an individual who happens to
owe some amount of money to the petitioner, and
because respondent Court ordered petitioner bank to
return the intercepted amount to said individual, who in
turn was found by the appellate Court to be indebted to
petitioner bank, THEREFORE, there must now be legal
compensation of the amounts each owes the other, and
FRANKLIN L. FLORES
-852-
Stipulation pour autri is an agreement in favor of a 3rd

party.
In the case at bar, PNB and Ramon Lapez is not principal
debtor and principal creditor to each other.
On the 2 PNB and Lapez 2nd remittance, PNB holds the
money in favor Ramon Lapez. Hence, Both PNB and
Ramon Lapez is principal debtor and principal creditor to
each other. Legal compensation may properly take place
between the parties.
EGV REALTY VS CA
*Compensation; Nature of Compensation.In Article 1278
of the Civil Code, compensation is said to take place when
two persons, in their own right, are creditors and debtors
of each other. Compensation is a mode of extinguishing
to the concurrent amount, the obligations of those persons
who in their own right are reciprocally debtors and
creditors of each other and the offsetting of two
obligations which are reciprocally extinguished if they are
of equal value, or extinguished to the concurrent amount if
of different values.
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St. Thomas More
Midterm Exam
Case Doctrines
* At best, what respondent Unisphere has against
petitioners is just a claim, not a debt which is not
enforceable in court.While respondent Unisphere does
not deny its 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 loss
has not been passed upon by any legal authority so as to
elevate it to the level of a debt. So we held in Alfonso
Vallarta v. Court of Appeals, et al., that: Compensation or
offset takes place by operation of law when two (2)
persons, in their own right, are creditor and debtor of each
other. For compensation to take place, a distinction must
be made between a debt and a mere claim. A debt is a
claim which has been formally passed upon by the highest
authority 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 a debt and must
pass thru the process prescribed by law before it develops
into what is properly called a debt.
METROBANK VS TONDA
* Compensation is not proper when one of the debts
consists in civil liability arising from a penal offense, the
raison detre for this being that if one of the debts consists
in civil liability arising from a penal offense, compensation
would be improper and inadvisable because the
satisfaction of such obligation is imperative.The
handwritten
note
by
the
METROBANK
officer
acknowledging receipt of the checks amounting to P2.8
Million made no reference to the TONDAS trust receipt
obligations, and we cannot presume that it was anything
more than an ordinary bank deposit. The Court of Appeals
citing the case of Tan Tiong Tick vs. American
Apothecaries implied that in making the deposit, the
TONDAS are entitled to set off, by way of compensation,
their obligations to METROBANK. However, Article 1288 of
the Civil Code provides that compensation shall not be
proper when one of the debts consists in civil liability
arising from a penal offense as in the case at bar. The
raison detre for this is that, if one of the debts consists in
civil liability arising from a penal offense, compensation
would be improper and inadvisable because the
satisfaction of such obligation is imperative.
TRINIDAD VS ACAPULCO
*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 of the
Civil Code are present. This is in consonance with Article
1290 of the Civil Code which provides that: Article 1290.
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.
*Since compensation takes place ipso jure, when used as a
defense, it retroacts to the date when all its requisites are
fulfilled.Since it takes place ipso jure, when used as a
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
defense, it retroacts to the date when all its requisites are
fulfilled.
*In order that moral damages may be awarded, there
must be pleading and proof of moral suffering, mental
anguish, fright and the like, and while no proof of
pecuniary loss is necessary in order that moral damages
may be awarded, it is nevertheless essential that the
claimant should satisfactorily show the existence of the
factual basis of damages and its causal connection to
defendants acts. Claims must be substantiated by clear
and convincing proof and there must be clear testimony
on the anguish and other forms of mental sufferings as
mere allegations will not suffice. Allegations of besmirched
reputation, embarrassment and sleepless nights are
insufficient for it must be shown that the proximate cause
thereof was the unlawful act or omission of the opposing
party.
FIRST UNITED CONST. VS BAYANIHAN
*Recoupment (reconvencion) is the act of rebating or
recouping a part of a claim upon which one is sued by
means of a legal or equitable right from a counterclaim
arising out of the same transaction. It is the setting up of a
demand arising from the same transaction as the
plaintiffs claim, to abate or reduce that claim. The legal
basis for recoupment by the buyer is the first paragraph of
Article 1599 of the Civil Code.
*It was improper for petitioners to set up their claim for
repair expenses and other spare parts of the dump truck
against their remaining balance on the price of the prime
mover and the transit mixer they owed to respondent.
Recoupment must arise out of the contract or transaction
upon which the plaintiffs claim is founded. To be
entitled to recoupment, therefore, the claim must
arise from the same transaction, i.e., the purchase
of the prime mover and the transit mixer and not to
a previous contract involving the purchase of the
dump truck. That there was a series of purchases made
by petitioners could not be considered as a single
transaction, for the records show that the earlier purchase
of the six dump trucks was a separate and distinct
transaction from the subsequent purchase of the Hino
Prime Mover and the Isuzu Transit Mixer. Consequently,
the breakdown of one of the dump trucks did not grant to
petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
*Legal
compensation
takes
place
when
the
requirements set forth in Article 1278 and Article 1279 of
the Civil Code are present, to wit: Article 1278.
Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other. Article
1279. In order that compensation may be proper, it is
necessary: (1) That each of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other; (2) That both debts
consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of
the same quality if the latter has been stated; (3)
That the two debts be due; (4) That they be
liquidated and demandable; (5) That over neither of
them there be any retention or controversy,
Page 13 of 19

