NICANOR

100

D. Third person who is not an interested party and without knowledge or against the
will of the debtor
REHABILITATION FINANCE CORPORATION vs. CA
G.R. No. L-5942 May 14, 1954

FACTS: Jesus de Anduiza & Quinatana Cano borrowed money from the Agricultural and
Industrial Bank(now RFC), as evidenced by a promissory note dated October 31, 1941.
Mortgagors Anduiza and Cano failed to pay the yearly amortizations that fell due on October
31,1942 and 1943. Learning of this, Estelito Madrid (who temporarily lived in the house of
Anduiza) offered to pay and actually paid on October 30, 1944 the full amount of said
indebtedness toAIB/RFC.
Madrid instituted the present action asking the court to (a) declare as paid theP16,425.17
Anduiza owed the AIB/RFC; (b) order AIB/RFC to cancel the mortgage and release the
properties; (c) condemn Anduiza to pay Madrid the P16,425.17 with legal interest, etc.
ISSUE: Whether the payment by third person was valid
RULING: YES. Article 1158 if the Civil Code of Spain which was in force in the Philippines at
the time of the payment under consideration provides that payments may be made by any
person, whether he has an interest in the performance of the obligation or not, and whether
payment is known and approved by the debtor or whether he is unaware of it. One who
makes a payment for the account of another may recover from the debtor the amount of the
payment, unless it was made against his express will. In this case, payments were not
made in objection of Anduiza or of the Bank. Anduiza, impliedly, but clearly agreed in the
validity of payment when he joined Madrid in appealing to CA.
PIEDAD
Case No. 101

What is to be Paid; Pay money Art. 1249, 1250; R.A. 529, R.A. 4100
Arrieta v. NARIC, supra

FACTS: Arrieta was awarded in a public bidding she participated called by NARIC for the supply
of 20,000 metric tons of Burmese Rice. Arrieta and NARIC entered into a Contract of Sale for
which she obligated herself to deliver 20,000 metric tons of Burmese Rice at $203.00 per metric
ton. In turn, the defendant corporation committed itself to pay for the imported rice "by means of
an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-
appellee and/or supplier in Burma, immediately." However, despite the agreement to immediately
pay by means of said letter of credit, NARIC failed to fulfill such agreement due to lack of funds
as the PNB required them to deposit 50% of the value of the letter amounting to $3,614,000.00.
Because of this delay Arrieta incurred damages as the allocation of her supplier Rangoon was
cancelled and the 5% deposit was forfeited. Thus, Arrieta demanded for compensation for the
damages caused her in US currency.
ISSUE: W/N the discharge of obligation must paid in US currency
RULING: NO. Republic Act 529 specifically requires the discharge of obligations only "in any
coin or currency which at the time of payment is legal tender for public and private debts." In view
of that law, therefore, the award should be converted into and expressed in Philippine Peso
at the rate of exchange prevailing at the time the obligation was incurred, or when the contract in
question was executed.

REYES
Case No. 102

What is to be Paid; Pay money Art. 1249, 1250; R.A. 529, R.A. 4100
Kalalo v. Luz
34 SCRA 377 (1970)

FACTS: On 17 November 1959, Octavio Kalalo entered into an agreement with Alfredo Luz
where he was to render engineering design services for a fee. On 11 December 1961, Kalalo
sent Luz a statement of account where the balance due for services rendered was P59,505. On
18 May 1962, Luz sent Kalalo a resume of fees due to the latter, and a check for P10,861.08.
Kalalo refused to accept the check as full payment of the balance of the fees due him. On 10
August 1962, Kalalo filed a complaint containing 4 causes of action, i.e. $28,000 (representing
20% of the amount paid to Luz in the International Research Institute project) and the balance of
P30,881.25 as fees; P17,0000 as consequential and moral damages; P55,000 as moral
damages, attorney’s fees and litigation expenses; and P25,000 as actual damages, attorney’s
fees and litigation expenses). The trial court ruled in favor of Kalalo. Luz filed an appeal directly
with the Supreme Court raising only questions of law.

Issue: Whether or not the rate of exchange of dollar to peso are those at the time of the payment
of the judgment.

Held: Yes. Luz’ obligation to pay Kalalo the sum of US$28,000 accrued on 25 August 1961, or
after the enactment of RA 529 (16 June 1950). Thus, the provision of the statute which requires
payment at the prevailing rate of exchange when the obligation was incurred cannot be applied.
RA 529 does not provide for the rate of exchange for the payment of obligation incurred after the
enactment of the Act, and thus the rate of exchange should be that prevailing at the time of
payment. The view finds support in the ruling of the Court in Engel vs. Velasco & Co. The trial
court did not err in holding the rate of exchange is that at the time of payment.

SAJILI
Case no. 103

What is to be paid (“Identity”); iii. pay money- Art. 1249, 1250; R.A. 529, R.A. 4100
St. Paul Fire and Marine Insurance v. Macondray
70 SCRA 122 (1976)

FACTS: On June, 1960, Winthrop Products, Inc. of New York, New York, USA shipped 218
cartons and drums of drugs and medicines consigned to Winthrop-Steams, Inc., Manila, aboard
SS “Tai Ping”, owned and operated by Wilhelm Wilhelmsen. Barber Steamship Lines Inc. issued
Bill of Lading 34 (a document issued by a carrier which details a shipment of merchandise and
gives title of that shipment to a specified party.) in the name of Winthrop Producs Inc. as shipper
with arrival notice to Manila to consignee Winthrop-Steams Inc. Manila. The shipment was
insured by shipper against loss and/or damage with St. Paul Fire& Marine Insurance Company
under its insurance Special Policy. Two months after, SS “Tai Ping” arrived at the Port of Manila
and discharged shipment into the custodyof Manila Port Service, the arrastre contractor.
Shipment was complete and in good order except of 1 drum and several cartons which were in
bad condition. Winthrop-Steams, Inc. Manila upon failing to receive the whole shipment and as
several cartons were in bad condition, they filed a claim in the amount of P1,109.67 representing
the CIF1 (Cost, Insurance, and Freight) value of the damaged drum and cartons of medicine to
Macondray & Co. Inc., and Barber Steamship Lines Inc. and Manila Port Service. However, both
refused to pay.

ISSUE: Whether insurer (St. Paul Fire & Marine Insurance Company) who paid claim in dollars to
Winthrop-Steams Inc should be reimbursed in peso equivalent on date of discharge or on date of
decision

RULING: NO. Since St. Paul Fire & Marine Insurance company are subrogated merely to the
rights of the assured, it can only recover the amount that is recoverable by Winthrop-
Steams Inc as limited and restricted by the provisions of the Bill of Lading. "The insurer
after paying the claim of the insured for damages under the insurance is subrogatedmerely to the
rights of the insured and therefore can necessarily recover only that to what was recoverable by
the insured. The obligation of the carrier to pay for the damage commenced on the date it failed
to deliver the shipment in good condition to the consignee. The C.I.F. Manila value of the goods
which were lost or damaged, according to the claim of the consignee dated September
26, 1960 is $226.37 (for the pilferage, Exhibit "G") and $324.33 (shortlanded, Exhibit "H")
or P456.14 and P653.53, respectively,in Philippine Currency. The peso equivalent was based by
the consignee on the exchange rate of P2.015to $1.00 which was the rate existing at that time.
We find, therefore, that the trial court committed no error in adopting the aforesaid rate of
exchange.

SAKIR
Case No. 104

Payment or Performance; What is to be paid in obligations to pay money

Papa vs. A.V. Valencia, et. al., G.R. No. 105188, January 23, 1998

FACTS: Respondents filed a complaint for specific performance against Petitioner who sold a
parcel of land to the former. Petitioner refused to transfer said land to respondent since there
were still some mortgage disputes with the bank. Later, when the title to the land was released,
petitioner still refused and failed to deliver the title to the property despite repeated demands.
Petitioner contended that the sale was never consummated as he did not encash the check in
the amount of P40,000 in full payment of the purchase price of the land, which was delivered to
him around 10 years ago. He argued that the obligation was not extinguished in accordance with
Article 1249 of the Civil Code since it was not encashed.

ISSUE: Whether or not the obligation was extinguished when the petitioner received the check
but failed to encash it for almost 10 years.

RULING: Yes. Although the general rule is that the delivery of a check produces the effect of
payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, there is an exception if
the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance
of a check implies an undertaking of due diligence in presenting it for payment, and if he from
whom it is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. It has, likewise, been held that if no
presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless
presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under
which payment by way of check or other negotiable instrument is conditioned on its being
cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a
check would be a creditor under this provision and if its no-payment is caused by his
negligence, payment will be deemed effected and the obligation for which the check was
given as conditional payment will be discharged.

Case No. 105

Salazar

II. Payment or Performance (What is to be paid (“Identity”)

iii. pay money- Art. 1249, 1250; R.A. 529, R.A. 4100

PAL vs. CA 181 SCRA 557 (1990)

THE FACTS: Tan filed a complaint for damages against Philippine Airlines (PAL). The Court
rendered a judgment in favor of Tan. The CA affirmed the judgment of the lower court with
the modification that PAL is condemned to pay the latter the sum of P25, 000.00 as
damages and P5, 000.00 as attorney’s fee. The trial court upon the motion of Tan issued an
order of execution with the corresponding writ in favor of the respondent. Four months later
PAL opposed the motion for writ of execution, stating that it had already fully paid its
obligation to plaintiff through the issuance of checks payable to the deputy sheriff who later
did not appear with his return and instead absconded.

The CA denied the issuance of the alias writ for being premature. After two months the CA
granted her an alias writ of execution for the full satisfaction of the judgment rendered, when
she filed another motion. Deputy Sheriff del Rosario is appointed special sheriff for
enforcement thereof. PAL filed an urgent motion to quash that debt had already been
satisfied with the cash vouchers received by the executing sheriff. Deputy Sheriff del Rosario
served a notice of garnishment on the depository bank of PAL, through its manager and
garnished the latter’s deposit. Hence, PAL brought the case to the Supreme Court and filed
a petition for certiorari.

THE ISSUES:
1. WON payment of judgment to the implementing officer as directed in the writ of
execution constitutes satisfaction of judgment.
2. WON payment made in checks to the sheriff and under his name is a valid payment
to extinguish judgment of debt.

THE RULING:
1. Negative. In general, a payment, in order to be effective to discharge an obligation, must
be made to the proper person. Article 1240 of the Civil Code provides: “Payment made to
the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it.” Under ordinary circumstances, payment
by the judgment debtor in the case at bar, to the sheriff should be valid payment to
extinguish judgment of debt. However, under the peculiar circumstances of this case, the
payment to the absconding sheriff by check in his name did not operate as a satisfaction of
the judgment debt.

3. Negative. Article 1249 of the Civil Code provides: “The payment of debts in money
shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines”.
Unless authorized to do so by law or by consent of the obligee, a public officer has no
authority to accept anything other than money in payment of an obligation under a judgment
being executed. Strictly speaking, the acceptance by the sheriff of the petitioner’s checks
does not, per se, operate as a discharge of the judgment of debt.

A check, whether manager’s check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender or payment and may be refused receipt by
the oblige or creditor. Hence, the obligation is not extinguished.

SUBA
CASE NO. 106

De Guzman v. Court of Appeals

FACTS: De Guzman, et a., as SELLER, and Singh, as BUYER, executed a Contract to Sell covering
two parcels of land owned by the petitioners located at Pasay City, Singh should pay the balance of
the purchase price of ₱133K on or before February 17, 1975.

Two days before the said date, Singh asked the petitioners to furnish her with a statement of account
of the balance due; copies of the certificates of title covering the two parcels of land subject of the
sale; and a copy of the power of attorney executed by Gestuvo in favor of de Guzman. Petitioners
denied the request. Singh filed a complaint for specific performance with damages against the
petitioners before the CFI of Rizal. She said that petitioners committed a breach of contract, and had
also acted unfairly and in manifest bad faith for which they should be held liable for damages.
Petitioners claimed that the complaint failed to state a cause of action; that the balance due was
already pre-determined in the contract; that the petitioners have no obligation to furnish Singh with
copies of the documents requested; and that Singh's failure to pay the balance of the purchase price
on the date specified had caused the contract to expire and become ineffective without necessity of
notice or of any judicial declaration to that effect.

CFI: Approved the compromise agreement submitted by the parties wherein they agreed on the
following:

1.Not later than December 18, 1977, plaintiff will pay defendants the total amount of

₱240K and in case of failure to do so, she shall have only until January 27, 1978 within which to pay
the total amount of ₱250K which shall be treated as complete and final payment of the consideration
in the contract to sell;

2.Immediately upon receipt of either amount within the periods so contemplated, defendants
undertake to immediately execute the necessary legal instruments to transfer to plaintiff the title to the
parcels of land;

3.That defendants would temporarily desist from enforcing their right or possession over the
properties involved herein until January 27, 1978, but this shall not be construed as an abandonment
or waiver of its causes of action;
4.Should plaintiff fail to pay either of the amounts within the period herein stipulated, the aforesaid
Contract to Sell dated February 17, 1971 shall be deemed rescinded and plaintiff agrees to voluntarily
surrender and vacate the same without further notice or demand;

5.That payment of either amounts above-stated shall take place at CFI Rizal Branch 3 at 10:00 a.m.
Friday, January 27, 1978 unless payment has been earlier made, in which case plaintiff shall produce
receipt of the same at the same time and place

6.Both parties waive and abandon, by reason hereof, their respective claims and counterclaims as
embodied in the Complaint and Answer.

On January 28, 1978, the petitioners filed a motion for the issuance of a writ of execution, claiming
that Singh had failed to abide by the terms of the compromise agreement and pay the amount
specified in their compromise agreement within the period stipulated. Singh opposed the motion,
saying that she had complied with the terms and conditions of the compromise agreement and asked
the court to direct the petitioners to comply with the court's decision and execute the necessary
documents to effect the transfer of ownership of the two parcels of land to her. CFI Directed the
petitioners to immediately execute the necessary documents, transferring to private respondent the
title to the properties. CA Affirmed.

ISSUE: W/N Singh had complied with the terms of the compromise agreement.

RULING: YES. Singh had substantially complied with the terms and conditions of the compromise
agreement. Her failure to deliver to the petitioners the full amount on January 27, 1978 was not her
fault. The blame lies with the petitioners. The record shows that Singh went to the sala of Judge
Bautista on the appointed day to make payment, as agreed upon in their compromise agreement. But,
the petitioners were not there to receive it. Only the petitioners' counsel appeared later, but, he
informed Singh that he had no authority to receive and accept payment. Instead, he invited Singh and
her companions to the house of the petitioners to effect payment. But, the petitioners were not there
either. They were informed that the petitioner Pilar de Guzman would arrive late in the afternoon.
Singh was assured, however, that she would be informed as soon as the petitioners arrived. Singh, in
her eagerness to settle her obligation, consented and waited for the call which did not come and
unwittingly let the period lapse.

The next day, January 28, 1978, Singh went to the office of the Clerk of the Court of First Instance
of Rizal, Pasay City Branch, to deposit the balance of the purchase price. But, it being a Saturday,
the cashier was not there to receive it. So, on the next working day, Monday, January 30, 1978,
Singh deposited the amount of ₱30K with the cashier of the Office of the Clerk of the Court of First
Instance of Rizal, Pasay City Branch, to complete the payment of the purchase price of ₱250K.

