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OBLIGATIONS PART 2 Law
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Page 1: Law.obligations Part2

OBLIGATIONS PART 2

Law

Page 2: Law.obligations Part2

•CAUSES OF EXTINGUISHMENT OF OBLIGATIONS:1. PAYMENT OR PERFORMANCE2. LOSS OF THE THING DUE3. CONDONATION OR REMISSION OF DEBT4. CONFUSION OR MERGER OF RIGHTS OF CREDITOR AND

DEBTOR5. COMPENSATION6. NOVATION7. ANNULMENT8. RESCISSION9. FULFILLMENT OF RESOLUTORY CONDITION10. PRESCRIPTION11. OTHER CAUSES

Extinguishment of Obligations

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•PAYMENT MEANS NOT ONLY THE DELIVERY OF MONEY BUT ALSO THE PERFORMANCE, IN ANY OTHER

MANNER OF AN OBLIGATION.

•THUS IF THE OBLIGATION IS TO PAINT A PORTRAIT, PAYMENT CONSIST IN THE PERFORMANCE OF THE SERVICE. OR IF THE OBLIGATION IS TO DELIVER A

CERTAIN RING, PAYMENT CONSIST IN THE DELIVERY OF THE THING.

Payment or Performance

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How must payment be made

1. There must be delivery of the thing or rendition of service that was contemplated.

a. The debtor of a thing cannot compel the creditor to accept a different one although the latter may be of the same value as, or more valuable than that which is due. (Art.1244)

Example: D is obliged to give C a Seiko wristwatch. D cannot compel C to accept a Rolex wristwatch even if the latter is more valuable than a Seiko.

b. In obligation to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will. (Art1244)

Example: 1. D is obliged to paint C’s car. He cannot substitute it with an obligation to paint C’s house. 2. D borrowed P10,000.00 from C. C gave D 1 year to pay provided D must not enter a casino before he has paid the debt. D cannot ask C that the “ obligation not to enter a casino” be substituted with “not to drink and smoke” during the term of the loan.

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How must payment be made

c. In obligations to give a generic thing whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (Art.1246)

Example: D is obliged to give C 50 yards of textile. C cannot compel D to deliver first class wool textile. Neither can D deliver to C a textile that shrinks substantially at first wash. If C happens to be engaged in the sale of student uniforms, then D may give C the kind of textile fir for that purpose.

d. if the obligation is a monetary obligation, the payment must be in legal tender.

Legal tender, concept-Legal tender is the money or currency which the debtor may compel his creditor to accept in payment of his debt (whether public or private).

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How must payment be made

Medium of payments-payment of debts in money must be made in the

currency which is legal tender in the Philippines. However, the parties may stipulate that the payment may be made in currency other than Philippine legal tender at the time of payment. (R.A.8183)Under Section 52 of R.A. No.7653 ( The New Central Bank Act), the following are legal tender in the Philippines:

1.) twenty-five centavo (P0.25) coins and above are legal tender up to P50.00.

2.) ten centavo (P0.10) coins or less are legal up to P20.00.

3.) All bills are legal tender up to any amount.

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How must payment be made

Inflation and deflation, concept, value to be used when payment is made-inflation is a sharp sudden increase of money or credit or both without a corresponding increase in business transactions. (Webster’s Dictionary). It is the opposite of deflation, or the sharp sudden decrease of money or credit or both without a corresponding decrease in business transaction.-In case an extraordinary inflation or deflation of the currency should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is agreement to the contrary. (Art.1250)

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Example: D borrowed P1,000,000.00 from C payable at the end of 10 years.

1. Suppose that before maturity of the loan, an extraordinary inflation supervened causing the value of the debt to fail to P500,000.00 on the date of maturity. How much must D pay C at maturity?

2.Suppose that before maturity of the loan, an extra-ordinary deflation supervened causing the value of the debt to rise to P4,000,000 on the maturity date of the loan, how much must D pay C at maturity?

The answer can be determined by using the following formula: A= (B/C) x B where A= amount o be paid at maturity; B= amount of

Obligation; C= value on the date of maturity Thus: 1.) Extraordinary inflation

A= (P1,000,000.00/P500,000.00)x P1,000,000.00 = P2,0o0,000.00 (equivalent value of P1,000,000.00 on date of

maturity2.) Extraordinary deflationA= (P1,000,000.00/P4,000,000.00) x P1,000,000.00 = P250,000.00( equivalent value of P1,000,000.00 on the date

of maturity

Conflict with RESA

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How must payment be made

Delivery of mercantile documentsThe delivery of promissory notes

payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired. (Art.1249)

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How must payment be made:2. the payment or performance must be complete (Art1233). The

following are exceptions:

a. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. (Art 1234)

Example : S agreed to deliver 20 fire extinguishers to B. After S has delivered 18 fire extinguishers to B, there are no more stock available. He wants to complete the delivery but there is no more stocks available. S can recover the cost of 20 fire extinguishers less damages suffered by B

b. When the obligee accepts the performance knowing its incompleteness or irregularity, and without expressing any protest or objection, obligation is deemed fully complied with. (Art1235)

Example: D agreed to repair the car of C and to paint it red. D repaired the car but painted it maroon. C accepted the car without any objection. D’s obligation is fully complied with notwithstanding the irregularity of the performance.