St. Thomas More
Midterm Exam
Case Doctrines

COLLEGE OF LAW
commenced by third persons and communicated in

due time to the debtor.
be any retention or controversy, commenced by third

persons and communicated in due time to the debtor.
*A debt is liquidated when its existence and amount are

determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the
plaintiffs claim from the moment it is liquidated by
judgment. Article 1290 of the Civil Code provides that
when all the requisites mentioned in Article 1279 of the
Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the
concurrent amount. With petitioners expenses for the
repair of the dump truck being already established and
determined with certainty by the lower courts, it follows
that legal compensation could take place because all the
requirements were present. Hence, the amount of
P71,350.00 should be set off against petitioners unpaid
obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to
respondent.
ARTICLE 1291 - NOVATION

LICAROS VS GATMAITAN
*
Assignment of Credit Distinguished from
Subrogation.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.
PHILTRUST VS ROXAS
*It would be more unjust to stay the execution of a
decision that had become final and executory twentythree (23) years ago. There should be an end to litigation,
for public policy dictates that once a judgment becomes
final, executory, and unappealable, the prevailing party
should not be denied the fruits of his victory by some
subterfuge devised by the losing party.Unjustified delay in
the enforcement of a judgment sets at naught the role and
purpose of the courts to resolve justiciable controversies
with finality. To accept PTCs contentions would not only be
unfair to private respondents but, more importantly, would
defeat a vital policy consideration behind the doctrine of
immutability of final judgments.
*Under Rule 8, Section 2 of the 1964 Rules of Court, [a]
party may set forth two or more statements of a claim or
defense alternatively or hypothetically, either in one cause
of action or defense or in separate causes of action or
defenses. Thus, the defense of compensation would have
been proper and allowed under the rules even if PTC
disclaimed any liability at the time it filed its answer. In
Marquez v. Valencia, 99 Phil. 740 (1956), we held that
when a defendant failed to set up such alternative
defenses and chosen or elected to rely on one only, the
overruling thereof was a complete determination of the
controversy between the parties, which bars a subsequent
action based upon an unpleaded defense. Unmistakably,
the rationale behind this is the proscription against the
splitting of causes of action.
*Even if we assume that legal compensation was not
waived and was otherwise timely raised, we find that not
all requisites of legal compensation are present in this
case. Under Article 1279, in order for legal compensation
to take place, the following requisites must concur: (a)
that each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other; (b) that both debts consist in a sum of money, or if
the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(c) that the two debts be due; (d) that they be liquidated
and demandable; and (e) that over neither of them there
FRANKLIN L. FLORES
-852-
*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; Conventional subrogation requires an
agreement among the three parties concernedthe
original creditor, the debtor and the new creditor.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 three parties concerned
the original creditor, the debtor, and the new creditor. It
is a new contractual relation based on the mutual
agreement among all the necessary 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.
*Conventional subrogation has the effect of extinguishing
the old obligation and giving rise to a new one.It is true
that conventional subrogation has the effect of
extinguishing the old obligation and giving rise to a new
one. However, the extinguishment of the old obligation is
the effect of the establishment of a contract for
conventional subrogation. It is not a requisite without
which a contract for conventional subrogation may not be
created. As such, it is not determinative of whether or not
a contract of conventional subrogation was constituted.
GARCIA VS LLAMAS
*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.
Article 1293 of the Civil Code defines novation.
*Kinds; In general, there are two (2) modes of substituting
the person of the debtor: (1) expromision and (2)
delegacion.
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St. Thomas More
Midterm Exam
Case Doctrines
In expromision, the initiative for the change does not
come fromand may even be made without the
knowledge ofthe 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 subsists to
the extent that it remains compatible with the amendatory
agreement. Whether extinctive or modificatory, novation
is made either by changing the object or the 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.
*Elements; For novation to take place, the following
requisites must concur.:
1)
2)
3)
4)
There must be a previous valid obligation.