Since the deposit of the balance of the purchase price was made in good faith and that the failure
of Singh to deposit the purchase price on the date specified was due to the petitioners who also
make no claim that they had sustained damages because of the two days delay, there was
substantial compliance with the terms and conditions of the compromise agreement

TALAVER
CASE NO. 107

APPLICATION OF PAYMENTS (ART. 1252)

Reparations Commission vs. Universal Deep-Sea Fishing Corp., 83 SCRA 764 ,
June 27, 1978

FACTS: The Reparations Commission awarded six (6) trawl boats to the Universal Deep-Sea Fishing
Corporation (Universal, for short) which were delivered two at a time, each delivery being covered by
a Contract of Conditional Purchase and Sale providing for identical schedules of payments — the first
installment representing 10% of the total cost was to be paid 24 months after delivery and the balance
of the total cost to be paid in ten (10) equal installments, which, in the schedule were numbered as
"1", "2", "3", etc., the first of which was due one year after the first installment. When the Reparations
Commission sued Universal and its surety to recover various amounts of money due under the
constracts, they claimed that the amounts were not yet due and demandable. Universal alleged that
there was an obscurity in the terms of the contracts in question which was caused by the plaintiff as to
the amounts and due dates of the first installments which should have been first fixed before the
creditor could demand its payment from the debtor, specifically referring to the schedule of payments
which allegedly indicated two (2) due dates for the payment of the first installment.

ISSUE: Whether or not the first installments under the three (3) contracts of conditional purchase and
sale of reparations goods were already due and demandable when the complaint was filed?

RULING/MP: YES. The Court held that the terms of the contracts for the purchase and sale of the
reparations vessels, however, are very clear and leave no doubt as to the intent of the contracting
parties. Thus, in the contract concerning the M/S UNIFISH 1 and M/S UNIFISH 2, the parties
expressly agreed that the first installment representing 10% of the purchase price or P53,642.84 shall
be paid within 24 months from the date of complete delivery of the vessels or on May 8, 1961, and the
balance to be paid in ten (10) equal yearly installments. The amount of P56,597.20 due on May 8,
1962, which is also claimed to be a “first installment,” is but the first of the ten (10) equal yearly
installments of the balance of the purchase price. xxx Viewing the contracts between the parties xxx
the first installment on the M/S UNIFISH 1 and M/S UNIFISH 2 of the amount of P53,642.84 was due
on May 8, 1961, while the first installments on the M/S UNIFISH 3 and M/S UNIFISH 4, and the M/S
UNIFISH 5 and M/S UNIFISH 6 in the amounts of P68,777.77 and P54,500.00 were due on July 31,
1961 and October 17, 1961, respectively. Accordingly, the obligation of UNIVERSAL to pay the first
installments on the purchase price of the six (6) reparations vessels was already due and demandable
when the present action was commenced on August 10, 1962. Also due and demanded from
UNIVERSAL were the first of the ten (10) equal yearly installments on the balance of the purchase
price of the M/S UNIFISH 1 and M/S UNIFISH 2 in the amount of P56,597.20 and P72,565.68 on the
M/S UNIFISH 3 and M/S UNIFISH 4. The first accrued on May 8, 1962, while the second fell due on
July 31, 1962.

Main Point: A continuing bond is one whose period of insurance is indefinite or with no fixed expiration
date. The bond shall be in force unless cancelled by the Obligee, or by the Insurance Commissioner,
or by a court of competent jurisdiction, as the case may be. As consequence, the premium for
furnishing the bond and the obligation to the pay the same subsists for as long as the liability of the
Surety shall exists.

TINGKAHAN
CASE NO. 108

APPLICATION OF PAYMENTS (ART.1252)

PACULDO V. REGALADO, 345 SCRA 134 (2000)

FACTS: Petitioner Nereo Paculdo (Paculdo) and respondent Bonifacio Regalado (Regalado)
entered into a contract of lease over a parcel of land with a wet market building, located at
Fairview Park, Quezon City. The contract was for twenty five (25) years. For the first five (5)
years of the contract beginning December 27, 1990, Paculdo would pay a monthly rental of
P450,000, payable within the first five (5) days of each month with a 2% penalty for every month
of late payment. Aside from the above lease, Paculdo leased eleven (11) other properties from
Regalado, ten (10) of which were located within the Fairview compound, while the eleventh was
located along Quirino Highway Quezon City. Paculdo also purchased from respondent eight (8)
units of heavy equipment and vehicles. On account of Paculdo’s failure to pay the corresponding
monthly rentals, Regalado sent two demand letters to Paculdo demanding payment of the back
rentals, and if no payment was made within fifteen (15) days from the receipt of the letter, it
would cause the cancellation of the lease contract. Without the knowledge of Paculdo, Regalado
mortgaged the land subject of the lease contract, including the improvements which Paculdo
introduced into the land. Subsequent dates thereafter, Regalado refused to accept Paculdo’s
daily rental payments. Consequently, Paculdo filed an action for injunction and damages seeking
to enjoin respondents from disturbing his possession of the property subject of the lease
contract. On the same day, Regalado also filed a complaint for ejectment against Paculdo. The
lower court rendered a decision in favor of the Regalado, which was affirmed in toto by the Court
of Appeals. Hence, this petition.

ISSUE: Whether or not the Paculdo was truly in arrears in the payment of rentals on the
subject property at the time of the filing of the complaint for ejectment.

RULING: NO, the Paculdo was not in arrears in the payment of rentals on the subject property at
the time of the filing of the complaint for ejectment. As found by the lower court there was a letter
sent by Regalado to Paculdo, which states that Paculdo’s security deposit for the Quirino lot, be
applied as partial payment for his account under the subject lot as well as to the real estate taxes
on the Quirino lot. However later on, Regalado also informed Paculdo that the payment was to
be applied not only to Paculdo’s accounts under the subject land and the Quirino lot but also to
heavy equipment bought by the latter from Regalado. Paculdo submits that his silence is not
consent but is in fact a rejection. As provided in Article 1252 of the Civil Code, the right to
specify which among his various obligations to the same creditor is to be satisfied first
rest with the debtor. In the case at bar, at the time Paculdo made the payment, he made it
clear to Regalado that they were to be applied to his rental obligations on the Fairview wet
market property. However, Regalado applied a big portion of the amount paid by Paculdo to the
satisfaction of an obligation which was not yet due and demandable- the payment of the eight
heavy equipment. The lease over the Fairview wet market is the most onerous to the petitioner in
the case at bar. Consequently, the petition is granted.

ADIL
Case 109

Concept Art. 1245: Dation in Payment - Distinguished from Payment by Cession

Development Bank of the Philippines v. CA, G.R No. 118342, Jan. 5, 1998

FACTS: Lydia Cuba is a grantee of Fishpond Lease Agreement from the government. She obtained
loans from DBP through Deeds of Assignment of her Leasehold. She failed to pay her loan on time in
accordance with the terms of the Promissory Notes. Without foreclosure proceeding, DBP
appropriated the Leasehold Rights of Cuba over the fishpond. DBP sent Notice of Rescission and
took possession of the Leasehold Rights over said fishpond. DBP thereafter executed a Deed of
Conditional Sale in favor of defendant Agripina Caperal to award Fishpond Lease Agreement. The
RTC ruled in favor of Cuba, but the CA ruled otherwise except for damages awarded to Cuba. On
appeal, DBP contended that the assignment novated the promissory notes in that the obligation to
pay a sum of money the loan was substituted by the assignment of the rights over the fishpond.

ISSUE: W/N the assignment constitutes dation in payment.

RULING/MP: No. The Court holds that the Deeds of Assignment of Cuba’s Leasehold Rights is not
dation in payment under Article 1245 of the Civil Code. The said article reads that – “Dation in
payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall
be governed by the law on sales”. It bears stressing that the assignment, being in its essence
a mortgage, was but a security and not a satisfaction of indebtedness.
Neither did the assignment amount to payment by cession under Article 1255 for the plain and
simple reason that there was only one creditor, the DBP. Article 1255 contemplates the
existence of 2 or more creditors and involves the assignment of all debtor’s property. Thus, the
CA’s decision is reversed except as to the moral damages, and the trial court’s decision is modified.

Almonte
Case No 110
Filinvest Credit Corporation vs. Philippine Acetylene, , Jan 1982, 111 SCRA

FACTS:
Respondent purchased from Alexander Lim, a Chevrolet 1969 model motor vehicle payable under the
terms and conditions of the promissory note provided by respondent. As security for the payment,
respondent executed a chattel mortgage over the same vehicle in favor of Lim. Lim assigned to Filinvest
Finance all his rights, title, and interests in the promissory note and the chattel mortgage which
subsequently assigned it to Filinvest Credit. Respondent failed to comply with the terms in the
promissory note and chattel mortgage. Respondent informed Filinvest Credit that it was returning the
mortgaged property in full satisfaction of its indebtedness pursuant to Art. 1484 of the New Civil Code.
When it was returned to Filinvest, it could not however sell the vehicle since there were unpaid taxes on
said vehicle. Upon Filinvest’s offer to return the vehicle
to Phil Acetylene, the latter refused to accept it. Respondent contends that Filinvest has no cause of
action since its obligation was extinguished when it returned the mortgaged property to Filinvest and
assuming however that the return of the property did not extinguish its obligation, it was nonetheless
justified in refusing payment since Filinvest is not entitled to recover the same due to the breach of
warranty committed by the original vendor-assignor Alexander Lim. Additionally, it argues that by virtue
of the return, it extinguished their obligation through dation in payment

ISSUE: W/N the return of the mortgaged motor vehicle to the Filinvest by virtue of its voluntary
surrender by the Philippine Acetylene totally extinguished and/or cancelled its obligation to the Filinvest

RULING:
NO. The mere return of the mortgaged motor vehicle by the mortgagor, Phil Acetylene, to the
mortgagee, Filinvest, does not constitute dation in payment or dacion en pago in the absence, express or
implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of
the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of
obligation. The evidence on the record fails to show that the mortgagee, consented, or at least intended,
that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual
payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor
vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically
contemplated by dacion en pago, was transferred from Phil Acetylene to Filinvest. In the absence of clear
consent of Filinvest, there can be no transfer of ownership of the mortgaged motor vehicle from
appellant to appellee. Only transfer of possession of the mortgaged motor vehicle took place, for it is
quite possible that Filinvest merely wanted to secure possession to forestall the loss, destruction,
fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of
Phil Acetylene.

MAIN POINT:
Compare Dacion en pago and Cession by payment through Article 1255 of the New Civil Code.Both are
properties given to the creditors but the following are requisites of Payment by Cession.
1. Plurality of debts
2. Partial or relative insolvency of the debtor
3. Acceptance of the cession by the creditors

Amilhussin
Case No. 111
 CONSIGNATION
De Guzman v. Court of Appeals
G.R. No. 52733|J. Concepcion|July 23, 1985

FACTS: Petitioners Pilar De Guzman (De Guzman), Rolando (Rolando)

and Minerva (Minerva) Gestuvo executed a Contract to Sell with private
respondent Leona Singh (Singh) for two parcels of land owned by the
petitioners in Pasay City on February 17, 1971. The initial agreement
was that the private respondent should pay the balance of the purchase
price of PHP 133,640 on or before February 17, 1975 and two days
before the agreed date, the private respondent requested the petitioners
to furnish her the statement of account of the balance due, the copies of
the certificates of title covering the two parcels of land subject to sale,
and a copy of the power of attorney executed by Rolando in favor of De
Guzman. However, the petitioners denied the request which led to the
private respondent filing of a complaint for specific performance with
damages against the petitioners before the Court of First Instance (CF)
of Rizal. On November 29, 1977, the trial court rendered its decision
stipulating a compromise agreement between the two parties which
make the private respondent pay the petitioners the amount of PHP
240,000 no later than January 27, 1978 otherwise, the former shall
vacate and voluntarily surrender the premises without further or notice
of demand, but the petitioners claim that the respondent paid the amount
after the date agreed on their compromise agreement.
Issue: W/N Singh had complied with the terms of the compromise
agreement. YES.
Ruling: The private respondent did comply with the terms and
conditions of the compromise agreement. Private respondent's failure to
deliver the full amount stipulated in their compromise agreement with
the petitio ners was not the former's fault because the former went to the
sala of Judge Bautista on January 27, 1978 to make a payment however,
the petitioners failed to appear and only their counsel appeared and
requested the private respondent to go the house of the petitioners to
settle the payment but the latter were not in the house. The private
respondent waited for the petitioner’s arrival which never happened on
that day, which proved how eager she was to settle the obligation. She
also went to the Office of the Clerk of the CFI of Rizal, Pasay City Branch,
the following day to complete the payment of the purchase price of PHP
250,000 but since it was a Saturday, the cashier was not present to
receive it, hence, she returned on the same place on, Monday, January
28, 1978. Since the deposit of the balance of the purchase price was
made in good faith and the failure of the private respondent to deposit
the purchase price on the date specified in their compromised agreement
was due to the petitioners who also make no claim that they had
sustained damages because of the two days delay, there was substantial
compliance with the terms and conditions of the said agreement.

ANOOS
CASE NO. 112

EXPENSES OF CONSIGNATION- ART.1259

TLG INTERNATIONAL CONTINENTAL ENTERPRISING, INC. V. FLORES, 47 SCRA 437
(1972)

FACTS: In a case for an action for declaratory relief involving the rights of Bearcon Trading Co,
Inc. as lessee of the premises of Juan Fabella, Judge Flores granted TLG’s Motion to Intervene.
TLG intervened as sub-lessee of Bearcon over the property to protect its rights as sub-lessee
and to enable it, during pendency of the case, to make a consignation of the monthly rentals as it
was at a loss as to who is lawfully and rightfully entitled to receive payments of the monthly
rentals. TLG deposited with the Clerk of Court of the CFI P3,750.00. Upon Juan Fabella’s prayer,
Judge Flores issued an Omnibus Order dismissing the complaint and the complaint in
intervention on ground that the subject matter could be better ventilated in the ejectment case
against Bearcon. Petitioner filed its motion to withdraw the P3,750.00 it deposited because the
order dismissed the case and complaint in intervention without a resolution having been made as
to the right of Fabella/Bearcon to the rentals deposited by TLG. This left TLG without any
recourse but to apply for authority to withdraw the amount and turn it over to Fabella. Judge
Flores denied it and the motion for reconsideration as well.

ISSUE: W/N Respondent Judge could authorize the withdrawal of the deposits considering that
according to Respondent, the Court has not ordered the intervenor to make any deposit in
connection with the case.

RULING: YES. Art. 1260 of the Civil Code of the Philippines provides “Before the creditor has
accepted the consignation, or before a judicial declaration that the consignation has been
properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation
to remain in force. In the case at bar, was dismissed before the amount deposited was either
accepted by the creditor or a declaration made by the Court approving such consignation. The
dismissal rendered the consignation ineffectual. Under such circumstances, it was incumbent
upon Respondent to have allowed the withdrawal by TLG of the money deposited with the CFI.
The 2 Orders are hereby set aside and respondent is directed to grant the withdrawal of the
deposit in accordance with the foregoing.

113
BENITEZ

Expenses of consignation- Art.1259

McLaughlin v. CA
144 SCRA 693 (1986)

FACTS: Luisa F. McLaughlin (petitioner) and Ramon Flores (respondent) entered into a
contract of conditional sale of real property. Due to Flores’s failure to pay some balance due,
Petitioner filed a complaint for rescission of the deed of conditional sale. Thereafter, a
compromise agreement was executed whereby respondents acknowledged his
indebtedness for P119,050.71 and both agreed that such is to be due and payable as
follows: a) P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71 in
two equal installments on June 30, 1980 and December 31, 1980.Respondent again failed to
pay the July installment. Hence, petitioner on October 15, 1980 demanded such balance
plus the December installment amount. Private respondent sent a letter to petitioner
signifying his willingness and intention to pay the full balance of P69,059.71. Moreover, he
stated that he tendered payment to petitioner but this was refused acceptance by petitioner.
However, this does not appear in the decision of the Court of Appeals.

On November 7, 1980, petitioner filed a Motion for Writ of Execution for respondent’s failure
to pay the July installment and rents accruing. Also, petitioner asked for rescission and a
court order for respondent to pay 1,000 back rentals from June 1980, among others. The
trial court granted the motion for writ of execution. MR was filed with respondent tendering a
certified manager’s check in the amount ofP76,059.71, payable to the order of petitioner and
covering the entire obligation including the installment due on December 31, 1980. However,
the same were denied. CA reversed. Hence, this appeal.