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When partial payment may be made

The creditor cannot be compelled to receive, and the debtor cannot be compelled to make partial payments except:

When there is an agreement to that effect. (Art.1248)However, the payment must still be made in full at

some future time in accordance with the agreement, to extinguish the obligation.

When the debt is in part liquidated(i.e., the amount is fixed) and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (Art1248)

The unliquidated part, once it is finally determined, must be also paid, to extinguish the obligation.

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Who must make the payment: payment must be made by the debtor who must possess the

following:

1. The free disposal of the thing due:Free disposal of the thing due means

that the property delivered should not be subject to any claim by, or encumbrances in favor of, third persons.

Thus, if a property mortgaged is used as payment by the debtor to a creditor other than the mortgagee, the payment is not valid. The said property can be made to answer for the debt secured in case of foreclosure of the mortgage.

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Who must make the payment: payment must be made by the debtor who must possess the

following:

2. The capacity to alienate the thingThe debtor must not be incapable of giving

consent.Effect on payment in the obligations to give if the debtor

does not have free disposal and capacity to alienateThe payment shall not be valid except in cases

provided by law (Art1239). If the payment is made, the guardian of the incapacitated person(during incapacity), or the incapacitated person himself when he regains his capacity, may seek the annulment of the payment. (Art1397) In case the debtor does not have the free disposal of the thing due, the injured party may seek to recover the payment.

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Payment by the debtor after court has ordered him to retain the debt

Payment made to the creditor by the debtor after the debtor has been judicially ordered to retain the debt shall not be valid. (Art1243) The court order is known as garnishment.

Example: D owes C P50,000.00. on due date, C demands payment but D cannot pay. C, however learns that D has received from X so he files a court against D and asks the court to order X not to make payment to D. The court issues the order. If X pays D, the payment will not be valid because there is an order of retention from the court. Should the court favor C in its judgment in the case filed by C against D, X can be required to pay again, this time to C.

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Payment by a third person

The creditor is not bound to accept payment or performance by a third person except in the ff. cases:

a. When there is a stipulation to that effectb. When the third person has an interest in the

fulfillment of the obligation such as a guarantor or a co-debtor. (Art.1236)

Example: D borrowed P20,000.00 from C with G as guarantor, G as a person has an interest in the fulfillment of the obligation may compel C to accept the payment from him.

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Rights of a third person who makes the payment

a. Payment with knowledge and consent of the debtor

1. He can recover what he has paid. (Art. 1236)

2. He is entitled to be subrogated in the rights of the creditor such as those arising from mortgage, guaranty or penalty. (Art.1237)

Example: D owes C P10,000.00. The obligation is secured by a mortgage of D’s lot. T, a third person, pays C the amount of P10,000.00 with the consent of D. T can recover the amount of P10,000.00 from D. If D cannot pay, T, having been subrogated in the rights of C, can foreclose the mortgage.

b. Payment without the knowledge or against the will of the debtor.

-He can recover only insofar as the payment has been beneficial to the debtor. He is not entitled to subrogation. (Arts.1236 and 1237)

Example: D borrowed P20,000.00 from C with G as guarantor. D pays C P2,000.00. T, a third person, pays C P20,000.00 believing that D still owed C P20,000.00. The payment is without consent of D. In this case, T can only recover P18,000.00 from D, the amount that was beneficial to D. If D cannot pay, T cannot go after G because he is not entitled to be subrogated in the rights of C.

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Payment by a third person who does not want to be reimbursed

The payment shall be deemed to be a donation which requires the debtor’s consent

If the debtor does not consent, the payment shall nevertheless be valid to the creditor who has accepted it. (Art.1238) In such case, the third person can only recover insofar as the payment has been beneficial to the debtor, he is also not entitled to subrogation. (Arts.1236 and 1237)

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To whom shall payment may be made

To the creditor (person in whose favor the obligation has been constituted)

To the creditor’s successors in interest, such as his heirs or assigns

To any person authorized to receive the payment.

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Payment to an incapacitated creditor

The creditor must be capacitated o receive the payment. Payment to an incapacitated creditor is not valid except in the following cases:

a. If has kept the thing deliveredExample: D borrowed P10,000.00 from C. On due

date, D paid the debt to C who had become insane. If C kept only P4,000.00 and threw away P6,000.00 then payment will be valid only up to P4,000.00.

b. Insofar as the payment has been beneficial to him. (Art.1241)

Example: in the above example, if the amount of P10,000.00 was used by C for the purchase of his food, payment will be valid for the entire amount of the debt.

