oblicon latest lecture

8/9/2019 Oblicon Latest Lecture

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Modes of extinguishment of obligations classied.Castan class ies the m odes of extinguishing ob ligations in the f ollowing manner:(1) Voluntary:

(a) Perf ormance:1) Payment; and2) Co nsignati on.

(b) Su bstitution:1) Dacion en pago (conveyance f or paym ent); and

2) Novation.

(c) By release agreem ent:1) Agreement subsequent to the constitution of the obligation:

a) M utual w aiver; b) Unilateral waiver; and

c) Rem ission.

2) Agreement simultaneous to the constitution of the obligation:a) Resolutory condition; and

b) Extinctive period.

(2) Involuntary:(a) By reason of t he subject:

1) Co nfusion; and

2) D eath of the con tracting parties i n the cases w here the o bligations are person al.

(b) By rea son of t he ob ject:1) Loss of t he thing d ue o r i mpossibility o f performance; and

(c) By failure to ex ercise (ri ght of acti on):1) Exti nctive p rescription. (see G . Florend o, The Law of O bligations and Contracts [1936], pp.

333-334, citing 2 C astan, Derecho C ivil Español , 46-47 .)

SECTION 1. — Payment or Performance

ART. 1232. Payment m eans not only t he d elivery of m oney but also the p erformance, in an y othermanner, of an obligation. (n)

Meaning of pa yment.

In ordinary p arlance, payment ref ers only to the d elivery of m oney. A s a m ode of ext inguishing anobligation, it has a m uch w ider m eaning.

Payment may con sist of not only i n the delivery of m oney but al so the givi ng of a thi ng (other t hanmoney), the doing of an act, or not doi ng of an act. When a d ebtor pays d amages or penalt y in lieu of thefulllment of an obligation (see A rt. 1226.), there i s al so p ayment in the sen se used in Article 123 2.

In law, payment and p erformance are synonymous.

Elements of paym ent.Matters relative to ordi nary o r com mon payment, without re gard to f orm, are di stinguished from those

referring to cert ain excep tional manifestations of the sam e, as t ender and consignation of paym ent, assignment,and cession of prop erties. This d istinction is accept ed by the Civil C ode, w hich treats rst of t he commondoctrine o f payment and then o f the speci al forms un der s eparate t itles.

Under t he com mon law doctrine an d the sam e traditional inuence, the ele ments of paym ent ar e anal yzed into:

(1) persons, who may pay a nd to w hom payment may be made;(2) thing or object in w hich pay ment m ust consi st;(3) the cau se thereo f;(4) the m ode or f orm thereof;(5) the p lace and the ti me in w hich it must be m ade;(6) the i mputation of expen ses occasi oned by it ; and(7) the speci al parts which may modify the sam e and the effects they gen erally produce — elements which aredesignated i n Latin quis, quinam , qui d, causa, quo modo, ubi, quando, expensae, and pacta adjunta. (G. Florendo, TheLaw of Obligations and Contracts [1936] , p. 335, ci ting 8 M anresa 260-261. )

Burden o f proving p ayment.

Burden of proof is the d uty o f a party to presen t evi dence o f the facts i n issue n ecessary t o p rove thetruth of hi s claim or defense by the am ount of evi dence requi red by law. (Dela Peñ a vs. Court of A ppeals, 579SCRA 396 [2009].)

When the exis tence of a d ebt i s fully establ ished by the eviden ce, the set tled rule i s t hat t he b urden ofproving extinguishment by paym ent devol ves upon the d ebtor w ho pleads paym ent or offer s such a defense tothe claim of t he credit or rat her than on the lat ter t o p rove non -payment. The d ebtor has the b urden of show ingwith legal c ertainty that t he obligation has b een d ischarged by payment.1 Only w hen the d ebtor i ntroduceseviden ce that t he o bligation has been extinguished does the b urden shift to the cred itor. (Biala vs. C ourt ofAppeals, 191 SCRA 51 [1990]; Good Earth Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991]; AudionElectric Co., Inc. vs . National Labor R elations C ommission, 308 SCRA 340 [1999] ; Far East Bank and Trust Co .,Inc. vs. Querimit, 373 SC RA 665 [2002]; Coronel vs. Cap ati, 459 SC RA 205 [2005]; G.M. [Phil.], Inc. vs.