The parties concerned must agree to a new contract.
The old contract must be extinguished.
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.
*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.
CALIFORNIA BUS LINES VS STATE INVESTMENTS
* Novation has been defined as the extinguishment of an

obligation by the substitution or change of the obligation
by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by
substituting the person of the debtor, or subrogating a
third person in the rights of the creditor.
*Novation, in its broad concept, may either be extinctive
or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes
the place of the former; it is merely modificatory when the
old obligation subsists to the extent it remains compatible
with the amendatory agreement. An extinctive novation
results either by changing the object or principal
conditions (objective or real), or by substituting the person
of the debtor or subrogating a third person in the rights of
the creditor (subjective or personal).
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
*Novation has two functions: one to extinguish an existing
obligation, the other to substitute a new one in its place.
*For novation to take place, four essential requisites have
to be met, namely, (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 valid new obligation.
*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.
The extinguishment of the old obligation by the new one is
a necessary element of novation which may be effected
either expressly or impliedly. The term "expressly" means
that the contracting parties incontrovertibly disclose that
their object in executing the new contract is to extinguish
the old one. Upon the other hand, no specific form is
required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
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 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.
The necessity to prove the foregoing by clear and
convincing evidence is accentuated where the obligation
of the debtor invoking the defense of novation has already
matured.
With respect to obligations to pay a sum of money, this
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 this case, the attendant facts do not make out a case
of novation. The restructuring agreement between Delta
and CBLI executed on October 7, 1981, 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
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St. Thomas More
Midterm Exam
Case Doctrines
implication. However, our review of its terms yields no
incompatibility between the promissory notes and the
restructuring agreement.
* It is clear from the foregoing that the restructuring
agreement, instead of containing provisions "absolutely
incompatible" with the obligations of the judgment,
expressly ratifies such obligations in paragraph 8 and
contains provisions for satisfying them. There was no
change in the object of the prior obligations. The
restructuring agreement merely provided for a new
schedule of payments and additional security in paragraph
6 (c) 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. Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a
buyer that provided for a different schedule and manner of
payment, to restructure the mode of payments by the
buyer so that it could settle its outstanding obligation in
spite of its delinquency in payment, is not tantamount to
novation.
* The addition of other obligations likewise did not
extinguish the promissory notes. In Young v. CA63, this
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.
AQUINTEY VS TIBONG
* The court herein held that there was no novation.
Court proceeded to differentiate novation from dacion in
payment which is one of the legal causes to which an
assignment of credit may be effected. Court referred to
art. 1292 which proves that in order for an obligation to be
extinguished by another which substitutes the same, it is
imperative that it be declared in unequivocal terms or that
the new and old obligation on every point be incompatible
with one another. Further, court cited the case of Iloilo
Traders v Heirs of Soriano in which it discussed the two
types of novation: extinctive and modificatory. Under an
extinctive novation, there is a complete extinguishment of
the original obligation which shall be effected upon
concurrence of these four requisites: 1.) that there is a
previous valid obligation, 2.) that there is agreement of all
the parties concerned to a new contract 3.) that there is
extinguishment of the old obligation, and 4.) that there is
birth of a new valid obligation.
On the other hand, a modificatory novation is one in which
the subsequent change in the agreement is incidental to
the main obligation such as a change in the rate of
interest or the extension of time to pay.
Court then further cited art. 1293 which provides for
novation by virtue of delegacion. Said article states that
novation which consists in substituting a new debtor in the
place of the original one may be made even without the
knowledge of the latter, but not without the consent of the
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
creditor. Further citing the case of City National Bank v
Fuller, court herein stated that in delegacion, the new
debtor contracts with the old debtor that he will pay the
debt while the creditor agrees to accept the new debtor
for the old. Hence, for there to be extinguishment of the
old obligation by delegacion, it is necessary that the old
debtor is relieved of the obligation and that third person or
new debtor takes his place.
However, as mentioned before, Court finds that in this
case what transpired between the parties was an
assignment of credit which was executed by Tibong in
favor of Aquintey.
An assignment of credit 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. It may be in the form of sale, but at times it may
constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person.
In a dation, the undertaking is in the nature of a sale
which means that the creditor is really buying the property
of the debtor to be charged against debtors obligation.
The requisites of a valid dacion are: 1.) that there is the
performance of the prestation in lieu of the payment, 2.)
that there is a difference between the prestation due and
the one substituting it, and 3.) that the parties (debtor and
creditor) had agreed that the performance of the
prestation would serve to extinguish the obligation
In this case, it was found by the court that all the
requisites for a dacion were present. Tibong had executed
the deeds of assignment in order to make good the
balance of her obligation since she was not able to comply
with the payment. Tibong and Aquintey also agreed to
relieve Tibong of the obligation to pay the balance and for
Aquintey to collect the same from the debtors of Tibong.
In addition, Aquintey since 1990 when deeds were
executed never once attempted to collect from Tibong and
that it was only 9 years later that Aquintey had attempted
to collect from Tibong when all the while Aquintey had
already collected 301,000 from Tibongs debtors.
There being no novation, court ruled that Tibong is still
liable for the balance on their account to Aquintey in the
amount of P33, 841 deducted already were the amounts
which were collected from Tibongs debtors and the partial
payment of 50,000 already made beforehand by Tibong.
LEDONIO VS CAPITOL
* This Court cannot sustain petitioners contention and
hereby declares that the transaction between Ms. Picache
and respondent was an assignment of credit, not
conventional subrogation, and does
not require
petitioners consent as debtor 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 causesuch as sale,
Page 16 of 19