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Payment to an unauthorized third person: As a general rule payment to an unauthorized person is not valid except in the ff. cases:

a. If the payment has redounded to the benefit of the creditor, which benefit need not be proved in the ff. cases:

1. If after the payment, the third person acquires the creditor’s right ( such as when the third person becomes the assignee of the instrument evidencing the credit).

2. If the creditors ratifies the payment to the third person

3. If by the creditor’s conduct, the debtor has been led o believe that the third person had the authority o receive payment (such as when a water service company gives a collector’s uniform to a third person who is not its employee and the debtor gives payment to such third person believing that he is the authorized collector.

b. If the payment is made in good faith to a third person in possession of the credit. (Art12420

In this case, the third person should be both in possession of the instrument and the credit.Example: M makes a note payable to bearer and deliver it to P. The note, however is lost by P and is picked up by A. A goes to M to collect on the note, M pays A believing in good faith that A is the intended bearer. M is released from liability.

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Where payment must be made:

1. If there is a stipulation, then in the place designated

2. If there is no stipulationa. If the obligation is to

give a determinate thing, wherever the thing might be at the time the obligation was constituted.

b. If the obligation is to give a generic thing or an obligation to do, then at the domicile of the debtor. (Art1251)

Special forms of payment:

1. Dation in payment2. Application of

payment3. Payment by Cession4. Tender of payment

and consignation

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Dation in Payment

Dation in payment (dacion en pago, adjudication en pago or datio in solutum), is a special form of payment where the ownership of property belonging to the debtor is transferred to his creditor to pay debt in money. (Art1245). It is governed by the law of sales since it partakes in a sense the nature of a sale with the creditor in effect buying the property of the debtor.

Example: D owes C P10,000.00. on due date, D proposes to C to accept a ring in payment of D’s debt of P10,000.00. C agrees to D’s proposal and accepts the ring. D’s monetary obligation is extinguished by dation in payment.

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Application of payment

Concept:-it is the designation of the debt

to which payment shall be applied when the debtor owes several debts in favor of the same creditor. (Art.1252)

Requisitesa. There must be two or more debts.b. The debts must be of the same

kind.c. The debts are owed by the same

debtor to the same creditor.d. All debts are due, except:1. when the parties have stipulated

that payment may be applied to a debt not yet due, or

2. When the application is made by the party for whose benefit of the term has been constituted. (Art1252)

How application of payment is madea. The debtor who is given the preferential

right to apply the payment designates the debt to be paid.

b. If the debtor does not make the designation, the creditor makes it by indicating the debt being paid in his receipt. If the debtor accepts the receipts from creditor, the debtor cannot complain unless there is a just cause of invalidating the contract

c. If neither the debtor nor creditor makes the designation, or application cannot be inferred from the circumstances, payment shall be applied by operation of law as follows:

1. payment shall be applied to the debt, among those due, which is the most onerous to the debtor.

2. If the debts are of the same nature and burden. Payment shall be applied to all due debts proportionately. (Arts.1252,1254)

Note: In all instances if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (Art1253

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Illustration 1: D owes C the following 5 distinct debts of P1,000.00 due on May 1, May 5, May 10, May 15, and May 20.

a. If today is May 16, and D has only

P1,000.00 but wants to pay C. D may apply the payment to any of the debts due on MAy1, May5, May 10 or May 15. He cannot apply the payment to the debt due on May 20 because it is not yet due unless he is allowed by the stipulation with C or the benefit of the period was given to him (D).

b. If D does not apply the payment, the right to apply I is shifted to C. C may apply the payment to any of the debts due on May1, May5, May10, or May15. He cannot apply the payment to the debt on May 20 because it is not yet due unless he is allowed by the stipulation with D or the benefit of the period was given to him (C).

c. If neither D nor C applies the payment, payment shall be applied proportionately to the debts due on May 1, May 5, May 10 and May 15 at P250.00 each. In case the debt due on May 5 is secured by a pledge then the payment shall be applied to such debt because it is the most onerous to D.

Illustration 2: D owes C P7,000.00 due on May 1, 5 sacks of rice worth P5,000.00 due on May 5 and P5,000.00 due on May 8.

If none of the debts have been paid as of May 8 and D has P5,000.00, D cannot apply the payment of the debt consisting of 5 sacks of rice because it is not payable in money, i.e., it is of different kind. D may not apply the payment due on May 1 because the payment would not be complete unless C consents. D may however, apply the payment to the debts due on May 8.

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Payment by Cession

ConceptPayment by cession is

the abandonment or assignment by the debtors of all his property in favor of all his creditors so that the latter may sell them and recover their claims out of the proceeds. (Art1255)

The cession or assignment operates only to the authorize the creditors to sell the debtor’s property, hence, ownership is not transferred to them. Unless agreed upon, the cession releases the debtor from his responsibility only to the extent of the net proceeds of the things assigned. (Art 1255)

Kinds of payment by cession:a. Voluntary or conventional-

agreed upon by the parties.b. Legal- cession by operation

of law

Requisites of payment by cession:

a. There must be two or more creditors

b. The debtor is insolventc. The debtors abandons all his

properties except those exempt from execution.

d. The creditors accept the abandonment.