ISSUE: W/N it is inequitable to rescind the deed of conditional sale

RULING: Yes. The court agrees with the appellate court that it would be inequitable to
cancel the contract of conditional sale and to have the amount of P101,550.00 already paid
by him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner,
particularly after private respondent had tendered the amount of P76,059.71 in full payment
of his obligation.

Private respondent's tender of payment of the amount of P76,059.71 together with his
motion for reconsideration on November 17, 1980 was, well within the thirty-day period
granted by law. The tender made by private respondent of a certified bank manager's check
payable to petitioner was a valid tender of payment. The certified check covered not only the
balance of the purchase price in the amount of P69,059.71, but also the arrears in the rental
payments from June to December, 1980 in the amount of P7,000.00, or a total of
P76,059.71.

Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that: "An offer in
writing to pay a particular sum of money or to deliver a written instrument or specific property
is, if rejected, equivalent to the actual production and tender of the money, instrument, or
property." However, although private respondent had made a valid tender of payment
which preserved his rights as a vendee in the contract of conditional sale of real
property, he did not follow it with a consignation or deposit of the sum due with the
court. Both parties submitted their respective manifestations which confirm that the
Manager's Check in question was subsequently withdrawn and replaced by cash, but the
cash was not deposited with the court.

According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom
tender of payment has been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the thing or sum due, and
that consignation alone shall produce the same effect in the five cases enumerated
therein; Article 1257 provides that in order that the consignation of the thing (or sum) due
may release the obligor, it must first be announced to the persons interested in the fulfillment
of the obligation; and Article 1258 provides that consignation shall be made by depositing
the thing (or sum) due at the disposal of the judicial authority and that the interested parties
shall also be notified thereof.

CRUZ
CASE NO. 114

F. Tender of Payment and Consignation

f. Expenses of consignation- Art.1259
Soco v. Militante, 123 SCRA 160 (1983)

FACTS: Plaintiff, Soco (lessor) and defendant Francisco (lessee) entered into a contract of lease
on for commercial building and lot for a monthly rental of P800.00 for a period of 10 years
renewable for another 10 years at the option of the lessee. One time, Francisco noticed that
Soco did not send her collector for the payment of rentals, and sometimes, the payments were
made with no receipts being issued. Soco later learned that Francisco sub-leased a portion of the
building to NACIDA, at a monthly rental of more than P3,000.00 which is definitely very much
higher than what Francisco was paying to Soco under the Contract of Lease, the latter felt that
she was on the losing end of the lease agreement so she tried to look for ways and means to
terminate the contract. The Court holds that there was in fact a tender of payment of the rentals
made by Francisco to Soco through Comtrust and since these payments were not accepted by
Soco evidently because of her intention to evict Francisco, by all means, Francisco was impelled
to deposit the rentals with the Clerk of Court of the City Court of Cebu, Soco was notified of this
deposit. She was further notified of these payments by consignation. The City Court declared the
payments of rentals valid and effective.

ISSUE: Whether or not the consignation was valid and effective.

RULING: NO. The consignation was not valid and effective.

In order that consignation may be effective, the debtor must first comply with certain
requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the
consignation of the obligation had been made because the creditor to whom tender 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 (Art. 1176, Civil Code); (3) that
previous notice of the consignation had been given to the person interested in the performance
of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the
court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person
interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is
enough ground to render a consignation ineffective. SC ruled that the essential requisites of a
valid consignation must be complied with fully and strictly in accordance with the law, as Articles
1256 to 1261, New Civil Code say. Substantial compliance is not enough for that would render
only a directory construction to the law. The use of the words "shall" and "must" which are
imperative, operating to impose a duty which may be enforced, positively indicate that all the
essential requisites of a valid consignation must be complied with. The Civil Code Articles
expressly and explicitly direct what must be essentially done in order that consignation shall be
valid and effectual, as the law provides in Art 1257, 1258, 1249. SC held that the respondent
lessee has utterly failed to prove the requisites of a valid consignation.

DELOS REYES
CASE NO. 115

Consignation: Expenses of consignation – Art.1259

Sotto v. Mijares, 28 SCRA 17 (1969)

FACTS: In this case, the plaintiff-appellee filed a “Motion for Deposit” on a case filed in CFI of
Negros Occidental in view of the admission of the defendant the P 5,106.00 balance shall be
deposited in the Office of the Clerk of Court in favor of the plaintiff. The defendants signified their
willingness to deposit the amount provided that they be absolved of all other liabilities, expenses
and costs. The CFI then issued an order to terminate the case if the said amount has been
deposited already. After a new days, while represented by a new counsel they filed a motion for
partial judgment on the pleadings with respect to the said amount, modifying their previous
request which had already been granted. The defendants moved to reconsider the order,
explaining that through oversight they failed to allege in their opposition that the amount was
actually secured by a real estate mortgage.

The CFI denied both motions. The case was originally appealed to the CA, certified to the SC.

ISSUE: WON the CFI acted with authority and in judicious exercise of its discretion in ordering
the defendants to make the deposited but without the condition they stated.

RULING: No. WON to deposit at all amount of an admitted indebtedness or to do so under

certain conditions is a right which belongs to the debtor exclusively. If he refuses he may not be
compelled to do so, and the creditor must fall back on the proper coercive processes provided by
law to secure or satisfy his credit, as by attachment, judgement and execution.

Consignation is a facultative remedy which the debtor may or may not avail himself of. The
debtor has the right to withdraw the thing or sum deposited before the creditor has accepted or
before a judicial declaration that the consignation has been properly made is given. If the debtor
has such right of withdrawal, he surely has the right to refuse to make the deposit in the first
place.

CASE 116
Riesenbeck v. Court of Appeals

FACTS:

On 25 July 1988, petitioner Riesenbeck filed a complaint for consignation and

damages against private respondent Maile in the RTC of Cebu. Two days later, he
(petitioner) consigned and deposited with the Clerk of Court P 113,750. The private
respondent then filed a Manifestation Accepting Consignation and Motion to Dismiss
(1 August 1988), stating “without necessarily admitting the correctness of the
obligation of plaintiff to defendant , the latter [privaterespondent] hereby manifests to
accept the said amount of P 113,750 which is consigned by plaintiff, provided that
the present complaint be dismissed outright with cost against plaintiff.”Riesenbeck
opposed the manifestation, but the lower court ruled that there was a valid
consignation, and the private respondent could legally accept the payment by
consignation with reservation to prove damages and other claims. The petitioner filed
for a motion for reconsideration, which was denied. The Court of Appeals also
denied his petition for certiorari, and his subsequent motion fo rreconsideration. The
petitioner then went to the Supreme Court.

ISSUE:
Can a creditor accept with reservation the amount consigned by the debtor?

HELD:
Yes, it is legally permissible. The instant petition was dismissed for lack of
merit.Private respondent’s acceptance of the amount consigned by the petitioner-
debtorwith a reservation or qualification as to the correctness of the petitioner’s
obligationis legally permissible.Before a consignation can be judicially declared
proper, the creditormay prevent the withdrawal of the amount consigned by
accepting the consignation, even withreservation (Tolentino).

CASE NO. 117

Consignation: Expenses of consignation – Art.1259

RURAL BANK OF CALOOCAN v. CA
GR No. L-32116, 1981-04-21

FACTS: On December 7,1959 respondent Maxima Castro together with Severino Valencia they
went to the rural bank of Caloocan to apply for an industrial loan in the amount of P3,000.00each
of them and mortgaged the house and lot of Mrs Castro and also they executed a promissory
note in favor of the bank. On February 13,1961 the subject property was a subject of sheriff sale
but was postponed due to the request of Castro and Valencia with the consent of the bank and
was scheduled on April 10,1961 which was a special holiday but the auctioncontinued in the
amount of P6,000.00 prompting Mrs Castro o filed a case against the bank for the recovery of
her property.

ISSUE: W/N the promissory note executed by Mrs Castro is valid.

RULING: NO. Supreme court declare the promissory note valid between the bank and Castro
and the mortgage contract binding on Castro beyond the amount of P3,000.00 for while contracts
may not be in may not be invalidated insofar as they affect the bank and Castro on the ground of
fraud because the bank was not a participant thereto suc may however be invalidated on the
ground of substantial mistake mutually committed bt them as a consequence of the fraud and
misrepresentation inflicted by the Valencias. Wherefore finding no irreversible error in the
judgment under review. We affirmed the same in toto.

Garcia
Case No. 118

LEONILA J. LICUANAN, petitioner,

vs.
HON. RICARDO D. DIAZ
G.R. No. L-59805 July 21, 1989

Facts: petitioner is the owner of an apartment situated at 3415 F. Aguilar St., Bo. Obrero,
Tondo, Manila, being rented by herein private respondent since March, 1973. On January
22, 1974, they executed a lease contract, and stipulated therein, among others, that the
monthly rental is One Hundred Eighty Pesos (Pl80.00) to be paid within the first five (5) days
of every month. both petitioner and private respondent appeared before Lt. Col. Antonio
Penala, Hearing Officer of the Civil Relations Service, but since the parties failed to reach any
agreement, Lt. Col. Penala placed the notation "HOLD" on the pertinent document; and as
precautionary measure, instructed private respondent to deposit the amount of rental due
for that month so that she could not be charged with non-payment, which directive private
respondent readily complied with and she was issued the corresponding receipt.
Private respondent filed her answer (Ibid., pp. 14-17). In the same, private respondent,
among others, denies that she failed in paying her monthly rentals, claiming that petitioner
has refused the rental being tendered and that upon advice of the Office of the Civil
Relations, AFP, she deposited her monthly rentals with that office for the months of April to
September, 1978, inclusive at P80.00 a month; and that she admits having received the
letter of demand dated August 23, 1978, and claims that upon receipt of the said letter, she
called up by telephone petitioner's counsel, Atty. Manuel Melo, informing him that the
rentals due for the months of April to August, 1978 have been deposited with the Office of
Civil Relations, AFP, and that petitioner can withdraw the said amount due from the said
office.

Issue: whether or not private respondent's deposit of the rentals due to petitioner with Civil
Relations Service, now Office for Civil Relations, AFP, is a valid consignation

Ruling: No, Their protestation that they deposited the rentals due though belatedly in the
Office of then Presidential Assistant Ronaldo Zamora does not help their cause at all. The
law prescribes that such consignation or deposit of rentals should be made with the Court
and/or under Batas Pambansa Blg. 25 in the bank and not elsewhere
In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160, 166-167
[1983]), this Court ruled that the codal provision of the Civil Code dealing with consignation
(Articles 1252-1261) should be accorded a mandatory construction
GRAVADOR

CASE 119

f. Expenses of consignation- Art.1259

Chan vs. CA (March 3, 1994, 230 SCRA)

FACTS: Felisa Chan and Grace Cu entered into a contract of lease whereby the latter will
occupy for residential purposes Room 401 and the rooftop of Room 442 of a building owned by
the former. The term of the lease is 1 year. In the contracts, it was agreed that the premises shall
be used as a learning center. The monthly rental was raised every year. Said contract of lease
was renewed every year for 2 successive years. After February 1, 1986, there was no written
contract of lease executed by the parties, but Cu has continuously occupied the premises as a
learning center. After sometime there was a dispute between parties and Chan did not collect the
rental for December 1989. Whereupon, Cu tendered to Chan a check, which the latter refused to
accept. Cu’s lawyer tendered the payment in cash in the same amount with notice to Chan that if
she will not accept the payment, the same will be deposited in court by way of consignation. Cu
filed a civil case for consignation with the Metropolitan Trial Court of Manila. She alleged that
Chan refused to accept, without justifiable cause, the rentals for the premises in question. Chan
interposed in her answer a counterclaim for ejectment. She contended that the lease, being
month to month, had expired but that despite demand, Cu refused to vacate the premises. The
MeTC declared that the rooftop is included in the lease and fixed the term of the lease over the
subject premises until June 30, 1992. It declared the consignation of rentals made by Cu to be
valid and legal and released Cu from the obligation of paying the said rentals. RTC affirmed the
MeTC’s decision. CA reversed and set aside the decisions of the MeTC and the RTC and
dismissed the complaint for consignation for lack of merit. CA ruled that Chan’s refusal to accept
the rental was justified and that she may not be compelled to accept such rental payments

ISSUE: Whether there is a valid consignation.

RULING: Yes, The court believes that under the undisputed facts earlier narrated, private
respondent has complied with all the requisites laid down in the said case, namely; ‘The debtor
must show (1) that there was a debt due; (2) that 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 (Art 1176, Civil Code); (3) that previous notice of the consignation had
been given to the person interested in the performance of the obligation (Art. 1177, Civil Code);;
(4) that the amount due was placed at the disposal of the court and (5) that after the consignation
had been made the person interested was notified thereof.

CASE NO. 120

HALIL

Expenses of Consignation – Art. 1259

Meat Packing Corp of the Phil. V. Sandiganbayan, June 22, 2001

FACTS: Meat Packing Corporation of the Philippines (MPCP) is a corporation wholly owned by
the GSIS. MPCP entered an Agreement with the Philippine Integrated Meat at the rate of
P1,375,563.92 payable over 28 years with it totaling P38,515,789.87. In 1986, PCGG
sequestered all the assets, properties, and records of PIMECO which included the meat packing
plant and the lease-purchase agreement. The Sandiganbayan ruled that MPCP should accept
the P5 M payment made by the PCGG.

ISSUE: 1) W/N MPCP’s refusal to accept the payment was unjustified. 2) W/N Sandiganbayan
has a jurisdiction to accept the consignation.

RULING: YES. It is unjustified. The Sandiganbayan already approved the consignation by the
PCGG wherein 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. Tender on the other hand is the antecedent of consignation,
an act preparatory to the consignation, which is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain. Tender of payment maybe
extrajudicial while consigning is necessarily judicial. The priority of tendering payment is to attempt to
make a private settlement before proceeding to the solemnities of consignation. Both tender and
consignation validly made produces the effect of payment and extinguishes the obligation. Refusal
due to the said rescission of contract is untenable since MPCP accepted annual amortizations or
rentals, advances, insurance, and taxes from PIMECO. The acceptance negates the said rescission.
Under the terms of the lease-purchase agreement, the amount of arrears in rentals or amortizations
must be equivalent to the cumulative sum of three annual installments, in order to warrant the
rescission of the contract. Therefore, it must be shown that PIMECO failed to pay the aggregate
amount of at least ₱10,038,809.10 before the lease-purchase agreement can be deemed
automatically cancelled. Assuming in the extreme that, as alleged by MPCP, the arrears at the time of
tender on January 30, 1991 amounted to ₱12,578,171.00, the tender and consignation of the sum of
₱5,000,000.00, which had the effect of payment, reduced the back rentals to only ₱7,578,171.00, an
amount less than the equivalent of three annual installments. Thus, with the Sandiganbayan’s
approval of the consignation and directive for MPCP to accept the tendered payment, the lease-
purchase agreement could not be said to have been rescinded.

2). YES. The voluntary appearance in court and its submission to its authority or by service of
summons gives the courts jurisdiction over the person. MPCPs appearance in the courts in the
Civil Case already created the said jurisdiction.

CASE N0. 121

IJIRANI

Expenses of consignation- Art.1259

TEDDY G. PABUGAIS v. DAVE P. SAHIJWANI

G.R. No. 156846, February 23, 2004

FACTS: Pursuant to an “Agreement and Undertaking”, petitioner Pabugais, in consideration of

the amount of P15,487,500, agreed to sell to respondent Sahjiwani a lot containing 1,239 square
meters. Respondent paid a reservation fee of P600,000, and the remaining balance
ofP14,887,5000 to be paid within 60 days from the execution of the contract, simultaneous to the
delivery of the petitioner of the necessary duplicate documents, however, petitioner failed to
deliver the necessary documents. Hence, to comply with their expressed agreement, the
petitioner returned the reservation fee of P600,000 through Far East Bank & Trust Company
Manager’s Check No. 088498, which was, however, dishonored. The Court of Appeals
declared the consignation as valid. It held that the validity of the consignation had the
effect of extinguishing petitioner’s obligation to return the reservation fee to respondent. Hence,
petitioner can no longer withdraw the same. However, opposing the refusal of the Court of
Appeals to his request to withdraw the consigned money, the petitioner filed the instant
petition for review contending that he can withdraw the amount deposited as a matter of right.