St. Thomas More
Midterm Exam
Case Doctrines
dation in payment or exchange or donationand without
need of the debtors 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.
*Assignment
of
Credit
and
Subrogation,
Distinguished; 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 while conventional subrogation
requires an agreement among the parties concernedthe
original creditor, the debtor, and the new creditor.A
noted authority on civil law provided a discourse on the
difference between these two transactions, to wit
Conventional Subrogation and Assignment of Credits.In
the Argentine Civil Code, there is essentially no difference
between conventional subrogation and assignment of
credit. The subrogation is merely the effect of the
assignment. In fact it is expressly provided (article 769)
that conventional redemption shall be governed by the
provisions on assignment of credit. Under our Code,
however, 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 an 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 the new obligation will
be perfectly valid; but the nullity of an obligation is not
remedied by the assignment of the creditors right to
another. This Court 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 debtors
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 debtors consent. On the other hand,
conventional subrogation requires an agreement among
the parties concernedthe original creditor, the debtor,
and the new creditor. It is a new contractual relation based
on the mutual agreement among all the necessary parties.
*Article 1300 of the Civil Code provides that conventional
subrogation must be clearly established in order that it
may take effect. Since it is petitioner who claims that
there is conventional subrogation in this case, the burden
of proof rests upon him to establish the same by a
preponderance of evidence.
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
*Since the Assignment of Credit, dated 1 April 1989, is just
as its title suggests, then petitioners consent as debtor is
not necessary in order that the assignment may fully
produce legal effects. The duty to pay does not depend on
the consent of the debtor; otherwise, all creditors would
be prevented from assigning their credits because of the
possibility of the debtors refusal to give consent.
Moreover, this Court had already noted previously that
there does not appear to be anything in Philippine statutes
or jurisprudence which prohibits a creditor, without the
consent of the debtor, from making an assignment of his
credit and the rights accessory thereto; and, certainly, an
assignment of credit and its accessory rights does not at
all obliterate the obligation of the debtor to pay, but
merely puts the assignee in the place of the assignor.
Hence, the obligation of petitioner to pay his debt subsists
despite the assignment thereof; only, his obligation after
he came to know of the said assignment would be to pay
the debt to the respondent (the assignee), instead of Ms.
Picache (the original creditor)
HEIRS OF SERVANDO FRANCO VS GONZALES

* A novation arises when there is a substitution of an
obligation by a subsequent one that extinguishes the first,
either by changing the object or the principal conditions,
or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor. For
a valid novation to take place, there must be, therefore:
(a) a previous valid obligation; (b) an agreement of the
parties to make a new contract; (c) an extinguishment of
the old contract; and (d) a valid new contract. In short, the
new obligation extinguishes the prior agreement only
when the substitution is unequivocally declared, or the old
and the new obligations are incompatible on every point.
A compromise of a final judgment operates as a novation
of the judgment obligation upon compliance with either of
these two conditions.
*To be clear, novation is not presumed. This means that
the parties to a contract should expressly agree to
abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new
obligations must be incompatible on every point.
According to California Bus Lines, Inc. v. State Investment
House, Inc., 418 SCRA 297 (2003): The extinguishment of
the old obligation by the new one is a necessary element
of novation which may be effected either expressly or
impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the
old one. Upon the other hand, no specific form is required
for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility
between the old and the new obligations.
Page 17 of 19

