Chapter 4

OBLIGATIONS
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
General Provisions
Art. 1231. Obligations are extinguished:

(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor
and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition
and prescription, are governed elsewhere in this Code.1
Modes of Extinguishing Obligations. — There are ten
modes of extinguishing obligations enumerated in the above article.
This enumeration, however, is not complete. There are others, such
as: (1) renunciation or waiver by the obligee or creditor; (2) compro-
mise; (3) expiration of the resolutory term or period; (4) death of
one of the contracting parties in purely personal obligations; (5) the
will of one of the contracting parties in certain contracts; or (6) the
agreement of both contracting parties or what is sometimes known
as mutual assent or dissent.2
1
Art. 1156, Spanish Civil Code, in modified form.
2
8 Manresa, 5th Ed., Bk. 1, pp. 501-503; 3 Castan, 7th Ed., pp. 235-236.
230
EXTINGUISHMENT OF OBLIGATIONS Arts. 232-1235
Payment or Performance
Section 1. — Payment or Performance
Art. 1232. Payment means not only the delivery of mon-

ey but also the performance, in any other manner, of an obli-
gation.3
Concept of Payment or Performance. — Historically, the
term payment has three different acceptations. In its broadest sense,
it consists in the fulfillment of the obligation either voluntarily
or involuntarily, including its extinguishment by any means or
mode whatsoever; in its limited sense, it consists in the normal
and voluntary fulfillment of the obligation by the realization of the
purposes for which it was constituted; in its more limited sense, it
consists in the fulfillment of the obligation by the delivery of a sum
of money.4 The Civil Code has adopted the second. Hence, payment,
as it is understood in the Civil Code, means not only the delivery
of money but also the performance, in any other manner, of an
obligation.5
Art. 1233. A debt shall not be understood to have been

paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the
case may be.6
Art. 1234. If the obligation has been substantially per-
formed in good faith, the obligor may recover as though
there had been a strict and complete fulfillment, less dam-
ages suffered by the obligee.7
Art. 1235. When the obligee accepts the performance,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed
fully complied with.8
When Obligation Is Understood Paid or Performed. — As

a consequence of the rule stated in Art. 1233, an obligation to give
3
New provision.
4
3 Castan, 7th Ed., p. 236.
5
Art. 1232, Civil Code.
6
Art. 1157, Spanish Civil Code.
7
New provision.
8
New provision.
231
Art. 1236 OBLIGATIONS
shall be understood to have been paid when the debtor or obligor

has completely delivered the thing which he had obligated himself
to deliver; an obligation to do shall be understood to have been
performed when the obligor has completely rendered the service
which he had obligated himself to render; an obligation not to do
shall be understood to have been complied with when the obligor has
completely refrained from doing that which he had obligated himself
not to do.
The above rule, however, is not absolute in character. It is
subject to the following exceptions:
(1) When the obligation has been substantially performed in
good faith.9 In this case, the obligor may recover as though there has
been a strict and complete fulfillment, less damages suffered by the
obligee.10 The fairness of this rule is evident. In case of substantial
performance, the obligee is benefited. So the obligor should be allowed
to recover as if there has been a strict and complete fulfillment, less
damages suffered by the obligee. This last condition affords a just
compensation for the relative breach committed by the obligor.11
(2) When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest
or objection.12 This rule is based on the principle of estoppel.
There is another instance when an obligation is considered by
some to have been paid and that is when the obligation to give, to do
or not to do is converted into an obligation to indemnify the obligee
or creditor because of breach or nonfulfillment and the indemnity is
finally paid in full.13 Strictly speaking, however, this case falls under
the general rule stated in Art. 1233.
Art. 1236. The creditor is not bound to accept payment

or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is stipulation to the
contrary.
9
10
Ibid.
11
Report of the Code Commission, p. 131.
12
Art. 1235, Civil Code; Joe’s Radio & Electrical Supply vs. Alto Electronics
Corp., 104 Phil. 333.
13
3 Capistrano, Civil Code, 1950 Ed., p. 167.
232
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.14
Art. 1237. Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty.15
Art. 1238. Payment made by a third person who does
not intend to be reimbursed by the debtor is deemed to be a
donation, which requires the debtor’s consent. But the pay-
ment is in any case valid as to the creditor who has accepted
it.16
Persons Who May Pay Obligation. — The following may

pay or perform the obligation: first, the debtor himself or his legal
representative; and second, any third person. The effect in both
cases when the payment is effected in accordance with the requisites
prescribed by law is the extinguishment of the obligation.
Idem; Payment by a third person. — It is evident from the
provisions of Arts. 1236 to 1238 of the Code that a third person,
whether he has an interest in the obligation or not, and whether the
payment was made with the knowledge and consent of the debtor or
not, may pay the obligation. Out of this act expressly recognized by
the law, there are several juridical effects which necessarily follow.
These effects are given in Arts. 1236 to 1237 of the Code.
These rules, however, cannot be applied to the case of a
third person who pays the redemption price in sales with right of
repurchase (pacto de retro). This is so because the vendor a retro is
not a debtor within the meaning of the law.17
14
Art. 1158, Spanish Civil Code, in amended form.
15
16
New provision.
17
15 Gonzaga vs. Garcia, 27 Phil. 7.
233
Arts. 1237-1238 OBLIGATIONS
Gonzaga vs. Garcia

27 Phil. 7
According to the records of this case, Francisco sold a
parcel of land to Martin with right of repurchase. Subsequently,
by virtue of a court judgment rendered against Francisco, the
right of repurchase was purchased by Del Rosario, the judgment
creditor, at an execution sale. Francisco, as judgment debtor,
was unable to redeem the right thus sold. Meanwhile, he paid
the redemption price to the vendee a retro, Martin, without
the knowledge of Del Rosario. Later, Del Rosario sold the right
to the plaintiff Gonzaga. One of the questions that had to be
decided in this case is whether the provision of what is now Art.
1236 of the New Civil Code is applicable or not. The Supreme
Court held:
“Del Rosario was not a debtor. He was under no obligation
to repurchase the land from Martin. He had a right to do so but
whether he exercised this right or not depended upon his own
volition. Article 1158 (now Art. 1236) is not for these reasons
applicable.’’
Idem; id. — Right of creditor. — Under Art. 1158 of the

Spanish Civil Code, the rule was that any person whether he has
an interest in the fulfillment of the obligation or not could compel
the creditor to accept payment. This rule has been changed in the
New Civil Code. The creditor is not bound as a general rule to accept
payment or performance by a third person. The Code Commission
gives the following reasons for the change.
“Under the present law (Art. 1158, Civil Code of Spain)

the creditor cannot refuse payment by a third person, but the
Commission believes that the creditor should have a right to
insist on the liability of the debtor. Moreover, the creditor should
not be compelled to accept payment from a third person whom
he may dislike or distrust. The creditor may not, for personal
reasons, desire to have any business dealings with a third
person; or the creditor may not have confidence in the honesty
of the third person who might deliver a defective thing or pay
with a check which may not be honored.’’18
18
Report of the Code Commission, p. 132.
234
There are, however, two exceptions to the rule that the creditor is
not bound to accept payment or performance by a third person. They
are:
(1) When it is made by a third person who has an interest in
the fulfillment of the obligation,19 such as a joint debtor, guarantor
or surety. Thus, where payment is made by a joint debtor in excess
of what he should pay for the benefit of his co-debtor, such payment
cannot be considered as a payment unduly made under Art. 2154
of the Civil Code, but as one made by a person interested in the
fulfillment of the obligation in accordance with the provision of Art.
1236 of the said Code.20
(2) When there is a stipulation to the contrary.21 In this case,
the creditor is deemed to have waived his right to refuse to deal with
strangers to the obligation.
Idem; id. — Rights of third person. — If a third person
pays the obligation with the knowledge and consent of the debtor,
there are two rights which are available to him. In the first place, he
can recover from the debtor the entire amount which he has paid;22
and in the second place, he is subrogated to all of the rights of the
creditor.23 However, if the payment is made without the knowledge
or against the will of the debtor, there is only one right which is
available to him; he can recover only insofar as the payment has
been beneficial to the said debtor.24
Idem; id.; id. — Right of reimbursement. — Whether the
payment is effected with the knowledge and consent of the debtor
or without his knowledge or even against his will, the third person
who made the payment is entitled to reimbursement. The extent or
amount of recovery, however, is different in either case.
If the payment was effected with the knowledge and consent
of the debtor, the third person can recover from the latter the entire
amount which he has paid.25 Thus, if D is indebted to C for P10,000,
19
Art. 1236, par. 1, Civil Code.
20
Monte de Piedad vs. Rodrigo, 63 Phil. 312.
21
22
23
Art. 1302, No. 2, Civil Code.
24
25
Ibid.
235
and subsequently, when the debt became due and demandable, P,

a third person, paid the entire amount with the knowledge and
consent of D, P can now demand from D the reimbursement of the
entire amount of P10,000.26
If the payment was effected without the knowledge or even
against the will of the debtor, the third person can recover only
insofar as the payment has been beneficial to the latter.27 It is,
therefore, evident that the extent of recovery in this case is much
more limited than when payment is made with the knowledge and
consent of the debtor. The rule is both just and logical. When the
third person pays the debt or obligation without the knowledge
or against the will of the debtor, there is no reason why he can
obligate the debtor to pay more than the amount which the said
debtor would have been legally compelled to pay to the creditor.
Hence, if the debt or obligation has been previously extinguished
totally by any of the modes of extinguishment of obligations, such as
payment, remission, compensation or prescription, the third person
who pays without the knowledge or consent of the debtor would not
be able to recover anything from the latter; if the debt or obligation
has been previously extinguished partially, the third person would
be able to recover only that part of the amount which he has paid
which would correspond to the part of the obligation which has not
been extinguished, because it would be only to that extent that the
payment has been beneficial to the debtor. In both cases, the remedy
of the third person would be to proceed, not against the debtor who
has not been benefited by the payment, but against the creditor who
was unduly paid applying the principle that no person can unjustly
enrich himself at the expense of another.28
It must be noted that from the viewpoint of the debtor, the
provision of the law that the third person or payor “can recover only
insofar as the payment has been beneficial to the debtor,” when made
against his express will, is a defense which may be availed of by the
debtor only and not by the creditor, for it affects solely the rights of
the former. At any rate, in order that the rights of the payor may be
subject to said limitation, the debtor must oppose the payment before
or at the time the same was made, and not subsequent thereto.29
26
See De Guzman vs. Santos, 68 Phil. 371.
27
28
29
RFC vs. Court of Appeals, 50 Off. Gaz. 2467.
236
Idem; id.; id. — Right of subrogation. — If the payment

was effected with the knowledge and consent of the debtor, the third
person who made the payment shall be subrogated to all of the rights
which the creditor could have exercised, not only against the debtor,
but even against third persons. The right is expressly recognized in
Art. 1302 of the Code; it can also be deduced from the provision of
Art. 1237. If the payment, however, was effected without the knowl-
edge or against the will of the debtor, the third person who made the
payment cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or penalty.30
It must be noted that the right of subrogation is not the same
as the right of reimbursement, although it includes the latter.
Subrogation is a right available to the third person or payor, whereby
he is entitled, not only to demand reimbursement from the debtor,
but also to exercise all of the rights which the creditor could have
exercised against the debtor and against third persons, such as those
arising from a mortgage, a guaranty, or a penalty. Reimbursement,
on the other hand, is merely a simple personal action available to
the third person or payor against the debtor to recover from the
latter what he has paid insofar as the payment has been beneficial
to the said debtor.
Problem No. 1 — In 1972, D executed a promissory note

promising to pay to C P10,000 within a period of four years.
The payment of the debt was guaranteed by G. In 1976, P, a
third person, paid the entire amount of the indebtedness with
the knowledge and consent of D. What are the respective rights
and obligations of the parties?
Answer — P shall be subrogated to all of the rights of C,
not only against D, but also against G. This is so, because the
law expressly states that if a third person pays the obligation
with the express or tacit approval of the debtor, he shall be
legally subrogated to all of the rights of the creditor, not only
against the debtor, but even against third persons, be they
guarantors or possessors of mortgages.31 Consequently, P can
demand reimbursement from D of the P10,000 which he had
30
31
Arts. 1302, No. 2, 1303, 1304, Civil Code.
237
paid to C.32 If D cannot pay because of insolvency, he can still

proceed against G for the recovery of the amount.33
Problem No. 2 — If in the above problem, C had condoned
one-half of the obligation in 1975, and subsequently, in 1976,
P, unaware of the partial remission of the indebtedness, paid,
without the knowledge and consent of D, the entire amount of
P10,000 to C, who accepted it, what would be the effect of such
payment upon the rights and obligations of the parties?
Answer — With respect to D, the only right which P has
against him is to recover P5,000, because, it is only to that extent
that he had been benefited by the payment.34 With respect to
G, if D cannot pay the P5,000 because of insolvency, P can no
longer proceed against him, because the payment was made
without the knowledge and consent of D, and consequently, he
cannot be subrogated to the rights of C against G.35 With respect
to C, however, undoubtedly, P can still proceed against him for
the recovery of P5,000, applying the principle that no person can
unjustly enrich himself at the expense of another.36
Idem; id. — Gratuitous payments. — If the payment is

made by a third person who does not intend to be reimbursed by
the debtor, the presumption arises that such payment is a donation.
Therefore, the debtor’s consent is necessary,37 as in the case of the
donee in ordinary donations.38 Once the debtor’s consent is secured,
then the rules on ordinary donations will apply. If such consent,
however, is not secured, the rules stated in Arts. 1236 and 1237 will
still apply. As far as the creditor who has accepted the payment is
concerned, the debtor’s consent is immaterial; the payment is valid
in any case.39
Art. 1239. In obligations to give, payment made by one

who does not have the free disposal of the thing due and
capacity to alienate it shall not be valid, without prejudice
32
33
Arts. 1302, No. 2, 1303, Civil Code.
34
35
36
37
38
Arts. 734, 745, Civil Code.
39
238
to the provisions of Article 1427 under the Title on “Natural

Obligations.’’40
Capacity To Make Payment. — It is, of course, essential that

the person who pays the obligation should have the necessary legal
capacity to effect such payment. This is especially true in obligations
to give. In such case, it is essential for the validity of the payment
that the payor should have the free disposal of the thing due and the
capacity to alienate it. The absence of one or the other will affect the
validity of the payment.
Consequently, if the payment was effected by a person who
does not have the free disposal of the thing due and/or the capacity
to alienate it, as in the case of a minor or an insane person, such
payment is not valid.41 In other words, even if the creditor has already
accepted it, it may still be annulled by a proper action in court at the
instance of the payor or his legal representative, unless it falls within
the purview of the exception expressly provided for in Art. 1427 of
the Code. However, from the viewpoint of the obligation itself, a
certain qualification must be made. If an incapacitated person offers
to pay the obligation and the creditor refuses to accept the payment
because he is aware of the payor’s incapacity, the obligation still
subsists. Such creditor cannot be compelled to accept the payment;
as a result, consignation of the thing due is not possible.
Art. 1240. Payment shall be made to the person in whose

favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it.42
To Whom Payment Must Be Made. — Payment shall be

made, as a general rule, to (1) the person in whose favor the obligation
has been constituted, or (2) his successor in interest, or (3) any
person authorized to receive it. Under the old Code, the second was
not included in the enumeration; in spite of the omission, however,
the first, according to Manresa, includes not only the person who
was the creditor at the time of the constitution of the obligation, but
also the person who is the creditor at the time of payment. This is
40
41
42
239
so, because, although the obligation was not constituted in favor of

the latter, in the last analysis, it was constituted for his benefit.43
In order to resolve all doubts with respect to this point, the Code
Commission has added the second (successor-in-interest) to the
original provision of the Spanish Civil Code. The third, on the other
hand, refers to any person expressly or impliedly authorized by the
creditor himself or by law.44
Idem; Persons authorized to receive payment. — As
stated in the preceding section, the person authorized to receive the
payment refers not only to a person authorized by the creditor, but
also to a person authorized by law to do so. Thus, payment made
to a guardian, or to the executor or administrator of the estate of
a deceased person, or to the assignee or liquidator of a partnership
or corporation is payment made to a person authorized by law to
receive it and, consequently, is valid.45
The above interpretation of the phrase “any person authorized
to receive payment is best illustrated by those cases decided by our
courts after liberation involving the validity of payments made to
the Bank of Taiwan during the war. It must be remembered that
during the occupation, enemy properties (properties belonging
to nationals of countries at war with Japan) were sequestered by
order of the Commander-in-Chief of the Japanese Imperial Forces
in the Philippines in accordance with the theory that a belligerent
occupant has the power to take by sequestration not only public
property but also private property of the enemy in an occupied
territory. These properties were given to the Enemy Property
Custodian for liquidation with the Bank of Taiwan as depository.
The question then is — if the debtor had incurred an indebtedness
from a certain enemy bank before the war and payment was made to
the Bank of Taiwan as liquidator of the said bank at any time during
the Japanese occupation, is the payment valid? This question was
answered in the affirmative by the Supreme Court for the first time
in the leading case of Haw Pia vs. China Banking Corporation.46 In
said case, the Court held:
43
8 Manresa, 5th Ed., Bk 1, p. 536; Tuazon and San Pedro vs. Zamora & Sons,
2 Phil. 305.
44
Haw Pia vs. China Banking Corp., 80 Phil. 604.
45
8 Manresa, 5th Ed., Bk. 1, p. 537.
46
80 Phil. 604.
240
“It having been shown x x x that the Japanese Military

Forces had power to sequestrate and impound the assets or
funds of the China Banking Corporation, and for that purpose
to liquidate it by collecting the debts due to said bank from its
debtors, and paying its creditors, and therefore to appoint the
Bank of Taiwan as liquidator with the consequent authority to
make the collection, it follows evidently that the payments by
the debtors to the Bank of Taiwan of their debts to the China
Banking Corporation have extinguished their obligation to
the latter. Said payments were made to a person, the Bank of
Taiwan, authorized to receive them in the name of the bank
credit or under Article 1162 (now Art. 1240) of the Civil Code,
because it is evident that the words ‘a person authorized to
receive it,’ as used therein, means not only a person authorized
by the same creditor but also a person authorized by law to do
so.’’47
Idem; id. — Payment to unauthorized persons. — If

the payment is made to a person other than those enumerated in
Art. 1240, it shall not be valid. Thus, where an electric plant was
sold and delivered by the plaintiff to the defendant and the latter
subsequently paid the purchase price, without the knowledge of the
former, to a certain person who represented himself as the plaintiff’s
agent, it was held that the defendant had no right to assume that
such person was authorized to receive the money; consequently, said
defendant made the payment at his own risk and can still be held
liable for the purchase price.48 This conclusion is strengthened by the
fact that in agency, an assumption of authority to act as agent for
another of itself challenges inquiry.49 Similarly, where the decedent
during his lifetime had assigned the right to collect a certain credit to
his children by a prior marriage, and subsequently, the debtor, with
knowledge of the assignment, paid the debt to the decedent’s second
wife, it was held that such payment is void on the ground that it was
made to a person not authorized to receive the payment.50 The same
conclusion can also be applied to the act of the vendee in depositing
the balance of the purchase price at the Philippine National Bank in
47
To the same effect: Everett Steamship Corp. vs. Bank of P.I., 47 Off. Gaz. 165;
Hodges vs. Gay, 48 Off. Gaz. 136; Winship vs. Phil. Trust Co., 90 Phil. 744; Bay Boul-
evard vs. Sycip, 92 Phil. 508.
48
Keleer Electric Co. vs. Rodriguez, 44 Phil. 19.
49
Ormachea vs. Triliana, 13 Phil. 194.
50
Crisol vs. Claveron, CA, 3 Off. Gaz. 3734.
241
the name of the vendor when he could not locate the latter because
of the conditions then existing in January, 1945, when the payment
became due.51 Although the payment is not valid because it is not
made to a person authorized to receive it in accordance with the
provision of Art. 1240 of the Code, nevertheless it is clear that the
vendee had acted in good faith; he cannot, therefore, be said to
have incurred in delay; consequently, the vendor cannot ask for the
rescission of the contract.52
Idem; id. — Exceptions. — There are, however, two excep-
tions to the rule that payment made to a person other than those
enumerated in Art. 1240 is not valid. They are: first, payment made
to a third person, provided that it has redounded to the benefit of the
creditor,53 and second, payment made to the possessor of the credit,
provided that it was made in good faith.54
Art. 1241. Payment to a person who is incapacitated to

administer his property shall be valid if he has kept the thing
delivered, or insofar as the payment has been beneficial to
him.
Payment made to a third person shall also be valid
insofar as it has redounded to the benefit of the creditor. Such
benefit to the creditor need not be proved in the following
cases:
(1) If after the payment, the third person acquires the
creditor’s rights;
(2) If the creditor ratifies the payment to the third
person;
(3) If by the creditor’s conduct, the debtor has been led
to believe that the third person had authority to receive the
payment.55
Payment to Incapacitated Persons. — According to the
above article, if payment is made to a person who is incapacitated
51
Arcache vs. Lizares & Co., 91 Phil. 348.
52
Ibid.
53
54
55
242
EXTINGUISHMENT OF OBLIGATIONS Art. 1241
to administer his property, the payment is considered valid: (1) if

he has kept the amount or thing paid or delivered, or (2) insofar
as the payment has been beneficial to him. It is evident that if the
incapacitated person has kept or preserved the amount or thing
paid or delivered, the act is beneficial to him; hence, the first case is
actually included in the second.
When the law says that the payment, in order to be valid, must
have been beneficial to the incapacitated person, it does not literally
mean that the amount or thing paid or delivered should have been
invested by such incapacitated person or used for expenses. The
payment is beneficial to him when that which has been paid or
delivered is applied or spent for some rational, necessary or useful
purpose for his benefit. Otherwise, the payment is not valid, and as
a consequence, the debtor may be made to pay again either at the
instance of the incapacitated person upon recovering or acquiring
capacity or at the instance of the legal representative of such person
during such incapacity.56
It must be noted that the rule is applicable only to obligations
to give.
Payment to Third Persons. — If the payment is made to
a third person, the rule is that it shall be valid insofar as it has
redounded to the benefit of the creditor.57 This rule constitutes an
exception to the general rule stated in Art. 1240. As in the case of
the preceding rule, it is applicable only to obligations to give.
It must be observed, however, that in order that the payment
shall be valid, it is essential that it should have redounded to the
benefit of the creditor. Consequently, the rule cannot be invoked
without conclusive proof of the benefit to the creditor, especially
when there is not the slightest evidence that the third person to
whom payment was made had any claim to the creditor’s right.58 It
cannot, therefore, be presumed except in the three cases specified
in the second paragraph of Art. 1241. Thus, even granting that the
payment to a third person was made through mistake and in good
faith, the debtor can still be held liable. If it becomes impossible
for such debtor to recover what was unduly paid, any loss resulting
56
57
58
Panganiban vs. Cuevas, 7 Phil. 477.
243
therefrom shall be borne by him unless there is a stipulation to

the contrary, or unless the creditor himself was responsible for the
wrongful payment.59
Art. 1242. Payment made in good faith to any person in

possession of the credit shall release the debtor.60
Payment to Possessors of Credit. — It must be noted that
the possession referred to in the above article is the possession of
the credit, not the possession of the document evidencing it. Thus,
the article may be applied to the payment made to the original
creditor by a debtor who is not aware of the fact that the credit has
already been assigned to another person. It may also be applied
to the payment made to an assignee, although the assignment is
afterwards rescinded or annulled. It must always, of course, be
indispensable that the payment should have been made in good
faith. If this requisite is present, then the payment shall release the
debtor. In such case, the remedy of the creditor would be to proceed
against the possessor of the credit to whom payment was improperly
made.61
It must be noted that the rule stated in the article under
discussion is another exception to the general rule stated in Art.
1240 and that it is applicable only to obligations to give.
Art. 1243. Payment made to the creditor by the debtor

after the latter has been judicially ordered to retain the debt
shall not be valid.62
Payment After Judicial Order of Retention. — According
to the above article, if the debtor pays the creditor after he has
been judicially ordered to retain the debt, such payment shall not
be valid. Consequently, after the debtor has received the notice of
attachment or garnishment, payment can no longer be made to the
creditor whose credit has been attached to satisfy a judgment in
favor of another person. Such payment must be made to the proper
59
Ibid.
60
61
8 Manresa, 5th Ed., Bk. 1, pp. 545-546.
62
244
officer of the court issuing the writ of attachment or garnishment in

conformity with the provisions of the Rules of Court.63
Art. 1244. The debtor of a thing cannot compel the

creditor to receive a different one, although the latter may
be of the same value as, or more valuable than that which is
due.
In obligations to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance against
the obligee’s will.64
Art. 1245. Dation in payment, wherein property is
alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law of sales.65
Art. 1246. When the obligation consists in the delivery
of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot
demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obliga-
tion and other circumstances shall be taken into consider-
ation.66
What Must Be Paid. — The two rules stated in Art. 1244

are logical consequences of the nature of specific or determinate
obligations.
According to the first paragraph, if the obligation is to give
and the object is a thing which is specific or determinate, the debtor
cannot fulfill his obligation by delivering a thing which is different
from that which is due. This is so although the thing which is
delivered may be of the same value or even more valuable than that
which is due. According to the second paragraph, if the obligation
is to do or not to do and the object is an act or forbearance which is
specific or determinate, the obligor cannot fulfill his obligation by
substituting another act or forbearance. In both cases, the creditor
or obligee cannot be compelled to accept the delivery of the thing or
63
Sec. 8, Rule 57, New Rules of Court.
64
65
New provision.
66
245
the substitution of the act or forbearance. However, if he accepts the

delivery or substitution, such acceptance shall give to the delivery
or substitution the same effect as a fulfillment or performance of the
obligation.
Idem; Effect of dation in payment. — However, if the
creditor and the debtor enter into an agreement by virtue of which
a certain property is alienated by the debtor to the creditor as the
equivalent of the performance of the obligation, the law on sales
shall then govern.67 It is, therefore, evident that dación en pago or
dation in payment constitutes an exception to the rule stated in Art.
1244.
Dation in payment (dación en pago) is defined as the transmis-
sion of the ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation.68 According
to the modern doctrine, in dacion en pago there is in reality an objec-
tive novation of the previous obligation effected by a change of the
object thereof. Our Civil Code, however, has adopted the traditional
concept of dación en pago as a special form of payment which is
most analogous to a contract of sales following the opinion of the Su-
preme Court of Spain (Sentencias, Jan. 9, 1916 and Aug. 10, 1918)
and also of Spanish commentators. Hence, once there is an agree-
ment between the debtor and the creditor with regard to the thing
which must be delivered by the former to the latter as the equivalent
of the performance of the obligation, the law on sales shall govern,
with the credit as the price of the thing.69 Thus, if D executed a prom-
issory note in 1966 promising to pay to C P5,000 within four years
from the execution of the note, and in 1969 when the obligation be-
came demandable the two entered into an agreement by virtue of
which D shall deliver his automobile to C as the equivalent of the
performance of the obligation, the effect is the transformation of the
previous contract into a contract of sale with the automobile as the
object and the loan of P5,000 as the purchase price.
Idem; Effect if object is generic. — The rule stated in Art.
1246 is based on equity and justice. If there is no precise declaration
in the obligation with regard to the quality and circumstances of the
67
68
69
Ibid., pp. 610-611.
246
indeterminate thing which constitutes its object, the creditor cannot