ISSUE:

1. Whether there was a valid consignation.

2. Whether or Not petitioner can withdraw the amount consigned as a matter or right.

RULING: YES, the consignation was valid. The initial declaration of invalidity by the Trial Court
was because of the issue arising from the claim that no valid tender of payment
was made. This is, as pursuant to Article 1256 of the New Civil Code of the Philippines, concerns
one of the most important requisites of consignation, i.e., the existence of valid tender of
payment. However, it was realized that the obvious intention of the respondent’s counsel’s
refusal of the payment made on August 5,1994, was because of the insufficiency, and not
because it was not tendered, nor was it because it’s in the form of a manager’s check.
Nevertheless, payment in check may be considered to be valid if no prompt objection to said
payment is made. This makes the payment through the manager's check valid.

NO. In the case of the petitioner’s request to withdraw the amount consigned as a matter of right,
the request is not valid. This is because the consignation was duly made. As according to the
provisions of Article 1260, “Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.” Taking this into consideration, the petitioner
cannot withdraw the consigned amount; henceforward, the instant petition for review is
DENIED.

CASE NO. 122 LAO

Expenses of consignation- Art.1259

Ponce De Leon v. Syjuco, October 31, 1951

FACTS: Ponce de Leon obtained a loan from Santiago Syjuco, Inc in the amount of P200,000 in
Japanese Military Notes, payable within one (1) year from May 5, 1948. It was also provided that
the Ponce de Leon could not pay, and Syjuco could not demand, the payment of said note
except within the aforementioned period. To secure the payment of said obligation, Ponce de
Leon mortgaged the parcels of land which he agreed to purchase from the Bank. Using the loan,
Ponce de Leon was able to pay the Bank and a deed of absolute sale was executed in his name.
Ponce de Leon further obtained an additional loan from Syjuco. On several occasion in October,
1944, Ponce de Leon tendered to Syjuco the amount of P254,880 in Japanese military notes in
full payment of his indebtedness which was refused by Syjuco which Ponce de Leon deposited
with the Clerk of Court of the CFI and filed for reconstitution of transfer of the certificates of the
lot name in the bank which was granted by the court. Syjuco prayed that the mortgage executed
by Ponce de Leon in favor of the Bank be declared null and void. On June 24, 1949, the lower
court rendered a decision absolving Syjuco from Ponce de Leon's complaint and condemning
Ponce de Leon to pay Syjuco the total amount of P23,130 with interest at the legal rate from May
6, 1949, until fully paid.

ISSUE: W/N consignation made by the plaintiff valid in the light of the law and the stipulations
agreed upon in the two promissory notes signed by the plaintiff.

RULING: No. In order that consignation may be effective, the debtor must first comply with
certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2)
that 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 for incapacitated, or because
several persons claimed to be entitled to receive the amount due (Art. 1176); (3) that previous
notice of the consignation have been given to the person interested in the performance of the
obligation (Art. 1177); (4) that the amount due was placed at the disposal of the court (Art 1178);
and (5) that after the consignation had been made the person interested was notified thereof
(Art. 1178). In the instant case, while it is admitted a debt existed, that the consignation was
made because of the refusal of the creditor to accept it, and the filing of the complaint to compel
its acceptance on the part of the creditor can be considered sufficient notice of the consignation
to the creditor, nevertheless, it appears that at least two of the above requirements have not
been complied with. Thus, it appears that the plaintiff, before making the consignation with the
court clerk, failed to give previous notice to the person interested in the performance of the
obligation.

CASE NO. 123

LAUGHTON
f. Expenses of consignation- Art.1259
Tengco v. CA, October 19, 1989

FACTS: Petitioner received a letter from the private respondent, demanding the surrender of
the possession of the premises in question, also claiming to be the owner of the property.
Upon receipt of this letter, petitioner forthwith went to the residence of the collector, another
sister of the private respondent to whom she had been paying her rentals, and there
tendered payment but this was refused without any justification.

Petitioner claims that the private respondent had failed to establish his ownership of the lot in
question; that it was not with private respondent that she entered into the lease agreement
but with his mother; that her failure to pay the rentals on the premises was due to the refusal
of the collector to accept her tender of payment;

ISSUE: W/N petitioner should have tendered payment of the rentals to the private
respondent.

RULING: YES. The petitioner should have tendered payment of the rentals to the private
respondent and if that was not possible, she should have consigned such rentals in court.
The ownership of the property had been transferred to the private respondent and the
person to whom payment was offered had no authority to accept payment. The petitioner
cannot claim ignorance of the transfer of ownership of the property because, by her own
account, Aurora Recto and the private respondent, at various times, had informed her of
their respective claims to ownership of the property occupied by the petitioner.

CASE NO. 124

Occeña v. CA, 73 SCRA 637 (1976)
FACTS: On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for
modification of the terms and conditions of its subdivision contract with petitioners, making
the following allegations: “That due to the increase in price of oil and its derivatives and the
concomitant worldwide spiraling of prices, which are not within the control of plaintiff…”.
Petitioners moved to dismiss the complaint principally for lack of cause of action.
Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary
injunction previously issued by it and dismissed petition on the ground that under 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.”
ISSUE: W/N CA was right in applying Article 1267 of the Civil Code.
RULING: No. since respondent's complaint is not to be released from having to comply with
the contract (which is what Art 1267 would do if applied) but to modify “the terms and
Conditions of the Contract by fixing the proper shares that should pertain to the herein
parties out of the gross proceed., from the sales of subdivided lots of subject subdivision”.
The cited article does not grant the courts this authority to remake, modify or revise the
contract or to fix the division of shares between the parties as contractually stipulated with
the force of law between the parties, so as to substitute its own terms for those covenanted
by the parties themselves. Respondent's complaint has no basis in law.
CASE NO. 125

“Impossibility” distinguished from “difficulty”

Naga Telephone Co. v. CA, 230 SCRA 351 (1994)

FACTS: Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering
local as well as long distance service in Naga City while private respondent Camarines Sur II
Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of
operating an electric power service in the same city. They entered into a contract for the use by
petitioners in the operation of its telephone service the electric light posts of private respondent in
Naga City. NATELCO agreed to install, free of charge, 10 telephone connections for the use by
private respondent. After the contract had been enforced for over 10 years, private respondent
filed with the RTC against petitioners for reformation of the contract with damages, on the ground
that it is too one-sided in favor of petitioners. The trial court ruled, as regards private
respondent’s that the contract should be reformed by ordering petitioners to pay private
respondent compensation for the use of their posts in Naga City, while private respondent should
also be ordered to pay the monthly bills for the use of the telephones also in Naga City. And in
like manner, private respondent should pay petitioners from the same date its monthly bills for
the use and transfers of its telephones in Naga City at the same rate that the public are paying.
The trial court found that the contract does not mention anything about the use by petitioners of
private respondent's posts outside Naga City. Therefore, the trial court held that for reason of
equity, the contract should be reformed by including therein the provision that for the use of
private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00
per post. The trial court found the claim not sufficiently proved.

ISSUE: W/N Article 1267 of the is applicable.

W/N that the contract was subject to a potestative condition which rendered said
condition void

RULING: Yes. Article 1267 of the New Civil Code is applicable primarily because the contract
does not involve the rendition of service or a personal prestation and it is not for future service
with future unusual change.

Article 1267 does not distinguish between an “active’’ personal obligation to do and a “passive’’
personal obligation not to do. Despite the use of the term “service,’’ Article 1267 also applies to a
real obligation to give or deliver a thing. The term “service’’ should be understood as referring to
the performance of the obligation. In a contract of lease, the lessor engages to perform both real
and personal obligations. Article 1266 is applicable only to obligations to do.

In reformation of contracts, what is reformed is not the contract itself, but the instrument
embodying the contract. It follows that whether the contract has become disadvantageous or not
under Article 1267 is irrelevant to reformation and, therefore, cannot be an element in the
determination of the period for prescription of the action to reform under Article 1144(1) of the
Civil Code.

NO, the conditions are mixed. A potestative condition is a condition wherein the fulfillment of
which depends upon the sole will of the debtor, in which case, the conditional obligation is void.
Based on this definition, respondent court's finding that the provision in the contract, to wit: That
the term or period of this contract shall be as long as the party of the first part (petitioner) has
need for the electric light posts of the party of the second part (private respondent) is a
potestative condition, is correct. However, it must have overlooked the other conditions in the
same provision

Mohammad
Case 126

PNCC vs. CA, GR 116896, May 5, 1997, 272 SCRA

Impossibility of Performance

Facts: This petition for review on certiorari was sparked by petitioner's refusal to pay the rentals as
stipulated in the contract of lease on a parcel of land owned by private respondents. petitioner argued
that under paragraph 1 of the lease contract, payment of rental would commence on the date of the
issuance of an industrial clearance by the Ministry of Human Settlements, and not from the date of
signing of the contract. It then expressed its intention to terminate the contract, as it had decided to
cancel or discontinue with the rock crushing project due to financial, as well as technical, difficulties.
Then private respondents instituted an action against petitioner for Specific Performance with
Damages.

Petitioner wants this Court to believe that the abrupt change in the political climate of the country after
the EDSA Revolution and its poor financial condition rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner.

Issue: W/N petitioner invoking Article 1266 and the principle of rebus sic stantibus, should be
released from the obligatory force of the contract of lease

Held: No. Anent petitioner's alleged poor financial condition, the same will neither release petitioner
from the binding effect of the contract of lease. 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.
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to
obligations "to do," and not to obligations "to give." An obligation "to do" includes all kinds of work or
service; while an 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 simple
possession, or in order to return it to its owner.

NICANOR

CASE 127

YAM & vs. CA

G.R. No. 104726 February 11, 1999

FACTS: Petitioners Victor Yam and Yek Sun obtained an IGLF loan from respondent Manphil
Invest Corporation in the amount of Php 300,000 with interest. It was secured by chattel
mortgage. On April 2, 1985, respondent was placed under receivership of Central Bank.
Petitioners paid on July 31, 1986 which was received by Central Bank. It contained a
notation on the voucher that there was already a full payment of IGLF loan. However,
respondent filed a collection case against petitioner after it failed to pay the remaining
balance. Petitioner contended that through respondent’s president, Carlos Sobrepeñas, it
was agreed to condone or waive the penalties and service charges as well as a voucher
showing the full payment of the petitioners. The trial court rendered a decision in favor of
respondents which was sustained by CA.

ISSUE: Whether or not there was condonation on petitioner’s loan

RULING: NO. The appointment of a receiver operates to suspend the authority of a

corporation and of its directors and officers over its property and effects, such authority being
reposed in the receiver. Sobrepeñas has no authority to condone the debt. The notation on
the voucher covering the check payment that a “full payment of IGLF loan” was made does
not bind the respondent. According to Art. 1270, for condonation or remission to be valid, the
following requisites must concur: the existence of a demandable debt, renunciation of the
debt is purely gratuitous, acceptance of the condonation or remission by the debtor,
formalities required by law on donation must be complied with, what has been condoned or
remitted must not be in officious.

PIEDAD
Case No. 128

Legal Compensation; Requisites; “due” distinguished from “demandable”

Gan Tion v. CA, 28 SCRA 235 (1969)

FACTS: Ong Wang Sieng was a tenant in certain premises owned by Gan Tion. Petitioner Gan
Tion filed and ejectment case against the former, alleging non-payment of rents for August and
September at P180/month. Ong Wang denied the allegations claiming that the agreed monthly
rentals was only P160, and he tried to paid the Gan Tion but he refused. The MTC ruled in favor
of the Petitioner, but it was reversed by the CFI and dismissed the complaint, awarding Ong Wan
the sum of P500 as attorney’s fees. Ong Wan was able to obtain a writ of execution of the
judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals,
where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the
sum of P4,320 for unpaid rents. The appellate court accepted the petition but eventually decided
for the respondent, holding that although respondent Ong is indebted to the petitioner for unpaid
rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal
compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned
over by the client to his counsel.
ISSUE: W/N the award for attorney’s fees may be the subject of legal compensation

RULING: YES. An award for attorney's fees is made in favor of the litigant, not of his counsel,
and the litigant, not his counsel, is the judgment creditor who may enforce the judgment for
attorney's fees for execution. In this case, it would be unjust to compel petitioner to pay his debt
for P500 when admittedly his creditor is indebted to him for more than P4,000. Hence, an award
for attorney's fees is a proper subject of legal compensation.

REYES
Case No. 129
 Legal Compensation; Requisites; “due” distinguished from “demandable”
BPI v. Reyes
255 SCRA 571 (1996)

FACTS: On September 25, 1985, private respondent Reyes opened a savings account at
petitioner Bank of the Philippine Islands (BPI). It is a joint "AND/OR" account with his wife, Sonia
S. Reyes. Private respondent also held a joint "AND/OR" savings account with his grandmother,
Emeteria M. Fernandez at the same BPI branch.

Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury Department.
She was still sent U.S. Treasury Warrant in the amount of U.S. $377.003 or P10,556.00. On
January 4, 1990, private respondent deposited the said U.S. treasury check of Fernandez in her
savings account. Two months later, private respondent closed the savings Account with his
grandmother and transferred its funds amounting to P13,112.91 to the savings account with his
wife.

On February 19, 1991, private-respondent received an urgent telegram from petitioner bank
requesting him to contact Manager Romero or Assistant Manager Bernardo. He assured
petitioners that he would drop by the bank to look into the matter. He also verbally authorized
them to debit from his other joint account the amount stated in the dishonored U.S. Treasury
Warrant. On the same day, petitioner bank debited the amount of P10,556.00 from private
respondent's savings account. Surprisingly, private respondent demanded from petitioner bank
restitution of the debited amount. He claimed that because of the debit, he failed to withdraw his
money when he needed them. He then filed a suit for Damages against petitioners

Issue: W/N BPI applied the legal compensation properly.

Held: Yes. 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.

Article 1279 states that in order that compensation may be proper, 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. 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.
SAJILI
Case no. 130

Legal Compensation; 1. Requisites- Art. 1279, 1280

a. “due” distinguished from “demandable”
PNB v. Sapphire Shipping
259 SCRA 174 (1996)

FACTS: A local bank, while acting as local correspondent bank, intercepted funds being
coursedthrough it by its foreign counterpart for transmittal and deposit to the account of an
individual with another local bank, and applied the said funds to certain obligations owed to it by
the said individual. PNB appropriated the amounts of $2,627.11 and P34,340.38 from
remittances of Ramon Lapez’s principals abroad. There were two instances in the past, one in
November 1980 and the other in January 1981 when Lapez’s account was doubly credited with
the equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate
amount of P87,380.44. PNB claims, however, that plaintiff’s claim has prescribed.PNB made a
demand upon Lapez for refund of the double or duplicated credits erroneously made on his
account, by means of a letter dated October 23, 1986 or 5 years and 11 months from November
1980, and 5 years and 9 months from January 1981. The deduction of P34,340.38 was made
by PNB with the knowledge and consent of Lapez, who was issued a receipt dated February 18,
1987.

ISSUE: W/N PNB was legally justified in making the compensation or set-off against the two
remittances coursed through it in favor of private respondent to recover on the double credits it
erroneously made in 1980 and 1981, based on the principle of solutio indebiti.

