Case:
ACE-AGRO Dev. Corp. vs. CA
Facts: Petitioner Ace-Agro Development Corporation and private
respondent Cosmos Bottling Corporation are corporations duly
organized and existing under Philippine laws. Private respondent
Cosmos Bottling Corp. is engaged in the manufacture of soft
drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace-
Agro) had been cleaning soft drink bottles and repairing wooden
shells for Cosmos, rendering its services within the company
premises.
On April 25, 1990, fire broke out in private respondent's
plant, destroying, among other places, the area where petitioner
did its work. As a result, petitioner's work was stopped.
On May 15, 1990, petitioner asked private respondent to
allow it to resume its service, but petitioner was advised that on
account of the fire, which had "practically burned all . . . old soft
drink bottles and wooden shells," private respondent was
terminating their contract.
Issue: W/N respondent was justified in unilaterally
terminating the contract on account of a force majeure?
Ruling: No. Only for suspension.
Article 1231 of the New Civil Code on extinguishment of
obligations does not specifically mention unilateral termination as
a mode of extinguishment of obligation. But in some contracts,
either because of its indeterminate duration or because of
the nature of the prestation which is its object, one of the
parties may free himself from the contractual tie by his own will
(unilateral extinguishment).
What defendant-appellant was trying to say was that the
prestation or the object of their agreement had been lost and
destroyed in the above-described fire. Apparently, the defendant-
appellant would like this situation to fall within what would be:
Obligations may be extinguished by the happening of unforeseen
events, under whose influence the obligation would never have
been contracted, because in such cases, the very basis upon
which the existence of the obligation is founded would be
wanting.
Both parties admitted that the April 25, 1990 fire was
a force majeure or unforeseen event and that the same even
burned practically all the softdrink bottles and wooden shells
which are the objects of the agreement.
But it is true that defendant-appellant still had other
bottles that needed cleaning and wooden shells that needed
repairing; therefore, the suspension of the work of the plaintiff-
appellee brought about by the fire is, at best, temporary as found
by the trial court.
Case:
Dominion Insurance Corp. vs. CA
Facts: Plaintiff Rodolfo S. Guevarra instituted Civil Case for sum
of money against defendant Dominion Insurance Corporation.
Plaintiff sought to recover thereunder the sum of P156,473.90
which he claimed to have advanced in his capacity as manager of
defendant to satisfy certain claims filed by defendants clients. In
its traverse, defendant denied any liability to plaintiff.
Issue: Whether respondent Guevarra is entitled to
reimbursement of amounts he paid out of his personal money in
settling the claims of several insured.
Ruling: YES. Article 1236, second paragraph, Civil Code,
provides: "Whoever pays for another may demand from the
debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor."
In this case, when the risk insured against petitioner
occurred, petitioners liability as insurer arose. This obligation was
extinguished when respondent Guevarra paid the claims and
obtained Release of Claim Loss and Subrogation Receipts from
the insured who were paid.
Thus, to the extent that the obligation of the petitioner
has been extinguished, respondent Guevarra may demand for
reimbursement from his principal. To rule otherwise would result
in unjust enrichment of petitioner.
Cases:
PAL vs. CA
Facts: Respondent Amelia Tan filed a motion praying for the
issuance of a writ of execution of the judgment, which was
granted. The writ was duly referred to Deputy Sheriff Emilio Z.
Reyes. Later, respondent Amelia Tan moved for the issuance of
an alias writ of execution stating that the judgment remained
unsatisfied.
Petitioner filed an opposition to the motion for the issuance of an
alias writ of execution stating that it had already fully paid its
obligation to plaintiff through the deputy sheriff of the respondent
court, Emilio Z. Reyes, as evidenced by cash vouchers properly
signed and receipted by said Emilio Z. Reyes.
CA ordered Emilio Z. Reyes to appear with his return and explain
the reasons for his failure to surrender the amounts paid to him by
petitioner PAL. However, the order could not be served upon
Deputy Sheriff Reyes who had absconded or disappeared.
Issue: Did the payment made to the absconding sheriff by check
in his name operate to satisfy the judgment debt?
Ruling: NO. PAL did not issue the checks intended for her, in
her name. The payment to the absconding sheriff by check in
his name did not operate as a satisfaction of the judgment
debt.
In general, a payment, in order to be effective to discharge an
obligation, must be made to the proper person. Article 1240.
Thus, payment must be made to the obligee himself or to an
agent having authority, express or implied, to receive the
particular payment.
Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had
been given for its receipt.
Likewise, if payment is made to one who by law is authorized to
act for the creditor, it will work a discharge.
The receipt of money due on a judgment by an officer authorized
by law to accept it will, therefore, satisfy the debt
The theory is where payment is made to a person authorized and
recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at
bar, to the sheriff should be valid payment to extinguish the
judgment debt.
There are circumstances in this case, however, which compel a
different conclusion.
The payment made by the petitioner to the absconding sheriff
was not in cash or legal tender but in checks. The checks were
not payable to Amelia Tan or Able Printing Press but to the
absconding sheriff.
Baritua vs. CA
Facts: Tricycle driven by Nacario (respondent parents) figured in
an accident with a BUS (petitioner) as a result Nacario died, and
the tricycle was damaged.
As a consequence of the extra-judicial settlement, by the
petitioners, Nacarios widow Alicia, received 18,500 in
consideration of the Release of Claim in favor of the petitioners.
1 year and 10 months from accident, private
respondents parents of Nacario filed a complaint for damages
against petitioners.
Issue: whether or not Alicia, the spouse and the one who received
the petitioners' payment, is entitled to it.
Ruling: YES. Article 1240 of the Civil Code of the Philippines
enumerates the persons to whom payment to extinguish an
obligation should be made. (Successors in Interest)
Certainly there can be no question that Alicia and her son with the
deceased are the successors in interest referred to in law as the
persons authorized to receive payment.
The surviving spouse concurs with all classes of heirs. As it has
been established that Bienvenido was married to Alicia and that
they begot a child, the private respondents are not successors-in-
interest of Bienvenido; they are not compulsory heirs. The
petitioners therefore acted correctly in settling their obligation with
Alicia as the widow of Bienvenido and as the natural guardian of
their lone child.
Culaba vs. CA
Facts: The spouses Culaba were the owners of Culaba Store and
were engaged in the sale of SMC beer products. SMC sold beer
products on credit to the Culaba spouses. As they failed to pay
despite repeated demands, SMC filed an action for collection of a
sum of money against Culaba.
The defendant-spouses denied any liability, Petitioner
Francisco Culaba asserts that he made the payment in good faith,
to an agent who issued SMC receipts which appeared to be
genuine. Thus, according to the petitioners, they had duly paid
their obligation in accordance with Articles 1240 and 1242 of the
New Civil Code. The private respondent SMC, for its part, avers
that the burden of proving payment is with the debtor, in
consonance with the express provision of Article 1233 of the New
Civil Code.
Issue: Did the spouses Culaba pay their obligation when they
paid the supervisor who came in an SMC van?
Ruling: NO. Payment is a mode of extinguishing an obligation.
Article 1240 of the Civil Code provides that payment shall be
made to the person in whose favor the obligation has been
constituted, or his successor-in-interest, or any person authorized
to receive it.
In this case, the payments were purportedly made to a
supervisor of the private respondent, who was wearing an SMC
uniform and drove an SMC van. The supervisor appeared to be
authorized to accept payments. Unfortunately for the Francisco
Culaba, he did not ascertain the identity and authority of the said
supervisor, nor did he ask to be shown any identification to prove
that the latter was indeed an SMC supervisor. Petitioners relied
solely on the mans representation. Petitioners were considered
negligent for not ascertaining the identity of the supervisor to
whom they were remitting their payments to.
Republic of the Philippines vs. De Guzman
Facts: Respondent is the proprietor of MGM, a contractor
accredited by the PNP. Respond averred that MGM and petitioner
PNP, through its chief, executed a Contract of Agreement
undertook to procure and deliver to the PNP the construction
materials. Now through counsel, demands payment to the PNP.
PNP, through its Officer-in-Charge, replied to
respondents counsel, informing her of the payment made to
MGM via LBP Check. Respondent, denying having ever received
the LBP check, personally or through an authorized person.
Could not support the PNPs claim of payment as the aforesaid
receipt belonged to MB, her other company, which was also doing
business with the PNP, and not to MGM, with which the contract
was made. Respondent filed a Complaint for Sum of Money
against the petitioner.
Issue: W/N petitioners obligation has been extinguished?
Ruling: NO. Petitioners obligation has not been extinguished.
The petitioners obligation consists of payment of a sum of
money. In order for petitioners payment to be effective in
extinguishing its obligation, it must be made to the proper person.
Article 1240.
75
In Cembrano v. City of Butuan, this Court elucidated on
how payment will effectively extinguish an obligation, to wit:
Payment made by the debtor to the person of the creditor or to
one authorized by him or by the law to receive it extinguishes the
obligation. When payment is made to the wrong party, however,
the obligation is not extinguished as to the creditor who is without
fault or negligence even if the debtor acted in utmost good faith
and by mistake as to the person of the creditor or through error
induced by fraud of a third person.
In general, a payment in order to be effective to
discharge an obligation, must be made to the proper person.
Thus, payment must be made to the obligee himself or to an
agent having authority, express or implied, to receive the
particular payment. Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for the
creditor, it will work a discharge. The receipt of money due on a
judgment by an officer authorized by law to accept it will,
therefore, satisfy the debt.
The respondent was able to establish that the LBP
check was not received by her or by her authorized personnel.
The PNPs own records show that it was claimed and signed for
by Cruz, who is openly known as being connected to Highland
Enterprises, another contractor. Hence, absent any showing that
the respondent agreed to the payment of the contract price to
another person, or that she authorized Cruz to claim the check on
her behalf, the payment, to be effective must be made to her.
Cases:
Pagsibigan vs. CA
Facts: Petitioner through her daughter as attorney-in-fact,
obtained an agricultural loan secured by a parcel of land from the
Planters Development Bank.
Initial payment was made followed by several payments
in the total amount of P11,900. However, only four of these
payments were applied to the loan, while the rest were
temporarily lodged to accounts payable since the account was
already past due. The property was foreclosed extra-judicially for
failure to pay an outstanding balance.
It is petitioner's contention that the bank has no right to
foreclose the mortgage, there having been full payment of the
principal obligation. As per their computation the payment which
they have made totalling P11,900.00 more than sufficiently
covered their total obligation with respect to their loan, there
having been, in fact, an overpayment based on the interest rate
used in the computation. Thus, the principal obligation having
been extinguished by payment, the accessory obligation of
mortgage is necessarily extinguished, and the foreclosure thereof
is improper and not valid.
The respondent bank on the other hand countered that
the computation relied upon by petitioner is not in consonance
with the Promissory Note which contains an acceleration clause.
