LAW ON SALES – Chapter 8

Assignment of credits and other incorporeal rights (4) Subrogation is the change in the person of the
creditor with the credit being extinguished. (see 8
Article 1624. An assignment of creditors and other
Manresa 400.)
incorporeal rights shall be perfected in accordance with
the provisions of article 1475.

Article 1625. An assignment of a credit, right or action

shall produce no effect as against third persons, unless
Assignment of credit defined.
it appears in a public instrument, or the instrument is
Assignment of credit is a contract by which the owner recorded in the Registry of Property in case the
(assignor/creditor) of a credit and other incorporeal assignment involves real property.
rights transfers, either onerously or gratuitously, to
another (assignee) his rights and actions against a third
person (debtor). Binding effect of assignment.

(1) As between the parties, the assignment is valid

although it appears only in a private document so long
Nature of assignment of credit.
as the law does not require a specific form for its
(1) Assignment of credit and other incorporeal validity. (see Art. 1356.)
rights is a consensual, bilateral, onerous, and
(2) To affect third persons, the assignment must appear
commutative or aleatory contract.
in a public instrument, and in case it involves real
(2) The assignment involves no transfer of property, it is indispensable that it be recorded in the
ownership but merely effects the transfer of Registry of Property.
rights which the assignor has at the time to the
(3) The assignee merely steps into the shoes of the
assignee. As a consequence of the assignment,
assignor, the former acquiring the credit subject to
the third party (assignee) steps into the shoes of
defenses (e.g., fraud, prescription, etc.) available to the
the original creditor (assignor) as a subrogee of
debtor against the assignor. The assignee is deemed
the latter.
subrogated to the rights as well as to the obligations of
(3) It may be done gratuitously (i.e., by donation) the seller. He cannot acquire greater rights than those
or onerously. If done onerously (i.e., exchange, pertaining to the assignor. Hence, the act of assignment
dacion en pago), whatever may be the legal cannot operate to efface liens or restrictions burdening
cause, it is really a sale. Thus, the subject matter the right assigned.
is the credit or right assigned; the consideration
is the price paid for the credit or right; and the
consent is the agreement of the parties to the Article 1626. The debtor who, before having knowledge
assignment of the credit or right at the agreed of the assignment, pays his creditor shall be released
price. from the obligation.

Assignment distinguished from other terms. Consent of debtor to assignment not required.

(1) Renunciation is the abandonment of a right without In an assignment of credit, the consent of the debtor is
a transfer to another. (see Art. 1270.) not essential in order that it may produce legal effects.
Hence, the duty to pay does not depend on the consent
(2) Agency involves representation, not transmission
of the debtor; otherwise, all creditors would be
wherein the agent acts for the principal.
prevented from assigning their credits because of the
(3) Substitution is the change of a new debtor for the possibility of the debtors’ refusal to give consent.
previous debtor with the credit remaining in the same
creditor. (see 10 Manresa 377.)
LAW ON SALES – Chapter 8
Effect of payment by debtor after assignment of credit.

(1) Before notice. Warranties of the assignor of credit.

(2) After notice, or before notice but debtor had (1) When a creditor assigns his credit, he warrants only
knowledge of assignment. the

(a) existence and

Article 1627. The assignment of a credit includes all the (b) legality of the credit at the perfection of
accessory rights, such as a guaranty, mortgage, pledge the contract.
or preference.
He is not even liable for the warranty if the credit had
been sold as doubtful.

Extent of assignment of credit. (2) There is no warranty as to the solvency of the debtor
unless it is expressly stipulated or unless the insolvency
The assignment of credit includes not only the credit
was already existing and of public knowledge at the
itself but also all rights accessory thereto. (see Art.
time of the assignment.
1537.) This follows the familiar rule that the accessory
follows the principal. But the parties may stipulate that If there be any breach of the above warranties, the
the accessory rights shall not be included in the assignor-vendor shall be held answerable therefor.
assignment.

EXAMPLE:
Liabilities of the assignor of credit.
D owes C P1,000.00, with G as guarantor. C assigns his
(1) For violation of the above warranties, the liability of
credit to T with notice given to D. In case D fails to pay
the vendor (assignor) in good faith is limited only to the
T, the latter may enforce the guaranty of G unless the
price received and to the expenses of the contract, and
credit was transferred with express stipulation that G
any other legitimate payments by reason of the
shall be released from his obligation.
assignment. (Art. 1616, par. 1.)

(2) The assignor in bad faith is liable not only for the
Article 1628. The vendor in good faith shall be payment of the price and all expenses, but also for
responsible for the existence and legality of the credit at damages. An assignor in bad faith is one who has
the time of the sale, unless it should have been sold as knowledge of any of the circumstances mentioned
doubtful; but not for the solvency of the debtor, unless above (i.e., non-existence or illegality of the credit,
it has been so expressly stipulated or unless the insolvency of the debtor, etc.) while an assignor in good
insolvency was prior to the sale and of common faith is one who is ignorant of them.
knowledge.