demand a thing of the best quality; neither can the debtor deliver a
thing of the worst quality. The obligation can only be fulfilled by the
delivery of a thing which is neither of superior nor inferior quality.
Hence, it becomes actually a question of relative appreciation; if there
is disagreement between the parties, the law steps in and declares
whether the obligation has been complied with or not, depending
upon the purpose of such obligation and other circumstances.70
Art. 1247. Unless it is otherwise stipulated, the extraju-

dicial expenses required by the payment shall be for the ac-
count of the debtor. With regard to judicial costs, the Rules
of Court shall govern.71
Expenses of Payment. — To the rules specified in the above
article we must add the supplementary rule stated in the fourth
paragraph of Art. 1251 that if the debtor changes his domicile in
bad faith or after he has incurred in delay, the additional expenses
shall be borne by him.
Art. 1248. Unless there is an express stipulation to that

effect, the creditor cannot be compelled partially to receive
the prestations in which the obligation consists. Neither may
the debtor be required to make partial payments.
However, when the debt is in part liquidated and in
part unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting for the
liquidation of the latter.72
Character of Payment. — According to Castan, in order that
the prestation which constitutes the object of the obligation may be
considered as paid or performed, three conditions or characteristics
must, as a general rule, concur. They are: identity, completeness
and indivisibility. The first refers to the rule that only the prestation
agreed upon and no other must be complied with;73 the second refers
to the rule that the thing or service in which the obligation consists
70
Ibid., pp. 552-553.
71
72
73
Arts. 1244, 1245, 1246, 1249, Civil Code.
247
must be completely delivered or rendered;74 and the third refers to

the rule that the payment or performance must be indivisible.75
It must be noted, however, that Art. 1248 is applicable only
to an obligation where there is only one debtor and one creditor;
it is not applicable to one where there is plurality of debtors and
creditors. The latter is governed by different rules which we have
already taken up in a previous chapter.76 Neither is it applicable to
one where the different prestations are subject to different terms
and conditions. Hence, even when there is only one debtor and only
one creditor, the rule stated in the article is only in the nature of
a general rule. There are three exceptions. They are: first, when
the obligation expressly stipulates the contrary; second, when the
different prestations which constitute the objects of the obligation
are subject to different terms and conditions; and third, when the
obligation is in part liquidated and in part unliquidated.77
Art. 1249. The payment of debts in money shall be made

in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in
the Philippines.
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.78
Rule in Monetary Obligations. — According to the first

paragraph of Art. 1249, in monetary obligations, payment shall be
made in the currency stipulated. If it is not possible to pay in the
currency stipulated, then the payment shall be made in legal tender
of the Philippines. Although the article does not expressly say so, it
is evident that if there is no stipulation regarding the currency in
74
Arts. 1233, 1234, 1235, Civil Code.
75
76
Arts. 1207, et seq., Civil Code.
77
78
248
which the payment shall be made, the payment shall still be made
in legal tender of the Philippines.
Thus, the Supreme Court in the case of Zagala vs. Jimenez, it
held that “a judgment awarding an amount in U.S. dollar may be
paid with its equivalent amount in local currency in the conversion
rate prevailing at the time of payment. If the parties cannot agree
on the same, the trial court should determine such conversion rate.
Needless to say, the judgment debtor may simply satisfy said award
by paying in full the amount in U.S. dollars. Therefore, when the
petitioners, in this case, filed their motion to fix the peso value
of the judgment in dollars, they only intended to exercise a right
granted to them by the present jurisprudence — that the trial court
shall determine or fix the conversion rate prevailing at the time of
payment.’’
Idem; Effect of Rep. Act Nos. 529 and 4100. — However, in
order to assure the stability of the Philippine currency the Congress
passed a law entitled “An Act To Assure the Uniform Value of
Philippine Coins and Currency” (Rep. Act No. 529) which took effect
on June 16, 1949. Under this Act, the rule in the Civil Code that
payment of debts in money shall be made in the currency stipulated
was completely abrogated. Thus, Sec. 1 of this Act provides:
“Every provision contained in, or made with respect to,

any obligation which provision purports to give the obligee the
right to require payment in gold or in a particular kind of coin
or currency other than Philippine currency or in an amount of
money of the Philippines measured thereby, be as it is hereby
declared against public policy, and null, void and of no effect.
x x x Every obligation heretofore or hereafter incurred x x x
shall be discharged upon payment in any coin or currency which
at the time of payment is legal tender for public and private
debts: Provided, That, if the obligation was incurred prior to
the enactment of this Act and required payment in a particular
coin or currency, it shall be discharged in Philippine currency
measured at the prevailing rates of exchange at the time the
obligation was incurred except in case of a loan made in a foreign
currency stipulated to be payable in the same currency in which
case the rate of exchange prevailing at the time of the stipulated
date of payment shall prevail.’’79
79
See Eastboard Navigation Co. vs. Ysmael Co., 102 Phil. 1; Arrieta vs. Nat. Rice
and Corn Corp., 10 SCRA 79.
249
Later on, in order to encourage foreign investments and to

cope with the requirements of international trade and banking
transactions, Rep. Act No. 4100 was enacted amending the above Act.
This law took effect on June 19, 1964. According to this Act, the law
prohibiting stipulations in domestic monetary obligations purporting
to give to the obligee the right to require payment in currency other
than Philippine currency does not apply to: (a) transactions where
the funds involved are the proceeds of loans and investments made
directly or indirectly, through bona fide intermediaries or agents,
by foreign governments, their agencies and instrumen-talities, and
international financial and banking institutions so long as the funds
are identifiable, as having emanated from the sources enumerated
above; (b) transactions affecting high-priority economic projects
for agricultural, industrial and power development as may be
determined by the National Economic Council which are financed by
or through foreign funds; (c) foreign exchange transactions entered
into between banks or between banks and individuals or juridical
persons; and (d) import-export and international banking, financial
investment and industrial transactions.80
Problem — “S,” an American resident of Manila, about

to leave on a vacation, sold his car to “B” for US$2,000.00,
the payment to be made ten days after delivery to ‘’X,’’ a third
party depositary agreed upon, who shall deliver the car to “B’’
upon receipt of “X” of the purchase price. It was stipulated that
ownership is retained by “S’’ until delivery of the car to “X.” Five
days after delivery of the car to “X,” it was destroyed in a fire
which gutted the house of “X,” without the fault of either “X” or
“B.’’
Question No. 1 — Is buyer “B’’ still legally obligated to pay
the purchase price? Explain. (1981 Bar Problem)
Answer — Yes, buyer “B” is still legally obligated to pay
the purchase price. It must be observed that “S” had already
delivered the car to “X,” the third party depositary or bailee.
It was agreed that ownership is retained by “S” until delivery
to “X.” Therefore, in effect, there was already a transfer of the
right of ownership over the car to “B.” Consequently, “B’’ shall
assume the fortuitous loss of the car. As a matter of fact, even
if it was agreed that “S’’ shall retain the ownership of the car
80
Sec. 1, Rep. Act No. 4100.
250
until the purchase price has been paid by “B,” the end result
will still be the same. Since, evidently, the purpose is to secure
performance by the buyer of his obligation to pay the purchase
price, by express mandate of the law, the fortuitous loss of the
car shall be assumed by “B.’’
(Note: The above answer is based on Art. 1504 of the Civil
Code.)
Question No. 2 — May seller “S’’ demand payment in U.S.
dollar? Why? (1981 Bar Problem)
Answer — The seller “S’’ cannot demand payment in U.S.
dollars. According to the law, an agreement that payment shall
be made in currency other than Philippine currency is void
because it is contrary to public policy. That does not mean,
however, that “S” cannot demand payment from “B.” He can
demand payment, but not in American dollars. Otherwise,
there would be unjust enrichment at the expense of another.
Payment, therefore, should be made in Philippine currency.
(Note: The above answer is based on R.A. No. 529 and on
Ponce vs. Court of Appeals, 90 SCRA 533.)
Idem; Meaning of legal tender. — Legal tender, within the

meaning of Art. 1249 of the Code, refers to such currency which may
be used for the payment of all debts, whether public or private.81
Under our law, the legal tender of the Philippines would be all notes
and coins issued by the Central Bank.82
Idem; Payments with Japanese military notes. — One of
the problems which confronted our courts after liberation was the
determination of the validity of payments made during the Japanese
occupation of pre-war debts which were then due in depreciated
Japanese military notes. Considering that some of these payments
were made during the last months of the occupation when these
notes had depreciated so much in value, a just solution based on the
laws then in force was called for.
Evidently, if the pre-war obligation contains a stipulation to
the effect that payment shall be made in a certain currency, such
as American or English currency, the rule is that the payment, in
order to be valid, must be made in the currency stipulated; hence,
81
Sec. 54, Rep. Act No. 265; Sec. 1, Rep. Act No. 529.
82
Ibid.
251
if payment was made in Japanese military notes and the creditor

refused to accept it, it would not be valid even if it was followed by
consignation.83
However, if the pre-war obligation contains a stipulation to the
effect that payment shall be made in the currency which is legal
tender in the Philippines at the time when payment is to be made
or if such obligation is silent with respect to the currency in which
the payment shall be made, payment in Japanese military notes is
valid and effective. In the words of the Supreme Court: “A payment
made by a debtor during the enemy occupation of a pre-war debt or
obligation with Japanese notes and accepted by the creditor, is valid
and extinguishes the former’s obligation.’’84
The doctrine is applicable irrespective of the attitude of the
creditor.85 Thus, it has been held that a payment made by a debtor and
accepted by the creditor during the enemy occupation “in compliance
with the orders of the military authorities to reopen banks and
accept the military notes as legal tender in payment of debts, issued
in the exercise of their authority as military occupants, cannot be
considered as made under a collective and general duress, because
an act done pursuant to the laws or orders of competent authorities
can never be regarded as executed involuntarily, or under duress, or
illegitimate constraint, or compulsion that invalidates the act.”86
The validity of such payments is, of course, based on the fact
that such military notes were legal tender in the Philippines at the
time such payments were made.87 As a matter of fact, Japanese
military notes were the only money in circulation in the Philippines
during the latter part of the occupation; they were not only intended
to be the legal tender in the Philippines, they were intended to be
circulated exclusively therein. In this sense, it is evident that they
were the Philippine currency or money during such period.88 Indeed,
83
Legarda vs. Carrascoso, 81 Phil. 450.
84
Hillado vs. De la Costa, 46 Off. Gaz. 5472. To the same effect: Haw Pia vs.
China Banking Corp., 80 Phil. 604; Del Rosario vs. Sandico, 47 Off. Gaz. 2866; Sori-
ano vs. Abalos, 47 Off. Gaz. 2894.
85
Hernaez vs. McGrath, 48 Off. Gaz. 2868.
86
Phil. Trust Co. vs. Araneta, 46 Off. Gaz. 4254; Larraga vs. Bañez, 47 Off. Gaz.
696; Compania General de Tabacos vs. Araneta, 96 Phil. 971.
87
Haw Pia vs. China Banking Corp., 80 Phil. 604.
88
Valdeabella vs. Marquez, 48 Off. Gaz. 719.
252
judicial notice must be taken of the fact that in 1943, they had as
much purchasing power, if not more, than the victory notes of 1945
— at least as regards local foodstuffs and products.89
Idem; Payments with emergency notes. — What had been
stated regarding payments with Japanese military notes can also
be applied to a certain extent to payments made with emergency
notes which were issued either by the Commonwealth government
during the invasion or by recognized guerrilla governments during
the occupation. This is so because undoubtedly these emergency
notes must be considered as legal tender but only in those places
which were under the control of either the Commonwealth or of the
guerrilla government issuing the notes.90 Consequently, where the
defendant borrowed P3,130 in emergency notes from the plaintiff
in 1942, he cannot now contend that the sum of money delivered
to him consisted of valueless notes which were not legal tender.
These emergency notes which the officers of the Commonwealth
were authorized by President Quezon to issue before he left the
Philippines were then valid and legal tender.91
Idem; Payments with negotiable paper. — Since negotiable
papers or mercantile documents, such as promissory notes payable
to order or bills of exchange, are not legal tender, it is logical that the
delivery of such papers or documents by the debtor to the creditor
shall not produce the effect of payment. Consequently, if the debtor
tenders a check to the creditor as payment of an obligation, the latter
has a perfectly valid right to refuse it, even if the check may be good.
In such case, the tender shall not produce the effect of payment.92 This
is true even if the refusal of the creditor is followed by consignation
whether the check is an ordinary check or a manager’s check.93
89
Aurreocoecha vs. Kabankalan Sugar Co., 81 Phil. 476.
90
Rep. Act Nos. 22 and 368, applied in Donasco vs. Serra, CA, G.R. No. 7046-R,
Sept. 30, 1953.
91
Phil. National Bank vs. Teves, 100 Phil. 491.
92
Belisario vs. Natividad, 60 Phil. 156; Phil. National Bank vs. Relativo, 92 Phil.
203.
93
Villanueva vs. Santos, 67 Phil. 648; Cuaycong vs. Ruiz, 47 Off. Gaz. 6125; CFI
of Tarlac vs. Court of Appeals, 91 Phil. 912; Hidalgo vs. Heirs of Tuason, 104 Phil.
336.
253
Hidalgo vs. Heirs of Tuazon, Inc.

104 Phil. 336
On August 31, 1943, plaintiffs obtained a loan of P100,000

from the defendant and to guarantee the payment of said
loan, plaintiffs constituted a mortgage on four parcels of land
belonging to them. It was agreed that the debtors may pay their
indebtedness at any time before the expiration of the term of
the contract subject, however, to the following conditions: (1)
if payment is made before the termination of the hostilities
between America and Japan, the indebtedness should be paid
with an increase of 100%; and (2) if payment is made thereafter,
30 day-notice in advance should be given to defendant
corporation. On Dec. 6, 1944, plaintiff Eduardo B. Hidalgo sent
a check to defendant for the sum of P101,673.50, representing
payment of his share in the obligation, but the same was
rejected by defendant for the reason that such mode of payment
was contrary to their agreement. On Dec. 29, 1944, plaintiff
Felipe R. Hidalgo sent another check for the same amount to
the defendant. The check was received by Nicasio A. Tuason.
From this date no further action was taken, and when liberation
came, plaintiffs brought this action in the Court of First Instance
of Manila praying that the defendant be ordered to execute a
document releasing them from their obligation and cancelling
the mortgage executed by them. The defendant answered that
notwithstanding the express provisions of the mortgage, said
loan shall not be paid except in genuine Philippine currency
after the war. After trial, the court rendered judgment in favor
of the plaintiffs. Hence, the defendant appealed. The question
now is whether the obligation has already been paid or not. The
Supreme Court held:
“With regard to the draft tendered by plaintiff Eduardo
Hidalgo to defendant which was rejected by the latter, the same
did not ripen into payment because of such rejection. The remedy
of Hidalgo was to make a consignation thereof as required by
law and give notice thereof to defendant. Such was not done
and so the tender of payment became ineffective. With regard to
the draft which plaintiff Felipe Hidalgo tendered to defendant,
it is true that the same was accepted by Nicasio Tuason, but
such tender cannot also have the effect of payment for under the
law payment made in check or draft has the effect of payment
only when actually cashed. There is no showing that the draft
has been cashed. Nor is there a showing that it was impaired
through the fault of defendant. Therefore, plaintiffs are still
indebted to defendant and unless they pay the same they cannot
254
ask for the cancellation of their mortgage. Considering however

that the indebtedness may be wholly or partially discharged
even before the termination of hostilities between America and
Japan, plaintiffs can only be made to pay the same subject to
conversion under the Ballantyne scale of values pursuant to a
long line of decisions of this court.”
Attention, however, must be called to the effect of Section 63 of

the Central Bank Act. This is very well illustrated in the following
case:
New Pacific Timber & Supply Co. vs. Seneris

101 SCRA 686
A petition for certiorari with preliminary injunction to

annul and/or modify the order of the Court of First Instance
of Zamboanga City (Branch II) dated August 28, 1975 denying
petitioner’s Ex-Parte Motion for Issuance of Certificate of
Satisfaction of Judgment.
Herein petitioner is the defendant in a complaint for
collection of a sum of money filed by the private respondent.
On July 19, 1974, a compromise judgment was rendered by the
respondent Judge in accordance with an amicable settlement
entered into by the parties the terms and conditions of which,
are as follows:
“(1) That defendant will pay to the plaintiff the amount
of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6%
interest per annum to be reckoned from August 25, 1972;
“(2) That defendant will pay to the plaintiff the amount
of Six Thousand Pesos (P6,000.00) as attorney’s fees for which
P5,000.00 had been acknowledged received by the plaintiff
under Consolidated Bank and Trust Corporation Check No.
16-135022 amounting to P5,000.00 leaving a balance of One
Thousand Pesos (P1,000.00);
“(3) That the entire amount of P54,500.00 plus interest,
plus the balance of P1,000.00 for attorney’s fees will be paid by
defendant to the plaintiff within five months from today, July
19, 1974; and
“(4) Failure on the part of the defendant to comply with
any of the above conditions, a writ of execution may be issued by
this Court for the satisfaction of the obligation.”
255
For failure of the petitioner to comply with his judgment

obligation, the respondent Judge, upon motion of the private
respondent, issued an order for the issuance of a writ of
execution on December 21, 1974. Accordingly, writ of execution
was issued for the amount of P63,130.00 pursuant to which, the
Ex-Officio Sheriff levied upon the following personal properties
of the petitioner, to wit:
(1) Unit American Lathe 24”
(1) Unit American Lathe 18” Cracker Wheeler
(1) Unit Rockford Shaper 24’’
and set the auction sale thereof on January 15, 1975. However,
prior to January 15, 1975, petitioner deposited with the Clerk of
Court, Court of First Instance, Zamboanga City, in his capacity
as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00
for the payment of the judgment obligation, consisting of the
following:
1. P50,000.00 in Cashier’s Check No. S-314361 dated
January 3, 1975 of the Equitable Banking Corporation; and
2. P13,130.00 in cash.
In a letter dated January 14, 1975, to the Ex-Officio
Sheriff, private respondent through counsel, refused to accept
the check as well as the cash deposit. In the same letter, private
respondent requested the scheduled auction sale on January
15, 1975 to proceed if the petitioner cannot produce the cash.
However, the scheduled auction sale at 10:00 a.m. on January
15, 1975 was postponed to 3:00 o‘clock p.m. of the same day
due to further attempts to settle the case. Again, the scheduled
auction sale that afternoon did not push through because of a
last ditch attempt to convince the private respondent to accept
the check. The auction sale was then postponed to the following
day, January 16, 1975 at 10:00 o’clock a.m. At about 9:15 a.m.
on January 16, 1975, a certain Mr. Tañedo representing the
petitioner appeared in the office of the Ex-Officio Sheriff and the
latter reminded Mr. Tañedo that the auction sale would proceed
at 10:00 o’clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado,
both representing the petitioner requested the Ex-Officio Sheriff
to give them fifteen minutes within which to contact their lawyer
which request was granted. After Mr. Tañedo and Mr. Librado
failed to return, counsel for private respondent insisted that the
sale must proceed and the Ex-Officio Sheriff proceeded with the
auction sale. In the course of the proceedings, Deputy Sheriff
Castro sold the levied properties item by item to the private
256
respondent as the highest bidder in the amount of P50,000.00.

As a result thereof, the Ex-Officio Sheriff declared a deficiency
of P13,130.00. Thereafter, on January 16, 1975, the Ex-Officio
Sheriff issued a “Sheriff’s Certificate of Sale” in favor of the
private respondent, Ricardo Tong, married to Pascuala Tong for
the total amount of P50,000.00 only. Subsequently, on January
17, 1975, petitioner filed an ex-parte motion for issuance of
certificate of satisfaction of judgment. This motion was denied
by the respondent Judge in his order dated August 28, 1975.
In view thereof, petitioner now questions said order by way of
the present petition alleging in the main that said respondent
Judge capriciously and whimsically abused his discretion in not
granting the motion for issuance of certificate of satisfaction of
judgment for the following reasons: (1) that there was already
a full satisfaction of the judgment before the auction sale was
conducted with the deposit made to the Ex-Officio Sheriff in
the amount of P63,000.00 consisting of P50,000.00 in Cashier’s
Check and P13,130.00 in cash; and (2) that the auction sale was
invalid for lack of proper notice to the petitioner and its counsel
when the Ex-Officio Sheriff postponed the sale from January
15, 1975 to January 16, 1975 contrary to Section 24, Rule 39
of the Rules of Court. On November 10, 1975, the Court issued
a temporary restraining order enjoining the respondent Ex-
Officio Sheriff from delivering the personal properties subject
of the petition to Ricardo A. Tong in view of the issuance of the
“Sheriffs Certificate of Sale.”
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as
to whether or not the private respondent can validly refuse
acceptance of the payment of the judgment obligation made by
the petitioner consisting of P50,000.00 in Cashier’s Check and
P13,130.00 in cash which it deposited with the Ex-Officio Sheriff
before the date of the scheduled auction sale. In upholding
private respondent’s claim that he has the right to refuse
payment by means of a check, the respondent Judge cited the
following:
Section 63 of the Central Bank Act:
“Sec. 63. Legal Character. — Checks representing

deposit money do not have legal tender power and their
acceptance in payment of debts, both public and private,
is at the option of the creditor: Provided, however, That a
check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the
257
creditor in cash in an amount equal to the amount credited

to his account.”
Article 1249 of the New Civil Code:
“Art. 1249. The payment of debts in money shall be

made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.’’
Likewise, the respondent Judge sustained the contention
of the private respondent that he has the right to refuse payment
of the amount of P13,130.00 in cash because the said amount is
less than the judgment obligation, citing the following Article of
the New Civil Code:
“Art. 1248. Unless there is an express stipulation to
that effect, the creditor cannot be compelled partially to
receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial
payment.
However, when the debt is in part liquidated and
in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without
waiting for the liquidation of the latter.”
It is to be emphasized in this connection that the check
deposited by the petitioner in the amount of P50,000.00 is
not an ordinary check but a Cashier’s Check of the Equitable
Banking Corporation, a bank of good standing and reputation.
As testified to by the Ex-Officio Sheriff with whom it has been
deposited, it is a certified crossed check. It is a well-known
and accepted practice in the business sector that a Cashier’s
Check is deemed as cash. Moreover, since the said check had
been certified by the drawee bank by the certification, the funds
represented by the check are transferred from the credit of the
maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank,
with rights and duties of one in such situation. Where a check
is certified by the bank on which it is drawn, the certification
258
is equivalent to acceptance. Said certification “implies that

the check is drawn upon sufficient funds in the hands of the
drawee, that they have been set apart for its satisfaction, and
that they shall be so applied whenever the check is presented
for payment. It is an understanding that the check is good then,
and shall continue to be good, and this agreement is as binding
on the bank as its notes in circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation it
can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money.’’ When the
holder procures the check to be certified, “the check operates as
an assignment of a part of the funds to the creditors.” Hence, the
exception to the rule enunciated under Section 63 of the Central
Bank Act to the effect “that a check which has been cleared
and credited to the account of the creditor shall be equivalent
to a delivery to the creditor in cash in an amount equal to
the amount credited to his account” shall apply in this case.
Considering that the whole amount deposited by the petitioner
consisting of Cashier’s Check of P50,000.00 and P13,130.00 in
cash covers the judgment obligation of P63,000.00 as mentioned
in the writ of execution, then, We see no valid reason for the
private respondent to have refused acceptance of the payment
of the obligation in his favor. The auction sale, therefore, was
uncalled for. Furthermore, it appears that on January 17, 1975,
the Cashier’s Check was even withdrawn by the petitioner and
replaced with cash in the corresponding amount of P50,000.00 on
January 27, 1975 pursuant to an agreement entered into by the
parties at the instance of the respondent Judge. However, the
private respondent still refused to receive the same. Obviously,
the private respondent is more interested in the levied properties
than in the mere satisfaction of the judgment obligation. Thus,
petitioner’s motion for the issuance of a certificate of satisfaction
of judgment is clearly meritorious and the respondent Judge
gravely abused his discretion in not granting the same under
the circumstances.
In view of the conclusion reached in this instance, We find
no more need to discuss the ground relied in the petition.
It is also contended by the private respondent that
appeal and not a special civil action for certiorari is the proper
remedy in this case, and that since the period to appeal from
the decision of the respondent Judge has already expired, then,
the present petition has been filed out of time. The contention is
untenable. The decision of the respondent Judge in Civil Case
No. 250 (166) has long become final and executory and so, the
259
same is not being questioned herein. The subject of the petition

at bar as having been issued in grave abuse of discretion is the
order dated August 28, 1975 of the respondent Judge which
was merely issued in execution of the said decision. Thus, even
granting that appeal is open to the petitioner, the same is not
an adequate and speedy remedy for the respondent Judge had
already issued a writ of execution.
WHEREFORE, in view of all the foregoing, judgment is
hereby rendered:
1. Declaring as null and void the order of the respondent
Judge dated August 28, 1975;
2. Declaring as null and void the auction sale conducted
on January 16, 1975 and the certificate of sale issued pursuant
thereto;
3. Ordering the private respondent to accept the
sum of P63,130.00 under deposit as payment of the judgment
obligation in his favor;
4. Ordering the respondent Judge and respondent
Ex-Officio Sheriff to release the levied properties to the herein
petitioner.
The temporary restraining order issued is hereby made
permanent.
Costs against the private respondent.
SO ORDERED.
Idem; id. — Exceptions. — It must be noted, however, that

under the law there are two cases when the delivery produces the
effect of a valid payment. They are:
(1) When the document has been cashed. This case is
applicable to a negotiable paper or document executed by either a
third person or the debtor himself and delivered by said debtor to the
creditor.94 Thus, where the debtor deposited a manager’s check with
the Clerk of Court in payment of a certain indebtedness pursuant
to a court order, and the latter indorsed the check to the Provincial
Treasurer, who deposited it with the Philippine National Bank and
the Bank honored the check and placed the amount thereof to the
94
Compania General vs. Molina, 5 Phil. 142.
260
credit of the Provincial Treasurer, it was held that the effect of these
facts, in contemplation of law, was the same as if the aforementioned
amount had been deposited in cash with the Clerk of Court, for said
sum thereby became available to him in cash.95
(2) When it had been impaired through the fault of the
creditor. This is applicable only to a paper or document executed
by a third person and delivered by the debtor to the creditor.96
Thus, where a bill of exchange was delivered to the plaintiff by
the defendant, and subsequently, upon maturity it was dishonored
by the drawee because the signature thereto was a forgery, the
negligence of the plaintiff in not protesting the nonpayment resulted
in the impairment of the value of the bill of exchange because of the
loss of the right to proceed against other parties who might be held
liable; consequently, the defendant can no longer be held liable.97
Art. 1250. In case an extraordinary inflation or deflation