Respondent bank also averred that upon petitioner's failure to pay
her first installment, the entire obligation became due and
demandable and its right to foreclose the mortgage has accrued.
Issue: W/N the payment constitutes substantial performance?
Ruling: YES. We hold that the payment amounting to P8,650.00
for the balance of P3,558.20 as of August 26, 1978 8 plus the
P1,000.00 it was asked to pay on April 24, 1984 would at the very
least constitute substantial performance. Article 1234.
Petitioner in this case has the right to move for the
cancellation of the mortgage and the release of the mortgaged
property, upon payment of the balance of the loan. Definitely, it
would not be in the amount demanded by the respondent bank.
Article 1234 xxx also militates against the unilateral act
of the defendants-appellants in cancelling the contract."
Thus, aside from the fact that the respondent bank was
estopped from enforcing its right to foreclose by virtue of its
acceptance of the delayed payments for a period of more than six
years, the application of such payment to the interest and the
principal during the first three payments constitutes a virtual
waiver of the acceleration clause provided in the contract. We
cannot sustain the legality of the foreclosure under the peculiar
facts of this case, because there is substantial performance of the
obligation on the part of petitioner. Under Article 1235 of the Civil
Code, when the creditor accepts performance, knowing its
incompleteness and irregularity without protest or objection, the
obligation is deemed complied with.
De Castro vs. CA, Artigo
Facts: Private respondent Francisco Artigo sued petitioners
Constante A. De Castro to collect the unpaid balance of his
broker's commission from the De Castros.
Appellants(De Castros) were co-owners of four (4) lots.
Appellee(Artigo) was authorized by appellants to act as real
estate broker in the sale of these properties for the amount
of P23,000,000.00, five percent (5%) of which will be given to the
agent as commission. Eventually, sometime in May of 1985, the
sale of 2 lots was consummated. Appellee received from
appellants P48,893.76 as commission.
It was then that the rift between the contending parties soon
emerged. Appellee apparently felt short changed because
according to him, his total commission should be P352,500.00
which is five percent (5%) of the agreed price.
Issue: Whether Artigo's claim has been extinguished by full
payment, waiver or abandonment?
Ruling: NO. The De Castros also contend that Artigo's inaction
as well as failure to protest estops him from recovering more than
what was actually paid him. The De Castros cite Article 1235.
The De Castros' reliance on Article 1235 of the Civil
Code is misplaced. Artigo's acceptance of partial payment of his
commission neither amounts to a waiver of the balance nor puts
him in estoppel. This is the import of Article 1235 which was
explained in this wise:
"The word accept, as used in Article 1235 of the Civil
Code, means to take as satisfactory or sufficient, or agree to an
incomplete or irregular performance. Hence, the mere receipt of
a partial payment is not equivalent to the required
acceptance of performance as would extinguish the whole
obligation."
There is thus a clear distinction between acceptance and
mere receipt. In this case, it is evident that Artigo merely received
the partial payment without waiving the balance. Thus, there is no
estoppel to speak of.
Cases:
PAL vs. CA
Issue: The payment made by the petitioner to the absconding
sheriff was not in cash or legal tender but in checks. The checks
were not payable to Amelia Tan or Able Printing Press but to the
absconding sheriff.
Did such payments extinguish the judgment debt?
Ruling: NO. Article 1249.
In the absence of an agreement, either express or
implied, payment means the discharge of a debt or obligation in
money and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as
medium of payment of his debt. Consequently, 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, in the
case at bar, does not, per se, operate as a discharge of the
judgment debt.
Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an instrument does
not, by itself, operate as payment (See Art. 1249). A check,
whether a manager's check or ordinary cheek, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender
of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3).
Fortunado vs. CA
Facts: Petitioners contended that the check issued by NSC, not
being legal tender, could not be considered payment of the
redemption price. Private respondents however contended that
Article 1249 of the New Civil code is inapplicable as it "deals with
a mode of extinction of debts" while the "right to redeem is not an
obligation, nor is it intended to discharge a pre-existing debt."
Issue: W/N tender of payment through a check is valid?
Ruling: NO. Tolentino v. Court of Appeals, besides citing
Javellana, stresses the liberality of the courts in redemption
cases. On the issue of the applicability of Article 1249 of the Civil
Code and the validity of the tender of payment through check, this
Court held: Redemption is not rendered invalid by the fact
that the said officer accepted a check for the amount
necessary to make the redemption instead of requiring
payment in money. It goes without saying that if he had seen fit
to do so, the officer could have required payment to be made in
lawful money, and he undoubtedly, in accepting a check, placed
himself in a position where he could be liable to the purchaser at
the public auction if any damage had been suffered by the latter
as a result of the medium in which payment was made. But this
cannot affect the validity of the payment.
TENDER OF CHECK SUFFICIENT TO COMPEL
REDEMPTION BUT IS NOT IN ITSELF A PAYMENT. We are
not, by this decision, sanctioning the use of a check for the
payment of obligations over the objection of the creditor. What we
are saying is that a check may be used for the exercise of the
right of redemption, the same being a right and not an obligation.
The tender of a check is sufficient to compel redemption but is not
in itself a payment that relieves the redemptioner from his liability
to pay the redemption price. In other words, while we hold that the
private respondents properly exercised their right of redemption,
they remain liable, of course, for the payment of the redemption
price.
Papa vs. A.U. Valencia, et. al.
Facts: Respondents A.U. Valencia and Pearroyo filed a
complaint for specific performance against herein petitioner
Myron C. Papa, as administrator Angela M. Butte.
The complaint alleged that petitioner Myron C. Papa, acting as
attorney-in-fact of Angela M. Butte, sold to respondent Pearroyo,
through respondent Valencia, a parcel of land, that prior to the
alleged sale, the said property, together with several other parcels
of land likewise owned by Angela M. Butte, had been mortgaged
by her to the Associated Banking, that it was only upon the
release of the title to the property, that respondents Valencia and
Pearroyo discovered that the mortgage rights of the bank had
been assigned to one Tomas L. Parpana, then, herein petitioner
had been collecting monthly rentals from the tenants of the
property, knowing that said property had already been sold to
private respondents; that despite repeated demands from said
respondents, petitioner refused and failed to deliver the title to the
property.
Petitioner, likewise, claimed that he could not recall in
detail the transaction which allegedly occurred in 1973; that he
did not have TCT No. 28993 in his possession; that he could not
be held personally liable as he signed the deed merely as
attorney-in-fact of said Angela M. Butte.
Issue: W/N delivery of checks produces payment only when
it is cashed.
Ruling: NO. It is an undisputed fact that respondents Valencia
and Pearroyo had given petitioner Myron C. Papa the amounts
of (P5,000.00) in cash, and (P40,000.00) in check, in payment of
the purchase price of the subject lot. After more than ten (10)
years from the payment in party by cash and in part by check, the
presumption is that the check had been encashed, since failure to
do so result to unreasonable and unexplained delay.
While it is true that the delivery of a check produces the
effect of payment only when it is cashed, pursuant to Art. 1249 of
the Civil Code, the rule is otherwise if the debtor is prejudiced by
the creditor's unreasonable delay in presentment. 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.
Considering that respondents Valencia and Pearroyo
had fulfilled their part of the contract of sale by delivering the
payment of the purchase price, said respondents, therefore, had
the right to compel petitioner to deliver to them the owner's
duplicate of TCT of Angela M. Butte and the peaceful possession
and enjoyment of the lot in question.
Union Bank vs. Sps. Tiu
Facts: Petitioner Union Bank and respondent spouses the
spouses Tiu entered into a Credit Line Agreement. The spouses
Tiu took out various loans pursuant to this CLA in the total
amount of three million six hundred thirty-two thousand dollars
(US$3,632,000.00), as evidenced by PNs.
Asserting that the spouses Tiu failed to comply with the payment
schemes set up in the Restructuring Agreement, Union Bank
initiated extrajudicial foreclosure proceedings on the residential
property of the spouses Tiu.
The spouses Tiu claim that from the beginning the loans were in
pesos, not in dollars. Their office clerk, Lilia Gutierrez, testified
that the spouses Tiu merely received the peso equivalent of their
US$3,632,000.00 loan at the rate of US$1=P26.00.
Issue: W/N the loan should be paid in pesos?
Ruling: No. The testimony of Lila Gutierrez, which merely attests
to the fact that the spouses Tiu received the peso equivalent of
their dollar loan, proves the intention of the parties that such loans
should be paid in pesos. If such had been the intention of the
parties, the promissory notes could have easily indicated the
same.
Such stipulation of payment in dollars is not prohibited
by any prevailing law or jurisprudence at the time the loans were
taken. In this regard, Article 1249.
On July 5, 1996, RA No. 8183 took effect, expressly
repealing RA No. 529 in Section 2 thereof. The same statute also
explicitly provided that parties may agree that the obligation or
transaction shall be settled in a currency other than Philippine
currency at the time of payment.
Although the Credit Line Agreement between the
spouses Tiu and Union Bank was entered into on November 21,
1995, when the agreement to pay in foreign currency was still
considered void under Republic Act No. 529, the actual loans, as
shown in the promissory notes, were taken out from September
22, 1997 to March 26, 1998, during which time RA No. 8183 was
already in effect.
Cases:
Philippine Manpower Services vs. NLRC
Facts: Petitioners herein appealed said POEA decision before
public respondent (NLRC). The NLRC, in its Resolution modified
the decision of the POEA but only insofar as it corrected the
POEA on the proper rate of exchange to be applied in converting
the award of US$11,550.00 to its equivalent in Philippine
currency.
It thus held: simple fairness dictates that the payment of the
awards in the Philippine Currency should not be "at the rate of
exchange at the time of payment," as mandated by the POEA,
but rather at the rate of exchange prevailing at the time the
complainant's cause of action accrued or at the time he was
illegally dismissed on 21 July 1988.
Issue: W the rate of exchange to be applied should be the
prevailing rate of exchange at the time of payment?
Ruling: YES. In the case of Republic Resources and
13
Development Corporation v. Court of Appeals, reiterating our
14
decision in Kalalo v. Luz, with regard to obligations incurred
15
after enactment of RA No. 529 on June 16, 1950, we also held
that the rate of exchange to be applied should be that prevailing
at the time of payment.
As a consequence of our affirmance of the POEA award, we find
incorrect the NLRC Resolution of March 4, 1991 to the effect that
the proper rate of exchange to be applied in converting the award
of US$11,550.00 to its equivalent in Philippine currency is that
prevailing at the time complainant's cause of action accrued and
not at the time of actual payment as ruled by the POEA.
Singson vs. CALTEX
Facts: Petitioner and respondent entered into a contract of lease.
Petitioner asked respondent to adjust or increase the amount of
rentals citing that the country was experiencing extraordinary
inflation. In a letter, respondent refused petitioner's request.