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Illustration:

D owes X P50,000.00, Y, P20,000.00 and Z, P30,000.00. Obligations are due but D has assets worth only P80,000.00. D offers to assign his assets to X,Y and Z so that the may sell them and apply the proceeds to their respective claims. X,Y, and Z accept the offer. If the assets are sold for P70,000.00 then D will be released from his obligations only up that amount, unless the creditors agreed to release him completely of his debts.

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Payment by cession and dation in payment distinguished

Payment by cession1. There must be two or

more creditors.2. The debtor is insolvent3. Affects all the debtor’s

properties, except those exempt from execution

4. The creditors are authorized to sell only the debtor’s properties.

5. The debtor is not released as a rule.

Dation in Payment1. Plurality of creditors is

not required.2. Debtor may not be

insolvent3. Does not affect all the

debtor’s properties.4. The creditor becomes

the owner of the properties given as payment.

5. The debtor is released as a rule.

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Tender of payment and consignation: Concept

Tender of payment is the act of the debtor of offering to his creditor what is due him.

Consignation, on the other hand, is the act of depositing the sum or the thing due with the judicial authorities whenever the creditor refuses without just cause to accept the same, or in the cases when the creditor cannot accept it.

Illustration of tender of payment and consignationD borrowed p50,000.00 from C. on due date, D tendered the payment in P20.00 bills totaling P50,000.00 to C. C refused to accept the payment demanding he be paid in higher denomination. Since the payment tendered by D was legal tender. C was not justified in refusing to accept it. D may thus consign the payment in court.

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Requisites (steps) of tender of payment and consignation to extinguish obligation

a. There must be a valid tender of payment.b. The creditor refuses without just cause to receive the payment.

(Art1256)c. The persons interested in the fulfillment of the obligation must be

notified by the debtor of his intention to deposit the sum or thing due with the judicial authorities. (Art.1256).the notice will enable the creditors, mortgagees, guarantors, sureties, solidary debtors, among others, to reconsider accepting the payment and avoid litigation. The notice is also required to give the creditor the opportunity to accept the payment because the expenses of consignation will be charged to him for his non-acceptance of the payment.

d. The sum or thing due is deposited with judicial authorities.e. The persons interested in the fulfillment of the obligation must

again be notified by the debtor that the consignation has been made. (Art.1258)

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Tender of payment and consignation: Effect of consignation duly made

If the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. The obligation shall be extinguished after the creditor has accepted the consignation or the judge has declared that the consignation has been properly made. (Art1260)

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Tender of payment and consignation:Debtor’s right to withdraw the sum or thing

consigned

a. before the acceptance of the consignation or the declaration by the judge that the consignation has been properly made-

The debtor may withdraw the sum or thing consigned as a matter of right. i.e., the creditor’s consent is not required. Such withdrawal produces the following effects:

1. The obligation remain in force. (Art.1260)

2. The co debtors, guarantors, and sureties are not released. (Art1261)

b. after the acceptance of the consignation or the declaration by the judge that the consignation has been properly made-

The debtor may withdraw the sum or thing consigned only with the creditor’s consent. Such withdrawal produces the following effects:

1. The obligation is revived.2. The creditor shall lose every preference

which may have over the thing.3. The guarantors, and sureties are

released. If there are several debtors and their obligation is solidary, such obligation will become a join obligation. (Art.1261). Thus, the creditor can no longer proceed against the guarantor surety if later on the debtor cannot pay. As regards the co-debtors, they are not released from liability they being the principal debtors. Their obligation becomes joint if it was previously solidary.

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When the consignation, without a previous tender of payment will produce the same

effect.

When the creditor is absent or unknown or does not appear at the place of payment.

When he is incapacitated to receive the payment at the time it is due.

When without just cause, he refuses to give a receipt.

When two or more persons claim the same right to collect.

When the title of the obligation has been lost. (Art1256)

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Loss of a thing Due

A thing is considered lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or cannot be recovered. (Ar.1189, par.2)

Loss includes the physical or legal impossibility of the service in which the obligation consists.

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Loss effect on the obligation

Loss of a determinate thing: As a general rule, the loss of a determinate thing extinguishes the obligation. (Art1262). The following are the exceptions:

a. When the loss is due to the fault of the debtor. (Art.1262)Loss of the thing while in the possession of the debtor shall be presumed to be due to his fault, unless proved otherwise. This presumption does not apply in case of earthquake, flood, storm or other natural calamity. (Art.1265)

b. When the debtor has incurred in delay. (Art.1262)c. When so provided by law, (Art.1262) as when the debtor has promised

to deliver the same thing to two or more persons who do not have the same interest. (Art.1165)

d. When it is stipulated by the parties. (Art1262)e. When the nature of the obligation requires the assumption of risk.