of the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement
to the contrary.98
Effect of Extraordinary Inflation or Deflation. — Accord-

ing to Dean Capistrano, the above article was formulated by the
Code Commission in view of the lessons learned in the last war,
when inflation of currency in the Philippines was such that the price
of a cavan of rice rose to P12,000. The Commission felt that in the
event of another war resulting in extraordinary inflation, the juridi-
cal relations of creditor and debtor should be equitably adjusted.99
Consequently, the basis of payment, according to the Code, would
be the value of the currency at the time of the establishment of the
obligation.100
Extraordinary inflation or deflation may be said to be that
which is unusual or beyond the common fluctuation in the value
95
Golez vs. Camara, 101 Phil. 363.
96
Compania General vs. Molina, 5 Phil. 142.
97
Quiros vs. Tan Guinlay, 5 Phil. 675.
98
New provision.
99
3 Capistrano, Civil Code, 1950 Ed., p. 189; Report of the Code Commission,
pp. 132-133.
100
261
of the currency, which the parties could not have reasonably

foreseen or which was manifestly beyond their contemplation at
the time when the obligation was established. (4 Tolentino 284.) By
extraordinary inflation or deflation of the currency is understood
to be any uncommon decrease or increase in the purchasing power
of the currency which could not have been reasonably foreseen. (3
Capistrano 189.)
Analyzing the above definitions, it is clear that in order that
there will be an extraordinary inflation or deflation of the currency
within the meaning of Art. 1250 of the Code, it is essential that the
following requisites must be present: (1) there must be a decrease or
increase in the purchasing power of the currency which is unusual
or beyond the common fluctuation in the value of said currency;
and (2) such decrease or increase 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 following is a good example: In 1955, A leased a house and
lot to B at a monthly rental of P500 for a period of 25 years. An option
to buy the property was given to B for the same period with the
rentals already paid constituting a part of the purchase price which
the parties fixed at an amount equivalent to the aggregate rentals for
25 years. May A now demand for an adjustment of the rent and the
purchase price on the ground that there is an extraordinary inflation
supervening? It is submitted that he may. We believe that both of
the requisites mentioned above are present in the instant case. We
can very well take notice of the fact that the purchasing power of the
Philippine peso now is much less than its purchasing power in 1955.
As a matter of fact, in 1955, the official rate of exchange between the
Philippine peso and the American dollar was still two to one (2:1),
while today, it is twenty point five to one (20.5:1). Certainly, this
development could not have been foreseen by the contracting parties
in 1955.
It would have been different had the above contract been
perfected in, let us say, 1965. The decline in the purchasing power
of the Philippine peso in such case cannot be considered very great
or extraordinary. In 1965, the official rate of exchange between the
peso and the dollar was already four to one (4:1), although the black
market quotation was about five point seventy-five is to one (5.75:1).
Today, the rate of exchange is twenty point five to one (20.5:1).
262
Besides, the tendency of the gradual decline of the purchasing power

of the peso was not only foreseeable but even evident in 1965. Even
then, economists were speaking of the possibility of devaluation. A,
in the example given, would not have any basis for demanding for an
adjustment of the rent and the purchase price.
It must be noted that the rule enunciated in Art. 1250 is
applicable only to contractual obligations; consequently, it can not
be applied to obligations arising from torts. Thus, in Velasco vs.
Manila Electric Co. (42 SCRA 556), the Supreme Court held that
the employment of the words “extraordinary inflation or deflation of
the currency stipulated” clearly shows that the legal rule envisages
contractual obligations where a specific currency is selected by the
parties as the medium of payment.
Furthermore, note that the law does not say that the value of
the currency at the time of the establishment of the obligation shall
be the amount to be paid; it merely says that it shall be the basis
of payment. Hence, the courts will be given some latitude in fixing
the amount to be paid by the debtor to the creditor with the value
of the currency at the time when the obligation was established or
constituted as basis, unless of course there is an agreement to the
contrary.
Idem; War-time obligations. — Because of the lack of
statutory provisions under the old law which would regulate the
basis of payment in case of extraordinary inflation or deflation of
the currency, one of the most vexing problems which confronted our
courts after the liberation of the Philippines was the question of
payment of obligations incurred during the Japanese occupation. It
was not a question of validity of payment because the obligation was
not yet paid, nor a question of the currency in which the payment
was to be made because the law was quite definite with respect to
that point. It is evident that if the war-time obligation contained a
stipulation to the effect that payment shall be made in a definite
currency other than Philippine currency or Japanese military notes,
the payment shall have to be made in the currency stipulated in
accordance with the provisions of the first paragraph of Art. 1170
of the old Civil Code (now Art. 1249 of the new) which was the law
then in force. It is also evident that if the war-time obligation did
not contain any stipulation with regard to the currency in which
payment shall be made, or if it did, it was to the effect that payment
263
shall be made in either Philippine currency or Japanese military

notes, payment shall have to be made in currency which is legal
tender in the Philippines in accordance again with the provision of
the first paragraph of Art. 1170 of the old Code (now Art. 1249 of
the new). The question was with respect to the amount that had to
be paid by the obligor or debtor considering the fact that Japanese
military notes were no longer legal tender after the liberation of
the Philippines, and consequently, the obligation had to be paid
in “genuine” or ordinary Philippine currency. Shall the amount be
computed in accordance with the rate of one Philippine peso for each
peso due in Japanese military notes or shall the amount be adjusted
in accordance with the Ballantyne Scale of Values?
Idem; id. — The Ballantyne Schedule. — The Ballantyne
Scale of Values was submitted by Dr. D.L. Ballantyne to the
President of the Philippines in his capacity as economic adviser of
the Commonwealth Government. It contained a recommendation
for the adoption of measures which were greatly needed to solve
the problem created by transactions made during the Japanese
occupation and to hasten the economic recovery of the country. The
Supreme Court, the Court of Appeals, and the different Courts of
First Instance in the country have repeatedly applied its provisions
in numerous cases. It is, therefore, an official document whose
publication constituted a leading event of general interest and
whose provisions are widely known and have played an important
part in the contemporary political history of the country, of which
courts of justice could take judicial cognizance.101
The report of Dr. Ballantyne which contains the Scale of Values
is as follows:
“Our own preliminary studies of this question which have

taken into account the cost of living index for the occupation
period, real estate values, black market quotations for the
Commonwealth peso and income payments expressed in
Japanese currency, indicate that a generally equitable scale of
values for the Commonwealth peso in terms of the Japanese
peso, is as follows:
101
Estrada vs. Noble, CA, 49 Off. Gaz. 139.
264
1941 1944
December P1.00 January P4.00
1942 P1.00 February 5.00
1943 March 6.00
January 1.05 April 9.00
February 1.10 May 12.00
March 1.15 June 15.00
April 1.20 July 20.00
May 1.25 August 25.00
June 1.30 September 30.00
July 1.40 October 40.00
August 1.50 November 60.00
September 1.60 December 90.00
October 1.70 1945
November 1.80 January 120.00
December 2.50 February None
Submitted by D.C. BALLANTYNE

Special Bank Adviser to the President.’’
It must, however, be noted that except when sheer necessity

demands it, because of the absence of other evidence, there is every
reason for not applying the Ballantyne schedule. The said schedule
assumes that there was only one rate of equivalence throughout
the islands, when it is a well-known fact that the conversion rate
changed from place to place. Thus, in cities where supply was scarce,
the purchasing power of the military notes was lower than in the
rural areas where food was more easily obtainable. Such schedule,
therefore, must yield to proof of actual transactions.102
Idem; id.; id. — Application. — From an analysis of court
decisions it is evident that in order that the Ballantyne Scale
of Values shall be applicable, it is essential that the following
requisites must concur; first, the obligation should have been
contracted during the Japanese occupation; second, it could have
been paid during the Japanese occupation; and third, it could have
102
Barcelon vs. Arambulo, CA, 48 Off. Gaz. 3976.
265
been paid with Japanese military notes.103 Consequently, where the

debtor borrowed, let us say, P90,000 in Japanese military notes in
December, 1944, from the creditor and executed a promissory note
promising to pay the amount “within a period of one year therefrom,”
the Ballantyne Schedule is applicable; hence, he can be compelled
to pay only P1,000 in accordance with the Ballantyne Conversion
Table.104 But where the debtor executed a promissory note promising
to pay the amount “one year after Oct. 5, 1944,” or “within 30 days
after the expiration of one year from June 24,1944,” or “four years
after date,” or within “five years from Jan. 1, 1946,” or within “one
year from Aug. 7, 1944,” the Ballantyne Schedule is not applicable;
hence, the debtor can be compelled to pay in Philippine currency,
peso for peso.105
Fernandez, et al. vs. Nat. Insurance Co. of the Phil.

105 Phil. 59
Juan Fernandez’ life was insured by the defendant

company for P10,000 on July 15, 1944, with his mother and
sisters as beneficiaries. He died on Nov. 2, 1944. In 1952, the
beneficiaries claimed the value of the policy. Proof of death was
approved by the company on July 9, 1954. The question now is
— when did the obligation of the company to pay the proceeds of
the value of the policy accrue — did it accrue upon the death of
the insured or upon receipt and approval of proof of death of the
insured? The Supreme Court held:
“In life insurance contracts, the policy matures either
upon expiration of the term set forth therein, in which case,
its proceeds are immediately payable to the insured himself,
or upon his death occurring at any time prior to the expiration
of the term, in which case, its proceeds are payable to the
beneficiaries, within 60 days after filing of proof of death.
103
See Jimenez vs. Bucoy, 103 Phil. 40; Valero vs. Sycip, 103 Phil. 1150; Fernan-
dez, et al. vs. Nat. Ins. Co. of the Phil., 105 Phil. 59.
104
Ang Lam vs. Peregrina, 92 Phil. 506. To the same effect: Hilado vs. De la
Costa, 46 Off. Gaz. 5472; Soriano vs. Abalos, 47 Off. Gaz. 168; De Asis vs. Agdamag,
90 Phil. 249; Samson vs. Andal, 94 Phil. 402; Aguilar vs. Miranda, 113 Phil. 515;
Server vs. Car, 18 SCRA 728.
105
Roño vs. Gomez, 46 Off. Gaz. 339; Gomez vs. Tabia, 47 Off. Gaz. 339; Garcia
vs. De los Santos, 49 Off. Gaz. 4830; Yay vs. Boltron, 100 Phil. 47; Stemberg vs. Solo-
mon, 102 Phil. 995; Dizon vs. Arrastia, 113 Phil. 476; Quiogue vs. Bautista, Generosa
vs. Court of Appeals, 12 SCRA 619; Server vs. Car, 18 SCRA 728.
266
(Sec. 91-A, Insurance Law.) Here, the policy matured upon the
death of the insured in 1944, and the obligation of the insurer
to pay arose as of that date. The sixty-day period fixed by law
within which to pay is merely procedural in nature. It is the
happening of the suspensive condition of death that matures
a life insurance policy and not the filing of the proof of death.
Since the insured died during the Japanese occupation, the
proceeds of his policy should, therefore, be adjusted accordingly,
for ‘the rule is already settled that where the debtor could have
paid his obligation at any time during the Japanese occupation,
payment after liberation must be adjusted in accordance with
the Ballantyne Schedule.’ ’’
Art. 1251. Payment shall be made in the place designated

in the obligation.
There being no express stipulation and if the undertaking
is to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation
was constituted.
In any other case, the place of payment shall be the
domicile of the debtor.
If the debtor changes his domicile in bad faith or after
he has incurred in delay, the additional expenses shall be
borne by him.
These provisions are without prejudice to venue under
the Rules of Court.106
Place of Payment. — If there is no express designation or

stipulation in the obligation with respect to the place where payment
shall be made, the following rules are applicable:
(1) If the obligation is to deliver a determinate thing, the
payment shall be made at the place where the thing might be at the
time the obligation was constituted.107
(2) In any other case, the payment shall be made at the
domicile of the debtor. This rule is intended to govern unilateral
obligations. Reciprocal obligations are governed by special rules. As
106
107
267
a corollary, if the debtor changes his domicile in bad faith or after he

has incurred in delay, it is logical that additional expenses shall be
borne by him.108
Subsection 1. — Application of Payment
Art. 1252. He who has various debts of the same kind

in favor of one and the same creditor, may declare at the
time of making the payment, to which of them the same
must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose
benefit the term has been constituted, application shall not
be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which
an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating
the contract.109
Concept. — Application of payment110 may be defined as the
designation of the debt to which the payment must be applied when
the debtor has several obligations of the same kind in favor of the
same creditor.111
Requisites. — In order that there will be an application of
payment, it is essential that the following requisites must concur:
first, there must be only one debtor and only one creditor; second,
there must be two or more debts of the same kind; third, all of the
debts must be due; and fourth, the amount paid by the debtor must
not be sufficient to cover the total amount of all the debts.
Idem; First requisite. — The requirement that there must be
only one debtor does not militate against the possibility of extending
the rules on application of payment to solidary obligations, because
108
Ibid.
109
110
Under the Civil Code, there are actually four special forms of payment. They
are: (1) application of payment (Arts. 1252-1254); (2) dation in payment (Art. 1245);
(3) payment by cession (Art. 1255); and (4) tender of payment and consignation (Arts.
1256-1261). Strictly speaking, however, application of payment, by its very nature, is
not a special form of payment.
111
268
Application of Payment
the solidary debtor who paid may have obligations other than the
solidary obligation in favor of the creditor to whom payment is made.
Neither does the requirement that there must be only one creditor
militate against extending the rules on application of payment to a
case in which a person is indebted at the same time in separate and
demandable sums to a partnership and to the managing partner of
the partnership. As a matter of fact, Art. 1792 provides:
“If a partner authorized to manage collects a demandable

sum, which was owed to him in his own name, from a person who
owed the partnership another sum also demandable, the sum
thus collected shall be applied to the two credits in proportion to
their amounts, even though he may have given a receipt for his
own credit only; but should he have given it for the account of
the partnership credit the amount shall be fully applied to the
latter.
“The provisions of this article are understood to be without
prejudice to the right granted to the debtor by Article 1252, but
only if the personal credit of the partner should be more onerous
to him.”
It is, therefore, apparent that the rule stated in the second

paragraph of the above article constitutes an exception to the rule
that in applications of payment it is essential that there must be only
one creditor, since it is a well-known principle that a partnership
has a juridical personality which is separate and distinct from that
of each of the partners.
Idem; Second requisite. — In applications of payment it is
not only essential that there must be only one debtor and only one
creditor, but that the debtor must have two or more debts in favor
of the same creditor. Hence, the rules on application of payment
cannot apply to a guarantor or surety whose liability is extended
or confined only to a particular obligation. Therefore, when such
guarantor or surety is made to pay in default of or solidarily with
the principal debtor, whatever payments may be made cannot be
applied to those obligations for which he is not responsible either
subsidiarily or solidarily.112
112
Socony Vacuum Corp. vs. Miraflores, 67 Phil. 304.
269
It is also essential that each of the debt must be of identical or

homogenous specie. Thus, if the debtor has several monetary
obligations in favor of one and the same creditor and he pays a certain
sum to the latter which is not sufficient to satisfy the aggregate sum
of all the obligations, the rules on application of payment can be
applied, but where some of the obligations consist in the payment of
money and the rest in the delivery of things other than money, such
rules can no longer be applied. There is, however, a case in which
even if some of the obligations are not of identical specie at the time
of their constitution, yet application of payment is possible if, at the
time the designation or application is made, such obligations had
already been converted into obligations to indemnify with damages
by reason of breach or nonfulfillment.113
Idem; Third requisite. — As a general rule, application of
payment is possible only when all of the debts are due. There are
two exceptions to this rule. They are: (1) when there is a stipulation
to the contrary; and (2) the application of payment is made by the
party for whose benefit the term or period has been constituted.114
The second exception must always be understood in relation to
the provision of Art. 1196. Thus, if from the tenor of the obligation
which is not yet due or from other circumstances, it should appear
that the term or period is for the benefit of the debtor (or the creditor
in a proper case) and there are other obligations of the said debtor in
favor of the same creditor which are already due, the payment made
may be applied by the said debtor to the obligation which is not yet
due. The exception is logical because if the term or period is for his
benefit, if he so desires, he may renounce the benefit of such term or
period by performing his obligation in advance.
Idem; Fourth requisite. — The requirement that the amount
paid by the debtor must not be sufficient to cover the total amount
of all the debts is indispensable, because, otherwise, there would be
no necessity of designating the debt or debts to which the payment
shall be applied.
Right of Debtor To Make Application. — It is apparent
from the provisions of the first paragraph of Art. 1252 that the right
to designate the debt to which the payment shall be applied belongs
113
114
270
primarily to the debtor. It must be noted, however, that the right is

available to him only at the time when payment is made. If he does
not exercise such right, the same is extinguished and the application
would then be governed by the provisions of Art. 1254, unless the
creditor, in the meantime, makes the application by giving to the
debtor, who accepts it, a receipt in which application of the payment
is made.115
Idem; Exception. — If the debtor does not avail himself
of the right to designate the debt to which the payment shall be
applied, and subsequently, he accepts from the creditor a receipt
in which an application of payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the
contract.116 Application of payment by the debtor is, therefore, the
general rule, while application of payment by the creditor is the
exception. However, to say that the application is made by the
creditor is not exactly accurate, because what such creditor merely
does is to propose the application by giving to the debtor a receipt
in which the application of payment is made subject to the express
or tacit approval of the said debtor. Consequently, the debtor may
either accept or reject the application. Once the receipt is accepted,
the application of payment made in such receipt can no longer
be impugned,117 unless there is a cause, such as mistake, force,
intimidation, undue influence or fraud, which will invalidate the
application. It is clear that the word “contract” used in the law can
only refer to the act whereby the debtor accepts the receipt in which
the application is made from the creditor, and not to the contract
from which the obligation to which the payment is applied arises.
Idem; Time when right is exercised. — From what had
been stated, it is clear that as far as the debtor is concerned, the
right to make an application of payment must be exercised at the
time payment is made.118 If he fails to exercise the right, the initiative
is taken away from him and such application may then be made by
the creditor who may exercise the right even after the delivery of
the receipt acknowledging payment, provided, of course, that such
115
116
117
Garcia vs. Enriguez, 71 Phil. 423.
118
Bachrach vs. Golingco, 39 Phil. 912; Powell vs. Phil. National Bank, 54 Phil.
34.
271
application is approved by the debtor. In the words of Manresa,

“the clear basis of this difference is that while the debtor decides for
himself, the creditor only proposes to the debtor who may or may not
agree.’’119
Art. 1253. If the debt produces interests, payment of the

principal shall not be deemed to have been made until the
interests have been covered.120
Limitation upon Right To Apply Payment. — There has
been some doubt as to whether the rule stated in the above article
is suppletory or obligatory to the debtor. Manresa believes that the
better view seems to be in favor of the latter because it is more in
consonance with justice. Consequently, the creditor may impugn
any application of payment which is contrary to the above rule.121
Our Supreme Court, however, sustains the contrary view. Thus, in
two recent cases, the Court held that the above provision applies
only in the absence of a verbal or written agreement to the contrary;
in other words, it is merely directory, and not mandatory.122
Art. 1254. When the payment cannot be applied in

accordance with the preceding rules, or if application cannot
be inferred from other circumstances, the debt which is most
onerous to the debtor, among those due, shall be deemed to
have been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately.123
Legal Application of Payment. — It must be noted in the

first place that the rules stated in Art. 1254 are applicable only
when payment cannot be applied in accordance with the rules
previously stated, or if the application cannot be inferred from other
circumstances. Thus, according to Dean Capistrano, if payment of
119
120
121
122
Baltazar vs. Lingayen Gulf Elec. Power Co.; Rose vs. Lingayen Elec. Power
Co., Baltazar vs. Acena, 14 SCRA 522; Magdalena Estate, Inc. vs. Rodriguez, 18
SCRA 967.
123
272
one of the debts has been demanded or if different places for payment
have been designated in the contract and payment has been made in
one of those places, it is evident that an application can be deduced
or inferred, in which case, the article is not applicable.124
Idem; When debts are not of same burden. — When the
debts due are not of the same burden, the rule is that the debt
which is most onerous to the debtor shall be deemed to have been
satisfied.125 From judicial decisions and works of commentators, the
following rules may, therefore, be stated:
(1) Where there are various debts which are due and they
were incurred at different dates, the oldest are more onerous to the
debtor than the more recent ones.126
(2) Where one debt bears interest and the other does not,
even if the latter was incurred at an earlier date, the first is more
onerous to the debtor.127 As between two debts which bear interest,
the debt with a higher rate of interest is more onerous to the debtor.
(3) Where one debt is secured and the other is not, the first is
more onerous to the debtor.128 However, “where in a bond the debtor
and surety have bound themselves solidarily, but limiting the
liability of the surety to a lesser amount than that due the principal
debtor, any such payment as the latter may have made on account
of such obligation must be applied first to the unsecured portion of
the debt, for, as regards the principal debtor, the obligation is more
onerous as to the amount not secured.’’129
(4) Where the debtor is bound as principal in one obligation
and as guarantor or surety in another, the former is more onerous to
him.
(5) When the debtor is bound as a solidary debtor in one
obligation and as the sole debtor in another, the former is more
onerous to him.
124
3 Capistrano, Civil Code, 1950 Ed., p. 193.
125
126
Philippine National Bank vs. Veraguth, 50 Phil. 353.
127
Menzi & Co. vs. Quing Chuan, 69 Phil. 46.
128
Sanz vs. Lavin, 6 Phil. 299; Traders Insurance & Surety Co. vs. Dy Eng Giok,
104 Phil. 806.
129
Hongkong & Shanghai Bank vs. Aldanese, 48 Phil. 390.
273
(6) Within a solidary obligation, the share which corresponds

to a solidary debtor would be most onerous to him.
(7) Where one obligation is for indemnity and the other is by
way of penalty, the former is more onerous to the debtor.
(8) Where one debt is liquidated and the other is not, the
former is more onerous to the debtor.130
Problem — The debtor owes his creditor several debts, all

of them due, to wit: (1) an unsecured debt; (2) a debt secured
with a mortgage of the debtor’s property; (3) a debt bearing
interest; (4) a debt in which the debtor is solidarily liable with
another.
Partial payment was made by the debtor. Assuming that
the debtor had not specified the debts to which the payment
should be applied and, on the other hand, the creditor had not
specified in the receipt he issued the application of payment,
state the order in which the payment should be applied and your
reasons therefore. (1982 Bar Problem)
Answer — In this case, according to the Civil Code, the
debt, which is most onerous to the debtor, among those due,
shall be deemed satisfied.
Analyzing the four debts stated in the problem, the most
onerous is No. 4, the second most onerous is No. 2, the third most
onerous is No. 3, and the least onerous is No. 1. Consequently,
the payment should be applied in that order.
(Note: The above answer is based on Art. 1254 of the Civil
Code, and on decided cases and commentaries of recognized
commentators.)
Idem; When debts are of same burden. — If the debts which

are due are of the same nature and burden, the rule is that the
payment shall be applied to all of them pro rata or proportionately.131
It is evident that this rule can also be applied to a case in which it
is fairly impossible to determine which of the debts which are due is
the most onerous or burdensome to the debtor by applying any of the
rules stated in the first paragraph of the article.
130
8 Manresa, 5th Ed., Bk. 1, pp. 602-604; 4 Tolentino, Civil Code, 1956 Ed., pp.
293-294.
131
Art. 1254; par. 2, Civil Code.
274
Payment by Cession
Subsection 2. — Payment by Cession
Art. 1255. The debtor may cede or assign his property

to his creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the
debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession,
are made between the debtor and his creditors shall be
governed by special laws.132
Concept. — Cession or assignment may be defined as a special
form of payment whereby the debtor abandons all of his property for
the benefit of his creditors in order that from the proceeds thereof
the latter may obtain payment of their credits.133
Requisites. — In order that the debtor can avail of this form
of payment, it is essential that the following requisites must concur:
first, plurality of debts; second, partial or relative insolvency of
the debtor; and third, acceptance of the cession by the creditors.134
In case the creditors do not accept the cession or assignment, a
similar result may be obtained by proceeding in accordance with the
Insolvency Law.135
Kinds. — Payment by cession may be either contractual
or judicial. The cession referred to in Art. 1255 of the Code is
contractual, while the cession which is regulated by the Insolvency
Law, and which may be voluntary or involuntary, is judicial.
Distinguished from Dation in Payment. — Payment by
cession must not be confused with dation in payment (dación en
pago). The two may be distinguished from each other as follows:
(1) As to number of parties: While in dacion en pago there
may be only one creditor, in payment by cession plurality of creditors
is essential.
(2) As to financial condition of parties: While in dación en
pago the debtor is not necessarily in a state of financial difficulty,
132
133
134
Ibid., pp. 605-606.
135
Act No. 1956, as amended.
275
in payment by cession the debtor is in a state of partial or relative

insolvency.
(3) As to object: While in dación en pago what is delivered by
the debtor is merely a thing to be considered as the equivalent of the
performance of the obligation, in payment by cession what is ceded
by the debtor is the universality of all of his property.
(4) As to effect: While in dación en pago the payment
extinguishes the obligation to the extent of the value of the thing
delivered either as agreed upon or as may be proved, unless the
silence of the parties signifies that they consider the delivery of
the thing as the equivalent of the performance of the obligation, in
payment by cession the effect is merely to release the debtor for
the net proceeds of the things ceded or assigned, unless there is a
contrary intention.136
Effect. — It is apparent from the provision of Art. 1255, that, in
the absence of a contrary stipulation, the assignment or abandonment
by the debtor of all his property to the creditors shall only release
him from responsibility for the net proceeds of the property
assigned. Consequently, the extinguishment of his obligations will
only be partial. It must also be noted that the assignment does not
transfer the ownership of the things or objects to the creditors. What
is transmitted to the latter is only the possession of such things or
objects including their administration so that they can proceed with
the sale and from the proceeds thereof their respective credits are
then paid.137
Subsection 3. — Tender of Payment

and Consignation
Art. 1256. If the creditor to whom tender of payment has

been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of
the thing or sum due.
Consignation alone shall produce the same effect in the
following cases:
136
8 Manresa, 5th Ed., Bk. 1, pp. 611-612; 3 Castan, 7th Ed., p. 257.
137
276
Tender of Payment and Consignation
(1) When the creditor is absent or unknown, or does