Petitioner instituted a complaint the payment by
respondent of adjusted rentals based on the value of the
Philippine peso at the time the contract of lease was executed.
The complaint invoked Article 1250 of the Civil Code, stating that
since the execution of the contract of lease in 1968 an
extraordinary inflation had supervened resulting from the
deterioration of worldwide economic conditions, a circumstance
that was not foreseen and could not have been reasonably
foreseen by the parties at the time they entered into contract.
Issue: Whether there existed an extraordinary inflation during the
period 1968 to 1983 that would call for the application of Article
1250 of the Civil Code and justify an adjustment or increase of the
rentals between the parties.
Ruling: NO. Article 1250.
We have held extraordinary inflation to exist when there
is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of
the establishment of the obligation.
The supervening of extraordinary inflation is never
assumed. The party alleging it must lay down the factual basis for
the application of Article 1250.
While there was a decline in the purchasing power of the
Philippine currency from the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal erosion of the
value of the Philippine peso which is a characteristic of most
currencies.
"Erosion" is indeed an accurate description of the trend
of decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly distinct
from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an official
declaration thereof by competent authorities.
Cases:
Sps. Tan vs. China Banking Corp.
Facts: On several occasions, Lorenze Realty represented by
petitioners obtained from China Bank various amounts of loans
and credit accommodations.
As a security for the said obligations, Lorenze Realty executed
Real
Estate Mortgages. Subsequently, Lorenze Realty incurred in
default in the payment of its amortization prompting China Bank
to cause the extra-judicial foreclosure. Mortgaged properties were
sold at a public auction wherein China Bank emerged as the
highest bidder for the amount of P85M.
In its effort to collect the deficiency obligation, China Bank
initiated an action for the collection of sum of money against the
Lorenze Realty.
Issue: Whether lorenze realty's obligation is fully settled when the
real properties constituted as securities for the loan were sold at
the public auction for 85M.
Ruling: NO. Lorenze Realty argues that the proceeds of the sale
of the foreclosed properties in the amount of P85M is more than
enough to cover the principal amount of the loan.
China Bank maintains that the obligation of Lorenze
Realty is not extinguished by the foreclosure and sale of real
properties constituted as securities citing Article 1253 payment of
the principal shall not be deemed to have been made until the
interests have been covered. By first applying the proceeds of the
sale to the interest, penalties and expenses of the sale, there
yields a balance in the principal obligation in the amount of P29M.
Obligations are extinguished, among others, by payment
or performance, the mode most relevant to the factual situation in
the present case. Under Article 1232, 1233. In contracts of loan,
the debtor is expected to deliver the sum of money due the
creditor. The provisions must be read in relation with the other
rules on payment, such as the application of payment Article
1252.
In the event that the debtor failed to exercise the right to
elect, the creditor may choose to which among the debts the
payment is applied as in the case at bar. It is noteworthy that after
the sale of the foreclosed properties at the public auction,
Lorenze Realty failed to manifest its preference as to which
among the obligations that were all due the proceeds of the sale
should be applied. Its silence can be construed as acquiescence
to China Bank's application of the payment first to the interest and
penalties and the remainder to the principal which is sanctioned
by Article 1253.
That they assume that the obligation is fully satisfied by
the sale of the securities does not hold any water. Nowhere in our
statutes and jurisprudence do they provide that the sale of the
collaterals constituted as security of the obligation results in the
extinguishment of the obligation.
Cases:
Phil. Lawin Bus vs. CA, Advance Capital
Facts: Plaintiff Advance Capital Corporation, a licensed lending
investor, extended a loan to defendant Philippine Lawin Bus
Company. To guarantee payment of the loan, defendant Lawin
executed in favor of plaintiff the following documents: (1) A Deed
of Chattel Mortgage wherein 9 units of buses were constituted as
collaterals.
Defendant LAWIN failed to pay. Thus, plaintiff foreclosed the
mortgaged buses. "17.A. Sale of the nine (9) units passenger
buses the proceeds of which will be credited against the loan
amount as full payment thereof; or in the alternative.
Issue: Whether there was dacion en pago between the parties
upon the surrender or transfer of the mortgaged buses to the
respondent.
Ruling: NO. In dacion en pago, property is alienated to the
creditor in satisfaction of a debt in money. It is "the delivery and
transmission of ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of the obligation."
Article 1245 of the Civil Code provides that the law on
sales shall govern an agreement of dacion en pago. A contract of
sale is perfected at the moment there is a meeting of the minds of
the parties thereto upon the thing which is the object of the
contract and upon the price.
In this case, there was no meeting of the minds between
the parties on whether the loan of the petitioners would be
extinguished by dacion en pago. The petitioners anchor their
claim solely on the testimony of Marciano Tan that he proposed to
extinguish petitioners obligation by the surrender of the nine
buses to the respondent acceded to as shown by receipts its
representative made. However, the receipts executed by
respondents representative as proof of an agreement of the
parties that delivery of the buses to private respondent would
result in extinguishing petitioners obligation do not in any way
reflect the intention of the parties that ownership thereof by
respondent would be complete and absolute. The receipts show
that the two buses were delivered to respondent in order that it
would take custody for the purpose of selling the same. The
receipts themselves in fact show that petitioners deemed
respondent as their agent in the sale of the two vehicles
whereby the proceeds thereof would be applied in payment
of petitioners indebtedness to respondent. Such an
agreement negates transfer of absolute ownership over the
property to respondent, as in a sale.
PNB vs. Dee
Facts: respondent Teresita Tan Dee (Dee) bought from
respondent Prime East Properties Inc. (PEPI) on an
installment basis a residential lot. PEPI obtained a loan from
petitioner, secured by a mortgaged including Dees property.
The petitioner claims that it has a valid mortgage over Dees
property, as part of the property mortgaged by PEPI to it to
secure its loan obligation, and that Dee and PEPI are bound by
such mortgage.
Respondent PEPI, on the other hand, claims that the title over the
subject property is one of the properties due for release by the
petitioner as it has already been the subject of a Memorandum of
Agreement and dacion en pago entered into between them.
Issue: W/N the execution of Dacion en Pago extinguished PEPIs
obligation.
Ruling: YES. Dacion en pago or dation in payment is the delivery
and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation. It is a mode of extinguishing an existing obligation and
partakes the nature of sale as the creditor is really buying the
thing or property of the debtor, the payment for which is to be
charged against the debtors debt. Dation in payment
extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement express or implied, or
by their silence consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.
There is nothing on record showing that the
Memorandum of Agreement has been nullified or is the
subject of pending litigation; hence, it carries with it the
presumption of validity. Consequently, the execution of the
dation in payment effectively extinguished respondent
PEPIs loan obligation to the petitioner insofar as it covers
the value of the property purchased by Dee. This negates the
petitioners claim that PEPI must first redeem the property before
it can cancel or release the mortgage. As it now stands, the
petitioner already stepped into the shoes of PEPI and there is no
more reason for the petitioner to refuse the cancellation or
release of the mortgage. Whatever claims the petitioner has
against PEPI and AFP-RSBS, monetary or otherwise, should not
prejudice the rights and interests of Dee over the property, which
she has already fully paid for.
Cases:
Sps. Ercillo vs. CA
Facts: Private respondents spouses Benjamin Cifra and Lutgarda
Cifra leased an apartment to herein petitioners spouses Teofilo
Ercillo.
Private respondents filed an action for unlawful detainer, in the
complaint that the petitioners failed to pay the rentals.
Petitioners, on the other hand, alleged that they never defaulted
in the payment of their rentals; that private respondents refused to
accept their payments; that they deposited the payments with the
Family Savings Bank.
Issue: W/N the deposit of the rentals with the bank released the
petitioners from their obligation to pay rentals.
Ruling: NO. The petitioners, for their part, assert that their
obligation to pay rent had been extinguished in view of their
consignation of the rent due with the bank after the private
respondents refused to accept them.
The law on tender of payment and consignation as a mode of
extinguishing an obligation is covered by Article 1256, Article
1257 and Article 1258.
It is the requirement under Article 1258 which had not
been strictly complied with by petitioners. What the law requires is
the deposit of the thing due at the disposal of judicial authority
before whom the tender of payment shall be proved, in a proper
case. The deposit of the rentals with the bank is not the
consignation contemplated by law. Depositing the rentals in the
bank does not place such rental at the disposal of the judicial
authority.
Sps. Bonostro vs. Sps. Luna
Facts: Spouses Luna, filed a Complaint for Rescission of
Contract and Damages against the spouses Bonrostro praying for
the payment by the latter of their unpaid obligation.
In their Answer, the spouses Bonrostro averred that they
were willing to pay their total balance of P630,000.00 to the
spouses Luna. However, during the time that they were ready to
pay the said amount. Constancia and her lawyer, Atty. Carbon,
did not show up. Then, Lourdes sent Atty. Carbon a letter
expressing her desire to pay the balance, but received no
response from the latter.
Issue: W/N the letter amounts to tender of payment?
Ruling: NO. The spouses Bonrostro assert that Lourdes letter
amounts to tender of payment of the remaining balance
amounting to P630,000.00. Accordingly, thenceforth, accrual of
interest should be suspended.
Tender of payment "is the manifestation by the debtor of
a desire to comply with or pay an obligation. If refused without just
cause, the tender of payment will discharge the debtor of the
obligation to pay but only after a valid consignation of the sum
due shall have been made with the proper court.Consignation is
the deposit of the proper amount with a judicial authority in
accordance with rules prescribed by law, after the tender of
payment has been refused or because of circumstances which
render direct payment to the creditor impossible or inadvisable.
"Tender of payment, without more, produces no
effect." "To have the effect of payment and the consequent
extinguishment of the obligation to pay, the law requires the
companion acts of tender of payment and consignation."
As to the effect of tender of payment on interest, the
accrual of interest on the obligation will be suspended from the
date of such tender. But when the tender of payment is not
accompanied by the means of payment, and the debtor did not
take any immediate step to make a consignation, then interest is
not suspended from the time of such tender.
Here, the subject letter merely states Lourdes
willingness and readiness to pay but it was not accompanied by
payment. She claimed that she made numerous telephone calls
to Atty. Carbon reminding the latter to collect her payment, but,
neither said lawyer nor Constancia came to collect the payment.
After that, the spouses Bonrostro took no further steps to effect
payment. They did not resort to consignation of the payment with
the proper court despite knowledge that under the contract, non-
payment of the installments on the agreed date would make them
liable for interest thereon. The spouses Bonrostro erroneously
assumed that their notice to pay would excuse them from paying
interest. Their claimed tender of payment did not produce any
effect whatsoever because it was not accompanied by actual
payment or followed by consignation. Hence, it did not
suspend the running of interest.