Batomalaque, 461 SCR A 111 [2005]; G & M Phils., Inc. vs. Cuambot, 507 SCRA 552 [2006]; Bulos, Jr. vs.Yasuma, 527 SCRA 727 [2007]; Cham vs. Paita-Moya, 556 SCRA [2008].)

There i s a disputabl e presum ption that m oney paid by one to an other w as du e to the l atter. (Rules ofCourt, Rule 1 31, Sec. 5[f ].)

A receipt of paym ent, although not excl usive, is deem ed to be the best evi dence of pay- m ent. A receipt is awritten and signed acknowledgment t hat m oney has or good s have been delivered, w hile voucher is a d ocumentaryrecord o f a bu siness t ransaction. A voucher i s not necessar ily an evidence of paym ent. It i s m erely a w ay o r m ethod of


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recording or keep ing track o f payments m ade. (Alonzo vs. San Juan , 451 SCRA 45 [2005]. ) In t he w orld o f business, it isunnatural to m ake p ayments and all ow them to be u nrecorded. (Union R enery C orpora- t ion vs. Tolentino, Sr., 471SCRA 613 [2005].) A cancellation of m ortgage ( i.e. , release of a real est ate m ortgage) i s no t conclusi ve p roof of paym entof a l oan, even as i t may serve as basis for an infer ence that paym ent of t he p rincipal obl igation has be en m ade. (Co vs.Admiral United Savings Bank, 551 SC RA 472 [2008].) N either is an invoi ce i n and by itself, as opp osed to a recei pt,considered as evidence of p ayment, nor d oes it s po ssession by the debtor rai ses t he presumption of paym ent. In fact,the term “invoice’’ indicates that m oney is ow ing or ow ed. ( Royal Cargo Corp. vs. DFS Sports Unlimited, I nc., 573SCRA 414 [2008].)

ART. 1233. A debt s hall not be u nderstood to h ave been paid un less t he thing or ser vice i n whichthe ob ligation consists has b een completely d elivered o r r endered, as t he case m ay b e. (1157)When debt considered p aid.

A debt m ay ref er t o an obligation to d eliver m oney, to d eliver a thi ng (other than money), to d o an act,or n ot t o d o an act. (supra.)

(1) Integri ty of t he p restati on. — This requ isite m eans t hat t he p restation be fulll ed completely. (Alonzo vs. San Juan, 451 SCRA 45 [2005].) A debt to deliver a

have been paid u nless t he thing o r ser vice ha s been completely delivered or rend ered, as t he case m ay be.Partial or irregular perf ormance w ill not produce the ex tinguishment of an ob ligation as a gen eral rule.

Neither a late p artial paym ent f orestall a l ong-expired maturity d ate. (Selegna Management & Dev.Corp. vs. United C oconut Pl anters Ban k, 489 SCRA 125 [2006] .)

EXAMPLES:(1) D bound himself t o p ay C P10,000.00. D is gi ving o nly P9,000. 00. C can ref use to accept P9, 000.00

because the fulllment is not complete.

(2) X a greed to p aint t he house of Y for P50 ,000.00. X did n ot pai nt t he k itchen anymore and insteadasked Y to p ay h im P50,000.00 les s t he cost of pai nting the k itchen. Y can ref use to pay X because the d ebt of Y(to d eliver m oney) w ill arise on ly a fter t he debt of X (to p aint t he house) i s com pletely ren dered. ( see A rt. 1191.)

(2) Iden tity of the prestati on. — This second requisite means that the very p restation due must be del ivered orperformed. (see A rt. 1244.)

ART. 1234. If t he obligation has been substantially per- f ormed in good faith, t he obligor m ayrecover as t hough there had been a st rict and complete full lment, less dam ages suff ered by the ob ligee. (n)

Recovery all owed in case of substanti al perform ance in go od faith.Article 123 4 is t he rst excepti on to the rule l aid down in Article 123 3. The reason for the excep tion

given by the Code Commission is as follows:

“The a bove rule ( Art. 1234.) is ado pted from American L aw. Its fairness i s evi dent. In case ofsubstantial perf ormance, t he obligee is bene ted. So the obligor shou ld be a llowed to recover as if therehad been a st rict and complete ful llment l ess dam ages suff ered by the obligee. This l ast condition

affords a j ust com pensation for the rel ative b reach committed by the obligor.” (Rep ort of t he CodeCommission, p. 131.)