(Art1262)f. When the debt proceeds from a criminal offense unless the person who

should receive it refuses to accept it without just cause. (Art.1268)

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Loss effect on the obligation

Loss of a generic thingThe loss or

destruction of anything of the same kind does not extinguish the obligation. (Art.1263)

Exception: In the case of a “delimited generic thing”, such as “100 canvass of rice from my harvest this year” when such harvest is completely destroyed.

Loss in personal obligations (obligations to do)

a. When the prestation becomes legally or physically impossible without the fault of the debtor, the obligation is extinguished. (Art1266)

b. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released in whole or in part (Art1267).

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Effect of partial loss

The court shall determine whether under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (Art.1264).

Creditor’s right if the loss is caused by a third person

If the obligation has been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of loss. (Art1269)

Example: D is obliged to give a specific carabao to C. X steals the carabao and slaughters it. D’s obligation is extinguished. C has a right to proceeds against X. Assignment of the right by D to C is not required since it is the law that gives C the right.

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Condonation or Remission

Condonation or remission is the gratuitous abandonment by the creditor of his right. In plain language, this refers to the forgiveness of an indebtedness. To extinguish the obligation it requires the debtor’s consent. (Art.1270)

Example: D owes C P3,000. The debt is evidenced by a promissory note. C informs that he will no longer collect the debt and delivers the promissory note to D. D accepts C’s generosity. D’s obligation is extinguished by condonation or remission.

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Kinds

2. As to form:a. Express- one made orally or in

writing. It must to be valid, comply with the formalities of donation as follows:

1. When the remission involves an immovable property, the remission and the acceptance must be in public instrument. The public instrument must specify the property remitted and the value of the charges that the debtor (donee) must satisfy.

2. When the remission involves a movable/personal property-

a.) if the value of the property exceeds P5,000.00, the remission and the

acceptance must be in writing (public or private).

b.) if the value of the property is P5,000.00 or less, the remission and the acceptance may be in any form, i.e., oral or in writing (public or private). The remission, however, if made orally, requires the simultaneous delivery of the thing or the document representing the right remitted.

b. Implied- one inferred from the conduct of the parties, such as when the creditor voluntarily delivers the private document evidencing the credit to the debtor. (Art 1271.)

1. As to amount or extenta. Total- when the obligation (both

principal and accessory obligations) is remitted.

b. Partial – when only a part of the obligation, or only he accessory obligation is remitted.

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Presumption when private document evidencing debt is found in the possession of the debtor

The private document is presumed to have been delivered voluntarily by the creditor to the debtor (so as to remit the obligation) unless the contrary is proved. (Art.1272)

Presumption when the thing pledged after its delivery to the creditor is found in the possession of the debtor or of a third person who owns the thing

The accessory obligation of pledge is presumed remitted but not the principal obligation. (Art.1274)

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Effect of remission/renunciation of principal obligation on the obligation and vice versa

The remission of the principal debt extinguishes the accessory obligation ( based on the accessory follows the principal rule).

The remission of the accessory obligation does not carry with that of the principal debt. (Art.1273)

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Confusion or Merger

Confusion or merger is the meeting in one person the qualities or the characteristics of the debtor. (Art.1275)

Example: M makes a promissory note payable to P or order. P indorses the note to A, A to B, B to C and back to M. The obligation here is extinguished because M is now the creditor of himself.

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Effect of merger when there is a guarantor

1. Merger which takes place in the principal debtor or creditor benefits the guarantors. (Art.1276) Here, both the principal obligation and guaranty are extinguished.Example: M owes P10,000.oo. The debt which is evidenced by a promissory note, is guaranteed by G. P assigns the note to A, A to B, B to C, and C back to M. M’s debt is extinguished. G’s guaranty is likewise extinguished since the principal obligation it secures has been extinguished.

2. Merger which takes place in the person of the guarantor does not extinguish the obligation. (Art.1276) Here, only the guaranty is extinguished.

Example: If in the immediately preceding example, C assigns the note to G instead of M, G’s guaranty is extinguished because the qualities of the debtor and the creditor are merged in his person. However, M’s obligation is not extinguished. G, as the new creditor may still go after him.

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Merger in a joint obligation

Merger extinguishes only the share of the joint debtor or creditor in whom the characters of the debtor and creditor concur. (Art1277)

Example: A,B and C are joint debtors of X, for P9,000.00. the promissory note evidencing the debt is assigned to X to Y, Y to Z, and Z to A. A’s share of P3,000.00 is extinguished by the merger of the qualities of the debtor and creditor in his person. B and C are still liable on the note with a now as the creditor for P6,000.00.

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Merger in a solidary obligation

Merger is one of the solidary debtors or solidary creditors extinguishes the whole obligation. (Art.1215) The solidary debtor in whom the characters of debtors. (Art1217) In the case of solidary creditor, he shall be liable to his co-creditors for the share corresponding to each of them (Art. 1215).]

Example: A. B and C are solidary debtors of X for P9,000.00. The promissory note evidencing the debt is assigned by X to Y, Y to Z, and Z to A. the whole obligation is extinguished by the confusion with all the debtors now being the creditors. A may demand reimbursement from B and C at P3,000.00 each.