Cases:
Syjuco vs. CA
Facts: Pilipinas Bank(PB) leased from the Syjucos. Contract of
Lease allows the PB, as lessee, to "sub-lease any part or portion
of the premises or the whole portion thereof without obtaining the
consent of the lessors thereto."
Subsequently, the PB sub-leased to Eugenio Trinidad,
President of KDIC. Contract of Sub-lease prohibited the
sublessee Eugenio Trinidad from further subleasing the property
subleased to him.
Inspite of the prohibition to sublease and in violation
thereof, Eugenio Trinidad "constructed stalls/stores thereon and
leased the same to 12 persons who conducted their individual
business.
After the expiration of the lease, Syjucos filed an action for
unlawful detainer, against the PB.
At the outset, there is no doubt that the lessee in a
contract of lease is obliged to return the thing subject of said
contract upon the expiration of the period agreed upon
Issue: W/N Article 1266 is applicable in this case.
Ruling: NO. Article 1266 cannot validly apply to the present case
since it makes express reference to obligations to do (or personal
obligations). This being so, it may not be invoked in exempting
Pilipinas Bank (as lessee) from returning the whole property to
the owners thereof for such obligation to return is in the nature of
an obligation to give (or a real obligation), in which case Article
1262, not Article 1266, applies. Nevertheless, for reasons already
discussed above, Pilipinas is deemed to have fully satisfied its
obligation to return the whole property leased.
PNCC vs. CA
Facts: Lease contract, commencing on the date of issuance of
the industrial clearance by the Ministry of Human Settlements.
Petitioner obtained from the MHS a Temporary Use Permit for the
proposed rock crushing project. Private respondents wrote
petitioner requesting payment of the first annual rental.
In its reply, petitioner 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."
Invoking Article 1266 and the principle of rebus sic
stantibus, petitioner asserts that it should be released from the
obligatory force of the contract of lease because the purpose of
the contract did not materialize due to unforeseen events and
causes beyond its control, i.e., due to the abrupt change in
political climate after the EDSA Revolution and financial
difficulties.
Issue: W/N Art. 1266 and the Priniciple of Rebus sic stantibus
is applicable.
Ruling: NO.
1. The law recognizes exceptions to the principle of the
obligatory force of contracts. One exception is laid down in Article
1266 of the Civil Code, which reads: "The debtor in obligations to
do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in
the said article, since it is applicable only to obligations "to do,"
and not 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.
The obligation to pay rentals or deliver the thing in a contract of
lease falls within the prestation "to give"; hence, it is not covered
within the scope of Article 1266. At any rate, the unforeseen event
and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in the said article.
2. The principle of rebus sic stantibus neither fits in with
the facts of the case. Under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these conditions
cease to exist, the contract also ceases to exist. This theory is
said to be the basis of Article 1267 of the Civil Code.
This article, which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the principle
of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional
changes of circumstances that equity demands assistance for the
debtor.
In this case, 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."
This Court cannot subscribe to this argument. As pointed out by
private respondents:
It is a matter of record that petitioner PNCC entered into
a contract with private respondents. Prior thereto, it is of judicial
notice that after the assassination of Senator Aquino, the country
has experienced political upheavals, turmoils, almost daily mass
demonstrations, unprecedented, inflation, peace and order
deterioration, the Aquino trial and other things that brought about
the hatred of people even against crony corporations. Pres.
Marcos, being interviewed live on U.S. television announced that
there would be a snap election. Notwithstanding the
above, petitioner PNCC entered into the contract of lease with
private respondents with open eyes of the deteriorating conditions
of the country.
NAGATEL CO. vs. CA
Facts: NAGATEL is a telephone company, respondent
CASURECO is an electric corporation. The parties 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. In consideration therefor, petitioners agreed to install,
free of charge, 10 telephone connections for the use by private
respondent.
After the contract had been enforced for over ten (10)
years, private respondent filed against petitioners for reformation
of the contract, on the ground that it is too one-sided in favor of
petitioners.
Issue: W/N Article 1267 is applicable.
Ruling: YES.
Article 1267 speaks of "service" which has become so
difficult. Taking into consideration the rationale behind this
provision, the term "service" should be understood as referring to
the "performance" of the obligation. In the present case, the
obligation of private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service contemplated in
said article. Furthermore, a bare reading of this article reveals that
it is not a requirement thereunder that the contract be for future
service with future unusual change.
Article 1267 states in our law the doctrine of unforseen
events. This is said to be based on the discredited theory of rebus
sic stantibus in public international law; under this theory, the
parties stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist the contract also ceases to
exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of a contract gives rise
to a right to relief in favor of the party prejudiced.
In a nutshell, in the Occea case respondent's complaint
seeks not release from the subdivision contract but that the court
"render judgment modifying the terms and conditions of the
contract. The cited article (Article 1267) does not grant the courts
(the) 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. Respondent's
complaint for modification of contract manifestly has no basis in
law and therefore states no cause of action. The courts cannot
even in equity grant the relief sought.
The ruling in the Occea case is not applicable because
we agree with respondent court that the allegations in private
respondent's complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. We,
therefore, release the parties from their correlative obligations
under the contract. However, we have to take into account the
possible consequences of merely releasing the parties therefrom:
petitioners will remove the telephone wires/cables in the posts of
private respondent, resulting in disruption of their service to the
public; while private respondent, in consonance with the contract
will return all the telephone units to petitioners, causing prejudice
to its business. We shall not allow such eventuality. Rather, we
require, as ordered by the trial court: 1) petitioners to pay private
respondent for the use of its posts and 2) private respondent to
pay petitioner the monthly dues of all its telephones. The peculiar
circumstance of the present case, as distinguished further from
the Occea case, necessitates exercise of our equity
jurisdiction. By way of emphasis, we reiterate the rationalization of
respondent court that: we are not making a new contract for the
parties herein, but we find it necessary to do so in order not to
disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff.
Sps. Poon vs. Prime Savings Bank
Facts: Petitioners owned a commercial building. Matilde Poon
and
Respondent executed a 10-year Contract of Lease over the
building for the latter's use as its branch office.
Barely three years later, however, the BSP placed respondent
under the receivership. Respondent vacated the leased premises
and surrendered them to petitioners. Subsequently, the PDIC
issued petitioners a demand letter asking for the return of the
unused advance rental on the ground that paragraph 24 of the
lease agreement had become inoperative, because respondent's
closure constituted force majeure. The PDIC likewise invoked the
principle of rebus sic stantibus under Article 1267 as alternative
legal basis for demanding the refund.
Petitioners, however, refused the PDIC's demand. They
maintained that they were entitled to retain the remainder of the
advance rentals following paragraph 24 of their Contract.
Issue: Whether respondent may be released from its contractual
obligations to petitioners on grounds of fortuitous event under
Article 1174 and unforeseen event under Article 1267.
Ruling: NO. The closure of respondent's business was neither a
fortuitous nor an unforeseen event that rendered the lease
agreement functus officio.
Tagaytay Realty Co., Inc. v. Gacutan lays down the requisites for
the application of Article 1267, as follows:
1. The event or change in circumstance could not have been
foreseen at the time of the execution of the contract.
2. It makes the performance of the contract extremely difficult but
not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.
The difficulty of performance should be such that the
party seeking to be released from a contractual obligation would
be placed at a disadvantage by the unforeseen event. Mere
inconvenience, unexpected impediments, increased expenses, or
even pecuniary inability to fulfill an engagement, will not relieve
the obligor from an undertaking that it has knowingly and freely
contracted.
 In a reciprocal contract such as the lease in this case,
one obligation of respondent as the lessee was to pay the agreed
rents for the whole contract period. It would be hard-pressed to
complete the lease term since it was already out of business only
three and a half years into the 10-year contract period. Without a
doubt, the second and the fourth requisites mentioned above are
present in this case.
The first and the third requisites, however, are lacking. It
must be noted that the lease agreement was for 10 years. As
shown by the unrebutted testimony of Jaime Poon during trial, the
parties had actually considered the possibility of a deterioration or
loss of respondent's business within that period.
Clearly, the closure of respondent's business was not an
unforeseen event. As the lease was long-term, it was not lost on
the parties that such an eventuality might occur, as it was in fact
covered by the terms of their Contract. Besides, as We have
previously discussed, the event was not independent of
respondent's will.
Cases:
Victor Yam and Yek Sun Lent vs. CA
Facts: Petitioners subsequently obtained a second IGLF loan of
P300T evidenced by two promissory notes.
Petitioners paid P410T by means of a PB check, receipt
of which was acknowledged by Destajo. The corresponding
voucher for the check bears the following notation: "full payment
of IGLF LOAN."
Respondent demanded from petitioners the balance,
however no replies, thus filed for the collection of a sum of
money.
In their Answer, petitioners claimed that they had fully
paid their obligation to private respondent, that this fact of full
payment is reflected in the voucher accompanying the PB check
they issued, which bore the notation "full payment of IGLF loan."
Issue: Whether petitioners are liable for the payment of the
penalties and service charges on their loan.
Ruling: YES. Art. 1270, par. 2 of the Civil Code provides that
express condonation must comply with the forms of donation. Art.
748, par. 3 provides that the donation and acceptance of a
movable, the value of which exceeds P5,000,00, must be
made in writing, otherwise the same shall be void. In the case at
bar, it is undisputed than the alleged agreement to condone
P266T of the second IGLF loan was not reduced in writing.
The notation in "full payment of IGLF loan" merely states
petitioners' intention in making the payment, but in no way does it
bind private respondent. Indeed, if private respondent really
condoned the amount in question, petitioners should have asked
for a certificate of full payment from respondent corporation.
As held in Villanueva v. CA "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:"Thus, Sobrepeas had no
authority to condone the debt.
Trans-Pacific vs. CA
Facts: Petitioner applied for and was granted several financial
accommodations. The loans were evidenced and secured by four
4 promissory notes, a real estate mortgage.
Unable to settle its obligations in full, the released
parcels of land were then sold and the proceeds were turned over
to the bank and applied to Trans-Pacific's restructured loan.
Subsequently, respondent bank returned the duplicate original
copies of the three promissory notes to Trans-Pacific with the
word "PAID" stamped thereon.
Despite the return of the notes, Associated Bank
demanded from Trans-Pacific payment representing accrued
interest. According to the bank, the promissory notes were
erroneously released.
Trans-Pacific initiated an action for specific performance.
There it prayed that the mortgage over the two parcels of land be
released and that its obligation to the bank be declared as having
been fully paid.
Issue: Whether or not petitioner has indeed paid in full its
obligation to respondent bank.
Ruling: Art. 1271 presumption, petitioner fully discharged, but
rebutted by Trans-Pacifics admission on the unpaid balance
representing interest.
The surrender and return to plaintiffs of the promissory
notes evidencing the consolidated obligation as restructured,
produces a legal presumption that Associated had thereby
renounced its actionable claim against plaintiffs (Art. 1271, NCC).