St. Thomas More
Midterm Exam
Case Doctrines
ACE FOODS VS MICROPACIFIC
*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.The Court must
dispel the notion that the stipulation anent MTCLs
reservation of ownership of the subject products as
reflected in the Invoice Receipt, i.e., the title reservation
stipulation, changed the complexion of the transaction
from a contract of sale into a contract to sell. Records are
bereft of any showing that the said stipulation novated the
contract of sale between the parties which, to repeat,
already existed at the precise moment ACE Foods
accepted MTCLs proposal. To be sure, novation, in its
broad concept, may either be extinctive or modificatory. It
is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the
amendatory agreement. In either case, however, 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.
BPI VS DOMINGO
*In De Cortes v. Venturanza, 79 SCRA 709 (1977), the
Court discussed some principles and jurisprudence
underlying the concept and nature of novation as a mode
of extinguishing obligations: According to Manresa,
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 the person of the debtor, or by subrogating a
third person to the rights of the creditor (8 Manresa 428,
cited in IV Civil Code of the Philippines by Tolentino, 1962
ed., p. 352). Unlike other modes of extinction of
obligations, novation is a juridical act with a dual function
it extinguishes an obligation and creates a new one in
lieu of the old. Article 1293 of the New Civil Code provides:
Novation which consists in substituting a new debtor in
the place of the original one, may be made even without
the knowledge or against the will of the latter, but not
without the consent of the creditor. (emphasis supplied)
Under this provision, there are two forms of novation by
substituting the person of the debtor, and they are: (1)
expromision; and (2) delegacion. In the former, the
initiative for the change does not come from the debtor
and may even be made without his knowledge, since it
consists in a third person assuming the obligation. As
such, it logically requires the consent of the third person
and the creditor. In the latter, the debtor offers and the
creditor accepts a third person who consents to the
substitution and assumes the obligation, so that the
intervention and the consent of these three persons are
necessary (8 Manresa 436-437, cited in IV Civil Code of
the Philippines by Tolentino, 1962 ed., p. 360). In these
two modes of substitution, the consent of the creditor is
an indispensable requirement (Garcia v. KhuYekChiong, 65
Phil. 466, 468).
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
*The Court also emphasized in De Cortes the
indispensability of the creditors consent to the novation,
whether expromision or delegacion, given that the
[s]ubstitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason of the
financial inability or insolvency of the new debtor; hence,
the creditor should agree to accept the substitution in
order that it may be binding on him.
*As a general rule, since novation implies a waiver of the
right the creditor had before the novation, such waiver
must be express. The Court explained the rationale for the
rule in Testate Estate of Lazaro Mota v. Serra, 47 Phil. 464
(1925): It should be noted that in order to give novation its
legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent
must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor
who is to be substituted by a new one, it implies on the
part of the creditor a waiver of the right that he had before
the novation, which waiver must be express under the
principle that renuntiatio non praesumitor, recognized by
the law in declaring that a waiver of right may not be
performed unless the will to waive is indisputably shown
by him who holds the right.