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Compensation

Compensation is a mode of extinguishing an obligation when two persons, in their own right, are debtors and creditors of each other. (Art.1278)

Example: D owes C P5,000.00. C owes D P5,000.00. the parties do not need to pay each other as their obligations are extinguished by compensation.

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Kinds of compensation

1. as to amount or extenta. Total- when the debts are of the same amount.

(Art.1281)b. Partial- when the debts are different amounts.

(Art.1281)2. As to cause or originc. Legal- takes place by the operation of law and

extinguishes both debts to the concurrent amount (Art.1279) even though the debts are payable at different places (Art.1286) and the creditors and debtors are not aware of the compensation. (Art.1290)

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Requisites of Legal Compensation (Art1279)

1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other.

Examples: (a) D owes C P5,000.00. C owes D P5,000.00. Legal compensation takes place because D and C are principal debtors and creditors of each other. (b) D owes C P5,000.00 with G as a guarantor. C owes G P5,000.00. Legal compensation may take place between G and C because although C is a principal debtor of G, G is only subsidiary debtor of C.Exception to first requisite: A guarantor may set up compensation as regards what the creditor may owe the principal debtor. (Art1280)

Example: D owes C P5,000.00 with G as guarantor. C owes D P4,000.00. On due date, C demands payment from D but D no longer has any assets as C goes after G. G may set up compensation up to P4,000.00 so C can collect from him P1,000.00 only.

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Requisites of Legal Compensation (Art1279)

2. That both debts consist in a sum of money or if the things 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. The maturity date of both dents must have arrived for legal compensation to takes place.

4. That both debts be liquidated and demandable. “Liquidated means the amount of the debts has already been determined or is easily determinable. On the other hand, “demandable” means both debts must be enforceable, so if one of them has prescribed, legal compensation cannot take place.

5. That over neither of them there be any retention or controversy commenced by third persons and communicated in due time to the debtor.

Example: D owes C P10,000.00. C owes D P10,000.00. C also owes X P10,000.00. X sues C and asks the court to order D not to pay C so that in the event the court renders judgment in favor of X, D will have to pay X. The court issues the order to D. There can be no legal compensation between D and C because there is an order of retention to D with respect to his debt to C. (Art1243)

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Kinds of compensation: As to cause or origin

b. Voluntary or conventional- takes place by agreement of the parties, such as when they agree to the compensation of debts which are not yet due. (Art 1282)

c. Judicial- compensation ordered by the court. In Art.1283, if one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages thereof.

d. Facultative- compensation that may be claimed or opposed by one of the parties (such as when not all the requisites for legal compensation are present).

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The following are instances of facultative compensation (because legal compensation cannot

take place):

1. When one of the debts arises from a deposit. (Art1287) A deposit is a contract where a person receives a thing belonging o another for safely keeping it and of returning the same. (Art.1962) The depositor may claim compensation, but not the depository. The deposit referred to here is different from a bank deposit which is actually a contract of loan.

Example: C is the depository of D’s ring. Previously, D made a promise to give a ring to C. If D demands the return of the ring he deposited with C, C cannot refuse to return it by claiming that D owes him a ring. However, if C demands the delivery of a ring from D as D had promised, D may, at his option, set off the claim for the return of the ring he deposited with C.

2. When one of the debts consists in civil liability arising from a penal offense. Here, the offended party may claim compensation but not the offender.

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The following are instances of facultative compensation (because legal compensation cannot

take place):

3. When one of the debts arises from the obligations of a bailee in commodatum. (Art.1287) Commodatum is contract whereby the bailee acquires the use without compensation of the thing loaned but not is fruits. (Art.1935) Here, the lender may claim or oppose the compensation, but not the borrower.

Example: C borrowed D’s bicycle. D has a promise to give a bicycle to C. If D demands the return of the bicycle he lent C, C cannot refuse to return it by claiming that D owes him a bicycle. However, if C demands the delivery of a bicycle from D as D had promised, D may at his option, set off the claim of C against his own claim for the return of the bicycle that he loaned to C.

4. When one of the debts arises because of a claim for support by gratuitous title. (Art.1287) The support referred to here is future support, not support in arrears. The party entitled to receive support may claim or oppose the compensation, but not the party required to give support.

Example: H, husband, was ordered by the court in a case of legal separation to give a monthly support of P20,000.00 to W, his wife. H has not yet given the amount to W for the present month. On the other hand, W owes H P20,000.00 by way of loan. W may claim compensation but not H.

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Compensation when one for both debts are rescissible or voidable

When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (Art 1284)

Compensation when the debts are payable at different places

Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (Art.1286)

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Rule on application of payment to apply when there are several susceptible of compensation

Example: D owes C the following debts on account of various merchandise purchase which he made from the store of C: P3,000.00, due on March 1, 2002; P3,000.00, due on March 15, 2002; P3,000.00, due on March 31, 2002; P3,000.00 due on April 15,2002. C on the other hand, owes D P3,000.00 due on April 5, 2002. On April 5, 2002, D may claim compensation for any debts due on March 1, March 15, and March 31. If D does not designate the debts to which compensation shall apply, the right shifts o C, and if C also fails to avail himself of that right, compensation shall be applied proportionately to the three debts due at P1,000.00 each.