The presumption is fortified by a showing that said promissory
notes all bear the stamp "PAID", and has not been otherwise
overcome.
It may not be amiss to add that Article 1271 of the Civil
Code raises a presumption, not of payment, but of the
renunciation of the credit where more convincing evidence
would be required than what normally would be called for to
prove payment. The rationale for allowing the presumption of
renunciation in the delivery of a private instrument is that,
unlike that of a public instrument, there could be just one copy of
the evidence of credit. Where several originals are made out of a
private document, the intendment of the law would thus be to
refer to the delivery only of the original original rather than to the
original duplicate of which the debtor would normally retain a
copy. It would thus be absurd if Article 1271 were to be applied
differently.
As petitioner would rather vehemently deny, undisputed
is the fact of its admission regarding the unpaid balance
representing interests. Hence, petitioner's attempt to seek refuge
under Art. 1271. As previously discussed, the presumption
generated by Art. 1271 is not conclusive and was successfully
rebutted by private respondent. Under the circumstances, i.e.,
outright and honest letters of admission vis-a-vis counsel-induced
recalcitrance, there could hardly be honest belief.
Cases:
MPCC vs. CA
It is clear from the record that both corporations, petitioner
Mindanao Portland Cement Corporation (appellant) and
respondent Pacweld Steel Corporation (appellee), were creditors
and debtors of each other, their debts to each other consisting
in final and executory judgments of the Court of First Instance
in two (2) separate cases, ordering the payment to each other of
the sum of P10,000.00 by way of attorney's fees. The two (2)
obligations, therefore, respectively offset each other,
compensation having taken effect by operation of law and
extinguished both debts to the concurrent amount of P10,000.00,
pursuant to the provisions of Arts. 1278, 1279 and 1290 of the
Civil Code, since all the requisites provided in Art. 1279 of the
said Code for automatic compensation "even though the creditors
and debtors are not aware of the compensation" were duly
present.
EGV Realty vs. CA
Facts: E.G.V. Realty is the owner/develops of a seven-storey
condominium. Respondent Unisphere demanded compensation
and reimbursement from petitioner CCC for the losses incurred as
a result of the robbery. Petitioner denied any liability for the losses
claimed to have been incurred by respondent Unisphere, stating
that the goods lost belonged to Amtrade, a third party. As a
consequence of the denial, respondent Unisphere withheld
payment of its monthly dues.
Ruling: We fully agree with the appellate court's dissertation on
the nature and character of a set-off or compensation. However,
we cannot subscribe to its conclusion that a set-off or
compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take
place when two persons, in their own right, are creditors and
debtors of each other. Compensation is "a mode of extinguishing
to the concurrent amount, the obligations of those persons who in
their own right are reciprocally debtors and creditors of each
other" and "the offsetting of two obligations which are reciprocally
extinguished if they are of equal value, or extinguished to the
8
concurrent amount if of different values." Article 1279 of the
same Code provides:
Absent any showing that all of these requisites exist,
compensation may not take place.
At best, what respondent Unisphere has against petitioners is just
a claim, not a debt. Such being the case, it is not enforceable in
court. It is only the debts that are enforceable in court, there being
9
no apparent defenses inherent in them. Respondent Unisphere's
claim for its loss has not been passed upon by any legal authority
so as to elevate it to the level of a debt. So we held in Alfonso
10
Vallarta v. Court of Appeals, et al., that:
Compensation or offset takes place by operation of law when two
(2) persons, in their own right, are creditor and debtor of each
other. For compensation to take place, a distinction must be
made between a debt and a mere claim. A debt is a claim
which has been formally passed upon by the highest
authority to which it can in law be submitted and has been
declared to be a debt. A claim, on the other hand, is a debt in
embryo. It is mere evidence of a debt and must pass thru the
process prescribed by law before it develops into what is
properly called a debt.
Tested by the foregoing yardstick, it has not been sufficiently
established that compensation or set-off is proper here as there is
lack of evidence to show that petitioners E.G.V. Realty and CCC
and respondent Unisphere are mutually debtors and creditors to
each other.
Special Steel vs. Villareal
Facts: Petitioner "sponsored" respondent Frederick So to attend
a training course in Kapfenberg, Austria conducted by BOHLER,
petitioners principal company. When respondent returned nine
months thereafter, petitioner directed him to sign a memorandum
providing that BOHLER requires trainees from Kapfenberg to
continue working with petitioner for a period of three (3) years
after the training. Otherwise, each trainee shall refund to
BOHLER $6K by way of set-off or compensation. Only 2 years
and 4 months after attending the training, respondent resigned
from petitioner.
In protest, respondents demanded from petitioner payment of
their separation benefits, commissions, vacation and sick leave
th
benefits, and proportionate 13 month pay. But petitioner refused
th
and instead, withheld their 13 month pay and other benefits.
Ruling: Petitioner may not offset its claims against private
respondents monetary benefits. With respect to its being the
surety of Villareal, two requisites of compensation are lacking, to
wit: that each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other and that
(the two debts) be liquidated and demandable (Art. 1279 (1) and
(4), New Civil Code). And in respect to its claim for liquidated
damages against So, there can be no compensation because his
creditor is not petitioner but BOHLER (Art. 1278, New Civil
Code).
As to respondent So, petitioner maintains that there can
be a set-off or legal compensation between them. Consequently,
th
it can withhold his 13 month pay and other benefits.
For legal compensation to take place, the requirements
set forth in Articles 1278 and 1279 of the Civil Code, quoted
below, must be present. In the present case, set-off or legal
compensation cannot take place between petitioner and
respondent So because they are not mutually creditor and debtor
of each other.
Caltex vs. COA
Francia vs. IAC and Fernandez, contend that there can be no
offsetting of taxes against the claims that a taxpayer may have
against the government, as taxes do not arise from contracts or
depend upon the will of the taxpayer, but are imposed by law.
It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot
be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
Soriano vs. People
Facts: Petitioner likewise argues that the CA also failed to
consider Alagaos obligation to deliver to her of every harvest.
Petitioner claims that her share in the harvest amounted
to P57,200 for four harvests. Therefore, applying the principle of
set off, it is Alagao who is indebted to petitioner in the amount
of P26,323 (P57,200 minus P30,877).
Respondent on the other hand contends that the amount of loan
extended to Alagao was P40,000 and not P51,730 as claimed by
petitioner. Moreover, the entire value of the 398 sacks of corn
grains shouId.not be set off with Alagaos loan since (1) the loan
was not yet due and demandable at the time of delivery of the
398 sacks of corn grains.
Ruling: This Court rules that all the above requisites for
compensation are present in the instant case.
First, petitioner and Alagao are debtors and creditors of each
other. It is undisputable that petitioner and Alagao owe each
other sums of money. Petitioner owes P85,607 for the value of
the corn grains delivered to her by Alagao in September 1994
while Alagao owes petitioner P51,730 by virtue of a loan
extended by the latter in February 1994.
Second, both debts consist in a sum of money. There is no
issue as to the P85,607 debt by petitioner that it consists a sum of
money. As to the P51,730 received by Alagao from petitioner,
though what was extended by petitioner consists of cash
advances and fertilizers, there is no dispute that said amount is
payable in money.
Third, both debts are due. Upon delivery of the 398 sacks to
petitioner, she was under the obligation to pay for the value
thereof as buyer. As to Alagaos debt, the contract of loan
provided that it is payable in February 1996. Though it was not
yet due in September 1994 when she delivered the 398 sacks of
corn grains to petitioner, it eventually became due at the time of
trial of the instant case.
Fourth, both debts are liquidated and demandable. A debt is
liquidated when the amount is known or is determinable by
inspection of the terms and conditions of relevant
19
documents. There is no dispute that the value of the 398 sacks
of corn grains is P85,607. As to Alagaos debt, we disagree with
respondent People that the loan amount is only P40,000 since
during pre-trial, Alagao herself admitted that she did not only
receive P40,000 but P51,730 in the form of cash advances and
fertilizers from petitioner. It is well settled that an admission made
in a stipulation of facts at pre-trial by the parties is considered a
judicial admission and, under the Rules of Court, requires no
proof. Such admission may be controverted only by a showing
that it was made through a palpable mistake or that no such
20
admission was made.
And lastly, neither of the debts are subject of a controversy
commenced by a third person. There are no third-party claims
with respect to Alagaos P51,730 loan. As to petitioners P85,607
debt representing the 398 sacks of corn grains, Alagao claims
that she is not the sole owner of all the 398 sacks. This claim of
Alagao, however, was never substantiated and a perusal of the
information for estafa shows that the subject corn grains are all
owned by her. Moreover, the alleged other owners have not
commenced any action to protect their claim over it. Thus,
the P85, 607 debt cannot be considered subject of a controversy
by a third person.
With the presence of all the requisites mentioned in Article
1279, legal compensation took effect by operation of law as
provided in Article 1290 of the Civil Code.
First United vs. Bayanihan Automotive
Facts: Respondent learned that FUCC had ordered the payment
stopped. That compensation was not proper because the claims
of the petitioners as alleged in their counterclaim were not
liquidated and demandable.
The petitioners withholding payment of the checks due to the
breakdown of one of the dump trucks they had earlier purchased
from respondent. That recoupment should not be restrictively
interpreted but should include the concept of compensation or
set-off between two parties who had claims arising from different
transactions; and that the series of purchases and the obligations
arising therefrom, being inter-related, could be considered as a
single and ongoing transaction for all intents and purposes.
Ruling: Legal compensation was permissible
Legal compensation takes place when the requirements set forth
in Article 1278 and Article 1279 are present.
A debt is liquidated when its existence and amount are
12
determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the
plaintiffs claim from the moment it is liquidated by
13
judgment. Article 1290 of the Civil Code provides that when all
the requisites mentioned in Article 1279 of the Civil Code are
present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount. With
petitioners expenses for the repair of the dump truck being
already established and determined with certainty by the lower
courts, it follows that legal compensation could take place
because all the requirements were present. Hence, the amount
of P71T should be set off against petitioners unpaid obligation
of P635T.
Cases:
Traders Royal Bank vs. Castanares
Issue: W/N petitioner validly applied, by way of
compensation, the $4K telegraphic transfer remitted by
respondent.
Ruling: YES. The subject promissory notes thus provide:
I/We, jointly and severally, further empower and authorize the
TRADERS ROYAL BANK, at its option, and without notice, to set-
off or to apply to the payment of this note any and all funds
Agreements for compensation of debts or any
obligations when the parties are mutually creditors and debtors
are allowed under Art. 1282 of the Civil Code even though not all
the legal requisites for legal compensation are present. Voluntary
or conventional compensation is not limited to obligations
which are not yet due. The only requirements for
conventional compensation are (1) that each of the parties can
fully dispose of the credit he seeks to compensate, and (2) that
they agree to the extinguishment of their mutual credits.