RULING: NO. The parties' obligations are not subject to compensation or set off under Art. 1279
of the Civil Code, for the reason that PNB is not a principal debtor nor is Lapez a principal
creditor insofar as the amount of $2,627.11 is concerned. They are debtor and creditor only with
respectto the double payments; but are trustee-beneficiary as to the fund transfer of
$2,627.11.Only the Lapez is principally bound as a debtor of PNB to the extent of the double
credits. On the other hand, PNB was an implied trustee, who was obliged to deliver to the
Citibank for the benefit of Lapez the sum of $2,627.11.Thus, while it may be concluded that
Lapez owes PNB the equivalent of the sums of $5,179.23 and $5,885.38 erroneously doubly
credited to his account, the PNB’s actuation in intercepting the amount of $2,627.11 supposed to
be remitted to another bank is not only improper; it will also erode the trust and confidence of the
international banking community in the banking system of the country, something we can ill
afford at this time when we need to attract and invite deposits of foreign currencies.

SAKIR
Case No. 131

Legal Compensation; Requisites

CKH Industrial Development v. CA, G.R. No. 111890, May 7, 1997

FACTS: Petitioner seek to rescind a sale of land to private respondent, Century-Well for failure to
pay the stipulated price. The sale was made by Rubi Saw, representing CKH, a company owned
by deceased Cheng, by executing a deed of absolute sale to private respondent Century-Well
which is owned by Chong, Choi, and Kei (sons of Cheng). However, private respondents failed to
pay the purchase price and petitioners filed a complaint for specific performance. The
respondents alleged however that the consideration for the parcels of land was paid partly by
means of off-setting or legal compensation through alleged promissory notes executed by Cheng
Kim Heng in favor of his sons, Choi and Kei, and partly through cash. The trial court ruled that
there was no valid compensation since the parties must be mutually bound principally as
creditors and debtors. The CA however ruled that there was a valid compensation and that the
contract cannot be rescinded.

ISSUE: WON there was a valid compensation of the obligations.

RULING: No. Compensation may take place by operation of law (legal compensation) or by
convention compensation, when two persons, in their own right, are creditors and debtors of
each other. Article 1279 of the Civil Code provides for the requisites of legal compensation:
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.
Moreover, the requisites for convention compensation are: (1) that each of the parties can
dispose of the credit he seeks to compensate, and (2) that they agree to the mutual
extinguishment of their credits.

In the instant case, there can be no valid compensation of the purchase price with the obligations
of Cheng reflected in the promissory notes, for the reason that CKH and Century-Well the
principal contracting parties, are not mutually bound as creditors and debtors in their own
name as evidenced by the promissory notes. In fact, there is no indication at all that such
indebtedness was contracted by Cheng from Choi and Kei as stockholders of Century-Well. Choi
and Kei are not parties to the Deed of Absolute Sale. They are merely stockholders of Century-
Well, and as such, are not bound principally in the contract of sale. Thus, their interest in the
promissory notes cannot be off-set against the obligations between CKH and Century-
Well arising out of the deed of absolute sale, absent any allegation that Choi and Kei's
interest in Century-Well are so considerable as to merit a declaration of unity of their civil
personalities.

Case No. 132

Salazar

Legal Compensation ( “due” distinguished from “demandable” )

Mirasol vs. CA (GR 128448, Feb 1, 2001, 351 SCRA)

FACTS: The Mirasols were sugarland planters while Philippine National Bank (PNB) financed
their sugar production. They signed credit Agreements, a chattel Mortgage, and a Real Estate
Mortgage in favor of PNB. The Chattel Mortgage empowered PNB to negotiate and sell the
latter's sugar and to apply the proceeds to the payment of their obligations to it.

President Marcos issued PD 579 in November, 1974 authorizing Philippine Exchange Co., Inc.
(PHILEX) to purchase sugar allocated for export and authorized PNB to finance PHILEX's
purchases. The decree directed that whatever profit PHILEX might realize was to be remitted to
the government. Believing that the proceeds were more than enough to pay their obligations,
petitioners asked PNB for an accounting of the proceeds which it ignored. Petitioners continued
to avail of other loans from PNB and to make unfunded withdrawals from their accounts with said
bank. PNB asked petitioners to settle their due and demandable accounts. As a result,
petitioners conveyed to PNB real properties by way of dacion en pago still leaving an unpaid
amount. PNB proceeded to extrajudicially foreclose the mortgaged properties. PNB still had a
deficiency claim.

Petitioners continued to ask PNB to account for the proceeds, insisting that said proceeds, if
properly liquidated, could offset their outstanding obligations. PNB remained adamant in its
stance that under P.D. No. 579, there was nothing to account since under said law, all earnings
from the export sales of sugar pertained to the National Government.

ISSUE: Whether or not the loans granted to the Mirasols by PNB have been fully paid by virtue
of legal compensation.

RULING: No. Petitioners' argument has no basis in law. For legal compensation to take place,
the requirements set forth in Articles 1278 and 1279 of the Civil Code must be present. Said
articles read as follows:

"Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.

Art. 1279. In order that compensation may be proper, 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 are 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."

In the present case, set-off or compensation cannot take place between the parties because:
First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579,
neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar
sold by the two firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to
wit:

"SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross
sales, the balance of the proceeds of sugar trading operations for every crop year shall be set
aside by the Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund
of the National Government subject to the disposition of the President for public purposes."

Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was
supposed to have off-set Mirasols' admitted indebtedness." Second, compensation cannot take
place where one claim, as in the instant case, is still the subject of litigation, as the same cannot
be deemed liquidated.

SUBA
CASE NO. 133

ASSOCIATED BANK V. VICENTE HENRY TAN

MP: A bank generally has a right of set off over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the
value of a dishonored check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loan.

Consequently, the highest degree of diligence is expected, and high standards of integrity and
performance are even required of it. By the nature of its functions, a bank is under obligation to treat
the accounts of its depositors with meticulous care.

FACTS: Associated Bank filed Petition for Review under Rule 45 of the Rules of Court, assailing the
January 27, 2003 Decision of the Court of Appeals (CA) in CA-GR CV No. 56292 which affirmed the
decision of the Regional Trial Court.

Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the
Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a
postdated UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain
Willy Cheng from Tarlac. The check was duly entered in his bank record thereby making his balance
in the amount of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00.
Allegedly, upon advice and instruction of the BANK that the P101,000.00 check was already cleared
and backed up by sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving
a balance of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing
balance in the amount of P107,793.45, because he has issued several checks to his business
partners.

However, his suppliers and business partners went back to him alleging that the checks he issued
bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take
positive steps regarding the matter for he has adequate and sufficient funds to pay the amount of the
subject checks. Nonetheless, the BANK did not bother nor offer any apology regarding the incident.
Consequently, TAN, as plaintiff, filed a Complaint for Damages on December 19, 1990, with the
Regional Trial Court.

By way of affirmative defense, petitioner averred that respondent had no cause of action against it
and argued that it has all the right to debit the account of the respondent by reason of the dishonor of
the check deposited by the respondent which was withdrawn by him prior to its clearing. Petitioner
further averred that it has no liability with respect to the clearing of deposited checks as the clearing is
being undertaken by the Central Bank and in accepting the check deposit, it merely obligates itself as
depositor's collecting agent subject to actual payment by the drawee bank.

Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the
respondent and against the [petitioner], ordering the latter to pay the respondent the sum of
P100,000.00 by way of moral damages, P75,000.00 as exemplary damages, P25,000.00 as
attorney's fees, plus the costs of this suit. In making said ruling, it was shown that [respondent] was
not officially informed about the debiting of the P101,000.00 from his existing balance and that the
BANK merely allowed the respondent to use the fund prior to clearing merely for accommodation
because the BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the respondent stating that such
lapses caused all the inconveniences to the respondent. The trial court also took into consideration
that [respondent's] mother was originally maintaining with the x x x BANK a current account as well as
a time deposit, but on one occasion, although his mother made a deposit, the same was not credited
in her favor but in the name of another.

Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to
debit the account of its client for a dishonored check; and whether it had informed respondent about
the dishonor prior to debiting his account.

ISSUE: Whether or not the petitioner, which is acting as a collecting bank, has the right to debit the
account of its client for a check deposit which was dishonored by the drawee bank.

RULING: A bank generally has a right of setoff over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the
value of a dishonored check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loan." Hence, the relationship between banks and depositors has been held to be that of
creditor and debtor Thus, legal compensation under Article 1278 of the Civil Code may take place
"when all the requisites mentioned in Article 1279 are present," as follows:

"(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."

Nonetheless, the real issue here is not so much the right of petitioner to debit respondent's account
but, rather, the manner in which it exercised such right. The Court has held that even while the right of
setoff is conceded, separate is the question of whether that remedy has properly been exercised.

The liability of petitioner in this case ultimately revolves around the issue of whether it properly
exercised its right of setoff. The determination thereof hinges, in turn, on the bank's role and
obligations, first, as respondent's depositary bank; and second, as collecting agent for the check in
question. In BPI v. Casa Montessori, the Court has emphasized that the banking business is
impressed with public interest. "Consequently, the highest degree of diligence is expected, and high
standards of integrity and performance are even required of it. By the nature of its functions, a bank is
under obligation to treat the accounts of its depositors with meticulous care."

Did petitioner treat respondent's account with the highest degree of care? From all indications, it did
not. It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued
client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing.
That act certainly disregarded the clearance requirement of the banking system. Such a practice is
unusual, because a check is not legal tender or money; and its value can properly be transferred to a
depositor's account only after the check has been cleared by the drawee bank.

Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the
amount to a depositor's account; or infuse value to that account only after the drawee bank shall have
paid such amount. Before the check shall have been cleared for deposit, the collecting bank can only
"assume" at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner should not have
authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over
and above his outstanding cleared balance of P196,793.45. Hence, the lower courts correctly
appreciated the evidence in his favor.

TALAVER
CASE NO. 134

REQUISITES OF LEGAL COMPENSATION: “due” distinguished from

“demandable”
`

FACTS: This case treats of the liability of a Government officer of the Bureau of Records
Management who was designated Administrative Officer and Training Coordinator of two (2) regional
seminars of the Bureau, and who, as such, and having custody of seminar fees collected from the
participants, authorized disbursements to certain of the latter for transportation expenses, food, etc.
although, as subsequently disclosed, they had already collected and received amounts corresponding
to said items from their respective offices.

ISSUE: Whether or not any conclusion that he "is indebted to the Government" so that, according to
Section 624 of the Revised Administrative Code, "any money due him or his estate" may be withheld
and "applied in satisfaction of such indebtedness," must proceed from judgment of a competent court,
not a mere opinion and pronouncement of an auditor or even by the COA?

RULING/MP: NO. While Section 624 of the Revised Administrative Code does indeed authorize the
set-off of a person’s indebtedness to the Government against “any money due him or his estate to be
applied in satisfaction of such indebtedness,” that indebtedness must be one that is admitted by the
alleged debtor or pronounced by final judgment of a competent court. In such a case, the person and
the Government are in their own right both debtors and creditors of each other, and compensation
takes place by operation of law in accordance with Article 1278 of the Civil Code. Absent, however,
any such categorical admission by an obligor or final adjudication, no legal compensation can take
place, as this Court has already had occasion to rule in an early case. Unless admitted by a debtor
himself, the conclusion that he is in truth indebted to the Government cannot be definitely and finally
pronounced by a Government auditor, no matter how convinced he may be from his examination of
the pertinent records of the validity of that conclusion. Such a declaration, that a government
employee or officer is indeed indebted to the Government, if it is to have binding authority, may only
be made by a court. That determination is after all, plainly a judicial, not an administrative function. No
executive officer or administrative body possesses such a power.

TINGKAHAN
CASE NO. 135

LELGAL COMPENSATION (a. “due” distinguished from “demandable”)

PEREZ V. CA (G.R. 56101, February 1984)

FACTS: CONGENERIC Development & Finance Corporation is, or was, a company engaged in
"money market" operations. CONGENERIC issued what was in effect a promissory note in the
amount of P111,973.58 in favor of bearer No. 049, later identified as Ramon C. MOJICA, or an
entity owned by him. That promissory note, denominated hereinafter as Bill 1298, was to mature
on August 6, 1974. CONGENERIC issued another bearer promissory note for the sum of
P208,666.67, also in favor of MOJICA or an entity owned by him. The note, denominated
hereinafter as Bill 1419, was to mature on August 13, 1974. MEVER Films, Inc. the private
respondent herein, borrowed P500,000.00 from CONGENERIC, the former issuing in favor of the
latter a negotiable promissory note to mature on August 5, 1974. What may be stated in
connection with the note is that it had no provision for interest, except that, if not paid on due
date, it would be subject to interest at 14% per annum. Under the terms of CS-0366, CORAZON
was to be paid P203,483.33 on August 5, 1974, CONGENERIC would make collection on behalf
of CORAZON; and ALL OF CONGENERIC'S INTEREST IN NCI-0352 WAS BEING
TRANSFERRED TO HER. Under this last provision, CORAZON, subject to defenses, could have
sued MEVER for payment of the full amount of P500,000.00, specially if CONGENERIC should
not object. It may also be noted that while NCI-0352 was not subject to interest prior to August 5,
1974, CONGENERIC obligated itself to pay CORAZON interest on August 5, 1974 in the amount
of P3,483.33, or roughly an interest rate of 19% per annum. On October 23, 1974,

ISSUE: Whether the obligation is extinguished at the time Mojico assigned the Bills to
Mever

RULING: NO. In the case at bar, it was held that Since, on the respective dates of maturity,
specifically, August 6, 1974 and August 13, 1974, respectively, Ramon C. Mojica was still the
holder of those bills, it can be safely assumed that it was he who had asked for the roll-overs on
the said dates. MEVER was bound by the roll-overs since the assignment to it was made only on
September 9, 1974. The inevitable result of the roll-overs of the principals was that Bill No. 1298
and Bill No. 1419 were not yet due and demandable as of the date of their assignment by
MOJICA to MEVER on September 9, 1974, nor as of October 3, 1974 when MEVER surrendered
said Bills to CONGENERIC. As a consequence, no legal compensation could have taken place
because, for it to exist, the two debts, among other requisites, must be due and demandable, as
said by Article 1279 of the Civil Code.

ADIL
Case 136

Requisites Art. 1279, 1280: Legal Compensation – “due” distinguished from “demandable”
Silahis Marketing Corp. v. IAC, 180 SCRA, Dec. 7, 1989

FACTS: Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a
reversal of the decision of the then Intermediate Appellate Court (IAC) in disallowing petitioner's
counterclaim for commission to partially offset the claim against it of private respondent Gregorio de
Leon for the purchase price of certain merchandise. Record shows that Gregorio de Leon, sold and
delivered to Silahis Marketing Corporation (Silahis) several items of merchandise covered by several
invoices totaling to 22,213.75 pesos payable within 30 days from the date of the invoices. Silahis was
not able to pay its account when it was due despite demands. Hence, De Leon filed a complaint
before the Court of First Instance for the collection of the accounts. Silahis admitted the allegations
insofar as the invoices were concerned but as a defense it presented a) a debit memo for 22, 200
pesos as unrealized profit for a supposed commission that Silahis is entitled to for the sale of
sprockets to Dole Philippines Inc.; and b) Silahis claim that it is entitled to return the stainless steel
screen which was found defective by its client, and to have the corresponding amount cancelled from
its account with De Leon.

ISSUE: W/N private respondent is liable to the petitioner for the commission or margin for the direct
sale which the former concluded and consummated with Dole Philippines, Inc. without coursing the
same through herein petitioner.

RULING/MP: No. The Court agrees with the respondent appellate court that there is no evidence on
record from which it can be inferred that there was any agreement between the petitioner and private
respondent prohibiting the latter from selling directly to Dole Philippines Inc. Definitely, it cannot be
asserted that the debit memo was a contract binding between the parties considering the same, as
correctly found by the appellate court, was not signed by private respondent nor was there any
mentioned therein of any commitment by the latter to pay any commission to the former involving the
sale of the sprockets. It must be remembered that compensation takes place when 2 persons
are creditors and debtors to each other. Article 1279 of the Civil Code provides that: "In order
that compensation may be proper, 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.