*The determination of the existence of the consent of BPI
to the substitution of debtors, in accordance with the
standards set in the preceding jurisprudence, is a question
of fact because it requires the Court to review the
evidence on record. It is an established rule that the
jurisdiction of the Court in cases brought before it from the
Court of Appeals via a petition for review on certiorari
under Rule 45 of the Rules of Court is generally limited to
reviewing errors of law as the former is not a trier of facts.
Thus, the findings of fact of the Court of Appeals are
conclusive and binding upon the Court in the latters
exercise of its power to review for it is not the function of
the Court to analyze or weigh evidence all over again.
However, several of the recognized exceptions to this rule
are present in the instant case that justify a factual review,
i.e., the inference is manifestly mistaken, the judgment is
based on misapprehension of facts, and the findings of the
Court of Appeals and the RTC are contrary to those of the
MeTC.
*The acceptance by a creditor of payments from a third
person, who has assumed the obligation, will result merely
to the addition of debtors and not novation. The creditor
may therefore enforce the obligation against both debtors.
As the Court pronounced in Magdalena Estates, Inc. v.
Rodriguez, 18 SCRA 967 (1966), [t]he mere fact that the
creditor receives a guaranty or accepts payments from a
third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a
novation, and the creditor can still enforce the obligation
against the original debtor. The Court reiterated in Quinto
v. People, 305 SCRA 708 (1999), that [n]ot too
uncommon is when a stranger to a contract agrees to
assume an obligation; and while this may have the effect
of adding to the number of persons liable, it does not
necessarily imply the extinguishment of the liability of the
first debtor. Neither would the fact alone that the creditor
receives guaranty or accepts payments from a third
person who has agreed to assume the obligation,
Page 18 of 19

St. Thomas More
Midterm Exam
Case Doctrines
constitute an extinctive novation absent an agreement
that the first debtor shall be released from responsibility.
ASB REALTY VS ORTIGAS
* Estoppel - The doctrine of estoppel was based on public
policy, fair dealing, good faith and justice, and its purpose
was to forbid a party to speak against his own act or
omission, representation, or commitment to the injury of
another to whom the act, omission, representation, or
commitment was directed and who reasonably relied
thereon.The application of estoppel was appropriate.
The doctrine of estoppel was based on public policy, fair
dealing, good faith and justice, and its purpose was to
forbid a party to speak against his own act or omission,
representation, or commitment to the injury of another to
whom the act, omission, representation, or commitment
was directed and who reasonably relied thereon. The
doctrine sprang from equitable principles and the equities
in the case, and was designed to aid the law in the
administration of justice where without its aid injustice
would result. Estoppel has been applied by the Court
wherever and whenever special circumstances of the case
so demanded.
*Section 39 of Act No. 496 (The Land Registration Act)
requires that every person receiving a certificate of title in
pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the
same free of all encumbrances except those noted on said
certificate. An encumbrance in the context of the provision
is anything that impairs the use or transfer of property;
anything which constitutes a burden on the title; a burden
or charge upon property; a claim or lien upon property. It
denotes any right to, or interest in, land which may
FRANKLIN L. FLORES
-852-