Consequently, no error was committed by the trial court in holding
that petitioner validly applied, by way of compensation, the $4.2K
telegraphic transfer remitted by respondents foreign client
through the petitioner.
Union Bank vs. Development Bank
Facts: Foodmasters, Inc. (FI) had outstanding loan obligations to
both Union Banks predecessor-in-interest, Bancom Development
Corporation (Bancom), and to DBP.
FI and DBP, among others, entered into a Deed of
7
Cession of Property In Payment of Debt (dacion en pago)
whereby the former ceded in favor of the latter certain properties
(including a processing plant) in consideration of the following: (a)
the full and complete satisfaction of FIs loan obligations to DBP;
and (b) the direct assumption by DBP of FIs obligations to
Bancom (assumed obligations).
DBP, new owner of the processing plant, leased back
the said property to FI (Lease Agreement) which was, in turn,
obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement with
Bancom (Assumption Agreement) whereby the former: (a)
confirmed its assumption of FIs obligations to Bancom; and (b)
undertook to remit up to 30% of any and all rentals due from FI to
Bancom (subject rentals) which would serve as payment of the
assumed obligations.
Any balance of the Assumed Obligations after
application of the entire rentals and or the entire sales proceeds
actually received by Bancom on the Leased Properties shall be
paid by DBP to Bancom not later than December 29, 1998.
(Emphases supplied)
Claiming that the subject rentals have not been duly
remitted despite its repeated demands, Union Bank filed a
collection case against DBP. In opposition, DBP countered,
among others, that the obligations it assumed were payable only
out of the rental payments made by FI. Thus, since FI had yet to
pay the same, DBPs obligation to Union Bank had not arisen.
Issue: W/N the CA correctly upheld the denial of Union Banks
motion to affirm legal compensation.
Ruling: YES. The rule on legal compensation is stated in Article
1290 of the Civil Code which provides that "[w]hen 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."
In this case, Union Bank filed a motion to seek affirmation that
legal compensation had taken place in order to effectively offset
(a) its own obligation to return the funds it previously received
from DBP as directed under the September 6, 2005 Writ of
Execution with (b) DBPs assumed obligations under the
Assumption Agreement. However, legal compensation could not
have taken place between these debts for the apparent reason
that requisites 3 and 4 under Article 1279 are not present. (1)
Since DBPs assumed obligations to Union Bank for remittance of
the lease payments are in the Courts words in its Decision
"contingent on the prior payment thereof by [FW] to DBP," it
cannot be said that both debts are due (requisite 3 of Article
1279). (2) Also, in the same ruling, the Court observed that any
deficiency that DBP had to make up (by December 29, 1998 as
per the Assumption Agreement) for the full satisfaction of the
assumed obligations "cannot be determined until after the
satisfaction of Foodmasters obligation to DBP." In this regard, it
cannot be concluded that the same debt had already been
liquidated, and thereby became demandable (requisite 4 of Article
1279).
Cases:
Mariano vs. People
Appellant Candida Mariano, while admitting in her testimony that
she received from complainant Antonia Santos the subject three
(3) jewelries and signed a receipt of "Katibayan" (Exhibit "A")
thereof on September 22, 1978, puts up the defense that the said
jewelries "are one and the same jewelries" which are already in
the possession of one Amelia Bote who, on September 30,
1978 executed a separate written agreement (Exhibit "4") with
the complainant. With the agreed conditions that she (Bote) will
sell the said jewelries in cash within two (2) days from receipt
thereof and immediately turn-over the proceeds of the sale to the
complainant, or return the jewelries, if unsold, on October 2,
1978. The agreed compensation or commission of Amelia Bote,
according to the agreement, shall be the overprice she makes on
the value of each jewelry. It was further agreed in Exhibit "4" that
Amelia Bote cannot sell the jewelries on credit or by installment,
nor can she lend, pledge or give the same as security. At the left
side margin of Exhibit "4" is the signature of appellant Candida
Mariano as "Guarantor," which signature she admitted to be her
own.
Ruling: YES. There was effectively a novation of the September
22, 1978 agreement wherein petitioner Candida Mariano was
initially obliged to sell in behalf of the complainant. The
complainant was shown to have acceded instead to the new
arrangement in which Ms. Bote would be her agent.
The novation occurred through a substitution of the person of the
agent and the assumption by the accused of an obligation of a
guarantor. (Article 1291, New Civil Code) Incidentally, the
corresponding change in the cost of each of the jewelries offered
to the new agent according to this novation provides the
explanation for the discrepancy in the amount contained in the
two contracts. The obligation of the accused under the September
22, 1978 transaction was extinguished by the September 30,
1978 transaction which substituted the first since the two
contracts are shown to have been on very point incompatible with
each other. (Article 1292, Civil Code) The novation prevented the
rise of liability under the old contract. Upon the novation, the first
obligation had lost all its force and effect and only the subsequent
obligation can be the basis of any action.
Heirs of Franco vs. Sps. Gonzales
Facts: The petitioners insist that the RTC could not validly
enforce a judgment based on a promissory note that had been
already novated; that the promissory note had been impliedly
novated when the principal obligation of P500K had been fixed
at P750K and the maturity date had been extended.
In contrast, the respondents aver that novation did not take place
because there was no complete incompatibility between the
promissory note and the memorandum receipt.
Ruling: NO. Novation did not transpire because no irreconcilable
incompatibility existed between the promissory note and the
receipt.
In light of the foregoing, the issuance of the receipt
created no new obligation. Instead, the respondents only
thereby recognized the original obligation by stating in the receipt
that the P400K was "partial payment of loan" and by referring to
"the promissory note subject of the case in imposing the interest."
The loan mentioned in the receipt was still the same loan
involving the P500K extended to Servando. Advertence to the
interest stipulated in the promissory note indicated that the
contract still subsisted, not replaced and extinguished, as the
petitioners claim.
The receipt dated February 5, 1992 was only the proof of
Servandos payment of his obligation as confirmed by the
decision of the RTC. It did not establish the novation of his
agreement with the respondents. Indeed, the Court has ruled
that an obligation to pay a sum of money is not novated by
an instrument that expressly recognizes the old, or changes
only the terms of payment, or adds other obligations not
incompatible with the old ones, or the new contract merely
24
supplements the old one. A new contract that is a mere
reiteration, acknowledgment or ratification of the old contract with
slight modifications or alterations as to the cause or object or
principal conditions can stand together with the former one, and
25
there can be no incompatibility between them. Moreover, a
creditors acceptance of payment after demand does not operate
26
as a modification of the original contract.
Worth noting is that Servandos liability was joint and
solidary with his co-debtors. In a solidary obligation, the creditor
may proceed against any one of the solidary debtors or some or
27
all of them simultaneously. The choice to determine against
whom the collection is enforced belongs to the creditor until the
28
obligation is fully satisfied. Thus, the obligation was being
enforced against Servando, who, in order to escape liability,
should have presented evidence to prove that his obligation had
already been cancelled by the new obligation or that another
debtor had assumed his place. In case of change in the person
of the debtor, the substitution must be clear and
29 30
express, and made with the consent of the creditor. Yet,
these circumstances did not obtain herein, proving precisely that
Servando remained a solidary debtor against whom the entire or
part of the obligation might be enforced.
Lastly, the extension of the maturity date did not
constitute a novation of the previous agreement. It is settled that
an extension of the term or period of the maturity date does
not result in novation.
Security Bank vs. Cuenca
Petitioner Security Bank and Trust Co. granted appellant Sta.
Ines Melale Corporation [SIMC] a credit line to assist the latter in
meeting the additional capitalization requirements of its logging
operations.
. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity
Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC.
Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta.
Ines.
"Subsequently, appellant SIMC repeatedly availed of its
credit line and obtained six (6) other loan[s] from [Petitioner]
SBTC.
SIMC however encountered difficulty, opted for
restructuring loan obligations and thus executed a Loan
Agreement 1989.
Ruling: YES. Original Obligation Extinguished by Novation.
An obligation may be extinguished by novation, pursuant to
Article 1292 of the Civil Code, which reads as follows:
Novation of a contract is never presumed. It has been
held that "[i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are
15
incompatible on every point." Indeed, the following requisites
must be established.
Petitioner contends that there was no absolute
incompatibility between the old and the new obligations, and that
the latter did not extinguish the earlier one. It further argues that
the 1989 Agreement did not change the original loan in respect to
the parties involved or the obligations incurred. It adds that the
17
terms of the 1989 Contract were "not more onerous." Since the
original credit accomodation was not extinguished, it concludes
that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites
of novation are present in this case. The 1989 Loan
18
Agreement extinguished the obligation obtained under the 1980
credit accomodation. This is evident from its explicit provision
to "liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied
to liquidate the principal portion of the Borrowers present total
outstanding Indebtedness to the Lender (the "Indebtedness")
while the Second Loan shall be applied to liquidate the past due
19
interest and penalty portion of the Indebtedness." (Italics
supplied.)
20
The testimony of an officer of the bank that the
proceeds of the 1989 Loan Agreement were used "to pay-off"
21
the original indebtedness serves to strengthen this ruling.
Furthermore, several incompatibilities between the 1989
Agreement and the 1980 original obligation demonstrate that the
two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8
22
million, the 1989 Agreement provided that the loan
was P12.2 million. The periods for payment were also
different.
 Likewise, the later contract contained conditions,
"positive covenants" and "negative covenants" not found in
the earlier obligation.
Since the 1989 Loan Agreement had extinguished
the original credit accommodation, the Indemnity Agreement,
an accessory obligation, was necessarily extinguished also,
pursuant to Article 1296.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a
mere renewal or extension of the P8 million original
25
accommodation; it was not a novation.
This argument must be rejected. To begin with, the 1989
Loan Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding
indebtedness.
Metro Bank vs. Reynado and Andrea
Novation not a mode of extinguishing criminal liability for
estafa; Criminal liability for estafa not affected by
compromise or novation of contract.
Initially, it is best to emphasize that "novation is not one of the
grounds prescribed by the Revised Penal Code for the
34
extinguishment of criminal liability."
In a catena of cases, it was ruled that criminal liability for estafa is
not affected by a compromise or novation of contract.
Thus, the doctrine that evolved from the aforecited cases is that a
compromise or settlement entered into after the commission
of the crime does not extinguish accuseds liability for
estafa. Neither will the same bar the prosecution of said
crime. Accordingly, in such a situation, as in this case, the
complaint for estafa against respondents should not be
dismissed just because petitioner entered into a Debt
Settlement Agreement with Universal. Even the OSG arrived at
the same conclusion:
Contrary to the conclusion of public respondent, the Debt
Settlement Agreement entered into between petitioner and
Universal Converter Philippines extinguishes merely the civil
aspect of the latters liability as a corporate entity but not the
criminal liability of the persons who actually committed the
crime of estafa against petitioner Metrobank.