not appear at the place of payment;
(2) When he is incapacitated to receive the payment at
the time it is due;
(3) When, without just cause, he refuses to give a
receipt;
(4) When two or more persons claims the same right to
collect;
(5) When the title of the obligation has been lost.138
Art. 1257. In order that the consignation of the thing
due may release the obligor, it must first be announced to
the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made
strictly in consonance with the provisions which regulate
payment.139
Art. 1258. Consignation shall be made by depositing the
things due at the disposal of judicial authority, before whom
the tender of payment shall be proved, in a proper case, and
the announcement of the consignation in other cases.
The consignation having been made, the interested
parties shall also be notified thereof.140
Concept. — Tender of payment consists in the manifestation

made by the debtor to the creditor of his decision to comply
immediately with his obligation. Consignation, on the other hand,
refers to the deposit of the object of the obligation in a competent
court in accordance with the rules prescribed by law after refusal or
inability of the creditor to accept the tender of payment.141
Distinctions. — Tender of payment and consignation may be
distinguished from each other as follows:
(1) Tender of payment is the antecedent of consignation; in
other words, while the first is the preparatory act, the second is
138
139
140
141
277
the principal act which will produce the effects of payment of the
obligation.142 Thus, according to the Supreme Court:
“Tender of payment, even if valid, does not by itself

produce legal payment, unless it is completed by consignation.
“Tender of payment alone Is not a mode of extinguishing
obligations. Tender of payment in the Civil Code is treated as
subtitle in the section on Payment as a mode of extinguishing
obligations. But the subtitle is ‘Tender of Payment and
Consignation.’ And Article 1176 (now Art. 1258) provides that
after a valid tender of payment ‘the debtor shall be released
from responsibility by the consignation of the thing due.’ As
a complement Article 1180 (now Art. 1260) says ‘after the
consignation has been duly made, the debtor may petition the
judge to order the cancellation of the obligation.’ All of which
patently indicate that consignation must follow, supplement or
complete the tender of payment if discharge of the obligation is
to be obtained.
“ ‘Ofrecimiento de pago y consignación. — Consiste el
primero en una declaracion de voluntad dirigida al acreedor,
por la que el deudor manifiesta su firme decisión de cumplir
immediatamente la obligación; y la segunda en el depósito que
en forma legal hace el deudor de la cosa objecto de la obligación,
cuando el acreedor no quiere y no puede recibirla. Solo la
consignación es forma de pago. La oferta unicamente nos interesa
aqui en cuanto es un acto preparatorio de la consignatión.’
(Castan, Derecho Civil, Vol. 2, 521.)’’143
(2) Tender of payment is by its very nature extrajudicial in

character, while consignation is judicial.144
General Requisites of Consignation. — According to
Manresa, we must distinguish between the general requisites of
a valid consignation, or those relative to payment, and the special
requisites, or those arising from the very nature of consignation.145
The first refers to those requisites which we have already taken up
in connection with payment in general (Arts. 1232-1251), such as the
142
143
Phil. National Bank vs. Relativo, 92 Phil. 203.
144
145
Ibid., pp. 628-630.
278
person who pays, the person to whom payment is made, the object
of the obligation which must be paid or performed, and the time
when payment or performance becomes demandable; the second, on
the other hand, refers to the five requirements which are prescribed
by Art. 1256 to Art. 1258 of the Civil Code. Since consignation is a
special form of payment, it is but logical, in order that it will produce
all the effects of payment, that it must conform not only with all
of the special requirements prescribed by law, but also with all of
the requisites of a valid payment. Hence, according to the second
paragraph of Art. 1258: “The consignation shall be ineffectual if
it is not made in consonance with the provisions which regulate
payment.” Thus, where the amount remitted to the Clerk of Court
is in the form of a cashier’s check, the consignation must be deemed
invalid, since the law requires that in order that consignation shall
produce the effect of a valid payment, it must conform to the rules
regulating payment, and one such rule is that payment should be
made in legal tender.146
Special Requisites of Consignation. — In order that

consignation shall produce the effects of payment, it is essential that
certain special requirements prescribed by law must be complied
with. The debtor must show:
(1) That there is a debt due;
(2) That the consignation has been made either because the
creditor to whom tender of payment was made refused to accept the
payment without just cause, or because any of the causes stated by
law for effective consignation without previous tender of payment
exists;147
(3) That previous notice of the consignation had been given
to the persons interested in the fulfillment of the obligation;148
(4) That the thing or amount due had been placed at the
disposal of judicial authority;149
146
Villanueva vs. Santos, 67 Phil. 648; Arambulo vs. Court of Appeals, 97 Phil.
965.
147
148
149
279
(5) That after the consignation had been made, the persons
interested in the fulfillment of the obligation had been notified
thereof.150
Idem; First requisite. — Before consignation can produce
the effect of payment, it is essential that there must be a debt which
is due.151 Thus, where the plaintiff and defendant entered into a
contract whereby the latter was given the right to cancel the contract
upon payment of a certain sum, and subsequently, the latter tried
to avail himself of such right by making a formal tender of the
amount, it was held that it was not necessary for him to deposit the
amount with the Clerk of Court, since there is no debt which is due.
Consequently, the tender made by the defendant in good faith was
sufficient to cancel the contract.152
Idem; Second requisite. — In order that the consignation
will be effective, the general rule is that there must have been a
tender of payment made by the debtor to the creditor. It is, however,
required: (1) that the tender of payment must have been made prior
to the consignation; (2) that it must have been unconditional; and (3)
that the creditor must have refused to accept the payment without
just cause.153 The first requirement is self-explanatory; the second
and third, however, require some explanation. It is a rule that
the tender of payment, in order to constitute a valid tender, must
be unconditional in character. Thus, where the debtor tendered
a check for P5,000 to the creditor as payment of a debt of P600,
but the payee of said check was a third person who accompanied
him, it was held that the tender did not constitute a valid tender of
payment because it was conditional in the sense that, in offering the
check, the defendant-debtor practically told the plaintiff-creditor —
“Here is P600, but you must pay the remainder of P4,400 to the
payee.”154 Similarly, where the debtor tendered a check for P3,250 to
the creditor as payment of a debt conditioned upon the signing by
the latter of a motion to dismiss a complaint for legal separation, it
was also held that such tender of payment is not valid.155 However,
150
151
Ponce de Leon vs. Syjuco, 90 Phil. 311.
152
Asturias Sugar Central vs. Pure Cane Molasses Co., 60 Phil. 255.
153
154
Phil. National Bank vs. Relativo, 92 Phil. 203.
155
Sy vs. Eufemio, 104 Phil. 1056.
280
where the check is sent to the debtor on condition that it is in full

satisfaction of a disputed claim of indebtedness and the creditor
retains the same and converts it into money, he is presumed to
have assented to the condition and to have accepted the compromise
offer, and a mere expression of dissatisfaction by the creditor with
the proposal cannot qualify the effects of actual use of the check.156
With respect to the third requirement, Manresa is of the opinion
that when the consignation is made, it is not necessary for the court
where the thing or the amount is deposited to determine whether
the refusal of the creditor to accept the same was with or without a
just cause. The reason is that the question will be resolved anyway
in a subsequent proceeding. Hence, the mere refusal of the creditor
to accept the tender of payment will be sufficient.157
Sy vs. Eufemio
104 Phil. 1056 (unrep.)
The records show that defendant and plaintiff, husband

and wife, had entered into a compromise agreement by virtue of
which the former undertook to pay to the latter P10,000 in cash
and P25,000 by installments within ten years, and the latter on
her part promised to move for the dismissal of a civil case for
support and a criminal case for bigamy which she had instituted
against the former. It was also agreed that both parties shall
waive whatever right of action, civil and criminal, they might
have against each other. This compromise agreement was
approved by the lower court. In spite of this agreement, plaintiff
subsequently brought an action for legal separation against the
defendant. In the course of the proceedings, defendant tendered
payment of P3,250 to the plaintiff. The latter refused to accept the
tender. The former then deposited the amount in the court, filing
a manifestation averring that because of plaintiff’s unjustifiable
refusal to accept the tender of payment which was made in
compliance with the compromise agreement, he is depositing
the amount pursuant to Arts. 1256 and 1258 of the Civil Code.
Plaintiff filed a reply, contending that she refused to accept
the tender because, in the first place, what was tendered was a
check, and in the second place, the tender was conditioned upon
the dismissal of the complaint for legal separation. In answer,
defendant alleged that for the past four years plaintiff had been
156
Araneta vs. Uy Tek, CA, 40 Off. Gaz. 28.
157
281
receiving similar payments in check without any objection;

hence, she is now in estoppel. Consequently, the question to be
resolved in this appeal is whether or not the tender of payment
is valid for purposes of consignation. The Supreme Court held:
“A check intended to pay a debt, if refused by the creditor,
is not a valid tender of payment. The fact that in previous years
payment in check by the debtor was accepted by the creditor does
not place the latter in estoppel to prevent him from requiring
the former to pay his obligation in cash. And as the tender of
the check by the debtor was conditioned upon the signing by the
creditor of a motion to dismiss the complaint for legal separation,
the tender of the check for payment of the debt was not, as it
should be, unconditional. Consequently, its consignation in
court does not render it legal, valid and effective. Whether
the appellee under the terms of the compromise agreement is
bound to file such motion, and whether the waiver of whatever
action the parties might have against each other is lawful and
enforceable, are questions to be determined in the case for legal
separation and for that reason they cannot be taken up in this
appeal because the trial court has not passed upon them.”
Idem; id. — Exceptions. — There are five exceptions to the

rule that in order that the consignation shall produce the effects
of payment, it is essential that there must be a previous tender of
payment.158 They are: (1) when the creditor is absent or unknown, or
does not appear at the place of payment; (2) when he is incapacitated
to receive the payment at the time it is due; (3) when, without just
cause, he refuses to give a receipt; (4) when two or more persons
claim the right to collect; and (5) when the title of the obligation has
been lost.159
Idem; id. — Effect of valid tender of payment. — When a
valid tender of payment is made, the obligation is not extinguished,
unless it is completed by consignation. However, it has the effect of
exempting the debtor from payment of interest and/or damages.160
The suspension of the running of interest is governed by principles
which regard reality rather than technicality, substance rather than
158
For application of these exceptions — see Panganiban vs. Cuevas, 7 Phil. 477;
Banahaw vs. Dejarme, 55 Phil. 338; Salvante vs. Ubi Cruz, 88 Phil. 236.
159
160
Phil. Nat. Bank vs. Relativo, 92 Phil. 203.
282
form. Good faith of the debtor should in simple justice excuse him
from paying interest after the offer was rejected.161
Idem; Third requisite. — It is also essential in order that the
consignation shall be effective that previous notice thereof had been
given to the persons interested in the fulfillment of the obligation.162
This requirement is separate and distinct from tender of payment
which precedes it. Tender of payment is a friendly and private act
manifested only to the creditor which by itself does not suggest
consignation which follows in case of unjust refusal of the creditor to
accept the payment; previous notice, on the other hand, is a formal
act manifested not only to the creditor, but also to other persons
interested in the fulfillment of the obligation directly announcing
the consignation which will be made as a result of the unjust refusal
of the creditor to accept the payment. Although separate and distinct
from each other, the procedure, as far as the debtor is concerned,
can be simplified by combining the two in a single act, which would
include principally the tender of payment and subsidiarily the
notice of consignation, unless the creditor accepts the payment.163
Even in this case it is necessary that notice shall be made to the
other parties interested in the fulfillment of the obligation, such as
a surety or guarantor or a solidary co-debtor.
Idem; Fourth requisite. — It is, of course, essential that
the thing or amount due must be placed at the disposal of judicial
authority.164 This requirement is complied with if the debtor
deposits the thing or amount, which the creditor had refused or
had been unable to accept, with the Clerk of Court. Normally, this
requirement is accompanied by the filing of the complaint itself
which is sometimes denominated as an action for consignation, but
which is in reality an action for specific performance of the obligation
or an action for cancellation of the obligation.
Idem; Fifth requisite. — After the consignation had been
made, the persons interested in the fulfillment of the obligation must
be notified thereof.165 This notification is separate and distinct from
161
Araneta vs. Tuason de Paterno, 49 Off. Gaz. 45. But see Llamas vs. Abaya, 60
Phil. 502.
162
Art. 1256, par. 1, Civil Code; Bellis vs. Imperial, 52 Phil. 530.
163
164
165
283
the notification which is made prior to the consignation. As declared

by the Supreme Court in the case of Cabanos vs. Calo,166 “there should
be notice to the creditor prior and after consignation as required by
the Civil Code. The reason for this is obvious, namely, to enable
the creditor to withdraw the goods or money deposited. Indeed, it
would be unjust to make him suffer the risk for any deterioration,
depreciation or loss of such goods or money by reason of lack of
knowledge of the consignation.” Of course, if the consignation was
accompanied by the corresponding complaint for specific performance
or for cancellation of the obligation, automatically, the requirement
is complied with, provided that the other parties interested in the
fulfillment of the obligation are furnished copies thereof.
It must be observed, however, that there is nothing in the
Civil Code or in the Rules of Court which would prohibit compliance
with all of the requisites of a valid and effective consignation before
the filing of the complaint for consignation. Consequently, upon
compliance with all of the requisites, either of two possible situations
may arise. There is the possibility that the creditor may finally
accept the thing or amount deposited. In such case, the question
of payment is settled altogether. There is also the possibility that
he refuses to accept the thing or amount deposited or that he is not
interested or that he is not known or that he is absent. In such case,
a litigation will arise. The debtor will then be compelled to bring an
action against the creditor for the extinguishment or cancellation of
the obligation on the ground of a valid and effective consignation.167
Ponce de Leon vs. Syjuco, Inc.

90 Phil. 311
Plaintiff contracted two loans from the defendant in

1941 during the Japanese occupation amounting to P216,000
in Japanese military notes. These loans are evidenced by two
promissory notes wherein plaintiff promised to pay “within one
year from May 5, 1948” in the legal tender of the Philippines.
On November 5, 1944, he offered to the defendant the principal
including interests up to the dates of maturity of the two
notes. The defendant refused to accept the tender of payment.
Subsequently, plaintiff deposited the money with the clerk of
166
G.R. No. L-10927, Oct. 30, 1958.
167
3 Castan, 7th Ed., pp. 253-254; 8 Manresa, 5th Ed., Bk. 1, pp. 635-636.
284
court. After liberation, he brought this action to compel the

defendant to accept the amount deposited. The issue, therefore,
is — is the consignation valid? The Supreme Court held:
“In order that consignation may be effective, the debtor
must first comply with certain requirements prescribed by
law. The debtor must show: (1) that there was a debt due; (2)
that the consignation of the obligation has been made because
the creditor to whom tender of payment was made refused
to accept it, or because he was absent or incapacitated, or
because several persons claimed to be entitled to receive
the amount due (Art. 1176 — now Art. 1256, Civil Code); (3)
that previous notice of the consignation had been given to the
person interested in the performance of the obligation (Art.
1177 — now Art. 1257, Civil Code); (4) that the amount due was
placed at the disposal of the court (Art. 1178 — now Art. 1258,
Civil Code); (5) that after the consignation had been made the
person interested was notified thereof (Art. 1178 — now Art.
1258, Civil Code). In the instant case, while it is admitted that
a debt existed, that the consignation was made because of the
refusal of the creditor to accept it, and that the filing of the
complaint to compel its acceptance on the part of the creditor
can be considered sufficient notice of the consignation to the
creditor, nevertheless; it appears that at least two of the above
requirements have not been complied with. Thus, it appears
that plaintiff, before making the consignation with the clerk
of court, failed to give previous notice thereof to the person
interested in the performance of the obligation. It also appears
that the obligation was not yet due and demandable when the
money was consigned, because, as already stated, by the very
express provisions of the document evidencing the same, the
obligation was to be paid within one year after May 5, 1948,
and the consignation was made before this period matured. The
failure of these two requirements is enough ground to render
the consignation ineffective. And it cannot be contended that
plaintiff is justified in accelerating the payment of the obligation
because he was willing to pay the interest due up to the date of
its maturity because, under the law, in a monetary obligation
contracted with a period, the presumption is that the same is
deemed constituted in favor of both the creditor and the debtor
unless from its tenor or from other circumstances it appears
that the period has been established for the benefit of either one
of them (Art. 1127 — now Art. 1196, Civil Code). Here no such
exception or circumstance exists.’’168
168
See also Limkako vs. Teodoro, 74 Phil. 313.
285
Subject Matter of Consignation. — Although Art. 1258

seems to give the impression that only movables may be the subject
matter of consignation, Spanish commentators advance the opinion
that not only movables, but even immovables may be the subject
matter thereof. They believe that consignation of immovable
property should be allowed because it would be unjust to charge
the debtor indefinitely with the task of preserving the immovable
property which constitutes the object of the obligation.169
Art. 1259. The expenses of consignation, when properly

made, shall be charged against the creditor.170
Expenses of Consignation. — Before the creditor can be

charged with the expenses of consignation, it is essential that such
consignation must have been properly made. From what had al-
ready been stated, consignation is considered properly made in the
following cases: first, when the creditor accepts the thing or amount
deposited as payment of the obligation without contesting the ef-
ficacy or validity of the consignation; and second when the creditor
contests the efficacy or validity of the consignation and the court
finally decides that it has been properly made or cancels the obliga-
tion at the instance of the debtor in accordance with the provision of
the first paragraph of Art. 1260.
Art. 1260. Once the consignation has been duly made,

the debtor may ask the judge to order the cancellation of the
obligation.
Before the creditor has accepted the consignation, or
before a judicial declaration that the consignation has been
properly made, the debtor may withdraw the thing or the
sum deposited, allowing the obligation to remain in force.171
Art. 1261. If the consignation having been made, the
creditor should authorize the debtor to withdraw the same,
he shall lose every preference which he may have over the
169
3 Castan, 7th Ed., p. 252; see Arts. 538, 2005, et seq., Civil Code.
170
171
286
Loss of the Thing Due
thing. The co-debtors, guarantors and sureties shall be

released.172
Effects of Consignation. — The effects of consignation may

be summarized as follows:
(1) If the creditor accepts the thing or amount deposited
without contesting the validity or efficacy of the consignation, it is
logical that the obligation is cancelled or extinguished.
(2) If the creditor contests the validity or efficacy of the
consignation, the result is a litigation. The same is true if the creditor
is not interested or is not known or is absent. The result is also a
litigation. If during the trial on the merits of the case, the plaintiff-
debtor is able to establish that all of the requisities of a valid and
effective consignation had been complied with, the obligation is
extinguished or cancelled.
Idem; Effect of withdrawal. — We must distinguish
between the effect of a withdrawal by the debtor of the object or
amount deposited when made before the creditor has accepted the
consignation or before a judicial declaration that the consignation
has been properly made,173 and a withdrawal made with the consent
of the creditor.174 In the first, the obligation remains in force;175 in the
second, the creditor loses every preference which he may have over
the thing. Solidary co-debtors, guarantors and sureties, however,
shall be released.176
Section 2. — Loss of the Thing Due
Concept. — In its strict sense, “loss of the thing due” means

that the thing which constitutes the object of the obligation perishes,
or goes out of the commerce of man, or disappears in such a way that
its existence is unknown or it cannot be recovered.177 In its broad
sense, it means impossibility of compliance with the obligation
172
173
174
175
176
177
287
through any cause.178 In other words, it is synonymous with what

other codes term “impossibility of performance.’’179 This is the sense
in which it is understood in this section of the Civil Code.
Art. 1262. An obligation which consists in the delivery of

a determinate thing shall be extinguished if it should be lost
or destroyed without the fault of the debtor, and before he
has incurred in delay.
When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not extinguish
the obligation, and he shall be responsible for damages. The
same rule applies when the nature of the obligation requires
the assumption of risk.180
Effect of Loss in Determinate Obligations To Give. —

According to the first paragraph of the above article, an obligation
to give a determinate thing will be extinguished if the thing should
be lost or destroyed without the fault of the debtor and before he has
incurred in delay.181 It is evident from this rule that before the loss of
the thing due will result in the extinguishment of the obligation, it
is necessary that the following requisites must concur:
(1) The thing which is lost must be determinate.182
(2) The thing is lost without any fault of the debtor. If the
thing is lost through the fault of the debtor, the obligation is not
extinguished; it is simply converted into an obligation to indemnify
the creditor for damages.183
(3) The thing is lost before the debtor has incurred in delay.
If the thing is lost after the debtor has already incurred in delay,
178
4 Sanchez Roman 442.
179
Ibid. For extended discussion — see 8 Manresa, 5th Ed., Bk. 1, pp. 650-652.
180
181
For illustrative cases — see Crame vs. Gonzaga, 10 Phil. 646; Insular Govern-
ment vs. Bingham, 13 Phil. 558; Bishop of Jaro vs. De la Peña, 26 Phil. 144; Lizares
vs. Hernaez, 40 Phil. 98; Obejera vs. Iga Sy, CA, 43 Off. Gaz. 121; Cruz vs. Valero, 89
Phil. 260; Bachrach Motor Co. vs. Lee Tay and Lee Chay, 90 Phil. 540; Ramcar vs.
Dizon, CA, 51 Off. Gaz. 3507.
182
See Lawyers Coop. Pub. Co. vs. Tabora, 13 SCRA 762; Rep. of the Phil. vs.
Grijaldo, 15 SCRA 681.
183
288
the rule is that such debtor can still be held liable for indemnity for
damages.184
Idem; Effect of fortuitous event. — The rule declared in
the first paragraph of Art. 1262 must always be read in relation
to the rule declared in Art. 1174 regarding the effect of the failure
of the debtor to comply with his obligation through a fortuitous
event. If the thing which constitutes the object of the obligation is
lost or destroyed through a fortuitous event, the debtor cannot be
held responsible.185 In other words, the obligation is extinguished.186
Thus, where some of the goods deposited in the defendant’s
warehouse were looted and the rest was taken by the Japanese
forces during the war, there would be no legal way of holding the
defendant responsible, because it is evident that the loss was due to
a fortuitous event.187 Similarly, where the launch or casco which the
defendant was supposed to deliver to the plaintiff was lost due to a
defect of the casco which could not have been foreseen, he cannot
be held liable.188 But where the defendant purchased a truck from
the plaintiff before the outbreak of the last war, payable in monthly
installments, and was commandeered by the USAFFE during the
war, the defendant’s obligation is not extinguished, because in the
first place, the truck became the property of the defendant when
it was delivered to him, and consequently, he must bear the loss;
in the second place, he could have filed a war damage claim with
the United States government and he would have been paid. His
negligent omission cannot, therefore, be imputed to the plaintiff who
was no longer the owner of the vehicle.189
Idem; id. — Exceptions. — There are, however, certain
exceptions to the rule that the debtor cannot be held liable if the
thing which constitutes the object of the obligation is lost or destroyed
through a fortuitous event. They are:
(1) When by law, the debtor is liable even for fortuitous
events;190
184
Arts. 1170, 1165, par. 3, Civil Code.
185
186
187
Cruz vs. Valero, 89 Phil. 260.
188
Ramcar vs. Dizon, CA, 51 Off. Gaz. 3507.
189
Bachrach Motor Co. vs. Lee Tay and Lee Chay, 90 Phil. 540.
190
Arts. 1174, 1262, par. 2, Civil Code.
289
(2) When by stipulation of the parties, the debtor is liable

even for fortuitous events;191
(3) When the nature of the obligation requires the assumption
of risk;192
(4) When the loss of the thing is due partly to the fault of the
debtor;193
(5) When the loss of the thing occurs after the debtor has
incurred in delay;194
(6) When the debtor promised to deliver the same thing to
two or more persons who do not have the same interest;195
(7) When the obligation to deliver arises from a criminal
offense;196 and
(8) When the obligation is generic.197
Art. 1263. In an obligation to deliver a generic thing,

the loss or destruction of anything of the same kind does not
extinguish the obligation.198
Effect of Loss in Generic Obligations To Give. — If the
obligation is generic in the sense that the object thereof is designated
merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor’s
fault and before he has incurred in delay will not have the effect
of extinguishing the obligation.199 This rule which is stated in Art.
1263 is based upon the principle that the genus of a thing can
never perish (genus nunquam peruit). Consequently, the debtor
can still be compelled to deliver a thing which must be neither of
191
Ibid.
192
193
Ibid. See Tan Chiong Sian vs. Inchauti & Co., 22 Phil. 152; Limpangco vs.
Yangco Steamship Co., 34 Phil. 597.
194
Arts. 1262, par. 1, 1165, par. 3, Civil Code.
195
196
197
198
New provision.
199
Art 1263; see discussion under Arts. 1163, et seq., Civil Code.
290
superior nor inferior quality.200 Thus, where the obligation consists

in the payment of money201 or in the delivery of any other generic
or indeterminate thing such as several cavans of rice202 or several
piculs of sugar203 or several tons of copra,204 the failure of the debtor
to make the payment or to effect the delivery even by reason of a
fortuitous event shall not relieve him of his liability.
There is, however, a sort of exception to the rule in the case
of a generic obligation whose object is a particular class or group
with specific or determinate qualities, such as the cattle or horses
of a certain ranch or the sugar in a certain warehouse. Thus, if A
obligated himself to deliver before the end of 1979 fifty heads of cattle
to B with the understanding that such fifty heads of cattle shall be
taken from a certain ranch and all of the cattle in that ranch are
wiped out by an epidemic, the obligation is extinguished. In reality,
such obligation is determinate in character.205
Art. 1264. The Courts shall determine whether, under the

circumstances, the partial loss of the object of the obligation
is so important as to extinguish the obligation.206
Effect of Partial Loss. — The rule stated in the above article
is self-explanatory. Whether or not the partial loss or destruction
of the thing is of such importance that it would be tantamount to a
complete loss or destruction, shall depend upon the sound discretion
of the court.
Art. 1265. Whenever the thing is lost in the possession

of the debtor, it shall be presumed that the loss was due to
his fault, unless there is proof to the contrary, and without
prejudice to the provisions of Article 1165. This presumption
does not apply in case of earthquake, flood, storm or other
natural calamity.207
200
201
Reyes vs. Caltex, 47 Off. Gaz 1193; Phil. Long Distance Co. vs. Jeturian, 97
Phil. 781.
202
Soriano vs. De Leon, 48 Off. Gaz. 2245.
203
Yu Tek Co. vs. Gonzalez, 29 Phil. 384; Lacson vs. Diaz, 47 Off. Gaz. 337.
204
Bunje Corp. vs. Elena Camenforte & Co., 48 Off. Gaz. 3377.
205
206
New provision.
207
291
Rule If Thing Is in Debtor’s Possession. — According

to the above article, if the thing which constitutes the object of a
determinate obligation is lost in the possession of the debtor, there
arises a disputable presumption that the loss was due to his fault.
In such case, the obligation is not extinguished; in other words,
the debtor is still liable to the creditor for damages. Therefore, the
burden of proof of absence of fault corresponds to the debtor. This
must be without prejudice to the rule stated in the third paragraph
of Art. 1165 to the effect that if the obligor delays, or has promised
to deliver the same thing to two or more persons who do not have
the same interest, he shall be responsible for any fortuitous event
until he has effected the delivery. Hence, in such cases, even if the
debtor or obligor can prove that the loss or destruction of the thing
in his possession was not through his fault or that it was through a
fortuitous event, he shall still be liable to the creditor or obligee for
damages.
The presumption, however, does not apply in case of earthquake,
flood, storm or other natural calamity. This qualification was added
by the Code Commission to the original rule stated in Art. 1183 of
the Spanish Civil Code, because “in case of a natural calamity, lack
of fault is more likely.’’
Art. 1266. The debtor in obligations to do shall also be

released when the prestation becomes legally or physically
impossible without the fault of the obligor.208
Effect of Impossibility of Performance in Obligations To