Even in these cases he shall only be liable for the price

Article 1629. In case the assignor in good faith should
received and for the expenses specified in No. 1 of
have made himself responsible for the solvency of the
article 1616.
debtor, and the contracting parties should not have
The vendor in bad faith shall always be answerable for agreed upon the duration of the liability, it shall last for
the payment of all expenses, and for damages. one year only, from the time of the assignment if the
period had already expired.

If the credit should be payable within a term or period

which has not yet expired, the liability shall cease one
year after the maturity.
LAW ON SALES – Chapter 8
Duration of assignor’s liability where debtor’s solvency equipment and a car. Subsequently, the car was
guaranteed. recovered by C, a creditor of the partnership.

This provision does not apply if the assignor acted in P is not liable to B because P does not warrant each of
bad faith. (see Art. 1628.) the various parts of his interest in the partnership but
only the legitimacy of his rights as partner taken as a
In case the assignor has expressly warranted the
whole. But if the value of the car exceeds P75,000.00, P
solvency of the debtor, the duration of the assignor’s
will be liable because B is evicted from “the part of
liability shall be as follows:
greater value.”
(1) If there is a stipulation, then for the term or period
fixed;
Article 1632. Should the vendor have profited by some
(2) If there is no stipulation:
of the fruits or received anything from the inheritance
(a) for one year from the assignment of the credit when sold, he shall pay the vendee thereof, if the contrary has
the period for payment of the credit has expired; or not been stipulated.

(b) for one year after its maturity, when such period for Article 1633. The vendee shall, on his part, reimburse
payment has not yet expired. the vendor for all that the latter may have paid for the
debts of and charges on the estate and satisfy the
credits he may have against the same, unless there is an
Reasons for the rule. agreement to the contrary.

There are two reasons for the rule contained in Article Article 1634. When a credit or other incorporeal right in
1629. litigation is sold, the debtor shall have a right to
extinguish it by reimbursing the assignee for the price
First, to prevent fraud which may be committed by the latter paid therefor, the judicial costs incurred by
feigning the solvency of the debtor at the time of the him, and the interest on the price from the day on
assignment when in fact he is insolvent; and which the same was paid.
Second, to oblige the assignee to exert efforts in the A credit or other incorporeal right shall be considered in
recovery of the credit and thereby avoid that by his litigation from the time the complaint concerning the
oversight, the assignor may suffer. same is answered.

The debtor may exercise his right within thirty days

Article 1630. One who sells an inheritance without from the date the assignee demands payment from
enumerating the things of which it is composed, shall him.
only be answerable for his character as an heir.

Article 1631. One who sells for a lump sum the whole of Legal redemption in sale of credit or other incorporeal
certain rights, rents, or products, shall comply by right in litigation.
answering for the legitimacy of the whole in general;
but he shall not be obliged to warrant each of the This article is an instance of legal redemption.
various parts of which it may be composed, except in The following are the requisites before the right of legal
the case of eviction from the whole or the part of redemption can be exercised:
greater value.
(1) There must be a sale or assignment of a credit.
EXAMPLE: The concept of sale must be understood in its
P is a partner in a partnership. He sells all his interests restricted sense. The right cannot be exercised
to B for the lump sum of P150,000.00. Upon the if the transaction is exchange or donation (see
dissolution of the partnership, B received the share of P 10 Manresa 416.);
in its assets consisting of P50,000.00, some office
LAW ON SALES – Chapter 8
(2) There must be a pending litigation at the time
of the assignment. The complaint by the
assignor must have been filed and answered by
the debtor before the sale of the credit.

(3) The debtor must pay the assignee:

(1) the price paid by him;

(2) the judicial costs incurred by him; and

(3) the interest on the price from the date

of payment; and

(4) The right must be exercised by the debtor

within thirty (30) days from the date the
assignee demands (judicially or extra-judicially)
payment from him.

Article 1635. From the provisions of the preceding

article shall be excepted the assignments or sales made:

(1) To a co-heir or co-owner of the right assigned;

(2) To a creditor in payment of his credit;

(3) To the possessor of a tenement or piece of land

which is subject to the right in litigation assigned.

Exceptions to debtor’s right to legal redemption.

(1) Sale to a co-heir or co-owner. — This exception

is based on the desire to do away with co-
ownership or pro-indivison. Moreover, if the
right of redemption is granted to the debtor, it
would not terminate litigation which is the
purpose of this article because the co-owner or
co-heir may still sue the debtor for the share
that corresponds to the former in the credit.

(2) Sale to a creditor. — There is a lawful basis for

the assignment as the assignee cannot be
considered as a vendee of a right in litigation
and as a speculator. It really refers to a dation in
payment.

(3) Sale to the possessor of property in question. —

The reason for this exception is that the
assignee is moved by a desire to preserve the
property and not to speculate at the expense of
the debtor.