When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or knowledge of the
creditors and debtors. Article 1279 requires, among others, that in order that legal
compensation shall take place, "the two debts be due" and "they be liquidated and
demandable." Compensation is not proper where the claim of the person asserting the set-off
against the other is not clear nor liquidated; compensation cannot extend to unliquidated,
disputed claim existing from breach of contract. Undoubtedly, petitioner admits the validity of its
outstanding accounts with private respondent in the amount of P 22,213.75 as contained in its
answer. But whether private respondent is liable to pay the petitioner a 20% margin or commission on
the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal
compensation from taking place.

Almonte
Case No 137
BPI vs. CA (GR 116792, March 29, 1996, 255 SCRA)

FACTS: Respondent has two joint accounts with BPI, one with his wife, and the other was with his
grandmother. He regularly deposited in his joint account with his grandmother the U.S. Treasury
Warrants representing pensions of her grandmother. No notice was given to the U.S. Treasury
Department when her grandmother died. Respondent closed the said joint savings account and
transferred its funds to the joint savings account with his wife.
An issued U.S. Treasury Warrant was dishonored as it was discovered that respondent’s grandmother
died three days prior to its issuance. The U.S. Department of Treasury requested BPI for refund. Upon
calling the bank, respondent was informed that the treasury check was the subject of a claim by Citibank
NA, correspondent of petitioner bank. While he assured BPI that he would drop by to look into the
matter, he also verbally authorized to debit from his joint account the amount as stated in the
dishonored U.S. Treasury Warrant.

Respondent demanded from BPI the restitution of the debited amount. He then filed a suit for damages
against the bank before the Regional Trial Court of Quezon City

ISSUE: W/N has the legal right to apply the deposit to the outstanding obligation under the principle of
legal compensation

RULING:
YES, the Supreme Court ruled that applying 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.
Article 1279 states that in order that compensation may be proper, 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.
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.

Case No. 138

 AJAX MARKETING & DEVELOPMENT CORP. VS. COURT OF APPEALS
G.R. NO. 118585, SEPTEMBER 14, 1995

Facts: There are three (3) Real Estate Mortgages (REMS) over a single property
between AJAX Marketing & Development Corporation and Metropolitan Bank &
Trust Co. First loan was under the name "Ylang- Ylang Merchandising Company", a
partnership, for the amount of P250,000.00. The second was when it changed its
name to "AJAX Marketing Co. for the amount of P150.000.00. And third was during
its incorporation as "AJAX Marketing & Development Corporation" for the amount of
P600,000.00. Later on, the AJAX Marketing executed a Promissory Note to
restructure and consolidate the 3 loans. Subsequently, the bank foreclosed the
mortgaged property.
Issue: WON there is novation by virtue of the consolidation of the three (3) loans into
a single Promissory Note.
Held: No, novation is never presumed. To effect either objective/subjective novation,
it must be imperative that the new obligation expressly declare that the old obligation
is thereby extinguished or that the original debtoris is/are released. In the case, there
is nothing mentioned about the intention of the parties to novate the three (3) Joans
nor their extinguishment. In addition, the annotations in the mortgaged property
remained uncancelled. The conversion from partnership to corporation, likewise, did
not expressly release the old debtor/s. Clearly, neither objective nor subjective
novation took place.

ANOOS
CASE NO. 139

NOVATION (CONCEPT- ART. 1291

BOYSAW V. INTERPHIL PROMOTIONS, 148 SCRA 635, MARCH 20, 1987

FACTS: On May 1, 1961, Boysaw and manager Ketchum signed with Interphil (represented by
Sarreal) a contract to engage Flash Elorde in a boxing match at Rizal Memorial Stadium on Sept
30, 1961 or not later than 30 days should a postponement be mutually agreed upon. Boysaw,
according to contract, should not engage in other bouts prior to the contest. However, Interphil
signed Elorde to a similar agreement. Boysaw fought and defeated Louis Avila in Nevada.
Ketchum assigned to Amado Araneta his managerial rights, who later transferred the rights to
Alfredo Yulo. Sarreal wrote to Games and Amusement Board (GAB) regarding this switch of
managers because they weren’t notified. GAB called for conferences and decided to schedule
the Elorde-Boysaw bout. On Nov 4, 1961, USA National Boxing Assoc approved. Sarreal offered
to move the fight to Oct 28 for it to be within the 30 day allowable postponement in the contract.
Yulo refused. He was willing to approve the fight on Nov 4 provided it will be promoted by a
certain Mamerto Besa. The fight contemplated in the May 1 contract never materialized. Boysaw
and Yulo sued Interphil, Sarreal and Nieto.
ISSUE: W/N the offending party in a reciprocal obligation may compel the other party for specific
performance.

RULING: NO. The evidence established that the contract was violated by appellant Boysaw
himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19,
1961 in Las Vegas Nevada. Another violation of the contract in question was the assignment and
transfer, first to J. Amado Araneta, and subsequently, to appellant Yulo, Jr., of the managerial
rights over Boysaw without the knowledge or consent of Interphil. The power to rescind is given
to the injured party. "Where the plaintiff is the party who did not perform the undertaking which he
was bound by the terms of the agreement to perform he is not entitled to insist upon the
performance of the contract by the defendant, or recover damages by reason of his own breach."
Under the law when a contract is unlawfully novated by an applicable and unilateral substitution
of the obligor by another, the aggrieved creditor is not bound to deal with the substitute.
However, it is clear that the appellees, instead of availing themselves of the options given to
them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to
postpone the fight date owing to an injury that Elorde sustained in a recent bout. That the
appellees had the justification to renegotiate the original contract, particularly the fight date is
undeniable from the facts aforestated. Under the circumstances, the appellees' desire to
postpone the fight date could neither be unlawful nor unreasonable.

CASE 140
Novation: Concept [Art 1291]
Dino v. Hon. Valencia and Ong
GR L-43886

FACTS: Petitioner Irene Dino is the registered owner of a parcel of land to which private
respondent Francisco L. Ong is the adverse claimant of the said parcel of land. Ong
executed an affidavit and memorandum of quitclaim wherein he waived and renounced all
his claims, rights, and credits over and against the parcel of land upon payment by petitioner
of P90,000.00 in the following manner: (a) Down payment of ₱40,000.00; (b) ₱ 10,000
before April 1974, and; c) the future sums covered by postdated checks in denominations of
₱10,000.00 each payable or redeemable on or before the 15th of June, August, October,
and December of 1974 and February of 1975, respectively, and for a total of ₱40,000.00.
The petitioner was able to pay ₱50,000.00 in cash, but issued 5 post-dated checks for the
remaining ₱40,000.00. However, 4 of the checks were dishonoured by the bank due to
insufficient funds and the account of the petitioner being closed. Respondent filed for the
enforcement of the obligation plus damages to which petitioner alleged that the original
agreement of the parties as to the payment had already been novated and disregarded by
the parties after the issuance of the said checks.

ISSUE: W/N the contract w4as novated by a change in the mode of payment

RULING: No. Her defense that the original agreement of the parties had already been
novated and disregarded after the issuance of the checks mentioned in private respondent’s
complaint and after the private respondent had executed and signed the Affidavit and
Memorandum of Quitclaim is a sham and false defense and did not tender an issue that
would require a hearing for the reception of evidence. It Is a mere device or scheme to avoid
or delay the immediate payment of petitioner’s obligation to the private respondent under the
Affidavit and Memorandum of Quitclaim. Thus, aptly observed by the court a quo, a
novation under the rules of civil law, where the term has been introduced into the modern
nomenclature of our common law jurisprudence, was a mode of extinguishing one
obligation by another; the substitution, not of new paper or rate but of a new
obligation in lieu of an old one, the effect of which was to pay, dissolve, or otherwise
discharge it. It will be noted that the original contract was not actually altered or changed.
The defendant, as a matter of fact, and for all intents and purposes, had issued checks in
payment of her obligation as per stated by the contract but asserts that the same were
issued only to guarantee but not as a payment in itself, but it is not denying the fact that one
of the five checks were cashed, thus making the balance of only₱32,000.00, that is without
mention the liquidated damages of ₱20,000.00. The ambivalent attitude of the defendant
could only mean or should be construed as a mere pretense to avoid an immediate demand
for the payment of her obligation. In order that an obligation may be extinguished by another
which substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and new obligation be on every point incompatible with each other (Art. 1292–
New Civil Code). In the present case the contract referred to did not expressly extinguish the
obligation existing in said affidavit and memorandum of quitclaim. On the contrary, it
expressly recognized the obligation between the parties and expressly provide a method by
which the same shall be extinguished, which method was expressly provided in the
aforementioned contract, by means of periodical payments.

CRUZ

CASE NO. 141

VII. Novation

A. Concept- Art. 1291

Espina vs CA and Rene G. Diaz (GR 116805)

FACTS: On November 29, 1991, Mario S. Espina, the private respondent as seller, and Rene
G.Diaz, the petitioner as buyer, executed a Provisional Deed of Sale, whereby the former sold to
the latter the aforesaid condominium unit for the amount of P100,000.00 to be paid upon the
execution of the contract and the balance to be paid through PCI Bank postdated checks.
Subsequently, in a letter dated January 22, 1992, petitioner informed private respondent that his
checking account with PCI Bank has been closed and a new checking account with the same
drawee bank is opened for practical purposes. The letter further stated that the postdated checks
issued will be replaced with new ones in the same drawee bank. On January 25, 1992, petitioner
through Ms. Socorro Diaz, wife of petitioner, paid private respondent Mario Espina P200,000.00,
acknowledged by him as partial payment for the condominium unit subject of this controversy.
On July 26, 1992, private respondent sent petitioner a "Notice of Cancellation" of the Provisional
Deed of Sale (p. 48, Rollo)."However, despite the Notice of Cancellation from private respondent,
the latter accepted payment from petitioner per Metrobank Check No. 395694 dated and
encashed on October 28,1992 in the amount of P 100,000.00. On February 24, 1993, private
respondent filed a complaint for Unlawful Detainer against petitioner. The trial court rendered its
decision ordering private respondent to vacate the condominium and to pay back rentals.
However, plaintiff shall refund the amount paid for the purchase price. On July 20, 1994, the
Court of Appeals promulgated its decision reversing the appealed decision and dismissing the
complaint for unlawful detainer. Hence, this appeal via petition for review on certiorari

ISSUE: Whether or not the provisional deed of sale novate the existing lease contract.

RULING: NO. The provisional deed of sale did not novate the existing lease contract. The

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.

DELOS REYES
CASE NO. 142

Novation: Concept – Art. 1291

Fua v. Yap

FACTS: The plaintiff-appellee Fua Cam Lu, obtained in a civil case of the CFI Manila a judgment
sentencing appellants to pay P 1,538.04 ], with legal interest and costs. Subsequently, appellants
yap Fauco and Yap Singco executed a mortgage in favor of appellee, wherein it was stipulated
that their obligation under the judgment was reduced to P1,200.00, a cimarin belonging to
appellants was mortgaged to appellee; that in case appellants defaulted in the payment of any of
the installments, they would pay 10% of the unpaid balance as attorney’s fees, plus the costs of
the action to be brought by appellee by reason of such default, and the further amount of P
338.00 representing the discount conceded to appellants.

ISSUE: WON there was Novation, thus extinguishing the obligation.

RULING: Yes. There was implied novation. That appellants’ liability under the judgment in the
civil case had been extinguished by the statement evidenced by the mortgage executed by
appellants in favor of appellee. Although said mortgage did not expressly cancel the old
obligation, this was impliedly novated by reason of incompatibly resulting from the fact that,
whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees,
and was not secured, the new obligation is or P1,200 payable in installments, stipulated for
attorney's fees, and is secured by a mortgage. The later agreement did not merely extend the
time to pay the judgment, because it was therein recited that appellants promised to pay
P1,200.00 to appellee as a settlement of the said judgment. Said judgment cannot be said to
have been settled unless it was extinguished.

CASE 143

GARCIA JR. VS CA

FACTS:
 Western Minolco Corporation (WMC) obtained from Philippine Investments Systems
Organization(PISO) two loans of P2,500,000 and P1,000,000 for which it issued
promissory notes. Antonio Garcia and Ernest Kahn executed a surety agreement for
the P2.5 million loan. WMC failed to pay after repeated demands. A memorandum of
agreement was entered into by WMC and its creditors in which promissory notes
were to be issued by NDC, fully and unconditionally guaranteed by the Philippine
government, in payment of WMC’s obligation. Also, the parties to the original loans
agreed to an extension of the original period of payment and the compounding of the
interest on the principal loans. Lasal Development Corporation, PISO’s assignee of
the credit, sued Garcia. He claims that the issuance of the new promissory notes
which extended the period of payment and provided for the compounding of the
interest operated as a novation of the contract, therefore releasing him fromhis
obligation as surety.

ISSUE:
Whether or not there was a novation of the contract.

HELD:
No. An obligation to pay a sum of money is not novated in a new instrument by
changing the term of payment and adding other obligations not incompatible with the
old one. It is not proper to consider an obligation novated as in the case at bar by the
mere granting of extension of payment which did not even alter its essence. To
sustain novation necessitates that the same be so declared in unequivocal terms or
that there is complete and substantial incompatibility between the two obligations.

CASE NO. 144

RURAL BANK OF CALOOCAN v. CA

GR No. L-32116, 1981-04-21

FACTS: Kabankalan Sugar Co. is a domestic milling corporation. Josefa Pacheco is the owner of
the Hilabañgan estate that produces sugar canes. The first contract was executed on November
1, 1920 by Kabankalan Sugar Co. through its Manager Guillermo Lizaraga, and by Pacheco,
granting the sugar company the right of way in and through the Hilabañgan estate for a railway
for a period of 20 years from November 1, 1920 and binding Pacheco for the same period to
deliver all sugar canes produced in the Hilabañgan estate to the Kabankalan’s sugar mill. On the
year 1922, Pacheco proposed Kabankalan to assume her obligations with the Ledesmas
Hermanos Company and PNB. Hence, a second contract was executed. The second contract
was executed on September 29, 1922 by Kabankalan Sugar Co. through its Manager Benito
Belzunce and by Pacheco. It was said that same conditions shall be stipulated in the contract.

ISSUE: W/N the contract of September 29, 1922, has extinguished the contract of November 1,
1920 by novation.
RULING: NO. In the contract of November 1, 1920, the duration of the right of way which
Pacheco bound herself to impose upon her estate in favor of Kabankalan was 20 years, while in
the contract of September29, 1922, that period was reduced to seven crops which is equivalent
to seven years. There can be no doubt that these two contracts, in so far as the duration of the
right of way is concerned, are incompatible with each other, for the second contract reduces the
period agreed upon in the first contract, and so both contracts cannot subsist at the same time.

Garcia
Case No. 145

MERCANTILE INSURANCE CO., INC., Petitioner,

VS. HON. COURT OF APPEALS and REPARATIONS COMMISSION
G.R. No. 85647. April 22, 1991

Facts: In this Petition for Review on Certiorari, petitioner Mercantile Insurance Co., Inc.
"Mercantile" seeks to annul and set aside a Decision of the Court of Appeals in C.A.-G.R. No.
03337 entitled "Reparations Commission v. Jose G. Lopez, Et Al.," dated 31 August 1988. In
that Decision, the Court of Appeals affirmed the decision of the Regional Trial Court,
National Capital Region, in Civil Case No. 78198 dated 7 February 1983 which held petitioner
liable under a performance bond posted to secure performance by Jose Lopez of the terms
and conditions of a Contract of Conditional Purchase and Sale of reparations goods which
Jose Lopez had entered into with respondent Reparations Commission "Repacom".
Issue: whether or not the reduction of the peso purchase price did not extinguish
Mercantile’s commitments under the bond.
Ruling: No. It must be recalled that under its bond Mercantile undertook to secure ten
percent 10% of the purchase price of the vessel which at that time was pegged at
P683,859.00 after converting the dollar price into the corresponding peso price using the
free market rate of exchange. With the adjustment of the vessel’s peso price mandated by
the writ of preliminary injunction, Mercantile’s undertaking to pay a certain number of
pesos under certain conditions was adjusted downward but not extinguished.
We also find no merit in petitioner’s contention that it did not secure Lopez’
obligations in the Contract of Conditional Purchase and Sale since the Mercantile
bond was posted before said Contract was entered into. We noted earlier that
Contract made express reference to the Mercantile bond. That reference confirmed
that the Mercantile bond was posted pursuant to one of Lopez’ undertakings under
that Contract, i.e., to post a performance bond to secure fulfillment of his obligations.