Effect of assignment on compensation of debts

1. When the assignment was with the debtors consent he cannot set up against the assignee the compensation that would pertain to him against the assignor unless he reserved his right to the compensation.

Example: D owes C P20,000.00 due on March 15. C owes D P8,000.00 due on March 10. On March 12, C assigned his credit right to T with the consent of D. On March 15, T can collect from D P20,000.00. If D reserved his right to the compensation that would pertain to him against C amounting to P8,000.00 when he consented to the assignment, then T can collect only P12,000.00 from D.

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Effect of assignment on compensation of debts

2.If the debtor was notified of the assignment but he did not give his consent thereto, the debtor may set-up compensation of debts maturing before the assignment but not of subsequent ones.

Examples: D owes C P20,000.00 due on March 15. C on the other hand, owes D the following debts: P8,000.00 due on March 1; P3,000.00 due on March 8; and P5,000.00 on March 14. on March 12, C assigned his credit to T with notice to D but D did not give his consent to the assignment. In this case, T may collect from D P9,000.oo because D can set up compensation with respect to the debts due on March 1(P8,000.00) and March 8 (P3,000.00) which had already matured at the time of the assignment.

3. If the assignment was without knowledge of the debtor, he can set up compensation of all debts maturing before the time he obtains knowledge of the assignment.

Example: D owes C P20,000.00 due on March 25. C, on the other hand, owes D the following debts: P8,000.00 due on March 1; P3,000.00 due on March 8; P5,000.00 on March 14; and P2,000.00 due on March 31. on March 12, C assigned his credit to T without the knowledge of D. On March 16, D learned of the assignment. In this case, T may collect from D P4,000.00 because D may set-up compensation with respect to the debts due on March 1 (P8,000.00), March 8 (P3,000.00) and March 14 (P5,000.00), which debts have become due as March 16 when D learned of the assignment.

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Compensation in solidary obligation

A is indebted to X, Y and Z, solidary creditors, for p30,000.00 due on June 1, 2002. X in turn owes A P30,000.00 due on June 1,2002. Both obligations being due, they are extinguished by compensation. However, X has to give Y and Z their respective shares at P10,000.00 each because compensation made by any solidary creditors shall render him liable to the others for the share in the obligation corresponding to them. (Art.1215)

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Novation

It is the modification or extinguishment of an obligation by another, either by changing the object or principal condition, substituting the person of the debtor, or subrogating a third person in the rights of the creditor. (Art.1291)

Example: D owes C P10,000.00. (1) If the parties later agree that D should give instead a ring to C, there is novation by changing the object or prestation. (2) if the parties agree that T shall take the place of D as the new debtor. (3) If the parties later agree that X shall take place of C as the new creditor, there is novation by subrogating a third person in the rights of the creditor.

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Requisites of novation

1. There must be a previous valid obligation.2. There must be an agreement between the parties to modify

or extinguish the obligation, except in the following:a. When the person of the debtor is changed which can be

made even if it is against the will of the debtor, orb. When another person is subrogated in the place of the

creditor: 1.) when a creditor pays another creditor who is preferred even without the debtor’s knowledge; 2.) when, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share.

3. The extinguishment of the old obligation.4. The validity of the new obligation.

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Kinds: According to object or purpose

a. real or objective- novation by changing the object or principal condition. (Art1291)

b. personal or subjective- novation by change of the parties (debtor or creditor)

c. Mixed- change of object and parties of the obligation.

Example: D owes C P50,000.00. Later the parties agree that a ring will be used to pay the debt with X making the payment.

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Personal or Subjective: 1.) Substituting of the debtor(always with the creditor’s consent)

Expromission- third person initiates the substitution and assumes the obligation even without the knowledge or against the will of the debtor.Rights of the new debtor if he makes the payment:

If the substitution was without the knowledge or against the will of the original debtor, the new debtor can only recover insofar as the payment has been beneficial to the debtor. ( Arts.1236, 1237, 1293)Effect if the new debtor is insolvent or does not fulfill obligation

If the substitution is without the knowledge or against the will of the debtor, new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. The original debtor is released from liability.

Delegacion- debtor initiates the substitution, which requires consent of all parties (original debtor, creditor, new debtor).Rights of the new debtor if he makes the payment:

He can recover what he has paid and is entitled to subrogation. (Arts. 1236, 1237 and 1293)

Effect if new debtor is insolventThe creditor’s right to proceed

against the original debtor is not revived except:1.) when the insolvency of the new debtor as already existing and of public knowledge when the original debtor delegated his debt. 2.) when the insolvency of the new debtor was already existing and known to the original debtor at the time he delegated his debt.