Requisites f or the ap plication of A rticle 1234.The requisites are:(1) Th ere m ust be substantial perf ormance. I ts exis tence depends u pon the circumstances o f each p articularcase; and

(2) Th e ob ligor m ust be i n good faith. G ood faith is presum ed in the absence of p roof t o the contrary. (see

Duran vs. Intermediate A ppellate Court, 138 SCRA 489 [1985]; Tan vs. G.V.T. Engineering Services, 498 SCRA93 [2006].)

EXAMPLE:S o bliged himself t o sell 1,000 b ags o f cem ent to B for a certai n price. However, despite d iligent effo rts

on his part , S was abl e to deli ver only 950 ba gs becau se of ce ment short age. Take n ote that S w ants t o com plywith his obl igation to d eliver t he e ntire 1, 000 b ags b ut he co uld n ot do so for reasons b eyond h is control .

Under A rticle 1234, S can recover as thou gh there h ad been complete d elivery les s t he price of the 50 bags. In other words, B cannot require S to deliver rst the remaining 50 bags as a condition to his liability for

the price. He must pay for the 950 b ags an d enforce his r ight to damages for fai lure o f S t o deliver t hedifference. I t i s i ncumbent up on S, how ever, to ex plain satisfactorily his f ailure to m ake complete d elivery.

ILLUSTRATIVE CASE:Cancellation o f only on e contract w here t here are t wo con tract s t o sel l covering tw o lot s and total paym ents by the

buyer are more t han value of one l ot.

Facts: S, as subd ivision owner, agreed to sell und er t wo contracts tw o lots t o B on installments f or aperiod of 10 years, covering 120 m onthly installments. The contract provi des that fai lure o f B to pay theprincipal plus inter est would mean the cancell ation of t he co ntract and the forf eiture of al l the am ounts paid.After the 95th installments f or bo th lots, B did not m ake further paym ents. S cancell ed the contract andforfeited the am ounts pai d. The am ount paid by B on the p rincipal al one (P1,682.00) was m ore t han the valueof on e lot (P1,500.00).

The C ourt of A ppeals ordered the cancel lation of only one contract and the con veyance o f one l ot of B’ schoice, while recog nizing the ri ght of S to ret ain the interes ts ( P1,890.00) pai d by B on both lots f or eight (8)years.

Issue: Does the decision deny substantial j ustice to S?

Held: No. U nder t he decision, the i nterests pai d by B are ret ained by S, and the other lot reverts t o S byreason of t he cancellation of t he contract as t o said lot. The judgment cann ot be d eemed to deny substantial

justice to S nor to defeat his rights under the letter and spirit of the contracts in question. In the interest of justice and equity, the decision may be upheld upon the authority of Article 1234.2 (Legarda Hermanos vs.

Saldana, 55 SCRA 324 [1974]. )


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ART. 1235. When the obli gee accepts the p erformance, knowing its incompleteness or i rregularity,and without expressing any protest or ob jection, the obligation is deem ed fully com plied with. ( n)

Recovery all owed w hen incomplete or i rregular performance w aived.The above p rovision is the other excep tion to A rticle 123 3. I t i s f ounded on the p rinciple of est oppel. In

case of acceptance, t he law considers t hat t he creditor w aives h is ri ght. The whole o bligation is exti nguished.

If the p ayment is i ncomplete o r i rregular , t he creditor m ay properly reject i t.

A level of work accomplishment of 97.56% complete would by any national norm be consi dered assubstantial t o w arrant f ull payment of t he co ntract amount, less act ual damages suff ered by the pri ncipal. (DieselConstruction Co., I nc. vs. UPSI P roperty Holdings, 549 S CRA 12 [2008] .)

Requisites f or the ap plication of A rticle 1235.The requisites are:(1) The obli gee k nows that the p erformance is incomplete or i rregular; and(2) He accepts the perf ormance without expressing a ny p rotest or obj ection.

Meaning o f “acc ept,” as used in A rticle 1235.The verb “a ccept,” as u sed in Article 1235 , means to take a s “sati s- f actory or suffi cient,” or to “g ive

assent t o,” or to “agree” o r “accede” to an incomplete or ir regular perform ance. Th e m ere rec eipt of par- t ialpayment is not equivalent to acceptance of performance within the purview of Article 1235 as wouldextinguish the w hole ob ligation. (Esguerra vs. Villanueva, 21 SCRA 1314 [1967]; Castro vs. Court of Ap- peals,384 SCRA 607 [2002].)

(1) When a credit or recei ves p artial payment, he is not ipso facto deemed to have abandoned his pr ior demandfor ful l paym ent. To im- pl y that a creditor accepts part ial paym ent as com plete p erformance, hi s accept ancemust be m ade under ci rcumstances that indicate his i ntention to con sider the perf ormance com plete and torenounce hi s claim arising from the d efect. (Selegna Management and Dev. Corp. vs. United C oconut Plant ersBank, 489 SCRA 125 [2006].)

(2) In a case, i t w as he ld that t he failure o f t he respon dent to ob ject or protes t t he non-payment of i nterest bythe p etitioner w ho incurred d elay in the sett lement of i ts obligations, when the form er accepted the certi cateof t itle to a su bdivision lot sol d by way o f set tlement of a cri minal case, cannot be con sidered as ful l payment ofthe p rincipal ob ligation in the civi l case, thus preclud ing recovery of i nterest under A rticle 12 35. O nly theprincipal obli gation was consi dered to h ave been paid o r perf ormed. H aving incurred d elay in the set tlementof i ts obligation, the p etitioner can not den y the resp ondent its right to coll ect i nterest pursua nt to A rticle 220 9of t he Civil Code. (Solid Homes, Inc. vs . Court of A ppeals, 170 SC RA 63 [1989] .)

(3) In an other case, however, where the sell er accepts t he buyer’s installment pay ments desp ite t he allegedcharges i ncurred by the latter, without qu alication, without any specic demand for them , and without anyshowing that he protest ed the ir regularity of su ch payment, the b uyer’s li ability, i f any, f or su ch charges, w asdeemed fully sati sed the seller having w aived the same. (Palanca vs. Guides, 452 SC RA 461 [2005] .)

Form of protest of cr editor.Article 1235 does n ot requir e the protest or ob jection of the credit or to be made in a particular

manner o r at a parti cular t ime. So long a s the acts of t he creditor, at t he time of the i ncomplete or ir regularpayment by the debtor, or w ithin a reasonable t ime thereaf ter, evince that t he former i s n ot sat ised oragreeable to sai d payment or p erformance, t he obligation shall not be d eemed extinguished. (Esguerra vs.Villan- ueva, supra. )

ART. 1236. The creditor is not bou nd to accept payment or per formance by a third p erson w ho has

no interest in the fu lll- m ent of t he obligation, unless there is a st ipulation to the con- t rary.

Whoever pays f or another m ay demand from the debtor what he has p aid, except t hat i f he p aidwithout t he knowledge or agai nst t he will of t he debtor, he can rec over only i nsofar as t he payment hasbeen benecial to the d ebtor. (1158a)

Persons from whom the creditor must accept payment.The cre ditor i s bou nd to accept paym ent or perf ormance fr om the fol lowing:

(1) Thedebtor;(2) Any person w ho has an interes t i n the o bligation (like a guarantor) ; or(3) A third person w ho has n o int erest in the o bligation when there i s st ipulation that he can make p ayment.(par. 1. )

Creditor m ay ref use paym ent by a thi rd pers on.“Under the old C ivil Code, the credi tor cannot re fuse paym ent by a t hird p erson but the Commission

believes that the creditor should have a right to insist on the liability of the debtor. Moreover, the credi- torshould n ot be com pelled to accept payment f rom a third p erson whom he m ay d islike or dis trust. The creditormay n ot, for person al reasons, desire t o have an y b usiness deali ngs w ith a t hird p erson; or t he cred itor m ay n othave con dence i n the h onesty of t he thi rd p erson who might deli ver a defect ive thi ng or pay with a checkwhich m ay not be hon ored.” (Report of t he C ode Commission, p. 132.)

“Or he m ight be t he creditor’s bit ter enemy. Or sup pose the con tract is t o sell a h orse, or a car of a cert ain m ake,or a tractor. Can a total stranger com pel t he creditor to accep t t he horse, or the car, or the tractor that h e(former) i s d elivering to him? How could the creditor be absolutely sure that t he thing delivered is inaccordance w ith the cont ract?” (Memorandum of the Code Commission, supra, p . 8.)

Effect of paym ent by a t hird p erson.The second paragraph of Article 1236 rec ognizes that paym ent or per formance may be m ade by any

person not i ncapacitated, even w ithout the kn owledge or against the will of the debtor, and although he hasabsolutely no interest in the obligation. Such payment w ould produce an enforceable ri ght i n favor of the

paying third person.

(1) If made w ithout the know ledge or a gainst the w ill of debt or. — The payer can recover from the d ebtor only in sofar as t he payment ha s been benecial t o the lat ter. (par. 2.) I n other w ords, t he recovery is only up to the ex tentor am ount of t he d ebt at the time of paym ent. Furthermore, the thir d person is not subrogate d to the ri ghts ofthe credit or, such as those arising from a m ortgage, gua rantee, or p enalty. ( Art. 1237; see A rt. 1425.)


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(2) If made w ith t he know ledge of the debt or. — The payer shall have the ri ghts of r eimbursement and subrogation,that i s, to recover w hat he h as pa id (not necessari ly the amount of t he debt) and to acq uire al l t he rights of t hecreditor. (Arts. 1236, pa r. 2; 1237 , 1302, 130 3.)

EXAMPLES:D owes C the sum of P1, 000.00. I f S, a st ranger t o the obligation, offers t o p ay C , the latter m ay o r m ay

not acce pt t he offer of payment. Suppose C accepts, the ri ght of S t o recover from D depends upo n w hether t hepayment i s w ith o r w ithout t he k nowledge or consent of D.

(1) Without t he kn owledge (or agai nst t he w ill) of D — If the act ual indebtedn ess i s P1,000. 00 an d S p aid P1 ,000.00,he can ask reimbursement f or P1,000. 00 but i f P400.00 had already been paid by D, then S is ent itled to bereimbursed only f or t he am ount of P600. 00 becau se i t is only t o that am ount t hat D has been beneted. S canrecover P400. 00 from C who sh ould n ot have acc epted i t.

If C acted in b ad faith, he is l iable also for i nterest in lieu of d amages.

(2) With the knowledge of D — In either case, if the payment of P1, 000.00 was m ade with the knowledge orconsent of D , S can recover f rom D P1,000.00 w ith a ll the ri ghts of subrog ation to the accessory o bli- gat ionssuch as m ortgage, guaran ty, or p enalty. (Art. 1237.)

ILLUSTRATIVE CASES:1. Right of j udgment cre ditor (or t ransferee) t o w hom was sol d at an executi on sale a ven dor a retro’s (j udgment debtor’ s)right of repurcha se, to have the prop erty repurchased by the latt er f rom the vend ee a retr o regis tered in the n ame of such

judgment creditor.

Facts: S sold a p arcel of l and w ith ri ght to rep urchase t o B. S’s ri ght w hich w as an notated in the reg istryrecords, was l ater at tached by C and sold under executi on. Because of t he failure o f S t o redeem the propertywithin on e year fr om the d ate of execut ion sale, a d eed for t he interest of S i n the land was i ssued to C , whowas t he p urchaser at said sale.

In the meantime, S repurchase d the land from B, and the annotation of the right t o redeem wascancelled. Sub sequently, C, in turn, sol d all hi s i nterests in the land to D who now seeks t o have the landregistered i n h is nam e cl aiming that un der A rticle 1158 (now Art. 1236.) t he repu rchase by S w as a p ayment f orC and that S m ay recover from C the pri ce paid.

Issue: Was the repurc hase by S a paym ent for C?

Held: No. The only interest acquired by C at t he sheriff’s sale was the ri ght to repurchase fr om B because this was the only interest that S

subsequent p urchase fr om C, t he judgment credi tor, was inval id, as the latter d id not acqu ire ti tle b y therepurchase of t he land u nder t he pacto de retro contract by S, t he judgment deb tor.

C was not a debtor of B, the pacto de retro vendee. He was un der no obligation to repu rchase the l andfrom B. C had the right t o d o so but t he exercise of t he ri ght w as op tional w ith him. Therefore, the repurchase

by S (for himself) did not make C or D, C’s transferee, the owner of the land. Article 1236 is not applicable.(Gonzaga vs. G arcia, 27 P hil. 7 [1914]. )

2. Redemption w as m ade by an uncle i n b ehalf of minors, the ow ners of propert y sol d in executi on.

Facts: A parcel of l and belonging to M , etc., minors, was sol d in execution to B. C, an u ncle of M , etc.deposited w ith t he sh eriff in thei r beha lf but without their kno wledge, the redem ption price and inter est on thelast day for redem ption. B refused to turn over the l and on the g round that t here w as no valid redemption

because C was not the legal guardian of the minors.

The guard ian d ied a few days before t he p eriod of redemption exp ired.

Issue: Was t he redem ption valid?

Held: Yes. Any p erson, whether he has an i nterest in the re demption o r not can m ake pay ment i n beh alfof t he minors, the d ebtors, without t he knowledge of the l atter. (Sison vs. Balgor, 34 Phil. 885 [19 16].)

3. Rights acquire d b y a third person w ho p aid taxes f or the account of a deli nquent taxpayer.

Facts: For fai lure o f t he heirs of X , t o pay the real estate taxes on the land in dispute, t he same w asforfeited to the go vernment. To avoid it s even tual s ale at public au ction, B, one of the h eirs, asked C to p ay theamount of s aid taxes w hich C did. Receipts f or paym ent w ere i ssued to C “in b ehalf of t he d eclared ow ner, X.”C contends that he has acqu ired by virtue of s aid payment t he ri ghts of X in and to sai d property.

Issue: What is the effect of the payment made by C ?

Held: The d elinquent taxpayer in thi s case i s the estate of X , not C , so that paym ent by C merelysubrogated h im into t he ri ghts of t he g overnment as creditor for sai d delinquent t axes u nder A rticle 1236 . Thefact that C accepted said recei pts i ssued in the n ame of X, i ndicates that C understood tha t he w as no t therebypurchasing the p roperty, but had made the p ayment f or t he accou nt or bene t of X. C became a tr ustee for t he

benet of X or his heirs. (Villarta vs. Cuyno, 17 SCRA 100 [1966].)

Payment w ith/without t he k nowledge or agai nst t he will of t he debtor.(1) Th e p rovision that the p ayor (or payer) “c an recover on ly insofar as t he payment has b een benecial t o thedebtor,” w hen made w ithout hi s kno wledge or agai nst hi s w ill, is a defense t hat m ay be avail ed of onl y by thedebtor, not by the cred itor, for it affects solely the rights of t he former. Once the credit or h as accepted payment,his s tatus an d rights as such , become au tomatically ex tinguished . (Rehabilitation Finance C orp. vs. Court ofAppeals, 94 P hil. 984 [1954]. )

(2) I f t he third person p ays w ith the k nowledge of t he debtor, the latter m ust opp ose the pay ment bef ore or atthe ti me the sam e w as m ade, not subsequen tly, in o rder t hat t he ri ghts of t he p ayor m ay be subject to the ab oveprovision. I t i s on ly fair t hat the eff ect of said payment be determined at t he time it was m ade, and that therights t hen acquired by the p ayor be n ot dep endent up on, or subje ct to m odication by su bsequent unil ateralacts of t he d ebtor. The qu estion whether t he p ayment w as bene cial or not t o the deb tor, depends up on the la w,not upon his w ill. (Ibid.)


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ART. 1237. Whoever pays on behalf of t he d ebtor without t he k nowledge or agai nst t he w ill of thelatter, cannot com pel the credit or to sub rogate him in his ri ghts, such as those ari s- i ng from a m ortgage,guaranty, or p enalty. (1159a)

Right of third p erson to sub rogation.Whoever p ays on behalf of t he debtor i s enti tled to su brogation if the payment i s w ith the consent of

the lat ter. (Arts. 1237, 1302[2]. ) I f t he payment is w ithout t he knowledge or ag ainst the w ill of t he debtor, thethird p erson can not c ompel the credit or to subrog ate hi m in the lat ter’s accessory ri ghts of m ortgage, guaranty,

or p enalty.

May there be subrogation, if the creditor w illingly permits the pay or to be su brogated in his r ights?Since the prov ision of A rticle 1237 is for the ben et of t he d ebtor, the sub rogation can o nly take place w ith hisconsent. The thi rd p erson who without necessi ty p aid under such condition is am ply protec ted by his r ight t oreimbursement. (see 8 M anresa 271- 273.)

Articles 1236 an d 123 7 do not apply where no debtor-creditor rel ationship exi sts betw een the p erson onwhose behal f the p ayment w as m ade an d the payee. (see Tangu ilig vs. Court of Appeals, 266 SCRA 78 [1997].)Legal subrog ation by o peration of l aw is presum ed in certai n cases. (see A rt. 1302.)

Subrogation an d rei mbursement di stinguished.(1) Insubrogati on,thepersonwhopaysforthedebtorisputinto the shoes of the creditor. The payer acquires n otonly the right t o be rei mbursed for w hat he has p aid but al so all other ri ghts w hich the creditor cou ld haveexercised pertaining to the credit ei ther against t he debtor or ag ainst thi rd p ersons, be they guarantors or

possessors of m ortgages. (Art. 1303.)

(2) I n reimbursement, the third person en titled by reason of paym ent has m erely the bare ri ght t o be ref undedto the extent provided in the second paragraph of Article 1236 without the right to the g uarantees andsecurities of the o riginal obligation. In su brogation, however, there is no rea l extinction of the ob ligation, butonly a ch ange o f creditor.

EXAMPLE:D borrowed from C P1,000.00. G is the g uarantor. Without the k nowledge o r consent of D , X paid C

P1,000.00.

In thi s case, X can claim reimbursement from D for the w hole am ount of P1,000.00 inasmuch as D was beneted up to that amount. (Art. 1236.) If

(even if C is w illing) because, having paid without t he consent of D , X is no t enti tled to su brogation. But i f t he

payment w as w ith the exp ress or t acit approval of D, X would be en titled n ot m erely to f ull reimbursement butalso to sub rogation.

Suppose t he ob ligation of D is secured by a mortgage of a l and owned by D. Payment by X without t heknowledge or aga inst t he w ill of D , cannot gi ve X the ri ght to forecl ose the m ortgage becau se he h as no right t osubrogation. X can recover onl y insof ar as t he p ayment has been benecial t o D .

ART. 1238. Payment m ade by a thi rd pers on w ho does not intend to be r eimbursed by the d ebtor isdeemed to be a dona- t ion, which requires the d ebtor’s consen t. But t he p ayment i s in an y case val id as tothe credit or w ho has accepted it . (n)

Payment by a t hird person w ho does not intend t o be rei mbursed.Article 1238 “embodies t he idea that no one should be co mpelled to accept t he generosity of another. ”

(Report of the Code Commission, p. 132. )

If the p aying third person does not i ntend to be rei mbursed the paym ent i s deem ed a d onation w hichrequires t he debtor’s con sent to be valid. (s ee A rt. 725. ) H owever, if t he creditor accep ts the payment, i t shall bevalid as t o h im and the p ayor al though the d ebtor di d not gi ve h is consent t o the d onation.

EXAMPLE:D owes C P1,000.00. Without the intention of being reimbursed, X paid D’s obligation. D had

previously a ccepted X ’s gen erosity.

In thi s case, D is no t l iable t o X and his obli gation to C is exti nguished . But i f D did n ot consen t t o thedonation, X may recover f rom D since there has been n o donation, al though originally X did n ot intend to bereimbursed. N evertheless, the o bligation of D to C is ext inguished because the pay ment i s val id as t o C whohas accepted it.