GRAVADOR

CASE 146

VII. Novation A. Concept- Art. 1291

Sandico v. PIQUIMG

FACTS: Petitioner spouses administrator of the estate of the late Sixta Paras obtained a
favorable judgment against Respondent Desiderio Paras. Petitioners moved for the issuance of a
writ of execution to enforce the appellate court’s judgment. The petitioners and respondent
reached a settlement agreeing to reduce the money judgment from 6,000 to 4,000. Thus,
respondent paid the amount. Petitioner sent respondent a letter demanding compliance to the
reconstruction and reopening of the irrigation canal. Upon refusal of the respondent, a motion for
contempt was filed to private respondent but was later denied. It was clear in the dispositive
portion of the judgment that nothing was stated for the reconstruction of the canal. Petitioner
moved for the issuance of an alias writ of execution to enforce the judgment of the Court of
Appeals. Respondent moved to set aside alleging full satisfaction of the money judgment. Court
of Appeals judge directed to quash the writ of execution stating that the parties novated the
money judgment provided in the decision

ISSUE: Whether or not there was novation on the money judgment.

RULING: NO. The appellate court's judgment obliges the respondent to do two things: (1) to
recognize the easement, and (2) to pay the petitioners the sums of 5,000 actual and 500
exemplary damages and 500 attorney's fees, or a total of 6,000. The full satisfaction of the said
judgment requires specific performance and payment of a sum of money by the respondent. The
respondent's judgment debt as having been fully satisfied. There is no valid objection to the
petitioners and the respondent entering into an agreement regarding the monetary obligation of
the latter under the judgment of the Court of Appeals, reducing the same from 6,000 to 4,000.
The payment by the respondent of the lesser amount of 4,000, accepted by the petitioners
without any protest or objection and acknowledged by them as "in full satisfaction of the money
judgment" in civil case 1554, completely extinguished the judgment debt and released the
respondent from his pecuniary liability. Both the petitioners and the respondent take exception to
the respondent judge's ruling that their agreement to reduce the judgment debt, as evidenced by
the receipt herein before adverted to, "novated" the money judgment rendered by the appellate
court.

Novation results in two stipulations — one to extinguish an existing obligation, the other to
substitute a new one in its place. Fundamental it is that novation effects a substitution or
modification of an obligation by another or an extinguishment of one obligation by the creation of
another. In the case at hand, we fail to see what new or modified obligation arose out of the
payment by the respondent of the reduced amount of P4,000 and substituted the monetary
liability for P6,000 of the said respondent under the appellate court's judgment. Additionally, to
sustain novation necessitates that the same be so declared in unequivocal terms — clearly and
unmistakably shown by the express agreement of the parties or by acts of equivalent import — or
that there is complete and substantial incompatibility between the two obligations.

CASE NO. 147

HALIL

Requisites – Art. 1292

MILLAR v. CA, 38 SCRA 642 (1971)

FACTS: Eusebio Millar obtained a favorable judgment from the CFI of Manila against Antonio
Gabriel, ordering the latter to pay him the sum of 1,746.98 with legal interest at 12% per annum
from the date of the filing of the complaint. Gabriel however pleaded with the petitioner to release
the jeep under an agreement whereby the former agreed to mortgage the vehicle in favor of
Eusebios Millar. The parties executed the chattel mortgage only to secure or get better security
for the judgment. Millar filed for a writ of execution in court. Pursuant to this, the sheriff levied on
certain personal properties belonging to respondent and then scheduled them for execution sale.
Gabriel then filed for an urgent motion to suspend the execution on the ground of payment of the
obligation. The court granted said petition; it ruled that novation had taken place as the parties
executed the chattel mortgage only to secure or get better security for the judgment. CA affirmed
the ruling and held that the subsequent agreement of the parties impliedly novated the judgment
obligation. It based its decision on the following: 1) the judgment ordered Gabriel to pay 1, 746.98
while the agreement states that the amount to be paid is 1,700. 2) judgment do not mention any
specific mode of payment, the agreement provides to equal installments. 3) the judgment does not
mention damages, the agreement obligates Gabriel to pay 300 pesos additional in case of default 4)
the judgment debt was unsecured, the mortgage agreement secured the obligation.

ISSUE: WON the subsequent agreement novated the judgment obligation

RULING: NO. 1) Reason why the amount provided in the mortgage agreement is that in the
interim, the respondent made partial payments, necessarily resulting in the lesser sum stated in
the deed of chattel mortgage. Besides, where the new obligation merely reiterates or ratifies the
old obligation, although the former effects minor alterations with respect to the object of the
obligation, such would not effectuate any substantial incompatibility between two obligations as
would require novation. Case at bar, the mere reduction of the amount due in no sense
constitutes a sufficient indicium (distinguishing marks) of incompatibility. 2) The chattel mortgage
simply gave the respondent a method and more time to enable him to fully satisfy the judgment
indebtedness. Also, the parties constituted the chattel mortgage purposely to secure the
satisfaction of the then existing liability of the respondent respondent arising from the judgment
against him.

Moreover, the defense of implied novation requires clear and convincing proof of
complete incompatibility between the two obligations. The test is whether the two
obligations can stand together. If they cannot, incompatibility arises, and the second
obligation novates the first.

CASE NO. 148

IJIRANI

Requisites- Art. 1292

Dormitorio v. Fernandez

72 SCRA 388 (1976)

FACTS: Municipality of Victorias owns several parcels of lands in Victorias, Negros Occidental.
Lazalita bought Lot No. 1, Block 16 w/an area of 230 sq. meters. Upon full payment, a deed of
definite sale and a certificate of title were executed in favor of the buyer. He possessed the land
for 8 continuous years & he introduced permanent & valuable improvements thereon. In 1955:
Sps Dormitorio bought Lot No. 2, Block 16 from the Municipality with an area of 343 sq meters.
They were able to obtain a transfer Certificate of Title although they have not taken actual
possession of said property. They subsequently filed an ejectment suit against Lazalita. Upon
investigation, it was discovered that the land originally bought by Lazalita was converted into a
municipal road (Jover St.) and the lot he was occupying actually belonged to the sps.

The Municipality agreed to amicably settle the case by giving Lazalita another lot if they could
open their newly proposed subdivision or pay him back the amount necessary & just for him to
acquire another lot for his residence & for the expenses of transferring his present residential
house thereto. The parties in the ejectment case agreed that the decision in that case would no
longer be enforced & executed in relation to the amicable settlement reached by Lazalita & the
municipality.

However, by means of fraud, misrepresentation & concealment of the true facts of the case, the
sps were able to mislead the court thru an ex-parte motion to issue by mistake an Order for the
issuance of a Writ of Execution by making the court believe that the former decision was still
enforceable & executory. Lazalita then filed a petition to set aside the writ of execution which was
granted by the CFI. The CFI ruled that the compromise agreement as evidenced by the agreed
stipulation of facts was a clear proof of animus novandi & superseded the first court order in the
ejectment case.

Issue & Ratio: WON there was novation in this case. – YES.

HELD: The compromise agreement created new rights & obligations between the parties which
naturally superseded the judgment of the municipal court. The judge properly set aside the writ of
execution mistakenly issued. The presence of animus novandi is undeniable nor is there
anything novel in such an approach. When after judgment has become final, facts &
circumstances transpire w/c render its execution impossible/unjust, the interested party may
ask the court to modify/alter the judgment to harmonize the same w/ justice & the facts (Molina
vs de la Riva). In this case, we have a stronger case since there is a later decision expressly
superseding the decision in the ejectment case. The agreement was a result of a compromise
which had the effect of res judicata. Thus, the parties were bound by it. There was an element of
bad faith when the sps tried to evade its terms. The sps can’t claim that they were not informed
by Judge Fernandez about Lazalita’s motion to set aside the writ of execution. The sps filed a
MFR which in effect cured the failure to notify them.

CASE NO. 149 LAO

Requisites- Art. 1292

Magdalena Estate v. Rodriguez, 18 SCRA 967 (1966)

FACTS: The Rodriguez spouses bought a parcel of land in Quezon City from Magdalena
Estates. They executed a promissory note in view of an unpaid balance of P5K. On the same
day, Rodriguez’s spouses and Luzon Surety executed a bond in favor of Magdalena. On June
20, 1958- when obligation became due and demandable Luzon Surety paid P5K to Magdalena.
Magdalena demanded from Rodriguez spouses Php 655.89, the alleged accumulated interests
on the P5K principal. Due to refusal to pay, Magdalena filed suit in the Municipal Court of Manila
to enforce collection. Court rendered judgment in favor of Magdalena. Rodriguez spouses to pay
jointly and severally Php655.89 plus legal interest from November 10, 1958 (date of filing of the
Complaint).

ISSUE: W/N CFI erred in its judgment and W/N there was a novation

RULING: No. there was no novation. Magdalena did not waive or condone the interests due
because it is very clear in the promissory note that Luzon Surety will only pay the balance of the
purchase price of P5K. The liability of Luzon Surety is not extended beyond the terms of his
contract.
There was no novation/modification of the obligation just because Magdalena accepted without
reservation the subsequent agreement in the surety bond despite its failure to provide that is also
guaranteed payment of accruing interest.

•Novation by presumption is never favored. To be sustained, it needs to be established that the

old and new contracts are incompatible in all points or that the will to novate appears by express
agreement of the parties

• An obligation to pay a sum of money is not novated in a new instrument wherein the old one is
ratified by changing only the terms of payment and adding other obligations not incompatible with
the old one or wherein the old contract is merely supplemented by the old one.

•Just because a 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 debt or shall be
released from responsibility does not constitute a novation and the creditor can still enforce the
obligation against the original debtor

CASE NO. 150

LAUGHTON
C. Requisites- Art. 1292
Reyes v. Secretary of Justice, 264 SCRA 35 (1996)

FACTS: Eurotrust (headed by Reyes) and Bermic (headed by Eleazar) entered into a loan
agreement, without collateral but with interest higher than the bank. Reyes issued 21
postdated checks as installment payments but was dishonored by the drawee bank RCBC
due to a stop payment order made by Eleazar. Reyes filed against her several criminal
complaints for violation of B.P. 22 and estafa under Art. 315 of RPC. In the testimony of
Eleazar, she asserted that it came to her knowledge that the funds she loaned from
Eurotrust belonged to AFP-MBAI. Upon knowing this, she requested a meeting with
Eurotrust and reached an agreement that Eleazar will directly settle its obligations with the
real owners, AFP-MBAI and DECS-IMC. Pursuant to this understanding, Bermic negotiated
with AFP-MBAI and DECS-IMC and made payments to the latter. In fact, Bermic paid AFP-
MBAI P31,711.11 and a check of P1-million. However, Eleazar later learned that Reyes
continued to collect on the postdated checks so upon her counsel’s advice, Eleazar had the
payment stopped. The Office of the Provincial Prosecutor of Rizal dismissed the complaints.
Reyes filed a petition for review with the Sec. of Justice but the case was dismissed. It held
that “the novation of the loan agreement prevents the rise of any incipient criminal liability
since the novation had the effect of canceling the checks and rendering without effect the
subsequent dishonor of the already canceled checks.”

ISSUE: W/N novation takes place.

RULING: NO. In order that a novation can take place, the concurrence of the following
requisites is indispensable: 1. there must be a previous valid obligation; 2. there must be an
agreement of the parties concerned to a new contract; 3. there must be the extinguishment
of the old contract; and 4. there must be the validity of the new contract. The last 3 requisites
of novation were not met. No new agreement for substitution of creditor was forged among
the parties concerned which would take the place of the preceding contract. The absence of
a new contract extinguishing the old one destroys any possibility of novation by conventional
subrogation. The fact that respondent Eleazar made payments to AFPMBAI and the latter
accepted them does not ipso facto result in novation. There must be an express intention to
novate - animus novandi. Novation is never presumed.
CASE No. 151

Conchingyan vs. RB Surety and Insurance (June 30, 1987, 151 SCRA)

FACTS: In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO)was granted an

increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with
the Philippine National Bank (PNB). PAGRICO submitted Surety Bond No, issued by the
respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the amount of P400,000.00
in favor of the PNB.

In consideration of R & B Surety's issuance of the Surety Bond, two identical indemnity
agreements were entered into with R & B Surety executed by the Catholic Church Mart (CCM)
and by petitioner Joseph Cochingyan, Jr, and (b) another agreement dated 24 December 1963
was executed by PAGRICO.When PAGRICO failed to comply with its Principal Obligation to the
PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount
of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that
demand totalling P70,000.00 evidenced by detailed vouchers and receipts.R & B Surety in turn
sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for
reimbursement of the payments made by it to the PNB and for a discharge of its liability to the
PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought
suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben.

ISSUE: Whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent to the
execution of the Trust Agreement.

RULING: No. The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND
demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the
terms and conditions set forth in said SURETY BOND — ." This part of the Agreement suggests
that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in
favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors
ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the
record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB
could not have directly demanded payment of the Principal Obligation from the petitioners. Thus,
we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension
granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned
and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B
Surety and the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking
under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B
Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The
Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the
Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those
obligations were to amture "as soon as [R & B Surety] became liable to make payment of any
sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have
been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079:

CASE NO. 152

 Novation: Requisites
Broadway Centrum Condominium Corp vs. Tropical Hut (July 5, 1993, 224 SCRA)

FACTS: Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private

respondent Tropical Hut Food Market. Inc. executed a contract of lease. Broadway, as lessor,
agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex
for a period of ten (10) years, commencing 1981 and expiring in 1991, "renewable for a like
period upon the mutual agreement of both parties." There were no problems during the first year
of lease, but in 1982 Tropical Hut requested for a rental rate reduction due to financial difficulties.
Tropical Hut is paying a rental rate of 6.08% of sales "which is too high for Tropical Hut-
Broadway considering that the present rental rates of other Tropical branches are even below the
normal rate of 1.5% on sales." Negotiations between Broadway Centrum and Tropical Hut
representatives were made. Tropical's officers recounted the low sales volume as a result of the
temporary closure of Doña Juana Rodriguez Avenue. This Avenue is a major thoroughfare
adjacent to the Broadway Centrum and was then closed to vehicular traffic because of the road
expansion project of the Government. Broadway agreed on 20 April 1982 to a "provisional and
temporary agreement" wherein Tropical will pay a monthly rental on the basis of 2% of gross
receipts or P60,000.00, whichever is higher. Tropical also committed to return 466.56 square
meters of their leased premises to Broadway management. After a few months, Broadway sent
Tropical a letter returning the old rental rates. Tropical requested that the reduced rental scheme
be maintained but Broadway did not agree and sought to enforce the original contract details.
Tropical Hut filed for a writ of prohibition against Broadway. TC and CA ruled in favor of Tropical
Hut.

ISSUE: W/N there was a novation.

RULING: NO. The rule is settled that novation by presumption has never been favored. To be
sustained, it needs to be established that the old and new contracts are incompatible in all points,
or that the will to novate appears by express agreement of the parties or in acts of similar import.
The 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.