Do. — The above article is applicable only to obligations to do, as
distinguished from Art. 1262, which is applicable only to obligations
to give. However, in order that the impossibility of compliance
with the obligation shall result in its extinguishment, practically
the same requisites prescribed by Art. 1262 are also prescribed in
this article. Consequently, the prestation constituting the object of
the obligation must have become legally or physically impossible
of compliance without the fault of the obligor and before he has
incurred in delay, otherwise, the obligation shall be converted into
one of indemnity for damages. In addition, the impossibility must
have occurred after the constitution of the obligation; otherwise, if
208
292
it was present before the obligation was constituted, there would be

an obligation which would be ineffective from its inception.
The article distinguishes between two causes of impossibility
of the prestation by considering the source of such impossibility. It
may arise from the law, although physically it may be possible of
performance, or it may arise from a fact which renders performance
impossible, although no law is violated. In both cases, the obligor is
released from his obligation.209
The first (legal impossibility) may be direct, when the law
prohibits the performance or execution of the work agreed upon, as
where it is immoral or dangerous; or it may be indirect, as where the
law imposes duties of a superior character upon the obligor which
are incompatible with the work agreed upon, although the latter
may be perfectly licit, as where the obligor is drafted for military
service or for a civil function. The second (physical impossibility),
on the other hand, arises principally from the death of the obligor,
when the act to be performed requires his personal qualifications, or
from the death of the obligee, when the act can be of possible benefit
only to him. In one and the other case, both the obligation and
the right, respectively, are intransmissible, and consequently, are
extinguished by the mere fact of death. Aside from these absolute
forms of extinction, physical impossibility may also arise from mere
accident, or from the acts of the debtor himself in which there is no
fault, or from the acts of third persons affecting the debtor’s capacity
to execute the work agreed upon.210
Idem; Effect. — When the prestation which constitutes the
object of the obligation becomes legally or physically impossible
without the fault of the obligor, according to Art. 1266, such obligor
is released from the obligation. Thus, where a contract is entered
into between the creditor and the principal debtor without the
knowledge and consent of the surety which made it impossible for
such surety to comply with his promise, it is clear that under Art.
1266 the surety can no longer be held liable, considering the fact that
the compliance with the obligation has become impossible without
any fault on his part.211 Similarly, where the obligor was unable
209
210
Ibid., pp. 661-663.
211
House vs. De la Costa, 63 Phil. 74.
293
to comply with his obligation to reconstruct certain apartments

including a movie house because of the refusal of the City Engineer
to issue the necessary building permit due to the plan of the Urban
Planning Commission to widen the street adjoining the lots where
such buildings were to be constructed, he cannot be held liable for
breach considering the fact that it was legally impossible for him to
comply with the obligation.212 The same is true where compliance
with the prestation which constitutes the object of the obligation will
prove dangerous to life or property.213 The application of this rule is
even more evident in those obligations where the prestation had to
be performed during the Japanese occupation because of the certain
conditions of peace and order then prevailing in the country.214
Labayen vs. Talisay-Silay Milling Co.

52 Phil. 440
Plaintiff and defendant entered into a contract whereby it

was agreed among other things that the latter shall extend its
railroad from its sugar central to a certain hacienda. Defendant,
however, failed to comply with the obligation because the
extension of the railroad would be very costly and dangerous to
life and property by reason of the contour of the land through
which the said railroad would be constructed. The question
now is — is there a breach of contract which would render the
defendant liable for damages? The Supreme Court held:
“It is elemental that the law requires the parties to do
what they have agreed to do. If a party charges himself with an
obligation possible to be performed, he must abide by it unless
performance is rendered impossible by the act of God, the law,
or the party. A showing of mere inconvenience, unexpected
impediments, or increased expenses is not enough. Equity
cannot relieve from bad bargains simply because they are such.
So one must answer in damages where the impossibility is only
so in fact.
“The foregoing are familiar principles found in the
American and English law of contracts. The civil law on the
212
Tabora vs. Lazatin, G.R. No. L-5245, May 29, 1953. To the same effect: Thea-
tres Supply Corp. vs. Malolos, CA, 48 Off. Gaz. 1803.
213
Labayen vs. Talisay-Silay Milling Co., 52 Phil. 440.
214
Castro vs. Longa, 89 Phil. 581. To the same effect: Santos vs. Sec. of Agricul-
ture, 48 Off. Gaz. 3368.
294
subject of obligations is not essentially different. Article 1272

(now Art. 1348) of the Civil Code provides: ‘impossible things or
services cannot be the subject matter of contracts.’ And Article
1184 (now Art. 1266) of the same Code provides: “The debtor
shall also be relieved from obligations which consist in the
performance of an act if fulfillment of the undertaking becomes
legally or physically impossible.’’
“May one obligate himself to do something which, when
accomplished, will prove to be dangerous to life and property?
We doubt it. Take the contract in question as an example. It
was a general contract of the form used by the central and
various proprietors of sugarcane field. It was intended to be
limited in particular application to haciendas not impeded by
physical impossibility. The contract was qualified by an implied
condition which, if given practical effect, results in absolving the
central from its promise. Not to sanction an exception to the
general rule would run counter to public policy and the law by
forcing the performance of a contract undesirable and harmful.’’
(8 Manresa’s Codigo Civil Español, p. 355.)
Idem; Effect in obligations not to do. — The Code only

speaks of legal and physical impossibility with respect to obligations
to do because it is very seldom that impossibility of performance
may arise in obligations not to do. There may, however, be rare or
exceptional cases in which legal or physical impossibility will occur
as when the obligor is compelled to do that which he had obligated
himself to refrain from performing. In such cases, his obligation is
extinguished applying the same principle invoked in Art. 1266.215
Art. 1267. When the service has become so difficult as to

be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.216
Effect of Relative Impossibility. — The general rule is that
impossibility of performance of an obligation to do shall release the
obligor. However, when the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the court should
be authorized to release the obligor in whole or in part. The intention
of the parties should govern and if it appears that the service turns
215
216
New provision.
295
out to be so difficult as to have been beyond their contemplation,

it would be doing violence to that intention to hold the obligor still
responsible.217
Art. 1267 contemplates of “service’’ which has become so dif-
ficult. Taking into consideration the rationale for this provision,
the word “service’’ should be understood as referring to the “perfor-
mance’’ of the obligation.
“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. According to Sen. Arturo M. Tolentino,
Art. 1267 states in our law the doctrine of unforeseen 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 the contract gives rise to a right to relief in favor of the
party prejudiced.’’ (Naga Telephone Co., et al. vs. Court of Appeals, et
al., Feb. 24, 1994, 48 SCAD 539.)
Art. 1268. When the debt of a thing certain and determi-

nate proceeds from a criminal offense, the debtor shall not
be exempted from the payment of its price whatever may be
the cause for the loss, unless the thing having been offered
by him to the person who should receive it, the latter refused
without justification to accept it.218
Rule If Obligation Arises from Criminal Offense. — The

rule stated in Art. 1268 is applicable not only to the case where
there is an obligation of restitution of a certain and determinate
thing on the part of the person criminally liable as provided for in
the Penal Code, but also to the case where such obligation arises
by virtue of reparation or indemnification. In all of these cases,
there is no question that the debt proceeds from a criminal offense.
217
Report of the Code Commission, p. 133. It seems that the doctrine enunciated
by the Supreme Court in the cases of Labayen vs. Talisay-Silay Milling Co., 52 Phil.
440, and Castro vs. Longa, 89 Phil. 581 (supra), can be justified by an application of
the principle now enunciated in this article.
218
296
Furthermore, the rule is applicable not only to the persons who are
principally liable, but also to those who are subsidiarily liable. In all
of these cases, if the thing is lost, the debtor shall not be exempted
from the payment of the price of the thing, whatever may be the
cause for the loss. The only case where he is relieved of the severity
of the precept is when he had offered the thing to the obligee and the
latter had refused to accept it without justification.219
The offer referred to in this article should not be confused with
consignation inasmuch as the latter refers only to the payment of
the obligation, while the former refers to the extinguishment of the
obligation through loss by a fortuitous event. In consignation, the
offer is but a step to the payment; in this article, it is essential that
the creditor should refuse to accept the thing without justification
in order that the debtor may be released from liability in case of loss
through a fortuitous event.220
When the offer is made by the debtor and the creditor refuses to
accept it without justification, he may choose either of two courses:
(1) he may make a consignation of the thing and thereby completely
relieve himself of further liability, or (2) he may keep the thing in
his possession, in which case, the obligation shall still subsist but
with this difference — that if the thing is lost through a fortuitous
event, Arts. 1262 and 1265, and not Art. 1268, shall govern. It must,
of course, be noted that this Article (1268) can have no application
to those cases where an offer is not possible, since such offer by the
debtor is an essential requisite.221
Art. 1269. The obligation having been extinguished by

the loss of the thing, the creditor shall have all the rights of
action which the debtor may have against the third persons
by reason of the loss.222
Effect of Extinguishment of Obligation. — According to

the above article, if the obligation is extinguished by the loss of the
thing, all of the rights of action which the debtor may have against
third persons by reason of the loss are transmitted by operation of
219
220
Ibid.
221
Ibid.
222
297
law to the creditor. Such transmission is made from the moment of

the extinguishment of the obligation. The application of the precept
is illustrated in a case where the object which is due is insured
and by reason of some cause is lost or destroyed. In such case,
the creditor can collect the indemnity from the insurer. It is also
illustrated by a case where the object is expropriated. In such case,
the creditor can collect the compensation which is due by reason of
the expropriation.223
Section 3. — Condonation or Remission of the Debt
Concept. — Remission is an act of liberality by virtue of which

the obligee, without receiving any price or equivalent, renounces the
enforcement of the obligation, as a result of which it is extinguished
in its entirety or in that part or aspect of the same to which the
remission refers.224 In the terse language of Sanchez Roman, it is the
gratuitous abandonment by the creditor of his right.225
Requisites. — In order that there will be a remission or
condonation which will result in the total or partial extinguishment
of the obligation, it is essential that the following requisites must
concur: first, it must be gratuitous; second, it must be accepted by
the obligor; and third, the obligation must be demandable.
Kinds. — Remission or condonation may be classified as
follows:
(1) As to form, remission may be express or implied. It is
express when it is made in accordance with the formalities prescribed
by law for donations; it is implied when, although it is not made in
accordance with the formalities prescribed by law for donations, it
can be deduced from the acts of the obligee or creditor.226
(2) As to extent, remission may be total or partial. It is total
when the entire obligation is extinguished; it is partial when it
refers only to the principal or to the accessory obligation or to an
aspect thereof which affects the debtor as for instance solidarity.
223
224
225
226
298
Condonation or Remission of the Debt
(3) As to constitution, remission may be inter vivos or mortis

causa. The first refers to that which is constituted by agreement of
the obligee and the obligor in which case it partakes of the nature
of a donation inter vivos;227 the second, on the other hand, refers to
that which is constituted by last will and testament in which case it
partakes of the nature of a donation mortis causa.228
Art. 1270. Condonation or remission is essentially gratu-

itous, and requires the acceptance by the obligor. It may be
made expressly or impliedly.
One and the other kinds shall be subject to the rules
which govern inofficious donations. Express condonation
shall, furthermore, comply with the forms of donations.229
Gratuitous Character of Remission. — The most essential

characteristic of remission is that it is gratuitous.230 Consequently,
before it can be said that an obligation has been condoned by the
creditor, it is essential that it must be an act of pure liberality of
the creditor for the benefit of the debtor; in other words, the creditor
should not have received any price or equivalent from the debtor as
a result of his act in renouncing the enforcement of the obligation.
Necessity of Acceptance by Debtor. — Because in reality
the remission or condonation of an obligation is by its very nature a
donation, the Code requires that it must be accepted by the debtor.231
This requisite is expressly declared in the first paragraph of Art.
1270; it can also be clearly inferred from the provision of the second
paragraph of the said article which states that it shall be subject to
the rules which govern inofficious donations.232
The question arises as to whether remission is a unilateral or
a bilateral act. Planiol and Valverde believe that it is by its very
nature a bilateral act, and this is rightly so, because our Code
requires its acceptance by the debtor, and besides, this view is in
conformity with the rule which subjects express remission to the
227
See Arts. 734, 745, 746, Civil Code.
228
See Arts. 935, 936, 937, Civil Code.
229
230
Ibid.
231
Ibid.
232
299
forms of donations.233 Thus, where a proffer was made by the plaintiff

to the defendant that in the event the latter loses a pending case
with his wife and, after the adjudication of the conjugal property,
what is left will not be sufficient for his livelihood, he (the plaintiff)
will be pleased to write off as a bad debt the balance of a certain
indebtedness, and the proffer was accepted, it is clear that such
proffer constitutes a binding obligation.234
Applicability of Rules on Donations. — It is not only with
regard to the necessity of acceptance by the debtor that the rules on
ordinary donations are applicable.235 There are other rules which are
equally applicable, such as those governing the forms of donations
if the remission is express,236 those governing the extent or amount
of the donation,237 and those governing the revocation of donations.238
This is not only deducible from the very nature of remission as an
act of pure liberality, it is also expressly declared by the second
paragraph of Art. 1270.
Idem; Extent of remission. — Whether express or implied,
the extent of the remission or condonation shall be governed by the
rules regarding inofficious donations.239 Hence, the following rules
are applicable:
“Art. 750, C.C. The donation may comprehend all the

present property of the donor, or part thereof, provided he
reserves, in full ownership or in usufruct, sufficient means for
the support of himself, and of all relatives who, at the time of the
acceptance of the donation, are by law entitled to be supported
by the donor. Without such reservation, the donation shall be
reduced on petition of any person affected.”
“Art. 751, C.C. Donations cannot comprehend future
property.
“By future property is understood anything which the
donor cannot dispose of at the time of the donation.’’
233
Ibid., pp. 265-266.
234
Dalupan vs. Harden, 90 Phil. 417.
235
Arts. 734, 745, 746, Civil Code.
236
237
Arts. 750, 751, 752, Civil Code.
238
Arts. 760-773, Civil Code.
239
300
“Art. 752, C.C. The provision of Article 750 notwithstanding,

no person may give or receive, by way of donation, more than he
may give or receive by will.
“The donation shall be inofficious in all that it may exceed
this limitation.”
“Art. 771, C.C. Donations which in accordance with the
provisions of Article 752, are inofficious, bearing in mind the
estimated net value of the donor’s property at the time of his
death, shall be reduced with regard to the excess, but this
reduction shall not prevent the donations from taking effect
during the life of the donor, nor shall it bar the donee from
appropriating the fruits.
“For the reduction of donations the provisions of this
Chapter and of Articles 911 and 912 of this Code shall govern.’’
Consequently, if the estate of the creditor consists of credits,

and there is a remission or condonation of all of such credits, it is
evident that there would be a violation of the rule stated in Art. 750
of the Code, in which case the remedy provided for in the said article
would be available. If the remission comprehends future debts, it
is also evident that it shall be void, not only because it lacks the
requisite of demandability, but also because it is contrary to the
precept contained in Art. 751 that donations cannot comprehend
future property. And finally, if the remission is inofficious in
accordance with the general precept contained in Art. 752, the
remedy provided for in Art. 771 by virtue of which the compulsory
heirs of the creditor-donor can proceed against the debtor-donee for
the reduction or even suppression of the remission, would also be
available.240
Idem; Form of express remission. — According to the
second paragraph of Art. 1270, express remission or condonation
must comply with the forms of donations. This rule is, of course,
logical considering the fact that the remission or condonation of a
debt is in reality a donation. Hence, the following provisions are
applicable:
“Art. 748, C.C. The donation of a movable may be made

orally or in writing.’’
240
8 Manresa, 6th Ed., Bk 1, pp. 679-680.
301
“An oral donation requires the simultaneous delivery of

the thing or of the document representing the right donated.’’
“If the value of the personal property donated exceeds five
thousand pesos, the donation and the acceptance shall be made
in writing. Otherwise, the donation shall be void.”
“Art. 749, C.C. In order that the donation of an immovable
may be valid, it must be made in a public document, specifying
therein the property donated and the value of the charges which
the donee must satisfy.’’
“The acceptance may be made in the same deed of donation
or in a separate public document, but it shall not take effect
unless it is done during the lifetime of the donor.’’
“If the acceptance is made in a separate instrument, the
donor shall be notified thereof in an authentic form, and this
step shall be noted in both instruments.”
Consequently, if the obligation to give which is expressly

condoned involves personal property, the provision of Art. 748 shall
apply with the qualification that the delivery of personal property,
if the remission is verbal, shall not be required since there is no
transfer of property but merely a remission or condonation of an
obligation to give personal property. On the contrary, in acts of
liberality of this sort the debtor is relieved from making a conveyance
of the property.241 It must also be noted that with respect to express
remission of an obligation to give personal property, acceptance by
the debtor maybe implied or tacit, provided that the value of the
debt which is condoned is not more than five thousand pesos.
If the obligation to give which is expressly condoned involves
immovable property, the provision of Art. 749 shall apply.
In obligations to do or not to do, the form of the express
remission must be in accordance with the less solemn formalities
established in Art. 748 with, of course, the necessary qualification
regarding delivery.242
It must also be noted that the fact that the obligation which is
condoned appears in a public document does not necessarily mean
241
Ibid.
242
Ibid.
302
that the remission must also be embodied in a document of the same

character.243
Idem; Form of implied remission. — It will be observed
that the Code is silent with respect to the form of implied remission.
Nevertheless, there is no question that it may be deduced from any
act or acts of the creditor which clearly show the intent to condone
the obligation. As in the case of express remission, there must be
acceptance by the obligor or debtor. Such acceptance may be express
or implied in any case.244 Examples of implied remission are those
regulated by Arts. 1271 to 1274 of the Code.
There is, however, an interesting question that arises in
connection with implied remission. Let us assume that the remission
is expressly made, but because it fails to comply with the forms
prescribed by Art. 748 or Art. 749, it cannot properly take effect as
an express remission. Can it be enforced as a tacit remission? The
question must be resolved in the negative. Otherwise, the purpose of
the last sentence of Art. 1270 would be defeated. Hence, an express
remission which is formally defective cannot affect the obligee or
creditor, unless new or other acts from which remission may be
deduced should confirm the purpose expressed in the former.245
Art. 1271. The delivery of a private document evidencing

a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had
against the latter.
If in order to nullify this waiver it should be claimed
to be inofficious, the debtor and his heirs may uphold it by
proving that the delivery of the document was made in virtue
of payment of the debt.246
Art. 1272. Whenever the private document in which
the debt appears is found in the possession of the debtor, it
243
Ibid.
244
Ibid.
245
Ibid. As a matter of fact because of the provision of the last sentence of Art.
1270, we believe that the only possible cases implied would be those contemplated in
Arts. 1271, 1272 and 1274 of the Civil Code.
246
303
shall be presumed that the creditor delivered it voluntarily,

unless the contrary is proved.247
Effect of Delivery of Evidence of Credit to Debtor. — Art.

1271 enunciates the rule that if the creditor voluntarily delivers
the private document evidencing the credit to the debtor, there is
a presumption that he renounces his right of action against the
latter for the collection of the said credit, From an examination of
the provision, it is clear that the following requisites must concur
in order that the presumption will arise: first, that the document
evidencing the credit must have been delivered by the creditor to the
debtor; second, that the document must be a private document; and
third, that the delivery must be voluntary. The second requisite is,
of course, logical because if the document is public the presumption
does not arise considering the fact that the public character of the
document would always protect the interest of the creditor.248 With
regard to the third requisite, it must be observed that, according to
Art. 1272, whenever the private document evidencing the credit is
found in the possession of the debtor, there arises a presumption
that the creditor delivered it to him voluntarily, unless the contrary
is proved. Thus, where the promissory note evidencing the credit
is already in the possession of the debtor, there arises a disputable
presumption to the effect that the creditor must have delivered
it voluntarily to him; consequently, in the absence of proof to
the contrary, an implied or tacit renunciation of the debt may be
presumed.249
Subsequently, however, the heirs of the creditor may try to
impugn or nullify the renunciation or condonation by establishing
that it is inofficious in conformity with the remedy which is available
to them under Art. 771 of the Code. In such case, according to the
second paragraph of Art. 1271, the debtor or his heirs may uphold
it by proving that the delivery of the private document was made
because the debt had already been paid. This is, of course, ridiculous,
because under this rule, we would witness the absurd spectacle of
a debtor or his heirs trying to uphold a presumption of remission,
247
248
249
Veloso vs. Masa, 10 Phil. 279; Lopez vs. Tambunting, 33 Phil. 236.
304
when it is claimed that such remission is inofficious, by proving that

the debt had already been paid when as a matter of fact it is not.250
Art. 1273. The renunciation of the principal debt shall

extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force.251
Art. 1274. It is presumed that the accessory obligation
of pledge has been remitted when the thing pledged, after
its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing.252
Effect of Remission in General. — The effect of remission

is to extinguish the obligation in its entirety or in the part or aspect
thereof to which the remission refers.
If the obligation is joint, the remission can only affect the share
of the creditor who makes the remission and the corresponding share
of the debtor in whose favor the remission is made, since the peculiar
feature of this type of obligation is the division of the credit or of the
debt into as many equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one another.253 If the
obligation is solidary, the provisions of Arts. 1215, 1219 and 1220 of
the Code shall govern.
Idem; Effect upon accessory obligations. — Under Art.
1273, if the remission refers to the principal obligation, all the
accessory obligations are extinguished, since the latter depend upon
the former for their existence or efficacy. However, if the remission
refers to the accessory obligations, the principal obligation continues
to subsist.
Idem; id. — Rule in pledge. — According to Art. 1274, it is
presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found
250
3 Castan, 7th Ed., p. 268. Under Sec. 5(h) and (k), Rule 131 of the New Rules
of Court, the rule is that if the private document evidencing the credit is in the pos-
session of the debtor, there arises a disputable presumption to the effect that the debt
has already been paid.
251
252
Art. 1191, Spanish Civil Code, in amended form.
253
305
in the possession of the debtor or of a third person who owns the

thing.254 Like the presumptions established in Arts. 1271 and 1272,
the presumption established in this article, according to the opinion
of a majority of commentators, Manresa among them, is disputable.255
The principal obligation for which the pledge is a security is, of
course, not affected.256 Thus, if A pledged his watch to B as security
for an indebtedness of P100, and subsequently, the watch is found
in his possession, there arises a presumption of remission of the
accessory obligation of pledge. The debt of P100, however, is not
affected. B may disprove the remission by proving that he gave the
watch temporarily to the debtor to be repaired or that A was able to
take possession thereof without his consent or authority.
Section 4. — Confusion or Merger of Rights
Art. 1275. The obligation is extinguished from the time

the characters of creditor and debtor are merged in the same
person.257
Concept of Confusion. — With the provision of Art. 1275 as
basis, confusion maybe defined as the merger of the characters of
creditor and debtor in one and the same person by virtue of which
the obligation is extinguished. The classic definition, however, is
that of Sanchez Roman. According to the eminent commentator,
confusion may be defined as the meeting in one and the same person
of the qualities of creditor and debtor with respect to one and the
same obligation.258
By its very nature, confusion or merger of rights will neces-
sarily result in the extinguishment of the obligation because of the
impossibility of enforcing it since it would certainly be absurd for
a person to enforce a claim against himself. Besides, the purpose
or end for which the obligation is constituted is realized when the
qualities of creditor and debtor are merged in one and the same per-
son.259
254
See Art. 2110, Civil Code.
255
Manresa, 5th Ed., Bk. 1, p. 697. Sanchez Roman, however, maintains that it
is conclusive (Vol. 4, p. 462).
256
257
258
259
306
Confusion or Merger of Rights
Requisites. — In order that there will be a confusion of

rights which will result in the extinguishment of the obligation,
it is essential that the following requisites must concur: (1) that
the merger of the characters of creditor and debtor must be in the
same person;260 (2) that it must take place in the person of either the
principal creditor or the principal debtor;261 and (3) that it must be
complete and definite.262 The requisite that the merger of rights of
creditor and debtor must be complete and definite does not mean
that the extinguishment of the obligation should be complete or
total in character; it merely means that whether the merger refers
to the entire obligation or only a part thereof, it must be of such a
character that there will be a complete and definite meeting of all of
the qualities of creditor and debtor in the obligation or in the part or
aspect thereof which is affected by the merger.263
Kinds. — Confusion or merger of rights may be classified as
follows:
(1) As to cause or constitutions: Inter vivos or mortis causa
— inter vivos, when it is constituted by agreement of the parties,
mortis causa, when it is constituted by succession.
(2) As to extent or effect: Total or partial — total, if it results
in the extinguishment of the entire obligation, partial if it results
in the extinguishment of only a part of the obligation. There are
two cases where the extinguishment is merely partial — first, when
the confusion or merger refers only to a part of the obligation; and
second, when the obligation is joint.264
Art. 1276. Merger which takes place in the person of

the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the
latter does not extinguish the obligation.265
260
261
262
Testate Estate of Mota vs. Serra, 40 Phil. 464.
263
For illustrative cases of partial confusion or merger — see Sochayseng vs.
Trujillo, 31 Phil. 153; Yek Ton Lin Fire & Marine Insurance Co. vs. Yusingco, 46
Phil. 473.
264
265
307
Effect upon Accessory Obligations. — Under Art. 1276 in