COLLEGE OF LAW
subsist in another to the diminution of its value, but
consistent with the passing of the fee by conveyance. An
annotation, on the other hand, is a remark, note, case
summary, or commentary on some passage of a book,
statutory provision, court decision, of the like, intended to
illustrate or explain its meaning. The purpose of the
annotation is to charge the purchaser or title holder with
notice of such burden and claims. Being aware of the
annotation, the purchaser must face the possibility that
the title or the real property could be subject to the rights
of third parties.
*To be clear, contractual obligations, unlikecontractual
rights or benefits, are generally not assignable. But there
are recognized means by which obligations may be
transferred, such as by sub-contract and novation. In this
case, the substitution of the petitioner in the place of
Amethyst did not result in the novation of the Deed of
Sale. To start with, it does not appear from the records
that the consent of Ortigas to the substitution had been
obtained despite its essentiality to the novation. Secondly,
the petitioner did not expressly assume Amethysts
obligations under the Deed of Sale, whether through the
Deed of Assignment in Liquidation or another document.
And thirdly, the consent of the new obligor (i.e., the
petitioner), which was as essential to the novation as that
of the obligee (i.e., Ortigas), was not obtained.
*Rescission under Article 1191 of the Civil Code is proper if
one of the parties to the contract commits a substantial
breach of its provisions. It abrogates the contract from its
inception and requires the mutual restitution of the
benefits received; hence, it can be carried out only when
the party who demands rescission can return whatever he
may be obliged to restore.
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OBLIGATIONS and CONTRACTS

St. Thomas More

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

* The fact of payment may be established not only by

*Evidence; Burden of Proof.The burden of proof of such

OBLIGATIONS and CONTRACTS

The Fraternal Order of

*Negligence is the omission to do something which a

* In the instant case, the trial court correctly found Allied

ALLIED BANKING VS LIM SIO WAN

DELA CRUZ VS. CONCEPCION

* Fundamental and familiar is the doctrine that the

* On March 25, 1996, petitioners entered into a Contract

OBLIGATIONS and CONTRACTS

The Fraternal Order of

*Respondents obligation consists of payment of a sum of

Furthermore, that Adoracion Losloso was indeed an agent

The Court explained in Cambroon v. City of Butuan, cited

*In general, a payment in order to be effective to

Q: Yes, but you have authorized her to receive payment?

OBLIGATIONS and CONTRACTS

NATL. POWER CORP. VS IBRAHIM

* Bad Faith-A finding of bad faith usually assumes the

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

persuade. In a true dacion en pago, the assignment of the

Guillermos copra deliveries amounted to P378,952.43.

TAN SHUY VS MAULAWIN

*As a dation in payment, the assignment of credit

*Dation in Payment; There is dation in payment when

SERFINO VS FAR EAST BANK

*The terms of the compromise judgment, however, did not

OBLIGATIONS and CONTRACTS

There should be stipulation of the automatic

Art. 2088 of CC prohibits creditor from

ARTICLE 1250 EXTRAORDINARY

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

MARQUEZ VS ELISAN CREDIT

OBLIGATIONS and CONTRACTS

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

stated, Article 1256 authorizes consignation alone, without

contemplated in the said article. Besides, petitioner failed

PHIL. NATL. CONST. VS CA

* The law provides that [w]hen the service (required by

OBLIGATIONS and CONTRACTS

The Fraternal Order of

PNB VS CA AND RAMON LAPEZ

Stipulation pour autri is an agreement in favor of a 3rd

OBLIGATIONS and CONTRACTS

The Fraternal Order of

OBLIGATIONS and CONTRACTS

The Fraternal Order of

commenced by third persons and communicated in

be any retention or controversy, commenced by third

*A debt is liquidated when its existence and amount are