In the case at hand the letter-agreement was, by its own terms, a " provisional and temporary
agreement to a reduction of Tropical's monthly rental." The non-specification by Broadway of the
period of time during which the reduced rentals would remain in effect, only meant that Broadway
retained for itself the discretionary right to return to the original contractual rates of rental
whenever Broadway felt it appropriate to do so. The formal notarized Lease Contract made it
clear that a temporary and provisional concessional reduction of rentals which Broadway might
grant to Tropical was not to be construed as alteration or waiver of any of the terms of the Lease
Contract itself. The course of negotiations between Broadway and Tropical clearly indicated that
what they were negotiating was a temporary and provisional reduction of rentals only and was
not to persist for the rest of the life of the ten (10)-year Contract of Lease.

Hence, no reasonable presumption can be indulged that the return of part of the leased space
constituted consideration for the reduction of rental rates. In the Contract of Lease, the rentals
were stipulated for a specified portion of the Broadway Centrum; the rental rate was not specified
on a per square meter basis.
There can be no novation unless two distinct and successive binding contracts take
place, between the same parties with the second designed to replace the preceding
convention. Modifications introduced before a bargain becomes obligatory can in no
sense constitute novation in law.

Mohammad
Case 153

Molino vs. Security Diners International (GR 136780, Aug. 16, 2001, 363 SCRA)
Novation

Facts: Assailed by this petition for review on certiorari is the decision of the Court of Appeals
which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with
herein Respondent Corporation. Danilo A. Alto applied for a Regular (Local) Card with SDIC. He
got as his surety his own sister-in-law Jeanette Molino Alto and was granted and he requested
for an upgrade of his card, granted again. He used this card and made purchases, and then he
had incurred credit charged plus appropriate interest and service charges. He defaulted in the
payment of this obligation. SDIC demanded of Danilo and Jeanette to pay said obligation but
they did not pay. So, SDIC filed an action to collect said indebtedness against Danilo and
Jeanette.

The trial court found that while petitioner clearly bound herself as surety under the terms of Danilo
Alto's Regular Diners Club Card, there was no evidence that after the card had been upgraded to
Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Petitioner was not liable
for any amount, since at the time of the upgrading Danilo had no outstanding credit card debts.
This is evident from the fact that Danilo's request for upgrading was approved, since one of the
requirements for the approval of a request for the upgrading of a credit card from Regular to
Diamond is that the applicant must have paid all his billings for the last three months prior to his
request.

Issue: W/N petitioner is liable as surety under the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. (Was the upgrading a novation of the original agreement
governing the use of Danilo Alto's first credit card, as to extinguish that obligation and the Surety
Undertaking which was simply accessory to it?)

Held: Yes. There is no doubt that the upgrading was a novation of the original agreement
covering the first credit card issued to Danilo Alto, basically since it was committed with the intent
of cancelling and replacing the said card. However, the novation did not serve to release
petitioner from her surety obligations because in the Surety Undertaking she expressly waived
discharge in case of change or novation in the agreement governing the use of the first credit
card.

Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit

declaration, or by material incompatibility (implied novation). 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. Novation must be
established either by the express terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a consideration for the emergence of
the new one. The will to novate, whether totally or partially, must appear by express agreement
of the parties, or by their acts which are too clear or unequivocal to be mistaken.
NICANOR

CASE 154

ROMEO C. GARCIA v. DIONISIO V. LLAMAS

G.R. No. 154127 December 8, 2003

FACTS: Petitioner and Eduardo De Jesus borrowed P400,000.00 from respondent. Both executed a
promissory note wherein they bound themselves jointly and severally to pay the loan on or before
23 January 1997 with a 5% interest per month. The loan has long been overdue and, despite
repeated demands, both have failed and refused to pay it. Hence, a complaint was filed against both.

Resisting the complaint, Garcia averred that he assumed no liability because he signed merely as an
accommodation party for De Jesus; and that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by De Jesus by means of a check dated 17 April 1997; and that,
in any event, the issuance of the check and respondent’s acceptance thereof novated or superseded
the note.

Respondent answered that there was no novation to speak of because the check bounced.

ISSUE: W/N there was novation in the obligation

RULING: No. In order to change the person of the debtor, the old one must be expressly released
from the obligation, and the third person or new debtor must assume the former’s place in the
relation. Well-settled is the rule that novation is never presumed. Consequently, that which arises
from a purported change in the person of the debtor must be clear and express. It is thus incumbent
on petitioner to show clearly and unequivocally that novation has indeed taken place. Petitioner
failed to do this. In the present case, petitioner has not shown that he was expressly released from
the obligation, that a third person was substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary undertaking of De Jesus.

For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract (Security Bank v Cuenca, October 3, 2000)
PIEDAD
Case No. 155

Novation; Requisites
California Bus Lines, Inc. vs. State Investment House, Inc. GR 147950

FACTS: Delta Motors sought for financial assistance from respondent SIHI to which eventually
Delta became indebted to SIHI. Petitioner CBLI purchased from Delta 35 bus units and to secure
such payment, CBLI executed 16 promissory notes payable in 60 monthly installments with 14%
interest per annum. When CBLI defaulted on all payments due, they entered into a restructuring
agreement with Delta to cover its overdue obligations which provided for a new schedule and of
payments, new interest rates and in case of default, Delta would have the authority to take over
the management and operations of CBLI until CBLI and/or its president, remitted and/or updated
CBLI’s past due account. In view of Delta’s failure to pay, the loan agreements were restructured
under a Memorandum of Agreement and When CBLI continued having troubles meeting its
obligations to Delta, this prompted Delta to enforce the management take over by virtue of a writ
of preliminary mandatory injunction and preliminary attachment over the buses it sold to CBLI.
Pursuant to the MOA, Delta executed a Deed of Sale assigning SIHI 5 of the 16 promissory
notes from CBLI which then refused by the latter. The RTC discharged CBLI’s liability on the 5
promissory notes stating that the restructuring agreement between Delta and CBLI novated the 5
promissory notes hence, at the time Delta assigned the five promissory notes to SIHI, the notes
were already merged in the restructuring agreement and cannot be enforced against CBLI. The
CA reversed the decision of the Trial Court, hence this petition.
ISSUE: W/N the Restructuring Agreement between CBLI and Delta Motors, Corp. novated the
five (5) promissory notes Delta Motors, Corp. assigned to respondent SIHI

RULING: NO. 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). 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.

Where the change is not extinctive but is merely modificatory, i.e., incidental to the main
obligation (e.g., change in interest rates or an extension of time to pay), the new agreement will
not have the effect of extinguishing the first but would merely supplement it or supplant some but
not all of its provisions. In other words, the old obligation subsists to the extent it remains
compatible with the amendatory agreement. Here, the restructuring agreement merely provided
for a new schedule and manner of payments and additional security Where the parties to the
new obligation expressly recognize the continuing existence and validity of the old one, there can
be no novation.
REYES
Case No. 156

Novation; Requisites
Chester Babst vs. CA
GR 99398, Jan. 26, 2001, 350 SCRA

FACTS: ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at
the rate of 14% per annum, evidenced by a promissory note. ELISCON defaulted in its
payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October
31, 1982.

Subsequently, Chua and Babst executed a Continuing Suretyship, whereby they bound
themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the
extent of P8,000,000.00 each.
Later on, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI,
as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.

Thereafter, by virtue of cession, DBP took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's
obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being
acceptable. Consequently, BPI, as successor-in-interest of CBTC, instituted a complaint for sum
of money against ELISCON, MULTI and Babst.

The trial court ruled in favor of BPI, and the same was affirmed by the Court of Appeals. Hence
the instant petition.

Issue: W/N there was valid novation

Held: Yes. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP
for ELISCON as debtor. Hence, there was a valid novation which resulted in the release of
ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as
the new debtor.

SAJILI
Case no. 157

G. Subjective Novation; Delegacion effects Art 1295

Garcia v. Llamas
417 SCRA 292 (2003)

FACTS: A complaint for sum of money was filed by respondent Dionisio Llamas against
Petitioner Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000
from him. They bound themselves jointly and severally to pay the loan on or before January 23,
1997 with a 15% interest per month. The loan remained unpaid despite repeated demands by
respondent.

Petitioner resisted the complaint alleging that he signed the promissory note merely as an
accommodation party for de Jesus and the latter had already paid the loan by means of a check
and that the issuance of the check and acceptance thereof novated or superseded the note.

The trial court rendered a judgment on the pleadings in favor of the respondent and directed
petitioner to pay jointly and severally respondent the amounts of Php 400, 000 representing the
principal amount plus interest at 15% per month from January 23, 1997 until the same shall have
been fully paid, less the amount of Php 120,000 representing interests already paid.

ISSUE: Whether or not there was novation of the obligation

RULING: NO. For novation to take place, the following requisites must concur: (1) There must be
a previous valid obligation; (2) the parties concerned must agree to a new contract; (3) the old
contract must be extinguished; and (4) there must be a valid new contract.

The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check or that the check would take the place of the note.

(2) By its terms, the note was made payable to a specific person rather than bearer to or order—
a requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the
liabilities and defenses of an accommodation party. Besides, a non-negotiable note is merely a
simple contract in writing and evidence of such intangible rights as may have been created by
the assent of the parties. The promissory note is thus covered by the general provisions of the
Civil Code, not by the NIL.

Even granting that the NIL was applicable, still petitioner would be liable for the note. An
accommodation party is liable for the instrument to a holder for value even if, at the time of its
taking, the latter knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and surety. It is
a settled rule that a surety is bound equally and absolutely with the principal and is deemed an
original promissory debtor from the beginning. The liability is immediate and direct.

SAKIR
Case No. 158

Subjective Novation; Delegacion

Quinto v. People, G.R. No. 126712, April 14, 1999

FACTS: Quinto and private complainant, Cariaga, entered into an agreement whereby the
former will sell, on a commission basis, jewelry owned by Cariaga and return the proceeds
thereof, or return said jewelries if not sold within 5 days. After the lapse of 5 days, Quinto asked
for extension. However, even after 6 months, some jewelries were not yet sold so Cariaga
demanded the return of the jewelries but Quinto ignored them, to which Cariago filed a case of
estafa against her. Quinto contended there was a novation of the obligation because she
managed to sell the remaining jewelry to Camacho and Ramos. Although those buyers were
unable to pay the amount in full, Quinto brought them to Cariaga in which the three allegedly
agreed to the terms of payment. The trial court found Quinto guilty of the crime of estafa which
the CA, on appeal, affirmed.

ISSUE: WON the agreement was effectively novated when the complainant consented to receive
payment by installments directly from Camacho and Ramos.

RULING: No. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation, thereby releasing the original debtor
from the obligation; here, the intervention and the consent of all parties thereto would perforce
be necessary. In this case, Cariaga’s acceptance of Ramos and Camacho’s payment on
installment basis cannot be construed as a case of delegacion sufficient to justify the attendance
of extinctive novation. A stranger to a contract may agree 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, constitute an extinctive novation absent an agreement that the first
debtor shall be released from responsibility.

Moreover, Quinto in this case committed the crime of estafa. Novation is not one of the means
recognized by the Penal Code whereby criminal liability can be extinguished. The criminal liability
for estafa already committed is not affected by the subsequent novation of contract, for it is a
public offense which must be prosecuted and punished by the State in its own conation.

Case No 159
Salazar
Subjective Novation [By change of creditor: Subrogation of a third person in the rights of
the creditor- Art. 1300] Conventional subrogation / iii. effects- Art. 1303, 1304

Licaros Vs. Gatmaitan, G.R. No. 142838, August 9, 2001.

Facts: Licaros invested with the Anglo-Asean Bank and Trust Limited (Anglo-Asean). Its
business is in receiving fund placements from investors and then investing them in money
market placements and potentially profitable capital ventures in H.K, Europe and the U.S. for
maximization of returns. Licaros’ investment didn’t turn out well as he had difficulties in retrieving
not only his profits but also his investments. Thus, he sought the counsel of Antonio Gatmaitan, a
reputable banker and investment manager to help get back his investments. Gatmaitan
voluntarily offered to assume the payment of Anglo-Asean’s indebtedness to Licaros subject to
terms and conditions. They made it formal and effective through a MEMORANDUM OF
AGREEMENT (MOA) on July 29, 1988. In line w/ this agreement, Gatmaitan executed a NON-
NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS in favor of
Licaros. Here, it’s stated that: Gatmatian promises to pay Licaros P3,150,000 w/o interest as
material consideration for the full settlement of his money claims from Anglo-Asean. Also, 70% of
all cash dividends from his shares of stock in the Prudential Life Realty Inc. to the extent of his
shareholding in Prudential Life Plan, Inc. (holding company of Prudential Realty) was assigned
as a security for the payment of the promissory note. Nothing happened when Gatmaitan tried to
claim the S150, 000 from Anglo-Asean. Thus, he didn’t bother to fulfill his promise to pay Licaros
the amount states in the promissory note. However, Licaros felt that he had a right to collect on
the basis of the promissory note regardless of the outcome of Gatmaitan's recovery efforts. Thus,
in July 1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan,
demanding payment of the latter’s obligations under the promissory note. Gatmaitan, however,
did not accede to these demands. Licaros then filed a complaint to the RTC where he won. But
CA reversed it saying that the MOA is of a conventional subrogation which needs the consent of
Anglo-Asean for its validity.

ISSUES: WON the MOA is one of assignment of credit or one of conventional subrogation? And
WON the MOA was perfected?

RULING : Yes , the MOA is a conventional subrogation. The intent for it to be one of
conventional subrogation is clear in its stipulations. To wit: “WHEREAS, the parties herein have
come to an agreement on the nature, form and extent of their mutual prestations which they now
record herein with the express conformity of the third parties concerned” (emphasis supplied),
which third party is admittedly Anglo- Asean Bank.

If the intent was just to make Gatmaitan the “assignee” of Licaros’ credit, it woud’ve been
senseless to stipulate in the MOA that same is conditioned on the “express conformity” of Anglo-
Asean Bank.

And NO, the MOA was not perfected. The consent of Anglo-Asean wasn’t obtained and since
consent is a requirement of subrogation, the MOA wasn’t perfected. Thus, there’s no cause of
action.

SUBA
CASE NO. 160

ASTRO ELECTRONICS CORP. & PETER ROXAS v. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION
G. R. No. 136729
September 23, 2003
FACTS: Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes. In each of these promissory
notes, it appears that petitioner Roxas signed twice, as President of Astro and in his personal
capacity. Roxas also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as
President of Astro and as surety.

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of
70% of Astro’s loan, subject to the condition that upon payment by Philguanrantee of said amount, it
shall be proportionally subrogated to the rights of Philtrust against Astro. As a result of Astro’s failure
to pay its loan obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to
Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati.

Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed the same in
blank and the phrases “in his personal capacity” and “in his official capacity” were fraudulently
inserted without his knowledge.

The trial court ruled in favor of Philguarantee, stating that if Roxas really intended to sign the
instruments merely in his capacity as President of Astro, then he should have signed only once in the
promissory note. On appeal, the Court of Appeals affirmed the RTC decision.

ISSUE: Whether or not Roxas should be solidarily liable with Astro for the sum awarded by the RTC

RULING: YES. CA affirmed. Under the Negotiable Instruments Law, persons who write their names
on the face of promissory notes are makers,promising that they will pay to the order of the payee or
any holder according to its tenor. Even without the phrase personal capacity, Roxas will still be
primarily liable as a joint and several debtor under the notes considering that his intention to be liable
as such is manifested by the fact that he affixed his signature on each of the promissory notes twice
which necessarily would imply that he is undertaking the obligation in 2 different capacities, official
and personal.

3 promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and solidarily,
promise to pay to PHILTRUST BANK or order. An instrument which begins with I, We, or Either of us
promise to pay, when signed by two or more persons makes them solidarily liable.

Subrogation 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. Instances of legal subrogation are those
provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that
which takes place by agreement of the parties

Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of Philtrust to
demand for and collect payment from both Roxas and Astro since it already paid the value of 70% of
roxas and Astro Electronics Corp.s loan obligation.

Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of
the legal subrogation that occurs by operation of law, and without need of the debtors knowledge

Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and
Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor