law on OBLIGATION AND CONTRACTS, business law

law on obligation and contracts

1. OBLIGATIONS General Provisions (Articles 1156-1162)

2. TODAY’S PRESENTATION Discussion Points Concept of Obligation Civil Obligations vs Natural Obligations Elements of Obligations Sources of Obligations

3. CONCEPT OF OBLIGATION (Article 1156) Obligation has been defined in various ways-depending on the aspect in which the writer views its nature.

4. CONCEPT OF OBLIGATION (Article 1156) Obligation is a tie of law which binds us, according to the rules of our civil law, to render something. -Institute of Justinian

5. CONCEPT OF OBLIGATION (Article 1156) Obligation is a legal relation between one person and another, who is bound to the fulfilment of a prestation which the former may demand of him. -Manresa

6. CONCEPT OF OBLIGATION (Article 1156) Obligation refers to the juridical necessity to comply with a prestation. -Sanchez Roman

7. CONCEPT OF OBLIGATION (Article 1156) Article 1156 – An obligation is a juridical necessity to give, to do or not to do.

8. CONCEPT OF OBLIGATION (Article 1156) It has been criticized as being incomplete.

9. CONCEPT OF OBLIGATION (Article 1156) Eminent Filipino civilist Justice J.B.L. Reyes defines an obligation as a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinative conduct (giving, doing, or not doing), and in case of breach, may demand satisfaction from the assets of the latter.

10. CONCEPT OF OBLIGATION (Article 1156) The obligation referred to in Article 1156 is a civil obligation, as distinguished from a natural obligation.

11. CIVIL vs NATURAL Civil obligations are based on positive law , whereas natural obligations, are based on equity and natural law .

12. CIVIL vs NATURAL In civil obligations , a right of action to compel their performance is granted to the creditor in case of non-performance, while in natural obligations , no such right is granted. However, the voluntary fulfillment of a natural obligation by the debtor will preclude him/her from recovering what he/she delivered to or rendered for the creditor.

13. ELEMENTS OF OBLIGATION 1. Active Subject - obligee or creditor - the possessor of a right -person in whose favor the obligation is constituted

14. ELEMENTS OF OBLIGATION 2. Passive Subject -obligor or debtor - the party who has the duty of giving, doing, or not doing

15. ELEMENTS OF OBLIGATION 3. Object/Prestation -the particular conduct required to be observed by the debtor - to give (personal), do or not to do (real)

16. ELEMENTS OF OBLIGATION 4. Juridical Tie -the efficient cause established by the sources of obligations - law, contracts, quasi-contracts, delicts, and quasi-delicts

17. SOURCES OF OBLIGATION (Article 1157) Article 1157 – Obligations arise from law, contracts, quasi-contracts, acts or omissions punished by law, and quasi-delicts.

18. SOURCES OF OBLIGATION (Article 1157) -Law -Private Acts (contracts, quasi-contracts, delict, quasi-delict)

19. SOURCES OF OBLIGATION (Article 1157) Private acts may either be unilateral (quasi-delict, delict, quasi-contract) or bilateral (contract)

20. SOURCES OF OBLIGATION (Article 1157) Private unilateral acts are either lawful (quasi-contracts) or unlawful (delict and quasi delict)

21. SOURCES OF OBLIGATION (Article 1157) The list is exclusive. “ expressio unius est exclusio alterius ”

22. SOURCES OF OBLIGATION (Article 1157) A practice or custom is not a source of a legally demandable or enforceable right, as a rule. -Makati Stock Exchange, Inc. versus Campos

23. SOURCES OF OBLIGATION (Article 1158:LAW) Article 1158 – Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this book.

24. Law is a rule of conduct laid down by legitimate authority for the common observance and benefit. SOURCES OF OBLIGATION (Article 1158:LAW)

25. In the Philippines, law includes: a. statutes enacted by the legislature; b. presidential decrees and executive orders issued by the President in the exercise of his legislative powers; c. rulings of the Supreme Court construing the law; d. rules and regulations promulgated by administrative or executive officers pursuant to a delegated power; and e. ordinances passed by the Sanggunians of local government units. SOURCES OF OBLIGATION (Article 1158:LAW)

26. To be demandable, that is to qualify as a civil obligation, it must be expressly imposed by law. SOURCES OF OBLIGATION (Article 1158:LAW)

27. Examples: Obligation to pay taxes; 13 th month pay; Parental support; and Obligation not to give alms to beggars. SOURCES OF OBLIGATION (Article 1158:LAW)

28. SOURCES OF OBLIGATION (Article 1159:CONTRACTS) Article 1159 – Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

29. Article 1305 of the New Civil Code defines a contract as a meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. SOURCES OF OBLIGATION (Article 1159:CONTRACTS)

30. Consent (express or implied) distinguishes contracts from other sources of obligation. SOURCES OF OBLIGATION (Article 1159:CONTRACTS)

31. Obligatory force of contracts Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. SOURCES OF OBLIGATION (Article 1159:CONTRACTS)

32. Examples: Contract of Loan Contract of Carriage Contract of enrolment SOURCES OF OBLIGATION (Article 1159:CONTRACTS)

33. Article 1160 – Obligations derived from quasi-contracts shall be subject to the provisions of Chapter I, Title XVII, of this Book. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

34. Article 2142 of the New Civil Code defines quasi-contracts as a juridical relation that arises from certain lawful, unilateral, and voluntary acts to the end that no one shall be unjustly enriched or benefitted at the expense of another. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

35. The Supreme Court, in Loria vs Munoz, discussed that there is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

36. A quasi-contract, however, is not the same as an implied contract because in an implied contract, there is a meeting of the minds, which is not present in a quasi-contract. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

37. Two Principal Forms: Negotiorum Gestio Solutio Indebiti SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

38. Negotiorum Gestio This happens when someone voluntarily takes charge of an abandoned property or business of another without the latter’s authority (Article 2144). SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

39. Elements of Negotiorum Gestio i . Gestor – the person who voluntarily assumes the management of the business or property of another; ii. Abandoned business/property – the business/property must be abandoned; otherwise, it will result to an unauthorized/unenforceable contract; iii. No authorization from the owner – The gestor was not authorized by the owner, ether expressly or impliedly; otherwise, it will be a case of agency; and iv. Good faith – The gestor must take charge of the business/property in good faith SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

40. Solutio Indebiti As defined by Article 2154 of the New Civil Code, this happens when something is received when there is no right to demand it, and it was unduly delivered thru mistake resulting in the obligation to return what has been delivered. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

41. Requisites of Solutio Indebiti i . There is payment even though there is no binding relation between the payor, who is not obliged to pay, and the person who received the payment; and ii. The payment was made by mistake. SOURCES OF OBLIGATION (Article 1160:QUASI-CONTRACTS)

42. SOURCES OF OBLIGATION (Article 1161: DELICT) Article 1161 – Civil Obligations arising from criminal offenses shall be governed by penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages.

43. This obligation is based on Article 100 of the Revised Penal Code which provides that every person criminally liable for felony is also civilly liable. SOURCES OF OBLIGATION (Article 1161: DELICT)

44. As a general rule , when one commits a crime, he/she offends the State and the person of the victim . SOURCES OF OBLIGATION (Article 1161: DELICT)

45. Civil action is impliedly instituted with the criminal action unless the offended party waives , reserves , or instituted it prior to the criminal action. SOURCES OF OBLIGATION (Article 1161: DELICT)

46. Requisites a. There must be a crime or a felonious act or omission; b. Which results in damage or injury to another; and c. Which is the direct and proximate cause thereof. SOURCES OF OBLIGATION (Article 1161: DELICT)

47. But what if the accused in the criminal case is acquitted? Will there be no civil liability as well? SOURCES OF OBLIGATION (Article 1161: DELICT)

48. It depends on the kind of acquittal. SOURCES OF OBLIGATION (Article 1161: DELICT)

49. The accused is acquitted because he/she is not the author of the act or omission complained of. In this case, there will be no civil liability based on delict. SOURCES OF OBLIGATION (Article 1161: DELICT)

50. The accused is acquitted because his/her guilt has not been proved beyond reasonable doubt. In this case, the accused can still be liable for civil liability for the act or omission complained of because civil liability requires a lower quantum of proof, that is, preponderance of evidence. SOURCES OF OBLIGATION (Article 1161: DELICT)

51. But what if the accused dies pending appeal of his/her conviction? SOURCES OF OBLIGATION (Article 1161: DELICT)

52. Both his criminal liability, as well as the civil liability arising from the crime are extinguished. SOURCES OF OBLIGATION (Article 1161: DELICT)

53. Article 1162 – Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

54. This obligation is also referred to as torts or culpa aquiliana . SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

55. This is based on Article 2176 of the New Civil Code which provides that whoever by act or omission causes damage to another , there being fault or negligence , and there being no pre-existing contractual relation between the parties, is obliged to pay for the damage done. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

56. Requisites A. Damage suffered by the plaintiff; B. Fault or negligence of the defendant; and C. Proximate cause or the connection of cause and effect between the fault or negligence of the defendant and damages incurred by the plaintiff. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

57. Reason: A man should subordinate his acts to the precepts of prudence and if he fails to observe them and causes damage to another, he must repair the damage (Mendoza versus Gomez) SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

58. Quasi-delict is different from delict: SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

59. 1. Crimes affect public interest, while quasi-delicts are only of private concern; SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

60. 2. In delicts, the criminal act is punished/corrected, while in quasi-delicts the damage is repaired by means of indemnification; and SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

61. 3. Delicts are not as broad as quasi-delicts. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

62. Quasi-delict is different from breach of contract in three respects : SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

63. a. In quasi-delict, negligence must be proved, while in breach of contract, negligence is presumed; SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

64. b. In quasi-delict, there is no pre-existing relation between the plaintiff and the defendant, while in breach of contract, there is; and SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

65. c. In quasi-delict, the defense of good father of a family is a proper defense insofar as parents, guardians, and employers are concerned, while in breach of contract, it is not a proper defense in the selection and supervision of employees. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

66. c. In quasi-delict, the defense of good father of a family is a proper defense insofar as parents, guardians, and employers are concerned, while in breach of contract, it is not a proper defense in the selection and supervision of employees. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

67. Effect of Pre-Existing Contractual Relations As a general rule, the pre-existing contract between the parties will bar the applicability of the law on quasi-delict. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

68. Effect of Pre-Existing Contractual Relations An exception to the rule is when the acts which breaks the contract is also a tort. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

69. Singson versus BPI We have repeatedly held, however, that the existence of a contract between the parties does not bar the commission of a tort by one against the other and the consequent recovery of damages therefor. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

70. Singson versus BPI In Air France versus Carrascoso , involving an airplane passenger who, despite his first-class ticket, had been illegally ousted from his first-class accommodation and compelled to take a seat in the tourist compartment, was held entitled to recover damages from the air-carrier, upon the ground of tort on the latter’s part, for although the relation between the passenger and a carrier is contractual, the act that breaks the contract may also be a tort. SOURCES OF OBLIGATION (Article 1162: QUASI-DELICT)

71. [G.R. No. 206327. July 06, 2022] INTERNATIONAL EXCHANGE BANK, PETITIONER, VS. RUDY S. LABOS AND ASSOCIATES, INC., SPS. RODOLFO S. LABOS AND CONSUELO R. LABOS, AND ROCKWELL LAND CORPORATION, RESPONDENTS. RECENT JURISPRUDENCE

72. The instant case stemmed from an action for sum of money with prayer for preliminary attachment filed by herein petitioner International Exchange Bank (IEB), now Union Bank of the Philippines, against respondents Rudy S. Labos & Associates, Inc. (RSLAI), spouses Rodolfo S. Labos and Consuelo R. Labos (spouses Labos ), and Rockwell Land Corporation (Rockwell). RECENT JURISPRUDENCE

73. Rudy S. Labos & Associates, Inc. or RSLAI, represented by its President, [respondent] Rodolfo S. Labos , was granted by [IEB] a 10 million peso credit line under a Letter Agreement dated June 6, 2003 & Credit Agreement dated July 2, 2003. As partial security for the credit line & all availments thereunder, RSLAI assigned to [IEB] all its rights, title & interest over one (1) condominium unit identified as Unit 23- A Luna Gardens, Rockwell Center , Makati City under a Deed of Assignment dated July 2, 2003 whereunder [respondent] RSLAI represented by Rodolfo S. Labos & [IEB] agreed not to sell, assign or transfer the assigned property to another person without the consent of the [IEB]. The condominium unit was purchased by RSLAI from [Rockwell] under a Contract to Sell dated December 20, 1999. As additional security for the credit line, Rodolfo S. Labos in his behalf & as attorney-in-fact of Consuelo R. Labos , executed a Continuing Surety Agreement dated July 2, 2003 in favor of [IEB]. RECENT JURISPRUDENCE

74. Issue: The main issue is whether or not Rockwell should be held liable to IEB. RECENT JURISPRUDENCE

75. Ruling: The petition is unmeritorious. The Court finds that the lower courts correctly absolved Rockwell from any liability. The basic principle of relativity of contracts is that contracts can only bind parties who entered into it, and cannot favor or prejudice a third person, even if he or she is aware of such contract and has acted with knowledge thereof. Where there is no privity of contract, there is likewise no obligation or liability to speak about. RECENT JURISPRUDENCE

76. THANK YOU!

77. CHAPTER 2: NATURE AND EFFECT OF OBLIGATIONS

78. ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. ART. 1664. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. ART. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by article 1170, may compel the debtor to make the delivery.

79. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. 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 deliver. ART. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned.

80. To preserve or take care of the thing with the proper diligence of a good father of a family. It means the ordinary diligence that a prudent man would exercise in taking care of his own property taking into consideration the nature of the obligation, of the time and of the place, like a person who is obliged to deliver a determinate horse to another should, pending its delivery, preserve it by taking care of the same as if the horse is his own. Obligations of the Debtor To Give a determinate thing

81. To deliver the object or thing when the obligation to deliver arises, including: Fruits of the thing if any . Kinds of fruits: Natural, industrial or civil. Natural - spontaneous product of the soil; the young and other products of animal. E.g. tress, plants on lands without he intervention of man. Industrial - produced by lands of any king through cultivation and labor. E.g. sugar cane, vegetables, rice. Civil - derived by virtue of juridical relations. E.g. rents of a building; prices of leases of lands and other similar income. Obligations of the Debtor To Give a determinate thing

82. Accessions and accessories. Accession is the right pertaining to the owner of a thing over its products and whatever is attached thereto either naturally or artificially. Accretion which refers to the gradual and addition of sediment to the shore by action of water. Accessories are those things which are joined attached to the principal object as ornament or to render it perfect. Obligations of the Debtor To Give a determinate thing

83. To be liable for damages in case of breach of obligation . (Art. 1170, NCC) When creditor acquire a right to the thing to be delivered and its fruits The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same have been delivered to him. (Art. 1164, NCC) Obligations of the Debtor To Give a determinate thing

84. Determinate thing – a thing is determinate when it is particularly designated or physically segregated from all others from the same class. (Art. 1460, NCC) Indeterminate or generic thing – A thing is generic when it refers to a class or thing or genus and cannot be designated with particularity. (Art. 1460, NCC) Fortuitous Events – those events which could not be foreseen or which though foreseen were inevitable. (Art. 1174, NCC) Definition of terms:

85. Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone.

86. Being a personal positive obligation, The creditor has the right to secure the services of third person to perform the obligation at the expense of the debtor under the following instances: When the debtor fails to do the obligation; When the debtor performs the obligation but contrary to the tenor; or When the obligor poorly performs the obligation. Obligation of the Debtor To Do

87. ART. 1168. When the obligation consists in not doing, and the obligor does has been forbidden him, it shall also be undone at his expense. Obligation of the Debtor NOT To Do – This is negative personal obligation which is consisting of an obligation, of not doing something. If the debtor does what has been forbidden him to do, the obligee can ask the debtor to have it undone. If it is impossible to undo what was done, the remedy of the injured party is for an action of damages.

88. ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra - judicially demands from theme the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: ( 1 ) When the obligation or the law expressly declares; or ( 2 ) When from the nature and the circumstances of the obligation it appears that the destination of the time when the thing is to be delivered or the service is to rendered was controlling motive for the establishment of the contract; or ( 3 ) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

89. means a legal delay or default and it consists of failure discharge a duty resulting to one’s own disadvantage. The debtor incurred delay if: The debtor fails to perform his obligation when it falls due; and A demand has been made by the creditor judicially or extra judicially . Delay ( Mora )

90. However, there are instances when the demand by the Creditor is not necessary to place the debtor on delay: When the obligation expressly so provides The mere fixing of the period is not sufficient to constitute a delay. An agreement to the effect that fulfillment or performance is not made when the obligation becomes due, default or delay by the debtor will automatically arise.

91. When the law so provides The express provision of law that a debtor is in default. For instance, taxes must be paid on the date prescribed by law, and demand is not necessary in order that the taxpayer is liable for penalties. When time is of the essence Because time is the essential factor in the fulfillment of the obligation.

92. When demand would be useless When the debtor cannot comply his obligation as when it is beyond his power to perform. Like when the object of the obligation is lost or destroyed through the fault of the debtor, demand is not necessary. In a reciprocal obligation, from the moment one of the parties fulfills his obligation, delay to the other begins For instance, in a contract of sale, if the seller delivers the object to the buyer and the buyer does not pay, then delay by the buyer begins and vice versa, if the buyer pays and the seller did not deliver the object, then the seller is on delay.

93. Mora solvendi – delay on the part of the debtor. Mora accipiendi – delay on the part of the creditor, like when the creditor unjustifiably refused to accept payment at the time it was due, is in delay. Compensatio morae – delay by both parties in a reciprocal obligation. Kinds of delay

94. ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. ART. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. ART. 1172. Responsibility arising from negligence in the performance of every king of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances.

95. ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place . When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence of which is to be observed in the performance, that which is expected of a good father of a family shall be required.

96. Fraud ( dolo ) – is the intentional deception made by one person resulting in the injury of another. The fraud referred to is incidental fraud , that is, fraud incident to the performance of a pre-existing obligation.   Negligence (culpa) – consists in the omission by the obligor of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. (Art. 1173, NCC) Sources of liability for damages:

97. Delay (Mora) – like when there has been judicial or extra-judicial demand and the debtor does not comply his obligation, delay will occur. In contravention of the tenor of the obligation – refers to the violation of the terms and conditions or defects in the performance of the obligation. Sources of liability for damages:

98. Loss of the thing with the fault of debtor. Deterioration with the fault of debtor. (Art. 1189) Other sources of liability for damages

99. Moral damages – include physical sufferings, mental anguish, fright, serious anxiety, besmirched reputation, wounded feeling, moral shock, social humiliation and similar injury. Exemplary damages – imposed by way of example or correction for the public good. Kinds of Damages

100. Nominal damages – are adjudicated in order that a right of the plaintiff, which has been violated by the defendant, may be vindicated or recognized and not for the purpose of indemnifying the plaintiff for any loss suffered by him. (Art. 2221, NCC)   Temperate or moderate damages – are more than nominal but less than compensatory damages may be recovered when the courts finds that its amount cannot, from the nature of the case, be proved with certainty. Kinds of Damages

101. Actual or compensatory damages – except as provided by law, or a stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. (Art. 2199, NCC) Damages may be recovered: For loss or impairment of earning capacity in cases of temporary or permanent personal injury; For injury, to the plaintiff’s business standing or commercial credit. Kinds of Damages

102. Liquidated damages – are those agreed upon by parties to a contract to be paid in case of breach thereof. (Art. 2226, NCC) Kinds of Damages

103. Dolo – there is deliberate intent to cause damage or injury. Culpa – there is no deliberate intent to cause damage. Dolo – waiver of liability of future fraud is void. Culpa – waiver may in some cases be allowed. Dolo – fraud must be clearly proved. Culpa – presumed from breach of contractual obligation. Dolo – liability cannot mitigated by the courts. Culpa – may be reduced according to circumstances. Distinguish Fraud ( Dolo ) from Negligence (culpa)

104. ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable (1105a)

105. Fortuitous event – is an event which cannot be foreseen which though foreseen is inevitable. Fortuitous event proper are acts of God such as volcanic eruption, earthquake, lightning, etc. is now similar with force majeure or acts of man such as conflagration, war, robbery, etc. Requisites necessary to constitute fortuitous event The failure of the debtor to comply with the obligation must be independent from the human will; The occurrence makes it impossible for the debtor to fulfill the obligation on a normal manner, and the obligor did not take part as to aggravate the injury of the creditor. (Vasquez v.C.A . G.R. 42926)

106. As a general rule, no person shall be held responsible for fortuitous events Example – Sara obliged herself to deliver a determine car to Mark on Dec. 30, 1998. Before the arrival of the period, the car was struck by lightning and was totally destroyed. Sara cannot be held responsible for the destruction of the car, hence her obligation to deliver is extinguished.

107. Exceptions (when the person is responsible despite the fortuitous event) When the law expressly so provides , such as: The debtor is guilty of fraud, negligence or in contravention of the tenor of the obligation. (Art, 1170, NCC) The debtor has proved to deliver the same thing to two or more persons who do not have the same interest. ( Art. 1165,NCC ) The thing to delivered is generic. The debtor is guilty of default or delay. ( Art. 1169,NCC ) When declared by stipulation; When the nature of obligation requires the assumption of risk.

108. ART. 1175. Usurious transaction shall be governed by special laws. Note: C.B. Circular No. 905 suspends the ceilings in the usury law. Hence, parties can agree as to the rate of interest. Kinds of interest 1. Conventional *The rate which is agreed upon by the parties. 2. Legal Interest *The rate which is prescribed by law. 3. Lawful Interest *The rate which is agreed upon by the parties but which rate is within the rate authorized by law. 4. Usurious Interest *The rate which is in excess of the maximum rate of interest allowed by law.

109. ART. 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a) Presumption means “the inference as to the existence of a certain fact which if not contradicted is considered as true.”

110. The presumption in the above article is a disputable presumption , whereby one which can be contradicted by presenting proof to the contrary while a conclusive presumption does not admit any evidence or proof, hence, it is considered as a fact. Presumption under this article: Receipt of the principal, without reservation as to the interest, shall give rise to the presumption that the said interest has been paid. When the creditor issues a receipt of a later installment of a debt without reservation as to prior installment is presumed to have been paid.

111. ART. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Rights of Creditors – In order to satisfy their claims against the debtor, creditors have the following successive rights: to levy by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; to exercise all the rights and actions of the debtor, except, such as are inherently personal to him; and to ask for the rescission of the contracts made by the debtor in fraud of their rights.

112. ART. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) As a rule, all rights acquired in virtue of an obligation are transmissible, except in the following cases: When the law so provides. When the parties stipulate otherwise – by agreement of parties that the rights acquired by them will not be transmitted to any other person. When the obligation is purely personal in nature.

113. NATURE AND EFFECTS OF OBLIGATION (Different Kinds of Obligations) Secondary Classification under the Civil Code Primary Classification under the Civil Code

114. A. NATURE AND EFFECTS OF OBLIGATION Different Kinds of Obligations a. Secondary Classifications under the Civil Code a.1. Unilateral v. Bilateral (Arts. 1168-1169, NCC) a.2. Real v. Personal (Arts 1163-1168, NCC) a.3. Determinate v. Generic (Art. 1165, NCC) a.4. Civil v. Natural (Art. 1423, NCC) a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC)

115. A. NATURE AND EFFECTS OF OBLIGATION Different Kinds of Obligations b. Primary Classifications under the Civil Code b.1. Pure and Conditional Obligations (Arts. 1179-1192) b.2. Obligations with a Period (Arts. 1180, 1193-1198, NCC) b.3. Alternative and Facultative Obligations (Arts. 1199-1206, NCC) b.4. Joint and Solidary Obligations (Arts. 1207-1222, NCC) b.5 Divisible and Indivisible Obligations (Arts. 1223-1225, NCC) b.6 Obligations with a Penal Clause (Arts. 1126-1304, NCC)

116. a. Secondary Classifications under the Civil Code a.1. Unilateral v. Bilateral (Arts. 1168-1169, NCC) Article 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a) Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: x x x.

117. There are, however, certain cases where the remedy provided for in Art. 1168 is not available. In the first place, there are those cases where the effects of the act which is forbidden are definite in character, in which case, even if it is possible for the obligee to ask that the act be undone at the expense of the obligor, consequences contrary to the object of the obligation will have been produced which are permanent in character. x x x . Hence, in these cases, the only remedy available to the obligee would be to proceed against the obligor for damages under Art. 1170 of the Civil Code. Article 1170 of the Civil Code provides: "[t]hose who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof , are liable for damages." (CSTEA, Inc. v. Province of Camarines Sur, G.R. No. 199666, October 7, 2019)

118. a.2. Real v. Personal (Arts 1163-1168, NCC) From the point of view of its object or prestation, obligations are classified into real and person . The obligation is a real one if it consists in giving ; it is personal, if it consists in either doing or not doing . An obligation “to give” involves the delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its simple possession, or to return it to its owner. An obligation “to do” includes” all kinds of work or service, while an obligation “not to do” consists in abstaining from such acts. Note that the obligation to pay a sum in money, such as the obligation to pay rentals, falls within the prestation to give.

119. a.3. Determinate v. Generic (Art. 1165, NCC) A real obligation, on the other hand, may either be specific (or determinate) or generic (or indeterminate), depending on the nature of thing to be delivered. If the obligation to give consists in the delivery of a specific or determinate thing, the obligation is classified as a specific or determinate obligation . But if the obligation consists merely in that of delivering any member of the genus or class, the same is classified as a generic or indeterminate obligation.

120. a.3. Determinate v. Generic (Art. 1165, NCC) A thing is considered determinate or specific when it is particularly designated or physically segregated from all others of the same class (Art. 1460, par.1,NCC). A thing is indeterminate or generic, on the other hand, when only the genus or class has been determined, without the same being designated and distinguished from all others of the same class.

121. a.4. Civil v. Natural (Art. 1423, NCC) Article 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. x x x . It is thus readily seen that an element of natural obligation before it can be cognizable by the court is voluntary fulfillment by the obligor . Certainly retention can be ordered but only after there has been voluntary performance. But here there has been no voluntary performance. In fact, the court cannot order the performance. ( Ansay v. National Development Company, G.R. No. L-13667, April 29, 1960)

122. a.4. Civil v. Natural (Art. 1423, NCC) Article 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered. Article 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid. Article 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been benefited thereby, there is no right to demand the thing or price thus returned.

123. a.4. Civil v. Natural (Art. 1423, NCC) Article 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A) Article 1428. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. Article 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. Article 1430. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.

124. a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC) Article 1157. Obligations arise from: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or omissions punished by law; and (5) Quasi-delicts. (1089a)

125. a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC) It will be observed that according to the Civil Code obligations are supposed to be derived either from (1) the law, (2) contracts and quasi-contracts, (3) illicit acts and omission, or (4) acts in which some sort of lame or negligence is present. This enumeration of sources of obligations and the obligation imposed by law are different types. x x x The obligations which in the Code are indicated as quasi-contracts, as well as those arising ex lege , are in the common law system, merged into the category of obligations imposed by law, and all are denominated implied contracts . (Leung Beng v. O’Brien, G.R. No. L-13602, April 6, 1918)

126. a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC) Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) In the case of Royal Lines, Inc. v. CA, it was ruled that evasion by a party of legitimate obligations after receiving the benefits under the contract would constitute unjust enrichment on his part. However, in default of an agreement, the rules found in the Civil Code regulating such obligations are applicable.

127. a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC) Article 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a)

128. a.5. Legal, Conventional, and Penal (Arts. 1157, 1159, and 1161, NCC) Obligations Arising from Criminal Offenses.- As a rule, every person liable for a felony is also civilly liable. This principle is based on the fact that, generally, a crime has a dual aspect—the criminal aspect and the civil aspect. Although these two aspects are separate and distinct from each other in the sense that one affects the social order and the other, private rights, so that the purpose of the first is to punish or correct the offended, while the purpose of the second is to repair the damages suffered by the aggrieved party, it is evident that the basis of the civil liability is the criminal liability itself.

129. b. Primary Classifications under the Civil Code b.1. Pure and Conditional Obligations (Arts. 1179-1192) 1. Pure a. Concept Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. (Article 1179, NCC . ) Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. (Paragraph 2, Article 1179, NCC)

130. b. Primary Classifications under the Civil Code b.1. Pure and Conditional Obligations (Arts. 1179-1192) 2. Conditional a. Concept 1) Event-based Conditional obligations are governed by Article 1181 of the Civil Code, which provides: "In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition." In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. ( Pure obligations, or obligations whose performance do not depend upon a future or uncertain event, or upon a past event unknown to the parties, are demandable at once. On the other hand, obligations with a resolutory period also take effect at once but terminate upon arrival of the day certain. (Olivarez v. Castillo, G.R. No. 196251, July 9, 2014)

131. b. Primary Classifications under the Civil Code b.1. Pure and Conditional Obligations (Arts. 1179-1192) As Justice J.B.L. Reyes put it in the early case of Gaite v. Fonacier : x x x What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its demandability ) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. x x x ( Estipona v. Estate of Aquino, G.R. No. 207407, September 29, 2021)

132. Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional x x x. I.Obligations with a Period

133. a. Concept 1) Day certain Obligations for whose fulfillment a day certain has been fixd , shall be demandable only when that day comes. (Article 1193, NCC ) A day certain is understood to be that which must necessarily come, although it may not be known when. (Paragraph 3, Article 1193, NCC . ) If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. (Paragraph 4, Article 1193, NCC ) I.Obligations with a Period

134. A "period" has been defined "as a space of time which has an influence on obligation as a result of a juridical act, and either suspends their demandableness or produces their extinguishment." Obligations with a period are those whose consequences are subjected in one way or another to the expiration of said period or term. Art. 1193 of the Civil Code, provides, among others, that "obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when". In the light of the foregoing provisions x x x. (Lirag Textile Mills v. CA, G.R. No. L-30736 April 14, 1975) I.Obligations with a Period

135. The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states: Article 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. I.Alternative Obligations

136. "In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who generally has the right of election." The right of election is extinguished when the party who may exercise that option categorically and unequivocally makes his or her choice known. The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court. (Arco Pulp and Paper Co., Inc. v. Santos, G.R. No. 206806, June 25, 2014) I.Alternative Obligations

137. This second part of the obligation in question is what is known in law as a facultative obligation, defined in article 1206 of Civil Code of the Philippines, which provides: ART. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. x x x x x x x x x Concept and nature When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative.(Article 1206, Ibid. ) Facultative Obligations

138. Loss or deterioration of substitute GENERAL RULE: The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. (Paragraph 2, Article 1206, NCC. ) EXCEPTION: But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. Facultative Obligations

139. Joint and Solidary Obligations Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.

140. Joint and Solidary Obligations Dr. Tolentino explains the differences between a solidary co-debtor and a surety: A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

141. Joint and Solidary Obligations The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.

142. Joint and Solidary Obligations In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor "may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made." Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

143. Joint and Solidary Obligations What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the latter," such indemnity comprising of, among others, "the total amount of the debt." Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor."

144. Joint and Solidary Obligations “x x x, the rights to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the "indemnification" that pertains to the latter extends "only [to] the share which corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that because petitioners are identified in the Undertaking as "SURETIES," they are consequently joint and severally liable to Ortigas.” (Escaño v. Ortigas, G.R. No. 151953, June 29, 2007)

145. Divisible and Indivisible Obligations a. Concept Obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. (Paragraph 1, Article 1225, NCC) b. Indemnity for damages in joint indivisible obligations 1) For non-complying debtors A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. (Article 1224, NCC ) 2) For ready to comply debtors: limited to corresponding portion of price/value. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists.

146. Divisible and Indivisible Obligations c. Certain number of days When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. (Paragraph 2, Article 1225, NCC) d. If stipulated to be an indivisible obligation However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. (Paragraph 3, Article 1225, Ibid. ) e. In obligation not to do In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (Paragraph 4, Article 1225, NCC)

147. Obligations with a Penal Clause a. Concept In obligations with a penal clause, as provided in Article 1226 of the new Civil Code, the penalty shall substitute the indemnity for damages and the payment of interest. The exceptions to this rule, according to the same article, are: (1) when the contrary is stipulated ; (2) when the debtor refuses to pay the penalty imposed in the obligation, in which case the creditor is entitled to interest on the amount of the penalty, in accordance with Article 2209 ; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation .  The penalty may be enforced only when it is demandable in accordance with the provisions of the Civil Code. (Paragraph 2, Article 1226, NCC)

148. References: 1. Comments and Jurisprudence on Obligations and Contracts by Desiderio P. Jurado 2. Obligation and Contracts by Elmer Rabuya 3. Obligations and Contracts by Arturo Tolentino 4 . https://legalresource.ph/kinds-of-obligations-obligations-law/

149. Modes of Extinguishing Obligations

150. Modes of Extinguishment of obligations By Payment or Performance Burden of Proof Special Forms of Payment under the Civil Code: Application of payments Rules on Application of Payments Dacion en pago Payment by cession Financial Rehabilitation and Insolvency Act (FRIA) of 2010 Tender of payment and consignation By the Loss of the Thing Due Effect of Loss Due to Fortuitous Event By the condonation or remission of the debt By the confusion or merger of the rights of creditor and debtor By compensation; Kinds of compensation By Novation Subrogation Legal subrogation and assignment of rights

151. Modes of Extinguishing Obligations [Par. 1., Art. 1231, Civil Code] 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

152. Other Modes of Extinguishing Obligations [Par. 2, Art. 1231, Civil Code] By annulment By rescission By fulfillment of a resolutory condition Prescription

153. Sources of Obligations 1. Law; 2. Contracts; 3. Quasi-contracts; 4. Acts or Omissions punished by Law 5. Quasi-delict. (Art. 1157. NCC) This enumeration is exclusive. No obligation exists if its source is not one of those enumerated in Art. 1157 of the NCC.( Sagrada v. NACOCO , G.R. No. L-3756, June 30, 1952 ). Extinguishment of Obligations 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 Modes of Extinguishing Obligations By annulment By rescission By fulfillment of a resolutory condition Prescription

154. Other Forms of Extinguishment Not Found in Art. 1231 Death of one of the contracting parties in personal obligations [Art. 1311 (1), Civil Code] Will of one of the contracting parties Renunciation or Waiver by the creditor Mutual Desistance or withdrawal [ Saua Import & Export Co. v. DBP, G.R. No. L24968 (1972)] Happening of a fortuitous event [Art. 1165, Civil Code] Compromise [Art. 2028, Civil Code] Impossibility of fulfillment [Art. 1184 & 1266, Civil Code] Expiration of resolutory term or period [Art. 1193 (2), Civil Code]

155. Payment or Performance Concept: Payment means not only the delivery of money but includes the performance, in any other manner, of an obligation (Art. 1232, Civil Code). Like obligee and creditor, payment and performance are twin terms. Payment refers to obligations to give while performance refers to obligations to do .

156. Burden of Proof One who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to prove payment , rather than on the plaintiff to prove non-payment. However, where the debtor introduces some evidence of payment, the burden of going forward with the evidence – as distinct from the general burden of proof – shift to the creditor, who is then under a duty of producing some evidence to show non-payment ( Jimenez v. NLRC, G.R. No. 116960, April 2, 1996; Royal Cargo Corp. v. DFS Sports Unlimited, Inc., G.R. No. 158621, December 10, 2008 )

157. General Rule: An obligation is not considered paid unless there is complete and regular performance (Art. 1233 & 1235, Civil Code). Exceptions: a. Substantial Performance in Good Faith: when the obligation has been substantially performed in good faith (Art. 1234, Civil Code); and b. Waiver / Estoppel : when the creditor accepts performance, knowing its incompleteness and irregularity (Art. 1235, Civil Code)

158. Art. 1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. The word accept , as used in Article 1235 of the Civil Code, means to take as satisfactory or sufficient, or agree to an incomplete or irregular performance. Hence, the mere receipt of a partial payment is not equivalent to the required acceptance of performance as would extinguish the whole obligation. There is thus a clear distinction between acceptance and mere receipt . In this case, it is evident that Artigo merely received the partial payment without waiving the balance. ( De Castro v. CA, G.R. No. 115838, July 18, 2002 )

159. Special Forms of Payment under the Civil Code: Application of payments Dacion en pago Payment by cession Tender of payment and consignation

160. Application of payment Concept. It is the designation of the debt which is being paid by a debtor who has several obligations of the same kind in favor of the creditor to whom payment is made when the amount is not sufficient to cover all indebtedness. Requisites. If there is plurality of debts, the debtor, at the time of payment, may declare to which of the debts the payment must be applied, provided: Debts are of the same kind Debts are owed to the same creditor and by the same debtor All debts are due, UNLESS parties so stipulate, or when application is made by the party for whose benefit the term has been constituted Payment made is not sufficient to cover all debts [Art. 1252, Civil Code]

161. Rules on Application of Payments Preferential right of debtor - debtor has the right to select which of his debts he is paying [Art. 1252, Civil Code]. The debtor makes the designation at the time he makes the payment. If not, the creditor makes the application, by so stating in the receipt that he issues, unless there is cause for invalidating the contract. If neither the creditor nor debtor exercises the right to apply, or if the application is not valid, the application is made by operation of law . If debt produces interest, the payment of principal is not deemed to have been made unless the interests are covered [Art. 1253, Civil Code]. When no application can be inferred from the circumstances of payment, it is applied: a. to the most onerous debt of the debtor; or b. if debts due are of the same nature and burden, to all the debts in proportion [Art. 1254, Civil Code]. Rules on application of payment may not be invoked by a surety or solidary guarantor.

162. Article 1176 in relation to Article 1253 Article 1176 provides that: "The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. Article 1176 falls under Chapter I (Nature and Effect of Obligations) Article 1176 should be treated as a general presumption Article 1253 states: "If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered Article 1253 falls under Subsection I (Application of Payments), Chapter IV (Extinguishment of Obligations) of Book IV (Obligations and Contracts) of the Civil Code..“ Specific presumption under Article 1253

163. Article 1176 vs Article 1253 Article 1176 presumes that the creditor waives the payment of interest because he accepts payment for the principal without any reservation. Article 1253 resolves this doubt by providing a hierarchy: payments shall first be applied to the interest; payment shall then be applied to the principal only after the interest has been fully-paid.

164. Marquez v Elisan Credit Corporation G.R. No. 194642 April 06, 2015 Correlating the two provisions, the rule under Article 1253 that payments shall first be applied to the interest and not to the principal shall govern if two facts exist: (1) the debt produces interest (e.g., the payment of interest is expressly stipulated) and (2) the principal remains unpaid. The exception is a situation covered under Article 1176, i.e., when the creditor waives payment of the interest despite the presence of (1) and (2) above. In such case, the payments shall obviously be credited to the principal. Only when there is a waiver of interest shall Article 1176 become relevant

165. Dacion en Pago or Dation in payment (Art. 1245) Concept. Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation ( dacion en pago ). Dacion en pago is in the nature of a sale because property is alienated in favor of the creditor in satisfaction of a debt in money. Dacion en pago is governed by the law on sales (Art. 1245, NCC) Requisites. (a) the existence of a money obligation; (b) the alienation to the creditor of a property by the debtor with the consent of the former; and (c) the satisfaction of the money obligation of the debtor. To have a valid dacion en pago , therefore, the alienation of the property must fully extinguish the debt. ( Sps . Pen v. Sps . Santos. G.R. Na. 160408, January II, '2016

166. Payment by Cession (Art. 1255) Concept: Cession or assignment consists in the abandonment of the totality of the property of the debtor in favor of the creditors in order that the same may be applied for the satisfaction of their credits (8 Manresa 321) Requisites: There must be two or more debts; There must be two or more creditors; There must be one debtor who is insolvent; The debtor must abandon his properties in favor of the creditors; and The creditors must accept the abandonment in their favor ( Jurado, Comments and Jurisprudence on Obligations and Contracts, 2010 )

167. Financial Rehabilitation and Insolvency Act (FRIA) of 2010 Section 2. Declaration of Policy. - It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights . In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations. Remedy if Creditors Refuse Cession There will be a proceeding in accordance with the FRIA such that all of the assets of an insolvent debtor are pooled then sold for the benefit of the creditors [ R.A. No. 10142 ].

168. What remedies are available to insolvent corporations/ individuals in your jurisdiction? Under Republic Act No 10142 (Financial Rehabilitation and Insolvency Act of 2010 (FRIA)), which governs proceedings for the rehabilitation and/or liquidation, insolvent juridical debtors may undergo: (1) rehabilitation; or (2) liquidation proceedings . FRIA only covers private stock or non-stock corporations, government financial institutions other than banks, and government-owned or-controlled corporations, unless otherwise provided by their charters. FRIA is not applicable to banks, insurance and pre-need companies , which are governed by other laws. Individual debtors, on the other hand, can only avail of suspension of payments or liquidation, whether voluntary or involuntary.

169. Tender of Payment and Consignation Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender of payment . Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. Meat Packing Corporation of the Philippines v. Sandiganbayan G.R. No. 103068, June 22, 2001

170. Loss of the Thing Due Concept of Loss 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 ( Civil Code, Art. 1189, Par. 2 ). In its broad sense , it means impossibility of compliance with the obligation through any cause. In other words, it is synonymous with what other codes term "Impossibility of performance• ( Jurado, Obligations and Contracts ). Requisites 1. The thing which is loss must be determinate; 2. The thing is lost without any fault of the debtor; 3 . The thing is lost before the debtor has incurred in delay ( Civil Code, Art. 1262, Par. I Jurado, Obligations and Contracts ).

171. Loss of Determinate Things General Rule: Obligor shall not be liable for delivery of a determinate thing when: 1. Thing is lost or destroyed without debtor’s fault; and 2. Debtor has not incurred in delay [Art. 1262 (1), Civil Code]. Exception: the obligor is still liable for the loss when: 1. Law or a stipulation provides that obligor is still liable for fortuitous events; or 2. The nature of the obligation requires an assumption of risk. In such a case, obligor is also liable for damages [Art. 1262 (2), Civil Code]. 3. When the obligation to deliver a determinate object arises from a criminal act → debtor shall be liable for the payment of its price [Art. 1268, Civil Code] 4. Acceptance of payments in bad faith ( Art. 2159, Civil Code) Loss of Generic Things General Rule: Obligation is not extinguished In a generic obligation, the loss or destruction of anything of the same kind does not extinguish the obligation (Art. 1263, Civil Code). This rule is based on the principle that the genus of a thing can never perish. Genus nunquan perit ( Gaisano Cagayan, Inc. v. Insurance Co. of North America, G. R. No. 147839, June 8, 2006 ). An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor.

172. Effect of Loss Due to Fortuitous Event An event which could not be foreseen, or which, though foreseen, was inevitable. Fortuitous events, two general causes : 1. Act of God ( fortuitous event proper ) - refers to an event which is absolutely independent of human intervention, Example : earthquakes, storms, flood , epidemic , fires, 2. Act of man ( force majeure ) - refers to an event - which arises from legitimate or illegitimate acts of persons other than the obligor Example : armed invasion, attack by bandits, governmental prohibitions, robbery, ( Jurado, Obligations and Contracts ). General Rule: If the determinate thing is loss due to a fortuitous event, the debtor is not liable. Exceptions: 1. When by law, the debtor is liable even for fortuitous event; 2. When by stipulation, the debtor is liable even for fortuitous event, or 3. When the nature of the obligation requires the assumption of risk (Art. 1262[2], Civil Code).

173. Condonation or remission of debt Condonation or remission of debt is an act of liberality , by virtue of which, without receiving any equivalent, the creditor 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 ( Dizon v. Court of Tax Appeals, G.R. No. 140944, April 30, 2008 ). It is an essential characteristic of remission that it be gratuitous , that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation , when the object or principal conditions of the obligation should be changed; or compromise , when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives. ( Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1991 ed )

174. Confusion or Merger The meeting in one person of the qualities of creditor and debtor of the same obligation When the characters of creditor and debtor are merged in the same person [ Art. 1275, Civil Code ] Illustration : A executes a promissory note payable to the order of B. B uses it to pay C. Then C uses it to pay A. Merger as one of the means of extinguishing an obligation has the following elements : the merger of the characters of the creditor and debtor must be in the same person; it must take place in the person of either the principal creditor or the principal debtor; and it must be complete and definite. ( Valmonte v. CA, G.R. No. L-41621 (1999)

175. Compensation Mode of extinguishing the obligations of two persons, who in their own right, are reciprocal creditors and debtors of each other [ Art. 1278, Civil Code ]. It is settled that "[c] ompensation is a mode of extinguishing to the concurrent amount the debts of persons who in their own right are creditors and debtors of each other. The object of compensation is the prevention of unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts ."( Banco De Oro v. Ypil , G.R. No.212024; October 12, 2020) For compensation to validly take place, the governing Civil Code provisions require the concurrence of well-defined conditions. At its minimum , compensation presupposes two persons who, in their own right and as principals, are mutually indebted to each other respecting equally demandable and liquidated obligations over any of which no retention or controversy commenced and communicated in due time to the debtor exists. But while compensation, be it legal or conventional, requires the confluence in the parties of the characters of mutual debtors and creditors, their rights as such creditors, or their obligations as such debtors, need not spring from one and the same contract or transaction .

176. Kinds of Compensation: Compensation may be legal or conventional . Legal compensation takes place ipso jure when all the requisites of law are present, as opposed to conventional or voluntary compensation which occurs when the parties agree to the mutual extinguishment of their credits or to compensate their mutual obligations even in the absence of some of the legal requisites. Judicial . It takes place by order of the court or by judicial decree ( Jurado, Comments and Jurisprudence on Obligations and Contracts, 2010 ). ” It is NOT contemplated by the Civil Code. Takes place by judicial decree, needs pleading and proof. All requirements must concur except liquidation. In reality, what is set off against the other party is a counterclaim. A counterclaim must be pleaded to be effectual; whereas, a compensation takes place by mere operation of law. Hence, the counterclaim defined by the Rules of Court is not the legal compensation contemplated by the Code

177. Legal compensation may apply to The award of attorneys fees is made in favor of the litigant, not of his counsel, and is justi­fied by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation . ( Gan Tion v. CA, G.R. No. L-22490 (1969) The bank stands as a debtor of the depositor . At the same time, said bank is the creditor of the depositor with respect to the dishonored U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a third person. ( BPI v. CA, G.R. No. 116792 (1996 ) The relationship between a bank and its depositor is that of creditor and debtor. For this reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness. ( Equitable PCi Bank v. Ng Sheung Ngor , G.R. No. 171545, December 19, 2007 )

178. Novation Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when there is subrogation of the creditor . It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible with each other." Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. ( Asian Construction and Development Corp. v MERO Structures G.R. No. 221147 June 28 2021 ) Requisites of novation , namely: (a) there must be a previous valid obligation; (b) the parties concerned must agree to a new contract; (c) the old contract must be extinguished; and (d) there must be a valid new contract. ( David v. David G.R. No. 162365 January 14, 2014 )

179. Novation In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law jurisprudence, the principle – novatio non praesumitur — that novation is never presumed. At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one. ( Reyes v. CA 332 Phil. 40 (1996)

180. In order for an obligation to be extinguished by reason of novation, what form of extinguishment is required? a. Express – The contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one ( Sueno v. Land Bank of the Phil, G.R. No. G.R. No. 174711, Sep. 17, 2008 ); Novation is never presumed, and the animus novandi , whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unmistakable ( Sueno v. Land Bank of the Phil., R. No. 174711, Sep. 17, 2008 ). b. Implied – There is no express novation but there is irreconcilable incompatibility between the old and the new obligations or that the new obligations is on every point incompatible with the old one ( Ajax Marketing & Development Corp. v. CA, G. R. No. 118585, Sep. 14, 1995 ). To determine if there was at least an implied novation because of a clear incompatibility between the old and new contracts, it apply the rule that - In order that there may be implied novation arising from incompatibility of the old and new obligations, the change must refer to the object, the cause, or the principal conditions of the obligation. In other words, there must be an essential change.

181. Two forms of novation by substitution of debtor In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion . In expromision , the initiative for the change does not come from—and may even be made without the knowledge of—the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion , the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Garcia v. Llamas, 462 Phil. 779, 788 (2003)

182. Subrogation Concept: It is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights (Jurado, Comments and Jurisprudence on Obligations and Contracts, 2010). 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 [Art. 1303, Civil Code) Kinds of subrogation of a third person in the rights of the creditor? Subrogation of a third person in the rights of the creditor is either: 1. Legal subrogation, which is not presumed and takes place by operation of law, except in cases expressly mentioned In this Code; or '2. Conventional subrogation of a third person which requires the consent of the original parties and of the third person

183. subrogation and assignment of rights An assignment of credit has been defined as an agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause - such as sale, dation in payment or exchange or donation -and without need of the debtor's consent, transfers that credit and its accessory rights to another (known as the assignee), who acquires the power to enforce it, to the same extent as the assignor could have enforced it against the debtor. On the other hand, subrogation , by definition, is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.

184. conventional subrogation and assignment of rights Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the debtor’s consent is necessary; in the latter it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor’s right to another. ( Licaros v. Gatmaitan , G.R. No. 142838 August 09, 2001 ) This Court has consistently adhered to the foregoing distinction between an assignment of credit and a conventional subrogation. Such distinction is crucial because it would determine the necessity of the debtor's consent . In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce the legal effects. What the law requires in an assignment of credit is not the consent of the debtor, but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories without the debtor's consent. On the other hand, conventional subrogation requires an agreement among the parties concerned - the original creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties.

185. Legal subrogation and assignment of rights Legal Subrogation produces the same effects as assignment and also, no new obligation is created between the subrogee/new creditor and debtor. As observed in commentaries on the subject: The effect of legal subrogation is to transfer to the new creditor the credit and all the rights and actions that could have been exercised by the former creditor either against the debtor or against third persons, be they guarantors or mortgagors. Simply stated, except only for the change in the person of the creditor, the obligation subsists in all respects as before the novation. Unlike assignment, however, legal subrogation, to produce effects, does not need to be agreed upon by the subrogee and subrogor , unlike the need of an agreement between the assignee and assignor. As mentioned, "[l]egal subrogation is that which takes place without agreement but by operation of law because of certain acts," as in the case of payment of the insurer under Article 2207 of the Civil Code. Legal subrogation is not the same as an assignment of credit (as the former is in fact, called an "equitable assignment", no privity of contract is needed to produce its legal effects.

186. Thank you and Merry Christmas!

187. UPDATES ON CIVIL LAW DR. MYKEDOX KNOEL T. CUCHAPIN (PROFESSOR) (PLM-GSL-LLM 1 st TRIMESTER – S.Y. 2023-2024) by: Atty. Ervin John R. Reyes Confusion and Merger Compensation Novation

188. CONFUSION OR MERGER Confusion or merger - is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. (ART. 1275) Essential Requisites 1) It should take place between the principal debtor and creditor; 2) Must be clear and definite; 3) The very obligation involved must be the same or identical.

189. PASTORA VALMONTE, JOSE DE LEON, AND JOAQUIN VALMONTE vs THE HON. COURT OF APPEALS, PHILIPPINE NATIONAL BANK, ARTEMIO VALENTON, AND AREOPAGITA J. JOSON, G.R. No. L-41621 February 18, 1999 FACTS OF THE CASE On November 5, 1951, plaintiff-appellant Joaquin Valmonte sold to his daughter co-appellant Pastora , three (3) parcels of land, situated in the Municipality of Jaen, Province of Nueva Ecija, containing a total area of 70.6 hectares. On November 12, 1951, plaintiff-appellant Pastora obtained a crop loan of P16,000.00 from defendant-appellee Philippine National Bank and as security for payment, thereof, she executed a Real Estate Mortgage, dated November 12, 1951, in favor of appellee bank involving the same parcels of land ( Exh . J) as covered by Transfer Certificate of Title No. NT-10423 in the name of said appellant Pastora ( Exh . Q-1).

190. On September 19, 1952, appellant Pastora , then single, executed a Special Power of Attorney in favor of one Virginia V. del Castelo for the purpose of borrowing money in the amount of P5,000.00 from appellee bank with authority to mortgage the same parcels of land hereinabove mentioned ( Exh . A). As a result thereof, a loan of P5,000.00 payable on demand was granted by appellee bank and Virginia Castelo executed a Real Estate Mortgage in its favor ( Exhs . 6 and 7-Bank, and B). On June 14, 1954, appellee bank sent a "Notice of Extra-Judicial Sale of Mortgaged Properties" to the Provincial Sheriff of Nueva Ecija for publication ( Exh . 39-Bank). On June 20, 1954, appellant Pastora executed a Deed of Sale in favor of her father co-appellant Joaquin Valmonte selling unto the latter the same three (3) parcels of land covered by TCT No. NT-10423 subject to the following condition:

191. On July 19, 26 and August 2, 1954, the notice of extrajudicial sale on Augerst 19, 1954 to be held in the City Hall of Cabanatuan City, for the satisfaction of appellant Pastora's debt of P5,000.00 plus interests due thereon, was published in a newspaper called Nueva Era ( Exh . 56-Bank). The same notice was posted in three (3) public and conspicuous places in the City of Cabanatuan where the scheduled auction sale will take place and in three (3) public and conspicuous places in the Municipality of Jaen, Nueva Ecija where the properties are located ( Exh . 38-Bank). On August 19, 1954, the auction sale was conducted and appellee bank was the sole and only bidder for P5,524.40. On the same date, the Provincial Sheriff Ex-Officio issued the corresponding Minutes of Auction Sale and Certificate of Sale ( Exh.C , 55 and 54-Bank).

192. On December 7, 1955, appellant Pastora designated her father, co-appellant Joaquin Valmonte as her attorney-in-fact for the purpose of repurchasing the land from the appellee bank ( Exh . H). Appellants failed to purchase the properties on or before December 31, 1955. Hence, on January 3, 1956, appellee Valenton deposited the balance of P34,000.00 which the bank accepted [ Exhs 47-B (Bank) and 62-B ( Valenton )]. On Jan. 4, 1956, appellee bank executed the Deed of Absolute Sale in favor of appellee Valenton ( Exhs . 47-Bank, 11-Valenton and 47-C (Bank) as well as an Affidavit of Consolidation of Ownership ( Exh . D-1).

193. To enable the registration of the properties in the name of appellee Valenton , appellee Bank, as attorney-in-fact of the mortgagor under the Real Estate Mortgagor, dated September 30, 1952 ( Exh . B), had to execute a Deed of Sale in its favor on January 5, 1956 ( Exh . E). On January 6, 1956, a "Deed of Confirmation of Sale" was executed by appellee bank for the main purpose of asserting that the existing certificate of title covering the parcels of land in question at that time was TCT No. - NT 18899 of the land registry of Nueva Ecija in the name of appellee bank ( Exh . F). Appellee Valenton obtained the cancellation of TCT No. NT 18899 and the issuance of the Registry of Deeds of Nueva Ecija of TCT No. NT-18901 in his name ( Exhs . S and S-1).

194. The Trial Court ruled in favor of the defendants and against the plaintiffs, dismissing the complaint. Then, plaintiffs Pastora Valmonte , Jose de Leon and Joaquin Valmonte appealed to the Court of Appeals. The Court of Appeals affirmed the judgment of the lower court. ISSUE THE RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ERROR WHEN IT HELD, AS DID THE TRIAL COURT, THAT THE TWO MORTGAGES (P16,000.00 AND P5,000.00) WERE SEPARATE AND DISTINCT FROM ONE ANOTHER; WORSE STILL, THAT ONE WAS "JUNIOR"AND THE OTHER WAS "SENIOR"; THAT THE "MERGER" CAME ABOUT AFTER THE FORECLOSURE OF THE P5,000.00 PORTION OF THE MORTGAGE SUCH THAT THE PNB BECAME CREDITOR AND DEBTOR AT THE SAME TIME.

195. RULING of the supreme court The Court of Appeals erred not on the application of the principle of merger. Merger as one of the means of extinguishing an obligation has the following elements: (1) the merger of the characters of the creditor and debtor must be in the same person; (2) it must take place in the person of either the principal creditor or the principal debtor; and (3) it must be complete and definite. As can be gleaned from the attendant facts and circumstances, there were two mortgages constituted on subject properties by the appelants . The first mortgage was for a loan of P16,000.00 and the second one was for a loan of P5,000.00, by and between petitioners and the PNB. What the Bank did was to foreclose the second mortgage embodied in a separate mortgage contract.

196. Under ordinary circumstances, if a person has a mortgage credit over a property which was sold in an auction sale, the only right left to him was to collect its mortgage credit from the purchaser thereof during the sale conducted. This is so because a mortgage directly and immediately subjects the property on which it is constituted, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created. However, these steps need not be taken in the present case because PNB was the purchaser of subject properties and it did so with full knowledge that it has a mortgage thereon. Obligations are extinguished by the merger of the rights of the creditor and debtor.

197. In the case under consideration, the merger took place in the person of PNB, the principal creditor in the case. The merger was brought about during the auction sale, PNB purchased the properties on which it had another subsisting mortgage credit. This court is bound by the finding of respondent court that the two loans referred to are separate and distinct and the mere allegation by petitioners that said loans constitute a single indivisible obligation should be stricken off as the said is not supported by evidence. In effect, the mortgage for the P16,000.00 loan was deemed extinguished. While it is true that there was still an annotation on the Transfer Certificate of Title issued to respondent Artemio Valenton , the said annotation or encumbrance was already discharged by operation of law. Consequently, petitioners' contention that said title issued to Valenton was not valid by reason of the said annotation, is devoid of any legal basis.

198. COMPENSATION Compensation is the extinguishment in the concurrent amount of the obligations of those persons who are reciprocally debtors and creditors of each other. ART 1279. In order that compensation may be proper, it is necessary: 1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

199. 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.

200. 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.

201. Judicial Compensation or Set-off 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.

202. Effect of Assignment on Compensation of Debts (Art1285) 1) If made with consent of debtor — Compensation CANNOT be set up except if the right thereto is reserved. 2) With knowledge but without consent or against the will of debtor — compensation can be set up regarding debts previous to the assignment. 3) Without knowledge of debtor — Debtor can set up compensation as a defense for all debts maturing prior to his knowledge of the assignment.

203. novation is understood as the substitution or change of an obligation by another, which extinguishes or modifies the first, either changing its object or principal condition, or substituting another in place of the debtor, or subrogating a third person in the right of the creditor. Kinds of Novation Expressed ; and Implied

204. Essential Requisites  the old obligation must be valid;  the intent to extinguish or modify the old obligation by a substantial difference; th e capacity and consent of all parties except in expromision . the new obligation must be valid.

205. Implied Novation is made by making substantial changes: In the object or subject matter; 2) In the cause or consideration; In the principal terms or conditions  If a debt subject to a condition is made an absolute one; Reduction of the term or period;  When, without consent of some subscribers, the capital stock of a corporation is increased.

206. Instances Where there was NO Extinctive Novation When there are only slight alterations or modifications; When the new contract merely contains supplementary agreement; When additional interest is agreed upon; When additional security is given; A contract was entered into providing a method of payment; When a guarantor also becomes a principal debtor; When the creditor in the meantime refrains from suing the debtor, or extends the term of payment; When the place of payment is changed or there is a variation in the amount of partial payments; When a public instrument is executed to confirm a valid contract.

207. Expromision and Delegacion Distinguished (1) Consent Required Substitution of Debtor (Art 1293) a) Expromision — the initiative comes from a third person; (Art 1294) b) Delegacion — the initiative comes from the debtor. Here the three parties must agree. (Art 1295) Requisites for Expromision 1) Initiative must come from a third person who will be the new debtor; 2) the new debtor and creditor must consent; 3) the old debtor must be excused or released from his obligation. Requisites for Delegacion th e initiative comes from the old debtor; ALL parties concerned must consent or agree;

208. (2) Effect of Insolvency of New Debtor In expromision — If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (Art 1294) In delegacion — shall not revive the action of the creditor against the original obligor, EXC : when said insolvency was already existing and of public knowledge, OR known to the debtor , when he delegated his debt. (Art 1295)

209. Legal and Conventional Subrogation Extinctive subjective novation by change of creditor is the transfer to a third person of all the rights appertaining to the creditor. ART 1301 . Conventional subrogation of a third person requires the consent of the original parties and of the third person. ART 1302 . It is presumed that there is legal subrogation:  When a creditor pays another creditor who is preferred, even without the debtor's knowledge;  When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;  When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share.

210. TONY N. CHUA, JIMMY N. CHUA, and ERNEST T. JENG, vs. SECRETARY OF JUSTICE and BDO UNIBANK, INC., G.R. No. 214960. June 15, 2022. FACTS OF THE CASE Banco de Oro Universal Bank, Inc., the surviving entity in the merger between Banco de Oro Universal Bank, Inc. and Equitable PCI Bank, which in turn is the surviving entity in the merger between Equitable Banking Corporation (EBC) and PCI Banking Corporation filed a complaint for violation of Trust Receipts Law against Tony N. Chua and Ernest T. Jeng the responsible officers of NF Agri-Business Corporation (NF ABC).

211. In 1999, EBC (Equitable Banking Corporation) issued a commercial letters of credit and, thereafter, imported merchandise for the account of NF ABC (NF Agri-Business Corporation). The merchandise consisted of peruvian fish meal and various kinds of soybean meals for agriculture purposes. The imported merchandise was delivered to NF ABC. Consequently, petitioners executed trust receipts as follows; Trust Receipt No. Date of Execution Amount FSA 70410361PRL June 16, 1999 P4,111,175.25 FSA 704100470PRL July 1, 1999 8,749,580.10 FSA 704100453PRL [September] 8, 1999 3,850,507.46 FSA 704100470PRL [January] 21, 2000 3,698,375.42 16 Total   P20,409,638.23

212. The trust receipts were payable within 90 days from their dates of execution. However, NF ABC (NF Agri-Business Corporation) failed to pay its obligation under the trust receipts when it became due. On December 16, 2008, BDO demanded payment from NF ABC (NF Agri-Business Corporation) of the outstanding obligation under the trust receipts in the amount of P17,430,882.88; despite demand, however, NF ABC (NF Agri-Business Corporation) failed to turn-over the proceeds of the sale of the goods or return the goods if not sold. Hence a Complaint-Affidavit was filed against Tony N. Chua and Ernest T. Jeng the responsible officers of NF Agri-Business Corporation. In their defense, Tony N. Chua and Ernest T. Jeng alleged that NF ABC (NF Agri-Business Corporation) was severely affected by the Asian Financial Crisis in 1999 to 2000, and by the successive typhoons that hit the Philippines. The goods covered by the trust receipts were perishable hence they encountered difficulties in looking for buyers. They had to sell the goods at a non-profitable price, while some of the goods perished.

213. Petitioners averred that NF ABC (NF Agri-Business Corporation) maintained and continued its commitment to pay its debt. They entered into negotiations with BDO and reached an agreement with respect to the terms of payment and interest. This agreement was reduced into writing. NF ABC (NF Agri-Business Corporation) then issued postdated checks for the period until April 2002, after which it proposed a revised repayment schedule and issued anew postdated checks until March 2004. The outstanding obligation was ultimately reduced to P17,430,882.88. In sum, petitioners argued that there was a novation as the trust receipt transaction was converted into a simple loan.

214. Issue Whether there was novation as the trust receipt transaction was converted into a simple loan.

215. Ruling: Novation is a mode of extinguishing an obligation. The Civil Code provides that one of the ways to novate an obligation is by changing its object, cause, or principal conditions. Thus, Article 1292 of the Civil Code states: Article 1292. In order that an obligation may be extinguished by another which substitute 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.

216. A necessary element of novation is the cancellation of the old obligation by the new one, which may be effected expressly or impliedly. It is never presumed and must be proven as a fact. There is an express novation if the new obligation unequivocally declares that it extinguishes or substitutes the old obligation; on the other hand, there is an implied novation if the old and the new obligations are on every point incompatible with each other. The test of incompatibility is whether the two contracts can stand together, each one having an independent existence. "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." Here, the Court affirms and adopts the SOJ's and CA's factual finding that the new schedule of payments did not novate the trust receipt agreement. As the CA has determined that there is no written contract between the parties stating in unequivocal terms that they were novating the original obligation, it is necessary and proper to determine whether the new schedule of payments is incompatible with the original obligation under the trust receipts.

217. ASIAN CONSTRUCTION AND DEVELOPMENT CORPORATION,, VS. MERO STRUCTURES, INC., SUBSTITUTED BY NOVUM STRUCTURES LLC, INC., FIRST CENTENNIAL CLARK CORP., AND NATIONAL DEVELOPMENT COMPANY G.R. No. 221147. September 29, 2021 FACTS OF THE CASE In line with the 100th anniversary celebration of the Philippine independence from Spanish colonial, First Centennial Clark Corporation (FCCC) was created for the purpose of designing, constructing, operating and managing the Philippines’ National Centennial Exposition to be held in the Clark Special Economic Zone in Pampanga. FCCC entered into a Construction Agreement with Asian Construction and Development Corporation ( Asiakonstrukt ) for the said event. Meanwhile, Asiakonstrukt contracted with MERO Structures Inc. (MERO) for the supply of materials in constructing a special Philippine flag.

218. However, FCCC failed to pay the Asiakonstrukt , which led Asiakonstrukt not to pay MERO. MERO, thru a letter, requested to Asiakonstrukt that it be paid directly by the FCCC which the latter interposed no objection to MERO’s request to collect payment directly from FCCC. But still no payment was made which prompt the MERO to institute before the RTC a Complaint for sum of money. MERO prayed that Asiakonstrukt or FCCC be ordered to pay US$1,033,990 including interest, plus litigation expenses and moral and exemplary damages, and BDC be directed to . RTC ruled that MERO’s right to collect from Asiakonstrukt and FCCC, the former by virtue of a contract and the latter for having benefited from MERO’s fulfillment of its obligation to supply the spaceframe but dismissed the complaint against NDC for lack of evidence. CA denied the appeal of MERO and Asiakonstrukt and affirmed the RTC DECISION with modification of the interest. The legal interest shall apply.

219. Issue WHETHER A NEW CONTRACT WAS BORNE OF THE LETTERS EXCHANGED BY MERO AND ASIAKONSTRUKT.

220. Ruling: No. No new contract was borne of the letters exchanged by MERO and Asiakonstrukt . Article 1231 of the Civil Code provides for the different modes of extinguishing obligations, to wit: Article 1231. Obligations are extinguished: By payment or performance; By the loss of the thing due; By the condonation or remission of the debt; By the confusion or merger of the rights of creditor and debtor; By compensation; 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. (1156a)

221. The rules on novation are outlined in the Civil Code as follows: 1. Changing their object or principal condition; 2. Substituting the person of the debtor; 3. Subrograting a third person in the rights of the creditor. Article 1292. In order that an obligation may be extinguished by another which substitute 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. Article 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 by the new debtor gives him the rights mentioned in Articles 1236 and 1237

222. Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible with each other. Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand, together, each one, with his own independent existence.

223. Applying the foregoing to the instant case, it is evident that there was neither an express nor implied novation through the letters exchanged between MERO and Asiakonstrukt . First, there is nothing in the letters that unequivocally states that the obligation of Asiakonstrukt to pay MERO would be extinguished. Second, there is also no mention that MERO would substitute or· subrogate Asiakonstrukt as FCCC's payee/ obligee as the letters merely show that MERO was allowed by Asiakonstrukt to try collecting from FCCC directly. Lastly, using the test of incompatibility, Asiakonstrukfs non-objection to MERO's request to collect from FCCC directly is not incompatible with the obligation of Asiakonstrukt to pay MERO. It merely provided an alternative mode in collecting payment to MERO, which is not even valid as far as FCCC is concerned since the latter did not even consent to the same, not to mention there is no existing contractual relationship between MERO and FCCC. With regard to the last point, it must be stressed that the consent of the third party, which is FCCC in this case, must also be secured for the novation to be valid. Again, FCCC was never a part of the letters exchanged between MERO and Asiakonstrukt . Thus, FCCC clearly could have not consented to any substitution or subrogation of the parties.

224. THANK YOU AND MERRY CHRISTMAS!