relation to Art. 1275, if the confusion or merger of rights will take
place in the person of either the principal creditor or the principal
debtor, the effect is the extinguishment, not only of the principal
obligation, but even of the accessory obligation. This is, of course,
logical because of the principle that the accessory obligation cannot
exist without the principal obligation.266 Consequently, guarantors
shall be benefited by the confusion of rights.267 If, on the other hand,
the confusion or merger will take place in the person of a subsidiary
creditor or a subsidiary debtor, such as a guarantor, it is evident
that there is no extinguishment of the principal obligation;268 there
will be only a substitution of creditor or debtor. If there are several
guarantors and the characters of creditor and guarantor are merged
in the person of any of the guarantors, such guarantor-creditor can
demand the performance of the obligation from the debtor, and in
case of default, even from his former co-guarantors. If the characters
of debtor and guarantor are merged, the creditor can demand the
performance of the obligation directly from the guarantor.269
Art. 1277. Confusion does not extinguish a joint obliga-

tion except as regards the share corresponding to the credi-
tor or debtor in whom the two characters concur.270
Effect upon Collective Obligations. — The rule stated in

the above article necessarily follows from the nature and character
of a joint obligation. Under Art. 1208 of the Code, which we have
already taken up in a previous chapter, the credit or debt shall
be presumed to be divided into as many equal shares as there
are creditors or debtors. This presumption of division is the most
essential characteristic of joint obligations. It is but logical that the
confusion which takes place, let us say, in one of the debtors shall
only refer to the share which corresponds to him. Consequently,
there is merely a partial extinguishment of the debt. The creditor
can still proceed against the other debtors.271
266
267
268
Ibid.
269
270
271
308
Compensation
With regard to solidary obligations, however, the provision

of Art. 1215 shall apply. In other words, the entire obligation is
extinguished, without prejudice to the rights and obligations of the
solidary creditors and solidary debtors among themselves.
Effect of Revocation of Confusion. — If the confusion
or merger is constituted by agreement, it is evident that it may
be revoked by the presence of any of the causes for the rescission,
annulment, nullity or inexistence of contracts or by some special cause
such as redemption. If it is constituted by inheritance, it may be
revoked by the nullity of the will, or by the subsequent appearance
of an heir with a better right, or by any other cause which will nullify
the merger. In all of these cases, the original obligation, as a general
rule, is recreated in the same form and under the same condition in
which it was found before the merger took place. Furthermore, the
period which has elapsed from the moment the merger took place
until its revocation cannot be computed in the determination of
the period of prescription, because during such period the creditor
could not possibly have made a demand for the fulfillment of the
obligation.272
Section 5. — Compensation
Art. 1278. Compensation shall take place when two

persons, in their own right, are creditors and debtors of each
other.273
Concept of Compensation. — According to Castan, compen-
sation may be defined as a mode of extinguishing in their concur-
rent amount those obligations of persons who in their own right are
creditors and debtors of each other.274 According to Manresa, it may
be defined as a figurative operation of weighing two obligations si-
multaneously in order to extinguish them to the extent in which the
amount of one is covered by the amount of the other.275
Compensation is very similar to payment, both from the the-
oretical and the practical point of view. In both cases, the obliga-
272
Ibid., pp. 700-701.
273
274
275
309
tions are extinguished because their economic object or purpose is

realized. Compensation, however, presents a more convenient and
less expensive method of effecting the payments of two obligations.
Consequently, it deserves the name of simplified payment (pago
abreviado).276
It has a double advantage over payment: first, facility of pay-
ment because it takes effect by operation of law; and second, guaran-
ty for the effectivity of the credit, because, otherwise, if the parties
will still have to comply with the formalities of ordinary payment,
one can easily be prejudiced by fraud or insolvency of the other.277
Idem; Distinguished from payment. — Compensation may
be distinguished from payment as follows:
(1) The requisites prescribed by law for compensation are
different from those prescribed by law for payment.
(2) Compensation takes effect by operation of law, while
payment takes effect by act of the parties.
(3) Capacity to give and to acquire is not necessary in com-
pensation, but it is essential in payment.
(4) Compensation is, as a rule, partial, while payment is, as
a rule, complete and indivisible.278
Idem; Distinguished from confusion. — Compensation
may be distinguished from confusion as follows:
(1) As to number of persons, in compensation there must be
two persons, who, in their own right, are creditors and debtors of
each other; in confusion there is only one person in whom is merged
the qualities of creditor and debtor.
(2) As to number of obligations, in compensation there must
be at least two; in confusion there is only one.279
276
Ibid., pp. 713-714.
277
278
2 Giorgi, Teoria de las Obligaciones, pp. 24-25.
279
Bocobo, Outlines of the Law on Obligations, p. 34.
310
Compensation
Idem; Distinguished from counterclaim. — Compensation

may be distinguished from set-off or counterclaim,280 as follows:
(1) Compensation requires that the two debts must consist in
money, or if the things due are fungibles, they must be of the same
kind and quality, but in counterclaim, this is not necessary.281
(2) Compensation, as a general rule, requires that the debts
must be liquidated but counterclaim does not.282
(3) Compensation need not be pleaded, while a counterclaim
must be pleaded to be effectual.283
Kinds of Compensation. — As to cause, compensation may
be:
(1) Legal — when it takes effect by operation of law from the
moment all of the requisites are present. This is the fixed type which
is regulated by Arts. 1278 and 1279 of the Civil Code.
(2) Voluntary — when the parties who are mutually creditors
and debtors agree to compensate their respective obligations, even
though all of the requisites for compensation may not then be
present. Giorgi includes under this class the so-called facultative
compensation which is effected by a party who is entitled to oppose
the compensation because he would be prejudiced thereby. This
occurs, for instance, when the obligation of one is with a term, while
that of the other is pure, and the former renounces the benefit of the
term, consequently making the compensation possible.284
280
“A counterclaim is any claim for money or other relief which a defending party
may have against an opposing party. A counterclaim need not diminish or defeat the
recovery sought by the opposing party, but many claim relief exceeding in amount
or different in kind from that sought by the opposing party’s claim.’’ (Sec. 6, Rule 6,
New Rules of Court) “A counter-claim not set up shall be barred if it arises out of or is
necessarily connected with the transaction or occurrence that is the subject matter of
the opposing party’s claim.’’ (Sec. 6, Rule 6, New Rules of Court) “A counter-claim not
set up shall be barred if it arises out of or is necessarily connected with the transac-
tion or occurrence that is the subject matter of the opposing party’s claim and does
not require for its adjudication the presence of third parties of whom the court can not
acquire jurisdiction.’’ (Sec. 4, Rule 9, New Rules of Court)
281
Art. 1179, No. 1, Civil Code; Sec. 6, Rule 6, New Rules of Court.
282
Art. 1179, No. 4, Civil Code; Yap Unki vs. Chua Japco, 14 Phil. 602.
283
Yap Unki vs. Chua Japco, 14 Phil. 602.
284
3 Castan, 7th Ed., pp. 272-273; Art. 1282, Civil Code.
311
(3) Judicial — when it takes effect by judicial decree. This

occurs, for instance, where one of the parties to a suit over an obliga-
tion has a claim for damages against the other and the former sets
it off by proving his right to said damage and the amount thereof.285
As to effect, compensation may be:
(1) Total — when the debts to be compensated are equal in
amount.286
(2) Partial — when the debts to be compensated are not equal
in amount.287
Art. 1279. In order that compensation may be proper, it

is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated
in due time to the debtor.288
Requisites of Compensation. — The essential requisites of
compensation are:
(1) There must be two parties, who, in their own right, are
principal creditors and principal debtors of each other;289
(2) Both debts must consist in money, or if the things due
are fungibles (consumables), they must be of the same kind and
quality;290
285
286
287
Ibid.
288
289
Arts. 1278, 1279, No. 1, Civil Code.
290
312
Compensation
(3) Both debts must be due;291

(4) Both debts must be liquidated and demandable;292
(5) There must be no retention or controversy commenced by
third persons over either of the debts and communicated in due time
to the debtor;293 and
(6) The compensation must not be prohibited by law.294
Idem; As to parties. — The first requisite in order that legal
compensation shall take place is that there must be two parties who,
in their own right, are principal creditors and principal debtors of
each other. In other words, it is necessary: (1) that the parties be
mutually creditors and debtors in their own right; and (2) that they
must be bound as principals.
By virtue of the provision of Art. 1278, it is necessary that the
parties must be mutually creditors and debtors in their own right.
Consequently, there can be no compensation between the obligations
of a legal representative, guardian or administrator incurred in his
personal capacity and the obligations of third persons to the person
represented, ward or estate under administration, although such
obligations may have been incurred by such third persons with
the said representative, guardian or administrator acting in his
legal capacity. The same can be said with regard to the obligations
incurred by the partnership as a juridical person and the individual
credits of any one of the partners.295 Thus, where the members of a
certain society had secured a judgment against a co-member for a
certain amount, the latter cannot interpose the defense that such
judgment must be compensated by her claim against the society,
because it is clear that the first requisite for legal compensation to
take place is not present.296
291
292
293
294
Arts. 1287, 1288, Civil Code; 3 Castan, 7th Ed., pp. 274-275.
295
296
Escano vs. Heirs of Escano, 28 Phil. 73.
313
Garcia vs. Lim Chiu Sing

59 Phil. 562
The defendant, who is indebted to the Mercantile Bank

of China for P9,105.17, contends in this action brought by the
Bank against him for payment of the debt that such debt must
be compensated by his shares of stock with the Bank. The
Supreme Court, however, held:
“According to the weight of authority, a share of

stock or the certificate thereof is not an indebtedness
and, therefore, it is not a credit. Stockholders, as such,
are not creditors of the corporation. It is the prevailing
doctrine of American courts, repeatedly asserted in the
broadest terms, that the capital stock of a corporation is a
trust fund to be used more particularly for the security of
creditors of the corporation, who presumably deal with it
on the credit of its capital stock. (4 Corpus Juris, p. 383,
Sec. 505.) Therefore, the defendant-appellant Lim Chiu
Sing, not being a creditor of the Mercantile Bank of China,
although the latter is a creditor of the former, there is no
sufficient ground to justify a compensation. (Art. 1195 —
now Art. 1278, Civil Code.)’’
Problem — “B’’ borrowed from “C’’ P1,000.00 payable in
one year. When “C’’ was in the province, “C’s’’ 17-year-old son
borrowed P500.00 from “B’’ for his school tuition. However, the
son spent it instead nightclubing. When the debt to “C’’ fell
due, “B’’ tendered only P500.00, claiming compensation on the
P500.00 borrowed by “C’s’’ son.
Question No. 1 — Is there legal compensation? Why? (1981
Bar Problem)
Answer — There is no legal compensation. Under the
Civil Code, in order that there will be a valid and effective
compensation, it is essential that there must be two parties, who
in their own right, are principal creditors and principal debtors
of each other. In the instant case, “C’’ cannot be considered as a
party to the act of his 17-year-old son in borrowing P500.00 from
“B.’’ Consequently, he did not become a principal debtor of “B’’;
neither did “B’’ become a principal creditor of “C.’’ Therefore,
there can be no partial compensation of the P1,000.00 borrowed
by “B’’ from “C.’’
(Note: The above answer is based on Arts. 1278 and 1279,
No. 1, of the Civil Code and on decided cases.)
314
Compensation
Question No. 2 — Suppose the minor son actually used

the money for school tuition, would the answer be different?
Reasons. (1981 Bar Problem)
Answer — There would be no difference in my answer.
There will still be no legal compensation. The fact that “C’s’’ son
actually used the P500.00 for his school tuition did not make “C’’
a party to the contract between his son and “B.’’ Therefore, “C’’
is not the principal debtor of “B’’ with respect to said amount.
(Note: The above answer is based on Arts. 1278 and 1279,
1, Civil Code.)
Idem; id. — Bound as principals. — By virtue of the provi-

sion of Art. 1279, No. 1, it is also necessary that the parties must be
bound as principals. In other words, the relation between the parties
must be that of principal creditor and principal debtor. Consequent-
ly, compensation cannot take place when one party is a debtor in one
obligation and a creditor of the other party’s creditor in another ob-
ligation or a creditor in one obligation and a guarantor of the other
party’s debtor in another obligation.297 Notwithstanding this rule,
however, the guarantor may set up compensation as regards what
the creditor may owe the principal debtor.298
When both parties are not only mutually creditors and debtors
in their own right, but are also principally bound as creditors and
debtors, compensation shall then take place, provided, of course, that
all of the other requisites are present. Thus, where the defendant
is indebted to the estate of the decedent for a certain amount
and the decedent, in turn, had, during his lifetime, contracted an
indebtedness from the defendant, the plaintiff-administrator of the
decedent’s estate cannot contend that compensation in this case is
not proper considering the fact that the decedent’s indebtedness is
chargeable against his estate.299 Similarly, where a corporation is
indebted to a stockholder for a certain amount and the stockholder,
on the other hand, is also indebted to the corporation for a certain
amount, it is evident that in such case compensation is proper.300 The
same is also true where the estate of a deceased person has a claim
297
298
299
De la Peña vs. Hidalgo, 20 Phil. 323.
300
Brimo vs. Goldemberg, 69 Phil. 502.
315
against the government and such claim has already been recognized
by the enactment of a corresponding law appropriating funds for
that purpose. Under the circumstances, since both the claim of the
intestate against the government and the claim of the government
for taxes against the estate of said intestate have already become
overdue and demandable as well as fully liquidated, compensation
has already taken place by operation of law in accordance with the
provisions of Arts. 1279 and 1290 of the Civil Code, and both debts
are therefore extinguished to the extent that the amount of one is
covered by the amount of the other.301
Gullas vs. Phil. National Bank

62 Phil. 519
It appears that a United States treasury warrant was

issued payable to Francisco Bacoa. This warrant was cashed
by the Philippine National Bank with plaintiff as one of the
indorsers, and subsequently, it was dishonored by the Insular
Treasury. Defendant bank then applied the deposit of plaintiff
to the payment of the amount paid by the bank for the warrant.
The question is: can there be a compensation in this case? The
Supreme Court held:
“The general rule is adopted for this jurisdiction that a
bank has a right of set-off of the deposit in its hands for the
payment of any indebtedness to it on the part of the depositor.
“As a general rule, a bank has a right of set-off of the
deposits in its hands for the payment of any indebtedness to
it on the part of a depositor. In Louisiana, however, a civil law
jurisdiction, the rule is denied, and it is held that a bank has no
right, without an order from or a special assent of the depositor
to retain out of his deposit an amount sufficient to meet his
indebtedness. The basis of the Louisiana doctrine is the theory
of confidential contracts arising from irregular deposits, e.g., the
deposit of money with a banker. With freedom of selection and
after full consideration, we have decided to adopt the general
rule in preference to the minority rule as more in harmony with
modern banking practice.’’
Idem; As to objects. — The second requisite in order that

legal compensation shall take place is that both debts must consist
301
Domingo vs. Carlitos, 8 SCRA 443.
316
Compensation
in a sum of money, or if the things due are fungibles, they must

be of the same kind and also of the same quality if the latter has
been stated. It is evident that this requisite contemplates only
obligations to give. The reason is that compensation is as a general
rule not possible in obligations to do because of the differences in the
respective capacities of the obligors.302
It must be observed that the Code uses the word “consumable,”
although what is actually contemplated is the word “fungible.” This
is evident because of the fact that “consumables” are those movables
which cannot be used in a manner appropriate to their nature
without being consumed, while “fungibles’’ are those which may be
exchanged or compensated by another of the same kind and quality.
Idem; As to maturity. — The third requisite is that both
debts must be due. Consequently, natural obligations, conditional
obligations before the fulfillment of the event which constitutes the
condition, and obligations with a period before the expiration of the
period, cannot be compensated.303
Idem; As to liquidation and demandability. — The fourth
requisite is that the debts to be compensated must be liquidated
and demandable. Liquidated debts are those the amount of which
may be determined by a simple arithmetical operation.304 Hence, if
one of the debts or both of them are still unliquidated, there can be
no compensation. If both are partially liquidated compensation may
take place with respect to the parts which are liquidated, but not
with respect to those which are unliquidated, applying by analogy
the rule stated in Art. 1248, since compensation is merely a sort of
simplified payment.305
Thus, the Supreme Court, in the case of Silahis Mktg. Corp. vs.
IAC (180 SCRA 217), held that compensation is not proper where
the claim of the person asserting the set-off against the other is not
clear nor liquidated: compensation cannot extend to unliquidated,
disputed claim existing from breach of contract.
Reading No. 4 of Art. 1279 with No. 3, it is evident that in order
that the debts to be compensated may be considered demandable,
302
303
3 Castan, 7th Ed., p. 275; 8 Manresa, 5th Ed., Bk. 1, pp. 724-725.
304
305
Ibid., pp. 725-726.
317
it is necessary that such debts must be due and, at the same time,
liquidated.306
Idem; As to claims of third persons. — The fifth requisite is
that there must be no retention or controversy, commenced by third
persons and communicated in due time to the debtor, over either of
the debts. Retention consists in the application of the credit of one
of the parties to the satisfaction of the claims of a third person. It is
evident that in such a case there can be no compensation. However,
if there is an excess or balance remaining after the application
of the credit, compensation will still take place, but only to the
extent that the credit is not affected by the retention. Controversy
refers to a case in which a third person claims to be the creditor.
In other words, the party interested in the compensation and the
third person each claims that he is the real creditor. The effect of
such case is a provisional suspension of the compensation. If the
credit is adjudicated to the former, compensation takes place; if it is
adjudicated to the latter, compensation cannot take place.307
Art. 1280. Notwithstanding the provisions of the preced-

ing article, the guarantor may set up compensation as re-
gards what the creditor may owe the principal debtor.308
Right of Guarantor To Set Up Compensation. — The
above article constitutes an exception to the rule stated in Art. 1279,
No. 1, in relation to Art. 1278. Under Arts. 1278 and 1279, No. 1, the
principal debtor can only set up compensation against the creditor
for what the latter owes him. He cannot set up what such creditor
owes the guarantor because then that would violate the rule that
the parties must be principally bound. The guarantor, on the other
hand, in case the payment of the debt is demanded from him, may
set up compensation, not only for what such creditor owes him, but
also for what such creditor owes the principal debtor. This rule is
based on the fact that the bond of the guarantor cannot be resorted
to so long as the debtor can pay although it may be in the abbrevi-
ated form of compensation and also on the fact that if the principal
306
Luengco vs. Herrero, 17 Phil. 29; Compania General de Tobacos vs. French
and Unson, 39 Phil. 34.
307
308
318
Compensation
obligation is extinguished, the accessory obligation of the guarantor

is also extinguished since it is subordinated thereto.309
Art. 1281. Compensation may be total or partial. When

the two debts are of the same amount, there is a total com-
pensation.310
Art. 1282. The parties may agree upon the compensation
of debts which are not yet due.311
Voluntary Compensation. — Actually, Art. 1282 is an

example of what is known as voluntary compensation. Thus, if the
obligation of A is pure, while the obligation of B is with a term or
period which has not yet expired, the general rule is that there can
be no compensation because B’s obligation is not yet due. However,
the parties may nevertheless agree upon the compensation of the
two obligations.
Art. 1283. If one of the parties to a suit over an obligation

has a claim for damages against the other, the former may set
it off by proving his right to said damages and the amount
thereof.312
Judicial Compensation. — In reality, what is set off against

the other party is a counterclaim. It will be remembered that “a
counterclaim must be pleaded to be effectual; whereas, a compensa-
tion takes place by mere operation of law.’’313 Hence, the counter-
claim defined by the Rules of Court314 is not the legal compensation
contemplated by the Code. This is so, because by its very nature a
set off or counterclaim can have no effect unless it is pleaded. In
addition, the claim is not liquidated; consequently, compensation
cannot take place. However, when the defendant who has an unliq-
uidated claim for damages against the plaintiff sets it off by proving
his right to said damages and the amount thereof, it is converted
309
310
New provision.
311
New provision.
312
New provision.
313
Yap Unki vs. Cha Japco, 14 Phil. 602.
314
Sec. 6, Rule 6, New Rules of Court.
319
into a liquidated claim by court decree, in which case compensa-

tion shall take effect from the moment the judgment liquidating the
claim has become final.
Art. 1284. When one or both debts are rescissible or

voidable, they may be compensated against each other be-
fore they are judicially rescinded or avoided.315
Rules in Case of Rescissible or Voidable Debts. — It
is evident that the above rule is an exception to the general rule
of demandability in order that compensation shall take place.
This exception is justified by the fact that rescissible or voidable
obligations are considered demandable while the vices with which
they are tainted are not yet judicially declared. Consequently, if the
action for rescission or annulment is not exercised, or is renounced,
or if the debt or debts are ratified the obligation or obligations are
susceptible of compensation.316
Art. 1285. The debtor who has consented to the assign-

ment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which
would pertain to him against the assignor, unless the assign-
or was notified by the debtor at the time he gave his consent,
that he reserved his right to the compensation.
If the creditor communicated the cession to him but
the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of
subsequent ones.
If the assignment is made without the knowledge of the
debtor, he may set up the compensation of all credits prior
to the same and also later ones until he had knowledge of the
assignment.317
Effect of Assignment of Rights. — If a creditor assigns his
credit to a third person, what is the effect of such assignment upon
the debtor’s right to set up the defense of compensation in case the
315
New provision.
316
317
320
Compensation
assignee tries to enforce the credit against him? Before answering

this question, attention must be called to the fact that at the time
the assignment of rights is made by a creditor to a third person
compensation may have already taken place. Hence, a distinction
must always be made between the effects of the assignment
when compensation has already taken place and the effects when
compensation has not yet taken place.
Idem; When compensation has taken place. — Inasmuch
as compensation takes place ipso jure without any intervention
on the part of the interested parties and, as a consequence, one or
the other obligation is extinguished, it follows that the subsequent
assignment of rights by a creditor to a third person cannot in any way
affect the debtor with respect to the compensation which has already
taken place. The assignee, on the other hand, can only demand
indemnity for damages from the assignor on the ground of fraud.
The only exception to this rule is when the debtor had consented to
the assignment, in which case the assignee can still demand for the
payment of the credit.318 This exception is based on the fact that the
law cannot protect a person who has acted fraudulently in giving
his consent. Besides, such consent is deemed to be a waiver or a
renunciation of the compensation that had already taken place.319
Idem; When compensation has not taken place. — When
compensation has not yet taken place because of the absence of
any or some of those requisites which are necessary, such as when
the debts are not yet due or when they are not yet liquidated, and
the creditor assigns his right to a third person, the effects of such
assignment once all of the requisites for compensation are present
shall depend upon whether it was made with the consent, or with
the knowledge but without the consent, or without the knowledge of
the debtor.
Idem; id. — With consent of debtor. — If the creditor
assigned his right or credit to a third person with the consent of the
debtor, the latter cannot set up against the assignee the compensation
which would have pertained to him against the assignor. However,
if the debtor notified the assignor, at the time he gave his consent,
that he is reserving his right to the compensation, he can still set up
318
319
321
the defense of compensation against the assignee in case the latter

demands the payment of the assigned credit.320
Idem; id. — With knowledge, but without consent, of
debtor. — Under the second paragraph of Art. 1285, if the creditor
notified the debtor of the assignment but the latter did not consent
thereto, and subsequently, the assignee demands the payment
of the assigned credit from the debtor, the latter may set up the
defense of compensation of debts prior to the assignment, but not of
subsequent ones.321 Evidently, the purpose of this rule is to prevent
fraud.
It is clear that the assignment cannot take effect as far as the
debtor is concerned unless he is properly notified thereof. Hence, the
different rules may be restated as follows:
(1) If the notification preceded the assignment, the effects
of the assignment are produced from the time it is made and not
from the time the notification is given; consequently, the debtor can
set up the defense of compensation of debts contracted prior to the
assignment.
(2) If the notification and the assignment are made simul-
taneously, then there can be no question about the time when the
effects of the assignment are produced. In such case, the debtor can
set up the defense of compensation of debts contracted prior to the
assignment.
(3) If the notification is given after the assignment had
already been made, it is evident that the assignment must have been
effected without the knowledge and consent of the debtor, in which
case the provision of the last paragraph of Art. 1285 is applicable.
Idem; id. — Without knowledge of debtor. — If the as-
signment is made without the knowledge of the debtor, and subse-
quently, the assignee demands the payment of the credit which was
assigned, the debtor may set up the defense of compensation of all
credits which he may have against the assignor and which may have
become demandable, before he was notified of the assignment.322 In
other words, if the debtor is not aware of the assignment and the as-
320
321
322
322
Compensation
signor subsequently contracts new debts from him, such obligations

which become due and demandable before he was notified of the
assignment can be set off by way of compensation against the credit
which was assigned. In such case, the only remedy of the assignee is
a personal action for indemnification against the assignor.323
Art. 1286. Compensation takes place by operation of law,

even though the debts may be payable at different places,
but there shall be an indemnity for expenses of exchange or
transportation to the place of payment.324
Art. 1287. Compensation shall not be proper when one
of the debts arises from a depositum or from the obligations
of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor
who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of Article 301.325
Art. 1288. Neither shall there be compensation if one
of the debts consists in civil liability arising from a penal
offense.326
Debts Which Cannot Be Compensated. — There are

five kinds of debts or obligations which are not susceptible of
legal compensation. They are: (1) debts arising from contracts of
depositum;327 (2) debts arising from contracts of commodatum;328 (3)
claims for support due by gratuitous title;329 (4) obligations arising
from criminal offenses;330 and (5) certain obligations in favor of the
government, such as taxes, fees, duties and others of a similar
nature.331
With respect to the first, it will be observed that the Code
uses the word “depositum” instead of the word “deposit.” Obviously,
323
324
325
326
New provision.
327
328
Ibid.
329
Ibid.
330
331
4 Tolentino, Civil Code 1956. Ed., p. 349.
323
the purpose is to prevent confusion with a bank deposit in which a

relationship of creditor and debtor is created between the depositor
and the bank.332 With respect to the third, although the rule is that
the right to receive support cannot be compensated with what the
recipient owes the obligor, yet this rule cannot be applied to support
in arrears.333
Evidently, all of these prohibitions are based on justice. Some
of these obligations are based on trust and confidence; others on
self-preservation. Justice and humanity demand that they must be
performed.
Art. 1289. If a person should have against him several

debts which are susceptible of compensation, the rules on
the application of payments shall apply to the order of the
compensation.334
Art. 1290. When all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the
compensation.335
Effect of Compensation. — The most fundamental effect of

compensation is that it extinguishes both debts to the extent that
the amount of one is covered by the amount of the other.336 If the
compensation is total because the amounts of both debts are equal,
it is evident that both debts would be totally extinguished, since
the amount of one is entirely covered by the amount of the other;
however, if the compensation is partial because the amounts are
different, it is equally evident that the extinguishment would be
total with respect to one and partial with respect to the other.337
How about accessory obligations? Since the principal obligations
to which they are subordinated are extinguished, it follows that such
accessory obligations are also extinguished. Such extinguishment
332
Gullas vs. Phil. Nat. Bank, 62 Phil. 519.
333
334
335
336
Art. 1290, Civil Code; Acuna vs. Dievas, 12 Phil. 250.
337
324
Novation
may be total or partial depending upon whether the compensation is

total or partial.338
Idem; When compensation takes effect. — Since compen-
sation takes effect by operation of law, it is clear that it will take
effect from the moment all of the essential requisites prescribed by
law are present, even though the creditor and debtor are not aware
thereof.339 Legal compensation operates even against the will of the
interested parties even without their consent. Since this compensa-
tion takes place ipso jure, its effects arise on the very day on which
all its requisites concur. When used as a defense, it retroacts to the
duty when its requisites are fulfilled. (BPI vs. CA, et al., 255 SCRA
571.) This rule, however, is applicable only to legal compensation.
Nevertheless, it is equally clear that voluntary compensation will
take effect from the moment agreed upon by the parties, while ju-
dicial compensation will take effect from the moment that the judg-
ment becomes final and executory.340
Section 6. — Novation
Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor.341
Concept of Novation. — Novation is the substitution or
change of an obligation by another, resulting in its extinguishment
or modification, either by changing its object or principal conditions,
or by substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor.342 It is one of the modes of
338
Ibid.
339
Art. 1290, Civil Code. Legal compensation operates even against the will of the
interested parties even without their consent. Since this compensation takes place
ipso jure, its effects arise on the very day on which all its requisites concur. When
used as a defense, it retroacts to the date when its requisites are fulfilled. (BPI vs.
CA, et al., 255 SCRA 571.)
340
See 4 Tolentino, Civil Code, 1956 Ed., p. 351.
341
342
325
extinguishing obligations through the creation of a new one effected

by the change or substitution of an obligatory relation by another
with the intention of substantially extinguishing or modifying the
same.343
The distinctive feature or characteristic of novation is that al-
though it extinguishes the obligation, it also gives birth to another
obligation. It has, therefore, a two-fold purpose — that of extinguish-
ing the old obligation, and that of giving birth to a new obligation to
take the place of the old.344 However, unlike the others, as a mode of
extinguishment, it is relative in character, not absolute.345
Requisites. — In every novation there are four essential
requisites: first, a previous valid obligation; second, agreement of
the parties to the new obligation; third, extinguishment of the old
obligation; and fourth, validity of the new obligation.346
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 objection; (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. (Quinto
vs. People, April 14, 1999, 305 SCRA 708.)
Problem — Suppose that under the judgment obligation,

the liability of the judgment debtor is for the amount of P6,000,
but both judgment debtor and judgment creditor subsequently
entered into a contract reducing the liability of the former to
343
4 Sanchez Roman 242; quoted by Court of Appeals in Government vs. Bautis-
ta, CA, 37 Off. Gaz. 1880.
344
Tiu Siuco vs. Habana, 45 Phil. 707.
345
346
326
Novation
only P4,000, is there an implied novation which will have the

effect of extinguishing the judgment obligation and creating a
modified obligatory relation? Reasons.
Answer — There is no implied novation in this case. We
see no valid objection to the judgment debtor and the judgment
creditor in entering into an agreement regarding the monetary
obligation of the former under the judgment referred to. The
payment by the judgment debtor of the lesser amount of P4,000,
accepted by the creditor without any protest or objection and
acknowledged by the latter as in full satisfaction of the money
judgment, completely extinguished the judgment debt and
released the debtor from his pecuniary liability.
Novation results in two stipulations — one to extinguish
an existing obligation, the other to substitute a new one in its
place. Fundamentally, it is that novation effects a substitution
or modification of an obligation by another or an extinguishment
of one obligation by the creation of another. In the case at
hand, we fail to see what new or modified obligation arose out
of the payment by the judgment debtor of the reduced amount
of P4,000 to the creditor. Additionally, to sustain novation
necessitates that the same be so declared in unequivocal terms
clearly and unmistakably shown by the express agreement of
the parties or by acts of equivalent import — or that there is
complete and substantial incompatibility between the two
obligations. (Sandico vs. Piguing, 42 SCRA 322.)
Kinds. — Novation may be classified as follows:

(1) As to its essence, novation may be (a) objective or real,
(b) subjective or personal, or (c) mixed.347 Objective or real novation
refers to the change either in the cause, object or principal conditions
of the obligations.348 Subjective or personal novation, on the other
hand, refers to the substitution of the person of the debtor or to the
subrogation of a third person in the rights of the creditor.349 When
there is a substitution of the person of the debtor, it is called passive;
when there is a subrogation in the rights of the creditor, it is called
active. Mixed novation refers to a combination of objective and
subjective novation.350
347
348
349
Art. 1291, Nos. 2 and 3, Civil Code.
350
327
(2) As to its form or constitution, novation may be express

or tacit, one and the other are recognized by the Code.351 When it is
declared in unequivocal terms that the old obligation is extinguished
by a new one which substitutes the same, the novation is express;
when the old and the new obligations are incompatible with each
other on every point, the novation is tacit or implied.352
(3) As to its extent or effect, novation may be total or partial
depending upon whether there is an absolute extinguishment of the
old obligation or merely a modification.353
Idem; Objective novation. — According to Castan, objective
or real novation, which is the novation referred to in No. 1 of Art.
1291, may be effected by: (1) changing the cause of the obligation; or
(2) changing the object of the obligation; or (3) changing the principal
or essential conditions of the obligation.354
Idem; id. — Change of cause. — Although the Code does not
speak of a change in the cause of the obligation as one of the methods
whereby novation may be effected, it is evident that such a change
or modification will result in the extinguishment of the obligation.
Manresa gives the example of a contract of sale or a contract of lease
in which the price has not yet been paid to the vendor or lessor. If
the parties to the contract subsequently enter into a new agreement
whereby the obligation to pay is converted into a loan made to the
vendee or lessee, the result is a real or objective novation.355 Castan,
on the other hand, gives the example of a contract of loan converted
into a contract of deposit.356
Idem; id. — Change of object. — It is also evident that when
there is a change or modification of the object of a previous obligation
there is a novation of such obligation. Thus, in those cases where a
certain amount is due to the obligee or creditor, any modification
in the amount due or any change whereby the obligation to pay
is converted into an obligation to render a personal service would
constitute a novation. The same is true in case of dation in payment.357
351
Ibid., p. 285.
352
353
354
Ibid., pp. 289-920.
355
356
357
Ibid., p. 290.
328
Novation
Idem; id. — Change of principal conditions. — It is also

evident that when there is a change or modification of the condi-
tions of a previous obligation there is also a novation. However, the
change or modification must refer to a principal, not incidental, con-
dition resulting in the alteration or modification of the essence of
the obligation. In other words, only those changes of an essential,
not accidental, character can effect a novation of the previous or
original obligation.358 Consequently, where the debtor merely exe-
cutes another instrument reiterating or ratifying his obligation to
the creditor,359 without changing its object or principal conditions,
although there might be minor changes with regard to the form of
payment,360 or with regard to additional facilities361 or benefits362 af-
forded to him, there is no novation of the obligation. Even granting
that there were some changes and alterations made after the perfec-
tion of a contract, such as where both contracting parties agree that
certain additions shall be made to a building under construction,
such changes shall not result in the novation thereof, provided that
they are not so great that it will be impossible to follow the original
contract; hence, the contractor cannot say that the original contract
has been entirely abandoned in such a way that he can now recover
from the other party on the basis of quantum meruit.363 This conclu-
sion gains added force where it is established that the original con-
tract was used as the basis for the construction of the building, and
those alterations which were subsequently made were founded upon
the original contract with the understanding that the owner shall
pay the reasonable value of all such alterations.364 Similarly, where
the change or alteration consists in providing for another method of
payment365 or for additional security,366 it is clear that such change
or modification cannot constitute a novation of the previous obliga-
tion, considering the fact that the change is not with regard to an
358
Ibid., p. 291.
359
Ramos vs. Gibbon, 67 Phil. 371; Padilla vs. Levy Hermanos, Inc., 69 Phil. 681;
Asiatic Petroleum Co. vs. Sim Poo, CA, 49 Off. Gaz. 44.
360
Ramos vs. Gibbon, 67 Phil. 371.
361
Asiatic Petroleum Co. vs. Sim Poo, CA, 40 Off. Gaz. 44; Yellow Ball Freight
Lines, Inc. vs. Western Export Co., CA, G.R. No. 10422-R, Sept. 3, 1954.
362
Padilla vs. Levy Hermanos, Inc., 69 Phil. 681.
363
364
Ibid.
365
Zapanta vs. De Rotaeche, 21 Phil. 154.
366
Bank of the P.I. vs. Herridge, 47 Phil. 57.
329
essential condition of the previous obligation and that there can be

no incompatibility between the old and the new obligation.
Art. 1292. In order that an obligation may be extinguished

by another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with
each other.367
Form of Extinguishment. — One of the essential requisites

of novation is the extinguishment of the previous obligation by the
new one.368 What is the form of this extinguishment? The Code does
not provide for any specific form. However, under Art. 1292, it may
be either express or implied. It is express when there is a declaration
in unequivocal terms that the old obligation is extinguished by the
new which substitutes it; it is tacit or implied when the old and
the new obligations are incompatible on every point.369 Novation
as one of the modes of extinguishing an obligation, requires the
concurrrence of the following: (1) there is a previous valid obligation;
(2) the parties concerned agree to a new contract; (3) the old contract
is extinguished; and (4) there is a valid new contract. (Cruz vs. Court
of Appeals, July 27, 1998, 293 SCRA 239.)
The rule is settled that novation by presumption has never
been favored. To be sustained it must be established that the old
and new contracts are incompatible in all points, or that the will
to novate appears by express agreement of the parties or in acts
of similar import;370 in other words, the animus novandi or the
intent to substitute a new obligation for the old one must be clearly
established before we can say that there is a novation resulting in
the extinguishment of the old obligation and in the creation of a
new one.371 Novation is never presumed, and the animus novandi,
367
368
369
370
Dungo vs. Lopena, 116 Phil. 1305; Magdalena Estate, Inc. vs. Rodriguez, 18
SCRA 967.
371
Martinez vs. Cavives, 25 Phil. 581; Tiu Siuco vs. Habana, 45 Phil. 707; Young
vs. Villa, 49 Off. Gaz. 1818; Joe’s Radio & Electrical Supply vs. Alto Electronics Corp.,
104 Phil. 333.
330
Novation
whether totally or partially, must appear by express agreement of

the parties, or by their acts that are too clear and unequivocal to be
mistaken. (Quinto vs. People, April 14, 1999, 305 SCRA 708.) In the
words of the Supreme Court:
“Novation of contracts cannot be presumed in any case

unless it is a necessary result of the express will of the parties,
or that the old and the new obligations are incompatible in all
points.
It is not proper to consider an obligation novated by
unimportant modifications which do not alter its essence and
when it is not extinguished by another which takes its place or
substitutes the person of the debtor.
Novation is a contract, the object of which is: either to
extinguish an existing obligation and to substitute a new one in
its place; or to discharge an old debtor and substitute a new one
for him; or to substitute a new creditor for an old creditor with
regard to whom the debtor is discharged.
It is never presumed. The intention must clearly result
from the terms of the agreement or by a full discharge of the
original debt. Novation by the substitution of a new debtor can
take place without the consent of the debtor but the delegation
does not ooiperate a novation, unless the creditor has expressly
declared that he intends to discharge with delegating debtor,
and the delegating debtor was not in open failure or insolvency
at the time. The mere indication by a debtor of a person who is
to pay in his place does not operate a novation. Delegatus debitor
est odiosus in lege.’’372
In People’s Bank and Trust Co. vs. Syvel’s, Inc. (164 SCRA
247), Syvel’s had a loan with People’s Bank and Trust Co. in the
amount of P900,000.00 secured by a chattel mortgage. Syvel’s
failed to pay the loan and People’s Bank and Trust Co. foreclosed
the chattel mortgage. Syvel’s opposed the foreclosure of the chattel
mortgage on the ground that the obligation secured by the chattel
mortgage sought to be foreclosed was novated by the subsequent
execution of a real estate mortgage as additional collateral to the
obligation secured by said chattel mortgage. The Supreme Court
held: “Novation takes place when the object or principal condition of
372
Martinez vs. Cavives, 25 Phil. 581.
331
an obligation is changed or altered. It is elementary that novation

is never presumed, it must be explicitly stated or there must be
manifest incompatibility between the old and the new obligation in
every aspect. In the case at bar, there is nothing in the Real Estate
Mortgage which supports appellants’ submission. The contract
on its face does not show the existence of an explicit novation
nor incompatibility on every point between the old and the new
agreements as the second contract evidently indicates that the same
was executed as new additional security to the chattel mortgage
previously entered into by the parties.’’
In the case of Sps. Francisco and Ruby Reyes vs. BPI Family
Savings Bank, Inc., et al., G.R. Nos. 149840-41, March 31, 2006,
Petitioner spouses executed a Real Estate Mortgage on their
property in favor of respondent BPI FSB to secure a P15,000,000 loan
of Transbuilders Resources & Development Corporation. When the
latter failed to pay within the stipulated period of one year, the loan
was restructured providing that the loan shall be paid in quarterly
installments at interest of 18% per annum. Petitioners averred that
they were not informed about the restructuring of the loan. Hence,
they wrote BPI FSB requesting cancellation of their mortgage and
the return of their title. They claimed that the new loan novated the
loan agreement and that because the novation was without their
consent, they were allegedly released from their obligation under
the mortgage.BPI FSB refused to cancel the mortgage and instituted
extrajudicial foreclosure proceedings against the petitioners. The
latter filed the instant petition.
Question —Was there a novation of the mortgage loan

contract?
Answer — No. Well-settled is the rule that with respect to
obligations to pay a sum of money, the obligation is not novated
by an instrument that expressly recognizes the old, changes only
the terms of payment, adds other obligations not incompatible
with the old ones, or the new contract merely supplements the
old one.
BPI FSB and Transbuilders only extended the repayment
term of the loan from one year to 20 quarterly installments
at 18% per annum. There was absolutely no intention by the
parties to supersede or abrogate the old loan contract secured
by the REM executed by the petitioners in favor of BPI FSB. In
332
Novation
fact, the intention of the new agreement was precisely to revive

the old obligation after the original period expired and the loan
remained unpaid. In the absence of an express agreement,
novation takes place only when the old and the new obligations
are incompatible on every point.
Idem; Express novation. — In order that an obligation may

be expressly extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms. Express
novation can therefore take place only when the intention to effect a
novation clearly results from the terms of the agreement or is shown
by a full discharge of the original debt; in other words, it can only
take place when the contracting parties disclose that the object in
making the new contract is to extinguish the old one; otherwise,
the old contract remains in force and the new one is added to it.
Consequently, the mere fact that the debtor had signed a second
promissory note for the balance of his indebtedness, does not mean
the extinguishment of the first promissory note, wherein the terms
of payment were expressly stipulated. Those terms, therefore, shall
still govern the manner of liquidation of the said balance.373
Idem; Implied novation. — In order that an obligation
may be impliedly extinguished by another which substitutes the
same, it is imperative that the old and the new obligations must be
incompatible with each other on every point.
The test of incompatibility between the old and the new obli-
gations is to determine whether or not both of them can stand to-
gether, each having its own independent existence. If they can stand
together, there is no incompatibility; consequently, there is no nova-
tion. If they cannot stand together, there is incompatibility; conse-
quently, there is a novation.374
Thus, where the new contract is merely a reiteration or ac-
knowledgment or ratification of the old contract with slight modifi-
cations or alterations with respect to the cause or object or principal
conditions, it is clear that the two contracts can stand together, and
consequently, there can be no incompatibility between them. There-
373
Phil. Nat. Bank vs. Granada, CA, 51 Off. Gaz. 62.
374
Borja vs. Mariano, 66 Phil. 93.
333
fore, there can be no novation.375 This is so even where the second

contract provides for another method of payment,376 or for additional
security,377 or for the postponement of the date of payment.378 As a
matter of fact, even where the creditor receives a guaranty or ac-
cepts payments from a third person who has agreed to assume the
obligation, so long as there is no agreement that the first debtor
shall be released from responsibility, there is no novation, and the
creditor can still enforce the obligation against the original debtor.
This is so even where a surety bond is filed, for the simple reason
that such bond is not a new and separate contract but is merely an
accessory of the original contract.379 In such a case, the third per-
son who has assumed the obligation merely becomes a co-debtor or
surety. If there is no agreement as to solidarity, the first and second
debtors are considered obligated jointly.380 In all of these cases, since
there is no clear case of incompatibility and since the change does
not refer to an essential or principal condition of the previous con-
tract, there can be no novation.
Problem — ABC Trading Co., a domestic corporation

engaged in the sale of automobile spare parts, opened with “X’’
Bank a letter of credit up to the extent of $450,000.00 for a period
of one year. To secure payment thereof, it executed a chattel
mortgage over its stock-in-trade valued at P500,000.00. On May
15 and June 15, 1981, “Y,” president and general manager of
ABC Trading, drew against this letter of credit by means of
promissory notes in the total amount of P430,000.00, payable
within 30 days from the respective dates of the promissory notes
with interest of 10%. Upon maturity of said notes, ABC Trading
failed to pay, but was able to negotiate for an extension of six
(6) months within which to pay said amount, in return for the
additional security posted by Mr. “Y’’ consisting of a real estate
mortgage over his land in Manila. At the end of 6 months, ABC
375
Tiu Siuco vs. Habana, 45 Phil. 707; Ramos vs. Gibbon, 67 Phil. 371; Padilla vs.
Levy Hermanos, Inc., 69 Phil. 681; Pablo vs. Sapungan, 71 Phil. 145; Asiatic Petrole-
um Co. vs. Sim Poo, CA, 40 Off. Gaz. 44; Yellow Ball, Inc. vs. Western Export Co., CA-
G.R. No. 10422-R, Sept. 3, 1954; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967.
376
Zapanta vs. De Rotaeche, 21 Phil. 154.
377
Bank of the P.I. vs. Herridge, 47 Phil. 57.
378
Ynchausti & Co. vs. Yulo, 34 Phil. 978; Pascual vs. Lacsamana, 100 Phil. 381;
La Tondeña, Inc. vs. Alto Surety & Ins. Co., 101 Phil. 879.
379
Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA 967.
380
Dungo vs. Lopena, 116 Phil. 1305; Magdalena Estate, Inc. vs. Rodriguez, 18
SCRA 967.
334
Novation
Trading Co. failed to pay the amount due despite repeated

demands by “X’’ Bank. “Y’’ Bank filed an action for foreclosure
of the chattel mortgage executed by ABC. Trading ABC Trading
opposed said action contending that the chattel mortgage has
been novated by the real estate mortgage executed by “X’’ Bank.
Is the contention of ABC Trading Co. tenable? Reasons.
Answer — The contention of ABC Trading Co. that the
chattel mortgage has been novated by the real estate mortgage
executed by Mr. “R” in favor of “X’’ Bank is untenable. Well-
settled is the rule that in order that there will be a novation there
must be complete incompatibility between the two obligations.
And the test of incompatibility is simple. The test is whether the
two obligations can stand together. If they can stand together,
then there is no incompatibility. If there is incompatibility, then
there is novation. Applying the test to the instant case, it is clear
that the two obligations can stand together. Therefore, there is
no novation.
(Note: The above answer is based on Arts. 1291[1], and
1292 of the Civil Code and on decided cases, such as Bank of P.I.
vs. Herridge, 47 Phil. 57; Ynchausti and Co. vs. Yulo, 34 Phil.
978; Pascual vs. Lacsamana, 100 Phil. 391; La Tondeña vs. Alto
Surety & Ins. Co., 101 Phil. 879.)
Problem — A obtained a favorable judgment against
B from the Court of First Instance of Manila for the sum of
P2,000. Subsequently, a writ of execution was issued and a jeep
belonging to the latter was seized by the sheriff. However, the
two (A and B) arrived at an arrangement by virtue of which B
executed a chattel mortgage on the jeep stipulating, inter alia
that B shall satisfy the judgment in two equal installments pay-
able at designated periods. B failed to pay the first installment,
and as a result, A obtained an alias writ of execution and levied
upon certain personal properties of B. The latter filed an urgent
motion for suspension of the execution sale on the ground of pay-
ment of the judgment obligation. He maintains that the execu-
tion of the deed of chattel mortgage has extinguished the judg-
ment debt because of implied novation. Is this correct? Reasons.
Answer — The contention of B that the mortgage obliga-
tion has extinguished the judgment obligation because of im-
plied novation is not correct.
The defense of implied novation requires clear and
convincing proof of complete incompatibility between the two
obligations. The law requires no specific form for an effective
novation by implication. The test is whether the two obligations
335
can stand together. If they cannot, incompatibility arises,

and the second obligation novates the first. If they can stand
together, no incompatibility results and novation does not take
place.
Applying this test, we see no substantial incompatibility
between the mortgage obligation and the judgment obligation
sufficient to justify a conclusion of implied novation. The
stipulation for the payment of the obligation under the terms of
the deed of chattel mortgage serves only to provide an express
and specific method for its extinguishment — payment in two
equal installments. The chattel mortgage simply gave the
judgment debtor a method and more time to enable him to fully
satisfy the judgment indebtedness. (Millar vs. Court of Appeals,
38 SCRA 642.)
But where there is a clear case of incompatibility between the

two contracts in the sense that they cannot stand together, such
as where there is a change, not only of the parties but also of the
amount due as well as of the date of maturity, it is clear that there
is a novation.381 Consequently, only the second contract can be the
basis of an action between the parties.382 Thus, where a third person
proposed to the creditor that he is assuming the entire obligation of
the debtor, and such proposal was categorically accepted, it cannot
be argued later on that there is no novation which will have the
effect of wiping out the old obligation on the ground that since
novation cannot be presumed, consequently, the act of the creditor
in accepting the offer of the third person merely implies that he
is accepting such third person as an additional debtor. It must be
remembered that novation of a contract may be effected not only by
expressly declaring that the parties intended such a change, but also
where the new obligation is in all respect incompatible and cannot
stand side by side with the former one. Hence, the substitution of the
third person as debtor by virtue of his agreement with the creditor
essentially and entirely wiped out the original obligation.383
In the case of obligations with a term or period, a distinction
must be made with regard to the effect of any subsequent change of
381
Macondray & Co. vs. Ruiz, 66 Phil. 562. To the same effect: Paterson vs. Aza-
da, 8 Phil. 432; Fua vs. Yap, 74 Phil. 287.
382
Borja vs. Mariano, 66 Phil. 393.
383
Phil. Nat. Bank vs. Mallari, 104 Phil. 437.
336
Novation
the term or period. If there is an increase of the term or period, such

as when there is a postponement of the date of payment,384 or an
extension of the period of payment,385 there is certainly no novation
because in such cases there is no clear case of incompatibility between
the two obligations; neither is there a change in the obligatory
relation between the parties which will alter the essence of the
obligation.386 But if there is a reduction or decrease of the duration
of the term or period, there is certainly a novation, not only because
there is a clear case of incompatibility between the two obligations,
but there is also a change or alteration of the principal condition of
the old obligation.387 Thus, where the two contracting parties entered
into a second contract reducing the duration of the term or period
of a right of way from twenty to seven years, “there can be no doubt
that the two contracts, in so far as the duration of the right of way is
concerned, are incompatible with each other, for the second contract
reduces the period agreed upon in the first contract, and so both
contracts cannot subsist at the same time. The term stipulated in
the second contract cannot be added to that of the first, because the
period would then be twenty-seven years instead of twenty years.’’388
In the case of Cruz vs. Court of Appeals (July 27, 1998, 293
SCRA 239), the Court ruled that the Memorandum of Agreement
falls short of producing a novation because it does not express a
clear intent to dissolve the old obligation as a consideration for the
emergence of the new one. Likewise, petitioner failed to show that
the two contracts were materially and substantially incompatible
with each other.
Further, in the case of Quinto vs. People (April 14, 1999, 305
SCRA 708), the Court stated that “the extinguishment of the old
obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term “expressly’’
means that the contracting parties incontrovertibly disclose that
their object in executing the new contract is to extinguish the
old one. Upon the other hand, no specific form is required for an
384
Pascual vs. Lacsamana, 100 Phil. 381.
385
Ynchausti & Co. vs. Yulo, 34 Phil. 978; La Tondeña, Inc. vs. Alto Surety & Ins.
Co., 101 Phil. 879.
386
387
Ibid., pp. 291-292.
388
Kabankalan Sugar Co. vs. Pacheco, 55 Phil. 555.
337
implied novation, and all that is prescribed by law would be an

incompatibility between the two contracts. While there is really
no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.’’
Moreover, the Court significantly stated in the said case of
Quinto vs. People that “there are two ways which could indicate,
in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the
same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and
the new obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot,
they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential
in nature and not merely accidental. The incompatibility must
take place in any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the
change would be merely modificatory in nature and insufficient to
extinguish the original obligation. The Court also ruled that the
subsequent novation of contract does not affect the criminal liability
for estafa already committed, for it is a public offense which must be
prosecuted and punished by the state.’’
Art. 1293. Novation which consists in substituting a new

debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but
not without the consent of the creditor. Payment of the new
debtor gives him the rights mentioned in Articles 1236 and
1237.389
Novation By Substitution of Debtor. — This type of

subjective or personal novation consists in the substitution of a new
debtor in the place of the original debtor, which must be effected with
the consent of the creditor at the instance of either the new debtor or
389
338
Novation
the old debtor. It has two forms — substitution by expromisión and

substitution by delegación.390
If the substitution of debtors is effected with the consent
of the creditor at the instance of the new debtor even without
the knowledge or against the will of the old debtor, it is called
expromisión. Consequently, the following requisites must concur:
first, the initiative for the substitution must emanate from the new
debtor; and second, consent of the creditor to the substitution. It
is, therefore, evident that there are two kinds of substitution by
expromisión. They are: (1) substitution with the knowledge and
consent of the old debtor; and (2) substitution without the knowledge
or against the will of the old debtor.
If the substitution of debtors is effected with the consent of the
creditor at the instance of the old debtor with the concurrence of the
new debtor, it is called delegación. In other words, delegación refers
to the substitution of debtors effected when the original debtor
offers and the creditor accepts a third person who consents to the
substitution.391 Consequently, the following requisites must concur:
first, the initiative for the substitution must emanate from the old
debtor; second, consent of the new debtor; and third, acceptance by
the creditor.
Manresa explains the concepts of expromisión and delegación
as follows:
“The two forms of this novation, impliedly recognized by

article 1206 (now Art. 1295) which employs the word ‘delegante,’
as applied to the debt, are the expromisión and delegación.
Between these there is a marked difference of meaning and, as a
consequence, a logical difference of requisites and another clear
difference as to their effects, of which we shall speak later.
“In expromision, the initiative for the change does not
emanate from the debtor and may be made even without
his consent, since it consists in a third person assuming his
obligation.
“In delegacion, the debtor offers and the creditor accepts
a third person who consents to the substitution so that the
intervention and the consent of these three persons are necessary
390
8 Manresa, 5th Ed., Bk. 1, p. 777; 3 Castan, 7th Ed., p. 292.
391
339
and they are respectively known as delegante, delegatorio, and