Sime Darby vs Goodyear
Macgraphics owned several billboards, Magallanes billboard
was leased to Sime Darby.
Sime Darby and Goodyear executed a deed entitled "Deed of
Assignment in connection with Billboard Advertising,
through which Sime Darby assigned its leasehold rights and
deposits made to Macgraphics pursuant to its lease contract
over the Magallanes billboard.
Sime Darby then notified Macgraphics of the assignment of
the Magallanes billboard in favor of Goodyear. Macgraphics
then sent a letter to Sime Darby, informing the latter that it
could not give its consent to the assignment of lease to
Goodyear.
Ruling: NO. Broadly, a novation 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). Under this
mode, novation would have dual functionsone to extinguish an
existing obligation, the other to substitute a new one in its place.
This requires a conflux of four essential requisites of novation.
While there is no dispute that the first requisite is
present, the Court, after careful consideration of the facts and the
evidence on record, finds that the other requirements of a valid
novation are lacking. A review of the lease contract between
Sime Darby and Macgraphics discloses no stipulation that
Sime Darby could assign the lease without the consent of
Macgraphics.
Moreover, contrary to the assertions of Sime Darby, the
records are bereft of any evidence that clearly shows that
Macgraphics consented to the assignment of the lease. As aptly
found by the RTC and the CA, Macgraphics was never part of
the negotiations between Sime Darby and Goodyear. Neither
did it give its conformity to the assignment after the
execution of the Deed of Assignment.
The consent of the lessor to an assignment of lease
may indeed be given expressly or impliedly. It need not be
given simultaneously with that of the lessee and of the assignee.
Neither is it required to be in any specific or particular form. It
must, however, be clearly given. In this case, it cannot be
said that Macgraphics gave its implied consent to the
assignment of lease.
PRA vs. PRAC
Facts: BCDA entered into a MOA with PRA, as project
manager. BCDA, PRA, and PNB executed a Pool Formation
Trust Agreement (PFTA). PRA tasked with the development
of the park and PNB to act as trustee for the Heritage Park
securitization.
PRA awarded the electrical and lighting works for the park to
Respondent Romago w/c it entered into a Construction
Agreement, and began construction works.
The parties of PFTA organized the Heritage Park Corp.
(HPMC) to take over the management of the project.
Because the HPMC refused to recognize the PRAs contract
with it, Romago filed a complaint seeking to collect its
claims.
Issue: Whether or not PRA still liable to Romago under the
Construction Agreement despite the subsequent turnover of the
Heritage Park Project to the HPMC. Yes and thus no Novation.
Ruling: NO. In novation, a subsequent obligation extinguishes a
previous one through substitution either by changing the object or
principal conditions, by substituting another in place of the debtor,
or by subrogating a third person into the rights of the
creditor. Novation requires requisites.
There cannot be novation in this case since the
proposed substituted parties did not agree to the PRAs
supposed assignment of its obligations under the contract
for the electrical and light works at Heritage Park to the HPMC.
The latter definitely and clearly rejected the PRAs
assignment of its liability under that contract to the HPMC.
Romago tried to follow up its claims with the HPMC, not because
of any new contract it entered into with the latter, but simply
because the PRA told it that the HPMC would henceforth assume
the PRAs liability under its contract with Romago.
Section 11.07 did not say that the HPMC shall,
thereafter, assume the PRAs obligations. On the contrary,
Section 7.01 of the PFTA recognizes that contracts that the PRA
entered into in its own name and makes it liable for the same.
ACE Foods vs. Micro Pacific
8
MTCL sent a letter-proposal for the delivery and sale of the
subject products to be installed at various offices of ACE Foods.
ACE Foods accepted MTCLs proposal and accordingly issued
Purchase Order. MTCL delivered the said products to ACE Foods
as reflected in (Invoice Receipt). The fine print of the invoice
states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC until full compliance of the terms and conditions
of above and payment of the price"(title reservation stipulation).
Ruling: NO. Novation. the Court must dispel the notion that the
stipulation anent MTCLs reservation of ownership of the subject
products as reflected in the Invoice Receipt, i.e., the title
reservation stipulation, changed the complexion of the transaction
from a contract of sale into a contract to sell. Records are bereft
of any showing that the said stipulation novated the contract of
sale between the parties which, to repeat, already existed at the
precise moment ACE Foods accepted MTCLs proposal. To be
sure, novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated
by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists
to the extent it remains compatible with the amendatory
agreement. In either case, however, novation is never presumed,
and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too
38
clear and unequivocal to be mistaken.
In the present case, it has not been shown that the
title reservation stipulation appearing in the Invoice Receipt
had been included or had subsequently modified or
superseded the original agreement of the parties. The fact
that the Invoice Receipt was signed by a representative of ACE
Foods does not, by and of itself, prove animus novandi since: (a)
it was not shown that the signatory was authorized by ACE Foods
(the actual party to the transaction) to novate the original
agreement.
Cases:
Reyes vs. CA
Facts: Petitioner, Reyes-EUROTRUST credit financing.
Respondents are Eleazar-BERMIC real estate development,
and AFP-MBAI, welfare services for the AFP.
A.
Reyes-Eurotrust entered into a loan agreement to Bermic to
finance construction of its Condominium, but Eleazar-Bermic
failed to make good the dishonoured checks, thus Reyes filed
criminal complaints against her.
Meanwhile, in its own investigation, AFP-MBAI invested funds w/
Eurotrust by buying government securities, and found out that
after Eurotrust delivered to AFP the securities purchased,
Eurotrust borrowed the same but failed to return them, and the
amounts paid by AFP to Eurotrust were in turn lent by Reyes-
Eurotrust to Bermic.
When Eleazar came to know that the funds loaned by Eurotrust to
Bermic-Eleazar belonged to AFP-MBAI. It had a meeting w/
Eurotrust and agreed that Bermic would settle directly their
obligations with the real owners of the fund AFP-MBAO.
Agreement was in the 2 letters, whereby, Bermic already made
payment to AFP-MBAI.
Prosecutor issued a resolution dismissing the complaints
filed by Elsa Reyes against Graciela Eleazar on the ground that
when the latter assumed the obligation of Reyes to AFP-MBAI, it
constituted novation, extinguishing any criminal liability on the
part of Eleazar.
B.
AFP-MBAI separate criminal complaint against Reyes. AFP-MBAI
decided to purchase several securities from Eurotrust. Eurotrust
delivered to AFP-MBAI treasury notes. However, Eurotrust
fraudulently borrowed all those treasury notes from the AFP-MBAI
for purposes of verification with the Central Bank. Despite AFP-
MBAI's repeated demands, Eurotrust failed to return the said
treasury notes. Instead it delivered 21 dishonered postdated
checks. Eurotrust nonetheless made partial payment to AFP-
MBAI amounting to P35M. However, after deducting this partial
payment, the amounts of P75M treasury notes with interest and
P35M have remained unpaid. Consequently, AFP-MBAI filed a
complaint for violation of BP 22 and estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-
MBAI's claim of unreturned P73M worth of government securities
has been satisfied upon her payment of P30M. With respect to
the remaining P43M, the same was paid when Eurotrust assigned
its Participation Certificates to AFP-MBAI.
Ruling. NO.
A.
We cannot see how novation can take place considering the
surrounding circumstances which negate the same. The principle
of novation by substitution of creditor was erroneously applied in
the first questioned resolution involving the contract of loan
between petitioner and respondent Eleazar. Admittedly, in order
that a novation can take place, the concurrence of the following
7
requisites is indispensable:
Upon the facts shown in the record, there is no doubt
that the last three essential requisites of novation are wanting
in the instant case. 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, In concluding that a
novation took place, the respondent court relied on the two
letters. Be that as it may, a cursory reading of these letters,
however clearly and unmistakably shows that there was nothing
therein that would evince that respondent AFP-MBAI agreed to
substitute for the petitioner as the new creditor of respondent
Eleazar in the contract of loan. It is evident that the two letters
merely gave respondent Eleazar an authority to directly settle the
obligation of petitioner to AFP-MBAI. It is essentially an
agreement between petitioner and respondent Eleazar only.
There was no mention whatsoever of AFP-MBAI's consent to the
new agreement between petitioner and respondent Eleazar much
less an indication of AFP-MBAI's intention to be the substitute
creditor in the loan contract. Well settled is the rule that
novation by substitution of creditor requires an agreement
among the three parties concerned the original creditor,
10
the debtor and the new creditor. It is a new contractual
relation based on the mutual agreement among all the
necessary parties, hence, there is no novation if no new
contract was executed by the parties. Article 1301 is explicit.
Conventional subrogation.
The fact that respondent Eleazar made payments to
AFP-MBAI and the latter accepted them does not ipso facto result
in novation. There must be an express intention to novate
12
animus novandi. Novation is never presumed. Article 1300 of
the Civil Code provides inter alia that conventional subrogation
must be clearly established in order that it may take effect.
B.
This contention is bereft of any legal and factual basis. Just like in
the first questioned resolution, no novation took place in this case.
A thorough examination of the records shows that no hard
evidence was presented which would expressly and
unequivocably demonstrate the intention of respondent AFP-
MBAI to release petitioner from her obligation to pay under the
contract of sale of securities. It is a rule that novation by
substitution of debtor must always be made with the consent
of the creditor. Article 1293 of the Civil Code is explicit.
The consent of the creditor to a novation by change of
debtor is as indispensable as the creditor's consent in
conventional subrogation in order that a novation shall legally
take place. The mere circumstance of AFP-MBAI receiving
payments from respondent Eleazar who acquiesced to assume
the obligation of petitioner under the contract of sale of securities,
when there is clearly no agreement to release petitioner from her
responsibility, does not constitute novation, at most, it only
creates a juridical relation of co-debtorship or suretyship on the
part of respondent Eleazar to the contractual obligation of
petitioner to AFP-MBAI and the latter can still enforce the
obligation against the petitioner.
Babst vs. CA
Facts: ELISCON, MULTI, and Babsts defaulted its obligations
with CBTC.
BPI) and CBTC entered into a merger, wherein BPI, as the
surviving corporation, acquired all the assets and assumed all the
liabilities of CBTC.
ELISCON encountered financial difficulties and became heavily
indebted to DBP. ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt.
DBP formally 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.
BPI, as successor-in-interest of CBTC, instituted a complaint for
sum of money against ELISCON, MULTI and Babst.
Issue: W/N BPI consented to the assumption by DBP of the
obligations of ELISCON.
Ruling: YES.
BPI contends that in order to have a valid novation, there must be
an express consent of the creditor.