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Kinds of Subrogation:a) Conventional subrogation- change of

the creditor by the agreement of the parties (the original parties and the new creditor)

b) Legal subrogation- subrogation by the operation of law.

Personal or Subjective: 2.) Subrogating a third person in the rights of the creditor. Subrogation transfers to the person

subrogated the credit with all the rights appertaining thereto, either against the debtor or against third persons, be they guarantors or processors or mortgages, subject to

stipulation in conventional subrogation. (Art.1303)

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It is presumed that there is legal subrogation in the following cases:

1. When a creditor pays another creditor who is preferred, even without the debtor’s knowledge.

Example: D owes C P50,000.00. The debt is secured by a mortgage. D also owes X P40,000.00 which is unsecured. If X pay D’s debt to C, X is subrogated in the rights of C. Hence, if D cannot pay the debt of P50,000.00, X can foreclose the mortgage.

2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor. (please see example on payment.)

3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. (Art.1302)

Example: D owes C P10,000.00 with G as guarantor. If G pays C, G is subrogated in the rights of C. However, G’s guaranty is extinguished because the qualities of debtor and creditor are merged in his person.

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According to form

a. Express- novation declared in unequivocal terms (Art.1292)

Example: D and C entered into a contract whereby d would construct a 3-storey building for C on a certain lot. Later however, D and C entered into a contract whereby they expressly agreed that D would not be constructing anymore a 3-storey building on the lot but a bungalow.

b. Implied- when the old and the new obligation are on every point incompatible with each other. (Art.1292)

Example: in the same example, if D and C entered into the second contract whereby D agreed to construct a bungalow on the lot but without the parties expressly stipulating that D would no longer construct a 3-storey building, then the parties are deemed to have impliedly novated the first contract because construction of the two structures on the same lot would not be possible.

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According to extent

Total or extinctive- here the old obligation is totally extinguished, such as when an obligation to pay a sum of money is replaced with an obligation to give a diamond ring.

Partial or modificatory- here, the old obligation still remains in force except as it has been modified, such as when the place of payment is changed or when there is a variation in the amount of installment payments.

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Effect of novation accessory obligation

When the principal obligation is extinguished in consequence of a novation, accessory obligations shall also be extinguished except with respect to those established for the benefit of third persons who did not give their consent. (Art.1296)

Example: D borrowed P50,000.00 from C. The obligation is secured by a chattel mortgage on D’s car and bears interest at 10% per annum which the parties stipulated will be paid by D to T, a student whom C is sending to school. Subsequently, D and C agreed that D will give C a diamond ring instead of money. The novation here extinguishes the accessory contract of chattel mortgage. However, the accessory obligation to pay interest will subsist unless T gave his consent to the novation.

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Effect if new obligation is void

If the new obligation is void, the novation is void. In such a case, the original one shall subsist, unless the parties intended that the former relation will be extinguished in any event. (Art.1297)

Effect if the original obligation is voidThe novation is void if the original obligation is void. (Art.1298) if the original obligation is void, there is no obligation to extinguish since it is non-existent.

Effect if the original obligation is voidable

The novation is valid provided that annulment may be claimed only by the debtor or when ratification extinguishes acts which are voidable. (Art.1298) The novation here cures whatever defects present in the original obligation.

Example: D executed a promissory note for P50,000.00 representing the price of a car that C, by means of violence, sold to D. Later when the violence has ceased, D proposed to C that D would give his ring instead of P50,000.00. C accepted the proposal. The novation here is valid. Whatever defect in the consent present in the original one is deemed cured by the new obligation to give the ring.

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Effect if original obligation is subject to a suspensive or resolutory condition

The new obligation shall be subject to the same condition unless otherwise stipulated by the parties. (Art1299).

Preference to a creditor in case of partial payment

A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (Art.1304)

Example: D owes C P10o,ooo.oo. With the consent of both, T, a third person pays C P50,000.00. Thus, C and T are now creditors of D at P50,000.00 each. If D has only P50,000.00, C will be preferred over T.

Novation in solidary obligation

A is indebted to X, Y, and Z, solidary creditors, in the amount of P30,000.00. Thereafter, X, without the knowledge of Y and Z, agreed with A that instead of A paying P30,000.00, A will instead give a specific ring to the creditors. The obligation of A to give P30,000.00 is extinguished by the obligation to give a specific ring. However, X has to give Y and Z their respective shares at P10,000.00 each because novation executed by any of the solidary creditors shall render him liable to the others for the share in the obligation corresponding to them.

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Insolvency and bankruptcy of debtor

Effect on obligationA debtor who is

adjudged an insolvent and subsequently discharged by the court shall be released from the obligation of all debts. He may thereafter engage in business and acquire property without being liable for the satisfaction of his former debts.

Debtors entitled o dischargeordinarily any debtor

has been adjudged insolvent and has complied with the requirements of the law in surrender of his property and rendition of an account of his assets and liabilities and who has not been guilty of any fraud will be entitled to discharge. However, no discharge shall be granted to any corporation.