delegado. It must be noted that the consent need not be given
simultaneously and that it may be given afterwards, as for
example, that of the creditor delegatorio to the proposition of
the debtor by the delegado.
“Delegacion notably differs from the mere indication
made by the debtor that a third person shall pay the debt; in
this case, there is no novation and the former is not acquitted
of his obligation and his relations with the third person are
regulated by the rules of agency. The French Code in Article
1276 expressly provides for this case, as well as the inverse one
where the debtor points out somebody else to answer for the
payment, declaring that there is no novation in either case. The
same sound criterion is impliedly accepted by our code.’’392
The case of Quinto vs. People, (April 14, 1999, 305 SCRA 709)
explain the concepts of expromisión and delegación as follows:
There are two forms of novation by substituting the person
of the debtor, depending on whose initiative it comes from, to
wit: expromisión and delegación. In the former, the initiative for
the change does not come from the debtor and may even be made
without his knowledge. Since a third person would substitute for the
original debtor and assume the obligation, his consent and that of
the creditor would be required. In the latter, the debtor offers, and
the creditor accepts, a third person who consents to the substitution
and assumes the obligation, thereby releasing the original debtor
from the obligation; here, the intervention and the consent of all
parties thereto would perforce be necessary. In either of these two
modes of substitution, the consent of the creditor, such as can be
seen, is an indispensable requirement.
Problem No. 1 — “A’’ owed “B’’ a certain sum of money. “C’’

wrote “B’’ a letter stating that he would be the one to take care of
“A’s’’ debt as soon as “A’’ had made a shipment of logs to Japan.
“A’’ never made such shipment. “C’’ did not pay “B.’’ Is “C’’ liable
to “B’’? Explain. (1975 Bar Problem)
Answer — “C’’ is not liable to “B.’’ In the first place, in order
that “C’’ may be held liable to “B,’’ there should have been a
392
8 Manresa, 5th Ed., Bk. 1, pp. 777-778, quoted in Testate Estate of Mota vs.
Serra, 47 Phil. 464.
340
Novation
substitution of debtor through expromision within the meaning

of Art. 1291, No. 2, and Art. 1293 of the Civil Code resulting
in novation of the obligation. Here, there was none. “C’’ merely
wrote a letter to the creditor “B” stating that he would take care
of “A’s” debt. The problem does not even say that “B” gave his
assent or consent to “C’s’’ statement. In the second place, even
assuming that there was a substitution of debtor, “C’s’’ liability
depends upon a suspensive condition, that he would take care of
“A’s’’ debt as soon as “A’’ had made a shipment of logs to Japan.
“A” never made such shipment. Therefore, “C’s’’ liability never
became effective. (Villanueva vs. Girged, 110 Phil. 478.)
Problem No. 2 — “A’’ borrowed from “B” the sum of
P3,000.00. Three days after, “A’’ in a letter authorized the
Philippine National Bank to pay his debt to “B” out of whatever
crop loan might be granted to him by said Bank. On the same
day, the Bank agreed but the Bank paid “B’’ only P2,000.00.
On the date of maturity, “B’’ sued the Bank and “A’’ for the
remaining P1,000.00. Is the Bank liable to “B’’? (1975 Bar
Problem.)
Answer — The Bank is not liable to “B’’ for the remaining
P1,000.00. Even assuming that “B’’ gave his consent to “A’s’’
proposal that the Bank shall pay his indebtedness of P3,000.00,
in reality, there was no substitution of debtor by delegacion
within the meaning of Arts. 1291, No. 2, and 1293 of the Civil
Code resulting in a novation of the obligation. The Bank never
assumed payment of the obligation. There was merely an
authorization, which was accepted by the Bank, that the latter
shall pay “A’s’’ debt out of whatever crop loan would be granted
to him by the Bank. As it turned out, the Bank agreed to lend
“A’’ only P2,000.00, and said amount was paid directly to “B’’ in
accordance with the Bank’s promise. Beyond that amount, the
Bank cannot be held liable. (Hodges vs. Rey, 111 Phil. 219.)
Idem; Necessity of creditor’s consent. — Whether the sub-

stitution is effected through expromision or delegacion the consent
of the creditor must always be secured.393 The reason for this re-
quirement is obvious. Substitution of one debtor for another may
delay or prevent the fulfillment or performance of the obligation by
the temporary inability or insolvency of the new debtor.394

393
Rio Grande Oil Co. vs. CA, 39 Off. Gaz. 986; Santissimo Rosario de Molo vs.
394
Gemperle, CA, 39 Off. Gaz. 1410.
341
The law does not prescribe when such consent may be given;
neither does it require any specific form. Consequently, it may be
given simultaneously with the substitution or even afterwards.
And since consent may as well be expressed by deeds as by words,
it may be express or implied.395 Thus, where a stockholder in a
certain corporation sold his shares of stock to another subject to the
condition that his indebtedness to the corporation shall be assumed
by the latter and the corporation was duly notified regarding the sale
including all of the terms and conditions thereof, the act of the Board
of Directors of the corporation in electing the vendee as president of
the corporation as well as member of the Board of Directors as a
substitute of the vendor clearly constitutes an implied acceptance
of the substitution of debtors. There is, therefore, a novation by the
substitution of debtors, which is perfectly valid and lawful placing
the new debtor under obligation to pay the debt which he has
assumed.396 It must be observed, however, that the mere act of the
creditor in accepting payments by a third party for the benefit of a
debtor whose accounts the third party has assumed, without further
facts, does not constitute an implied acceptance of the substitution of
the debtor.397 Thus, where the mortgagor transferred the mortgaged
property to a third person subject to the condition that the latter
shall assume the payment of the obligation, the mere fact that the
creditor accepted payments from the transferee does not relieve the
mortgagor from his obligation to pay the unpaid balance of the debt,
since the substitution of debtors was made without the consent of the
creditor — a requirement which is indispensable in order to effect
a novation of the obligation.398 In such case, it is evident that Arts.
1236 and 1237 of the Civil Code, and not Art. 1293, shall govern.
Idem; Effect of payment by new debtor. — With regard to
the relation between the original debtor and the new debtor, since
donation cannot be presumed in such case, justice demands that the
original debtor shall reimburse to the new debtor whatever benefits
395
Asia Banking Corp. vs. Elser, 54 Phil. 994; Elmac, Inc. vs. Gustilo, CA, 37 Off.
Gaz. 189; Rio Grande Oil Co. vs. Coleman, CA, 39 Off. Gaz. 986.
396
Asia Banking Corp. vs. Elser, 54 Phil. 994.
397
Pacific Commercial Co. vs. Sotto, 34 Phil. 237; McCullough vs. Veloso, 46 Phil.
1; Gov’t. of the Philippine Islands vs. Bautista, CA, 37 Off. Gaz. 1880; Rio Grande Oil
Co. vs. Coleman, CA, 39 Off. Gaz. 986.
398
McCullough vs. Veloso, 46 Phil. 1.
342
Novation
he may have derived therefrom. If the substitution was effected by

expromisión, and the debtor pays the debt or obligation, since such
payment is a real benefit to the original debtor, the relationship
shall be regulated by the rules regarding payment of a debt by a
third person — the specific rules applicable thereto depending
upon whether the substitution was made without the knowledge or
against the will of the original debtor or with the knowledge and
consent of such debtor. On the other hand, if the substitution was
effected by delegación, since ordinarily there would be a special
agreement of all the parties in such case, the relationship among
such parties shall be regulated by such agreement; however, in the
absence of an agreement, the relationship shall be regulated by
the rules regarding payment of a debt by a third person with the
debtor’s consent, since in delegación the original debtor himself is
the one who initiates the substitution.399
Consequently, in expromision —
(1) If the substitution was effected with the knowledge and
consent of the original debtor, and subsequently payment is made by
the new debtor with or without the knowledge and consent of such
original debtor, the new debtor can demand reimbursement from
the original debtor of the entire amount which he has paid,400 and, at
the same time, be subrogated in all of the rights of the creditor.401
(2) If the substitution was effected without the knowledge
and consent of the original debtor, and subsequently, payment is
made by the new debtor again without the knowledge and consent of
the original debtor, the new debtor can demand reimbursement from
the original debtor only insofar as the payment has been beneficial
to such debtor,402 but he cannot be subrogated in the rights of the
creditor.403 However, if payment is made with the knowledge and
consent of the original debtor, although the substitution had been
effected without his knowledge and consent, the new debtor can
still demand reimbursement from the original debtor of the entire
399
Manresa, 5th Ed., Bk. 1, pp. 778-779.
400
401
Arts. 1300, 1302, 1303, Civil Code.
402
403
Ibid.
343
amount which he has paid,404 and, at the same time, be subrogated

in all of the rights of the creditor.405
In delegación — since the substitution was effected with the
consent of all the parties, the new debtor (delegado) can demand
reimbursement from the original debtor (delegante) of the entire
amount which he has paid406 as well as compel the creditor
(delegatorio) to subrogate him in all of his rights.407
Art. 1294. If the substitution is without the knowledge

or against the will of the debtor, the new debtor’s insolvency
or nonfulfillment of the obligation shall not give rise to any
liability on the part of the original debtor.408
Art. 1295. The insolvency of the new debtor, who has
been proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the
original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor,
when he delegated his debt.409
Effect of Nonpayment By New Debtor. — As a general

rule, novation by substitution of the person of the debtor whether by
expromisión or by delegación has the effect of releasing the original
debtor from his obligation to the creditor and, at the same time, of
substituting the new debtor thereto.410
A problem, however, arises if the new debtor becomes insolvent
or is unable to fulfill the obligation. What would be the effect upon
the relationship between the creditor and the original debtor? Is the
liability of the latter revived? This question is answered by Arts.
1294 and 1295 of the Code. It must be observed that the first is
applicable only to expromisión, while the second is applicable only
to delegación.
404
405
Arts. 1300, 1302, 1303, Civil Code.
406
407
Arts. 1300, 1302, 1303, Civil Code.
408
New provision.
409
410
344
Novation
Idem; If substitution is by expromision. — Before the

promulgation of the New Civil Code, it was universally admitted,
following the weight of Spanish authority, that if the substitution
was effected by expromisión, the new debtor’s insolvency or
nonfulfillment of the obligation can never result in the revival of the
original debtor’s liability to the creditor. This doctrine is, of course,
based on the fact that in expromisión, the substitution can be made
without the knowledge of the original debtor or even against his
will.411 With the promulgation of the New Civil Code, however, this
doctrine has been modified. According to Art. 1294, a provision
which is not found in the old Code, if the substitution was effected
without the knowledge or against the will of the original debtor, the
new debtor’s insolvency or nonfulfillment of the obligation shall not
revive the original debtor’s liability to the creditor. From this it can
be inferred that if the substitution was effected with the knowledge
and consent of the original debtor, the new debtor’s insolvency or
nonfulfillment of the obligation shall revive the original debtor’s
liability to the creditor.
Idem; If substitution is by delegacion. — On the other
hand, if the substitution was effected by delegación, according to
Art. 1295, the right of action of the creditor can no longer be revived
except in the following cases: first, when the insolvency of the new
debtor (delegado) was already existing and of public knowledge at
the time when the original debtor (delegante) delegated his debt;
and second, when such insolvency was already existing and known
to the original debtor (delegante) when he delegated his debt. It
is evident that the purpose of these two exceptions is to prevent
the commission of fraud. With regard to the first exception, it is,
of course, necessary that the condition that the insolvency of the
delegado was of public knowledge should exist at the time the
delegación was made, because if it were otherwise, the delegante
cannot then be held responsible since he himself was not aware of
it.412
Art. 1296. When the principal obligation is extinguished

in consequence of a novation, accessory obligations may
411
Ibid., pp. 779-780.
412
Ibid., p. 780.
345
subsist only insofar as they may benefit third persons who

did not give their consent.413
Effect Upon Accessory Obligations. — The rule stated in

the above article is a necessary consequence of the principle that
an accessory obligation is dependent upon the principal obligation
to which it is subordinated. According to Manresa, the precept
applies to objective novations as well as to those novations effected
by substituting the person of the debtor. It cannot, however, apply to
novations effected by subrogating a third person in the rights of the
creditor because the effects of such novations are regulated by Arts.
1303 and 1304 of the New Civil Code.414
The exception refers to a case in which there is a stipulation
constituted in favor of a third person, which may be demanded
separately from the principal obligation, although subordinated to
the latter.415 A good example of this would be the stipulation pour
autrui416 referred to in the second paragraph of Art. 1311 of the New
Civil Code.417
Art. 1297. If the new obligation is void, the original one

shall subsist, unless the parties intended that the former
relation should be extinguished in any event.418
Art. 1298. The novation is void if the original obligation
was void, except when annulment may be claimed only by
the debtor, or when ratification validates acts which are
voidable.419
Effect If New and/or Old Obligations Are Void. — Among

the essential requisites of novation, whether objective or subjective,
are the validity of the new obligation and the existence of a previous
valid obligation.420 The first is deducible from the provision of Art.
413
414
415
Ibid., p. 793.
416
New provision.
417
418
New Provision; Tiu Siuco vs. Habana, 45 Phil. 707.
419
420
346
Novation
1297, while the second is expressly stated by the provision of Art.

1298. These requisites are logical because the purpose of novation is
the substitution of the new obligation for the old. In order to effect
the novation, it is, therefore, essential that both the old and the new
obligation must be valid.421 If the old obligation is void, then there
is nothing to novate. The new obligation, therefore, cannot produce
any effect. The same is true if the old obligation has already been
extinguished.422 On the other hand, if the new obligation is void, then
there is no new obligation which is supposed to be the substitute
for the old obligation. Consequently, such old obligation shall still
subsist, unless the parties intended that the former relation should
be extinguished in any event.423
Idem; Rule if old obligation is voidable. — With respect
to voidable obligations, the rule is different. According to Art. 1298,
when the annulment of the obligation may be claimed only by the
debtor, or when there is a ratification of the obligation, the rule
that the novation is void is not applicable. This is logical because
a voidable obligation is binding until it is annulled by a competent
court, and therefore, susceptible of ratification.424 It must, however,
be observed that if the debtor concurs in the novation, he impliedly
renounces his right to ask for annulment, and therefore, validates the
obligation. But this concurrence is not always indispensable because
it may be lacking such as in the case of expromisión. Therefore, if he
does not concur in the substitution of debtors, and the new debtor,
who has assumed the obligation, eventually pays such obligation,
he (the old debtor) can still avail himself of the right to invoke the
voidable character of the obligation against any claim of the second
debtor. The second debtor, on the other hand, if he was aware of
the vice or defect of the obligation at the time when he assumed
its payment, cannot avail himself of the right to invoke its voidable
character against any claim of the creditor.425
421
422
423
8 Manresa, 5th Ed., Bk. 1, p. 798. These so-called exceptions found in Art.
1298 of the Code are not really exceptions because they refer to voidable contracts
(Art. 1390), while the general rule refers to void contracts (Art. 1409).
424
New provision.
425
3 Castan, 7th Ed., p. 289, quoted in Gov’t. of the Phil. vs. Bautista, CA, 37 Off.
Gaz. 1880.
347
Art. 1299. If the original obligation was subject to a sus-

pensive or resolutory condition, the new obligation shall be
under the same condition, unless it is otherwise stipulated.426
Effect If Old Obligation Is Conditional. — According to the

above article, if the original obligation was subject to a suspensive
or a resolutory condition, the new obligation shall be subjected to
the same condition, unless it is otherwise stipulated. This rule is
based on the same principle enunciated in the previous article, since
the fulfillment of the event which constitutes the condition has the
effect of either rendering an obligation effective or extinguishing it
depending upon whether the condition is suspensive or resolutory.
In other words, if the original obligation is conditional, the novation
must also be conditional, and its efficacy shall, therefore, depend
upon whether the condition which affects the first is complied with
or not.427
According to Manresa, if the previous obligation is conditional,
the fulfillment or non-fulfillment of the condition affects the subse-
quent obligation. This is true whether the condition is suspensive
or resolutory in character. The reason is that the subsequent ob-
ligation was contracted on the basis of the efficacy of the previous
obligation as its equivalent. In other words, if the previous obliga-
tion does not arise because of the non-fulfillment of the suspensive
condition, or if it ceases to be effective because of the fulfillment of
the resolutory condition, then the previous obligation is placed in
the same category as a void obligation or an obligation which has
already been extinguished. Hence, if the suspensive condition is not
fulfilled, the novation is valid; otherwise, it is not.428
Cases may, however, arise in which the new, as well as the
previous, obligation is subject to different conditions. If the conditions
affecting both obligations can stand together, and they are all fulfilled,
the effect is that the new obligation becomes demandable; if only
the condition affecting the first obligation is fulfilled, the previous
obligation is revived, while the new obligation loses its force; if only
the condition affecting the second obligation is fulfilled, the effect
is that there is no novation since the requisite of a previous valid
426
427
Ibid., p. 798.
428
348
Novation
and effective obligation would be lacking. If the conditions affecting

both obligations are incompatible with each other, it is evident that
the effect of such incompatibility is the extinguishment of the first
obligation so that only one obligation remains — the new obligation
whose demandability or effectivity shall depend upon the fulfillment
or non-fulfillment of the condition affecting it.429
Art. 1300. Subrogation of a third person in the rights of

the creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this Code;
the latter must be clearly established in order that it may
take effect.430
Novation By Subrogation. — The second method whereby
personal novation may be effected is by subrogating a third person in
the rights of the creditor. There are two forms of this kind of novation
— conventional subrogation and legal subrogation.431 Conventional
subrogation is that which takes place by the agreement of the
original creditor, the third person substituting the original creditor,
and the debtor, while legal subrogation is that which takes place by
operation of law.
Art. 1301. Conventional subrogation of a third person

requires the consent of the original parties and of the third
person.432
Conventional Subrogation. — Conventional subrogation
must be clearly established in order that it may take effect.433 This
necessarily follows from the fact that in conventional subrogation it
is essential that there must be an agreement of all the parties with
respect to the subrogation. As a matter of fact, according to Art. 1301,
which gives the requisites of conventional subrogation, the consent
of the original creditor, of the third person who is subrogated to the
rights of the original creditor, and of the debtor is required.
429
430
New provision.
431
432
See Art. 1624, et seq., Civil Code.
433
349
There is, however, a case in which the creditor may transmit

his rights to a third person even without the consent of the debtor,
but in this case, there would be no novation of the obligation by
conventional subrogation, but an assignment of rights.434
The two may be distinguished from each other in the following
ways:
(1) As to rules which govern: Conventional subrogation is
governed by Art. 1300 to Art. 1304 of the Civil Code, while assignment
of rights is governed by Art. 1624 to Art 1627 of the same Code.
(2) As to necessity of debtor’s consent: In conventional
subrogation the debtor’s consent is required, while in assignment of
rights it is not.
(3) As to effect upon obligation: Conventional subrogation
has the effect of extinguishing the obligation and giving rise to a
new one, while assignment of rights has the effect of transmitting
the rights of the creditor to another person without modifying or
extinguishing the obligation.
(4) As to effect upon vices: In conventional subrogation defects
or vices in the original obligation are cured, while in assignment of
rights they are not.
(5) As to time of effectivity: In conventional subrogation the
effect arises from the moment of novation or subrogation, while in
assignment of rights the effect, as far as the debtor is concerned,
arises from the moment of notification.435
Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is pre-
ferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the obliga-
tion, pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor,
a person interested in the fulfillment of the obligation pays,
434
435
350
Novation
without prejudice to the effects of confusion as to the latter’s

share.436
Legal Subrogation. — Legal subrogation is that which

takes place without agreement of the parties but by operation of
law because of certain acts. Instances of legal subrogation are those
provided in this Art. 1302 of the NCC (Eduardo G. Ricarze vs. CA, et
al., G.R. No.160451, Feb. 9, 2007).
As a general rule, legal subrogation is not presumed.437 There
are, however, three exceptions to this rule. These exceptions are
enumerated in this same Art. 1302.
The word “preferred’’ under the first exception should be un-
derstood in its broad sense and in connection with the rules on pref-
erence of credits.438 It will be observed that in this type of legal sub-
rogation, the subrogation may be effected even without the debtor’s
knowledge. Thus, if A has a credit of P20,000 against D which is se-
cured by a real estate mortgage, while B has also a credit of P10,000
against D which is not secured, and subsequently, B pays A the en-
tire indebtedness of D without the knowledge and consent of the
latter, it is clear that B shall then be subrogated in all of the rights
of A, not only against the debtor, but even against third persons. D,
however, can still avail himself as against B of all defenses available
to him against A, such as compensation, payments already made, or
even any vice or defect of the former obligation.439
With respect to the second exception, it is evident that the
provisions of Arts. 1236 and 1237 are applicable. Consequently,
when a person, not interested in the obligation, pays such obligation
with the express or tacit approval of the debtor, he is entitled not
only to demand reimbursement for what he has paid, but also to be
subrogated in all of the rights of the creditor.440 However, if he pays
without the knowledge or against the will of the debtor, although he
is entitled to demand reimbursement to the extent that the latter
436
437
Ibid., pp. 805-806.
438
Arts. 1236, 1302, No. 2, Civil Code.
439
440
351
has been benefited by the payment,441 he is not subrogated in the

rights of the creditor.442
With respect to the third exception, it is also evident that a
“person interested in the fulfillment of the obligation’’ can only
refer to a co-debtor, a guarantor, the owner of the thing which is
given as security, or one who has a real right over the thing which
is the object of the obligation. As in the case of the first exception,
the debtor retains all of the defenses available to him against the
former.443 It must be observed, however, that if it is a solidary debtor
who pays, there can be no subrogation because then the obligation is
extinguished, although such solidary debt or who paid can demand
reimbursement from his co-debtors of the shares which correspond
to them in the obligation. In other words, the co-debtor who made
the payment does not step into the shoes of the creditor because he
cannot enforce against his co-debtors the payment of the original
obligation.444
Art. 1303. Subrogation transfers to the person subrogated

the credit with all the rights thereto appertaining, either
against the debtor or against third persons, be they
guarantors or possessors of mortgages, subject to stipulation
in a conventional subrogation.445
Art. 1304. A creditor, to whom partial payment has been
made, may exercise his right for the remainder, and he shall
be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit.446
Effect of Total Subrogation. — It must be remembered

that the effects of the other forms of novation are governed by the
provisions of Art. 1296. The effects of novation by subrogating a
third person in the rights of the creditor, on the other hand, are
governed by the provisions of Arts. 1303 and 1304.
441
442
Wilson vs. Berkenkotter, 49 Off. Gaz. 1401; 8 Manresa, 5th Ed., Bk. 1, p. 807.
443
444
445
8 Manresa, 5th Ed., Bk. 1, pp. 814-815. For illustrative case, see Somes vs.
Molina, 15 Phil. 133.
446
352
Novation
Subrogation transfers to the third person who is subrogated

the credit with all of the rights which the original creditor had
against the debtor or against third persons. Hence, unlike the
other forms of novation, accessory obligations are not extinguished
because in such obligations the person subrogated also acquires
all of the rights which the original creditor had against third
persons. The application of this rule is absolute with respect to legal
subrogations; however, with respect to conventional subrogations,
such accessory obligations may be increased or reduced depending
upon the agreement of the parties.
Effect of Partial Subrogation. — The effect of partial
subrogation is given in Art. 1304. Thus, if P, a third person, pays
two-thirds of the indebtedness of D to C, such payment shall result in
the partial subrogation of P in the rights of the creditor, C. C’s rights
with respect to the remainder are not affected by the subrogation. In
other words, both rights shall co-exist. In case of a conflict between
the two, however, the right of C shall be preferred.
353

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OBLIGATIONS

Art. 1231. Obligations are extinguished:

Section 1. — Payment or Performance

Art. 1232. Payment means not only the delivery of mon-

Art. 1233. A debt shall not be understood to have been

When Obligation Is Understood Paid or Performed. — As

shall be understood to have been paid when the debtor or obligor

Art. 1236. The creditor is not bound to accept payment

Whoever pays for another may demand from the debtor

Persons Who May Pay Obligation. — The following may

Gonzaga vs. Garcia

Idem; id. — Right of creditor. — Under Art. 1158 of the

“Under the present law (Art. 1158, Civil Code of Spain)

and subsequently, when the debt became due and demandable, P,

Idem; id.; id. — Right of subrogation. — If the payment

Problem No. 1 — In 1972, D executed a promissory note

paid to C.32 If D cannot pay because of insolvency, he can still

Idem; id. — Gratuitous payments. — If the payment is

Art. 1239. In obligations to give, payment made by one

to the provisions of Article 1427 under the Title on “Natural

Capacity To Make Payment. — It is, of course, essential that

Art. 1240. Payment shall be made to the person in whose

To Whom Payment Must Be Made. — Payment shall be

so, because, although the obligation was not constituted in favor of

“It having been shown x x x that the Japanese Military

Idem; id. — Payment to unauthorized persons. — If

Art. 1241. Payment to a person who is incapacitated to

to administer his property, the payment is considered valid: (1) if

therefrom shall be borne by him unless there is a stipulation to

Art. 1242. Payment made in good faith to any person in

Art. 1243. Payment made to the creditor by the debtor

officer of the court issuing the writ of attachment or garnishment in

Art. 1244. The debtor of a thing cannot compel the

What Must Be Paid. — The two rules stated in Art. 1244

the substitution of the act or forbearance. However, if he accepts the

indeterminate thing which constitutes its object, the creditor cannot

Art. 1247. Unless it is otherwise stipulated, the extraju-

Art. 1248. Unless there is an express stipulation to that

must be completely delivered or rendered;74 and the third refers to

Art. 1249. The payment of debts in money shall be made

Rule in Monetary Obligations. — According to the first

“Every provision contained in, or made with respect to,

Later on, in order to encourage foreign investments and to

Problem — “S,” an American resident of Manila, about

Idem; Meaning of legal tender. — Legal tender, within the

if payment was made in Japanese military notes and the creditor

Hidalgo vs. Heirs of Tuazon, Inc.

On August 31, 1943, plaintiffs obtained a loan of P100,000

ask for the cancellation of their mortgage. Considering however

Attention, however, must be called to the effect of Section 63 of

New Pacific Timber & Supply Co. vs. Seneris

A petition for certiorari with preliminary injunction to

For failure of the petitioner to comply with his judgment

respondent as the highest bidder in the amount of P50,000.00.

“Sec. 63. Legal Character. — Checks representing

creditor in cash in an amount equal to the amount credited

“Art. 1249. The payment of debts in money shall be

is equivalent to acceptance. Said certification “implies that

same is not being questioned herein. The subject of the petition