Court reiterated the rule that there can be implied consent of
the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all
maintain that due to the failure of BPI to register its objection to
the take-over by DBP of ELISCON's assets, at the creditors'
meeting and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear
indications that BPI was aware of the assumption by DBP of the
obligations of ELISCON. In fact, BPI admits that --- BPI did not
object to the substitution of debtors, although it objected to the
payment formula submitted by DBP. BPI's objection was to the
proposed payment formula, not to the substitution itself.
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.
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). Under this mode, novation
would have dual functions one to extinguish an existing
obligation, the other to substitute a new one in its place
requiring a conflux of four essential requisites, (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.
The original obligation having been extinguished, the contracts of
suretyship executed separately by Babst and MULTI, being
accessory obligations, are likewise extinguished
Garcia vs. Llamas
Respondent complaint for sum of money against Petitioner and
De Jesus, that they borrowed 400K in a promissory note they
bound themselves jointly and severally to pay the loan, overdue
and have failed to pay it.
Petitioner Garcia, averred that he assumed no liability under the
promissory note because he signed it merely as an
accommodation party for de Jesus; and, as the loan had been
paid by de Jesus by means of a check and that the issuance of
the check and [respondents] acceptance thereof novated or
superseded the note. Respondent reply, thereunder asserting that
the loan remained unpaid for the reason that the check issued by
de Jesus bounced.
Ruling: NO. We hold that no novation took place.
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. There is no incompatibility between the
promissory note and the check. As the CA correctly observed,
the check had been issued precisely to answer for the obligation.
On the one hand, the note evidences the loan obligation; and on
the other, the check answers for it. Verily, the two can stand
together.
Neither could the payment of interests -- which, in
18
petitioners view, also constitutes novation -- change the
terms and conditions of the obligation. Such payment was
already provided for in the promissory note and, like the check,
was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the
obligation was novated by the substitution of debtors. 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 formers place in the
19
relation. Well-settled is the rule that novation is never
20
presumed. Consequently, that which arises from a purported
21
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.
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. The CA aptly held: Plaintiffs
acceptance of the bum check did not result in substitution by de
Jesus either, the nature of the obligation being solidary due to the
fact that the promissory note expressly declared that the liability
of appellants thereunder is joint and solidary.
Moreover, it must be noted that for novation to be valid and
legal, the law requires that the creditor expressly consent to
23
the substitution of a new debtor. Since novation implies a
waiver of the right the creditor had before the novation, such
24
waiver must be express. It cannot be supposed, without clear
proof, that the present respondent has done away with his right to
25
exact fulfillment from either of the solidary debtors.
More important, De Jesus was not a third person to the
obligation. From the beginning, he was a joint and solidary
obligor of the P400K loan; thus, he can be released from it only
upon its extinguishment. Respondents acceptance of his
check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of
the obligation.
It must be noted that in a solidary obligation, the creditor is
entitled to demand the satisfaction of the whole obligation from
26
any or all of the debtors. It is up to the former to determine
27
against whom to enforce collection. Having made himself jointly
and severally liable with De Jesus, petitioner is therefore
28
liable for the entire obligation.
Cases:
CEIC vs. CA
Dynetics and Garcia filed for declaratory relief against
Consortium banks regarding the validity of surety agreement
they entered into.
Consortium alleged that the surety agreement was valid and
binding and Dynetics and Garcia were liable.
Dynetics and Garcia & MMTC filed for declaratory relief
against SBTC.
On July 2, 1985, RTC, granted SBTC, and issued writ of
attachment and notice of garnishment covering Garcias
share in Chemphil including the disputed shares.
On July 19, 1985, RTC granted the Consortium writ of
attachment, and various properties of Dynetics and Garcia
were garnished, including the disputed shares.
Meanwhile, on 15 July 1988, Antonio Garcia under a Deed of
Sale transferred to Ferro Chemicals, Inc. (FCI) the disputed
shares. It was agreed upon that part of the purchase price shall
be paid by FCI directly to SBTC.
FCI, through its Garcia, issued a BA Check in favor of
SBTC. SBTC refused to accept the check claiming that the
amount was not sufficient to discharge the debt, thus consigned
as payment in SBTC case.
FCI assigned its 4,119,614 shares in Chemphil, which included
the disputed shares, to petitioner CEIC.
Meanwhile, Antonio Garcia, in the consortium case, failed to
comply with the terms of the compromise agreement he entered
into with the consortium. Among Garcia's properties that were
levied upon on execution were his shares in Chemphil (the
disputed shares) previously garnished on 19 July 1985.
Issue: W/N CEIC have been subrogated to the rights of SBTC
by the payment by FCI of Garcias debts.
Ruling: NO. CEIC's claim
CEIC traces its claim over the disputed shares to the
attachment lien obtained by SBTC on 2 July 1985 against Antonio
Garcia in Civil Case No. 10398. It avers that when FCI, CEIC's
predecessor-in-interest, paid SBTC the due obligations of Garcia
to the said bank pursuant to the Deed of Absolute Sale and
41
Purchase of Shares of Stock, FCI, and later CEIC, was
subrogated to the rights of SBTC, particularly to the latter's
aforementioned attachment lien over the disputed shares.
CEIC argues that SBTC's attachment lien is superior as
it was obtained on 2 July 1985, ahead of the consortium's
purported attachment on 19 July 1985. More importantly, said
CEIC lien was duly recorded in the stock and transfer books of
Chemphil.
CEIC's subrogation theory is unavailing.
Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts; this is
the subrogation referred to in article 1302. Conventional
subrogation is that which takes place by agreement of the parties.
CEIC's theory is premised on Art. 1302 (2) states.
Despite, however, its multitudinous arguments, CEIC
presents an erroneous interpretation of the concept of
subrogation. An analysis of the situations involved would reveal
the clear inapplicability of Art. 1302 (2).
Antonio Garcia sold the disputed shares to FCI,
however, did not pay the entire amount to Garcia as it was
obligated to deliver part of the purchase price directly to
SBTC pursuant to the following stipulation in the Deed of
Sale.
Hence, when FCI issued the BA check to SBTC in the
amount of P35M to pay Garcia's indebtedness to the said bank, it
was in effect paying with Garcia's money, no longer with its own,
because said amount was part of the purchase price which
FCI owed Garcia in payment for the sale of the disputed shares
by the latter to the former. The money "paid" by FCI to SBTC,
thus properly belonged to Garcia. It is as if Garcia himself
paid his own debt to SBTC but through a third party FCI.
It is, therefore, of no consequence that what was used to
pay SBTC was a corporate check of FCI. As we have earlier
stated, said check no longer represented FCI funds but
Garcia's money, being as it was part of FCI's payment for the
acquisition of the disputed shares.
Since the money used to discharge Garcia's debt
rightfully belonged to him, FCI cannot be considered a third
party payor under Art. 1302 (2).
FCI was merely fulfilling its obligation under the aforementioned
Deed of Sale.
Additionally, FCI is not a disinterested party as required
by Art. 1302 (2) since the benefits of the extinguishment of the
45
obligation would redound to none other but itself. Payment of
the judgment debt to SBTC resulted in the discharge of the
attachment lien on the disputed shares purchased by FCI. The
latter would then have a free and "clean" title to said shares.
In sum, CEIC, for its failure to fulfill the requirements
of Art. 1302 (2), was not subrogated to the rights of SBTC
against Antonio Garcia and did not acquire SBTC's
attachment lien over the disputed shares which, in turn, had
already been lifted or discharged upon satisfaction by Garcia,
through FCI, of his debt to the said bank.
PNB vs CA
To finance the acquisition of seven (7) ocean-going vessels, the
Philippine International Shipping Corporation (hereinafter "PISC")
applied for and was granted by petitioner National Investment and
Development Corporation (hereinafter "NIDC") the following
guaranty accommodations.
PISC entered into a Contract Agreement with Hong Kong United
Dockyards, Ltd. for the repair and conversion of the vessel.
Central Bank of the Philippines authorized PISC to open with
private respondent China Banking Corporation (hereinafter
"CBC") a standby letter of credit for US$545,000.00 in favor of
Citibank, N.A. (hereinafter "Citibank") to cover the repair and
partial conversion of the vessel.
PISC executed an Application and Agreement for Commercial
Letter of Credit for $545,000.00 with private respondent CBC in
favor of Citibank.
Promissory note for US$545,000.00 was executed by PISC in
favor of Citibank pursuant to the Loan Agreement for
US$545,000.00 between PISC, as borrower, and Citibank, as
lender.
For failure of PISC to settle its obligations in the amount of
US$64,789,470.96, petitioner PNB conducted, thru the Sheriffs
Office, an auction sale of the mortgaged vessels.
Claiming that the foreclosure sale of its mortgaged vessels was
illegal, unjust, irregular, and oppressive, PISC instituted a civil
case against petitioners for the annulment of the foreclosure and
auction sale of its vessels.
Issue: W/N private respondent stepped into the shoes of
Hongkong United Dockyards, Ltd. by legal subrogation and thus
acquired the maritime lien of the latter over the vessel.
Ruling: YES. Since CBCs payment to the lienors was with the
express consent of the debtor owner of the vessels repaired, legal
subrogation took place in CBCs favor.
As held by the public respondent Court of Appeals, those who
provide credit to a master of a vessel for the purpose of
discharging a maritime lien also acquire a lien over the said
vessel. Advances to discharge maritime liens create a lien on the
vessel, and one advancing money to discharge a valid lien gets a
lien of equal dignity with the one discharged. There is no reason
why these doctrines cannot be given persuasive application in the
instant case considering that they do not violate or contravene
any of our existing laws. Moreover, as pointed out by the
appellate court, these doctrines are in accord with our provisions
on subrogation particularly Art. 1302(2).
From the foregoing, it is clear that the amount used for
the repair of the vessel M/V "Asean Liberty" was advanced by
Citibank and was utilized for the purpose of paying off the original
maritime lienor, Hongkong United Dockyards, Ltd. As a person
not interested in the fulfillment of the obligation between
PISC and Hongkong United Dockyards, Ltd., Citibank was
subrogated to the rights of Hongkong United Dockyards, Ltd.
as maritime lienor over the vessel, by virtue of Article
1302(2). By definition, subrogation is the transfer of all the rights
of the creditor to a third person, who substitutes him in all his
rights. Considering that Citibank paid off the debt of PISC to
Hongkong United Dockyards, Ltd. it became the transferee of
all the rights of Hongkong United Dockyards, Ltd. as against
PISC, including the maritime lien over the vessel M/V "Asean
Liberty."
 Private respondent CBC, as guarantor, was itself
subrogated to all the rights of Citibank as against PISC, the
latters debtor.
Private respondent, having paid off the debt of PISC to
Citibank, was therefore, subrogated to all the rights Citibank had
against its debtor PISC. Considering that Citibank had a maritime
lien over the vessel M/V "Asean Liberty," private respondent was
likewise subrogated to this right when it paid off Citibank under
the contract of guarantee.