Can D legally refuse t o p ay X and inst ead insist on p aying C ? No. ( see A rts. 1236, par. 2; 1237.)

ART. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and apa ity to alienate it shall not be valid, without pre!udi e to the provisions of Arti le1"2# under the Title on $%atural &bligations.'' (11)*a+

eaning of free disposal of thing due and apa ity to alienate.(1) Free disposal of the t hing due means that t he thing to be delivered m ust not be sub ject t o an y clai m or l ien orencumbrance of a third person.

(2) Capacity to ali enate means that t he person is no t i ncapacitated to e nter i nto con tracts (A rts. 1327, 1329.) andfor that m atter, to m ake a d isposition of t he thing d ue.

Free disposal of t hing due an d capacity to ali enate required.As a gen eral rule, in obligations t o give, paym ent by one w ho does not have the free dis position of t he

thing due or cap acity t o ali enate i t i s not vali d. This m eans t hat t he thing paid can b e recovered .

The excepti on is provided in Article 1427.3 The creditor cann ot be com pelled to accept paym ent w here

the p erson paying h as no cap acity to m ake i t.

Art. 1427. When a minor betw een eight een an d twenty-one years of age, who has en- t ered i nto a contr actwithout the consent of t he parent or gu ardian, vol untarily pays a su m of money or d elivers a fungibl e thi ng infulllment of the obli gation, there s hall be n o ri ght to recover t he sam e from the obli gee w ho h as spen t or consu med itin good faith. ( 1160a)


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ART. 1240. Payment shal l be m ade to the person in w hose favor t he o bligation has b een con stituted,or h is successo r i n interest, or an y p erson authorized to recei ve it . (1162a)

Person to whom payment shall be made.(1) Payment s hall be m ade to:

(a) the credit or or o bligee (person in w hose f avor the obligation has b een constituted);(b) his successo r i n interest (like an heir or assi gnee); or(c) any person authorized to receive i t.

(2) The credit or ref erred to m ust be the credit or at t he ti me the pay ment i s to be m ade no t at t he co nstitution ofthe ob ligation. Hence, i f a person is subrogated to the ri ght of t he cred itor, payment shou ld b e m ade to the n ewcreditor. (Tuazon v s. Zamora & Sons, 2 P hil. 305 [1903]. )

(3) When payment i s made to the w rong party, the o bligation is not ext inguished as to the credi tor w ho iswithout fault or neg ligence even if the d ebtor ac ted in outmost good faith and by mistake as to the p erson ofthe credit or or t hrough error i nduced by fr aud of a t hird person. ( Cembrano v s. City of Bu tuan, 502 SCRA 494[2006]; Allied Banking Corp. vs. Lim Sio W an, 549 SC RA 504 [2008].)

Meaning o f “any p erson au thorized to recei ve it .”As used in Article 1240, t he phrase means n ot onl y a person authorized by the creditor, but al so a

person au thorized by law to recei ve the p ayment, such as a gu ardian, executor or adm inistrator of t he estat e ofa d eceased, and assignee or l iquidator of a part nership or corporat ion as w ell as any other pers on who may beauthorized to d o so by law. (Haw Pia vs. China B anking Corporation, 80 P hil. 604 [1948] .)

(1) Where paym ent has been m ade to an ag ent, aside fr om proving the exi stence of a speci al power of attorney,it i s al so n ecessary for evidence to be presented regarding the nature an d extent of the all eged powers andauthority g ranted to t he ag ent. (Phil. National Bank vs. Court of A ppeals, 256 SC RA 44 [1996]. )

(2) Where paym ents were pu rportedly made to a “supervi sor’’ of respondent com pany, who was clad in thecompany’s un iform and drove a company’s van , but t he petitioner ( payor) did n ot asc ertain the identity an dauthority of t he said supervisor, nor did he ask to be shown any identication, r elying solel y on the man’srepresentat ion that he w as col lecting payments f or t he respo ndent, the p ayments did no t discharge peti tioner’sobligation to the respondent. (Culaba vs. Co urt of A ppeals, 427 S CRA 721 [2004] .)

(3) Where the charge invoice issued by X Corp., seller, clearly stat es that t he buyer shall “make all checkspayable to X Corp. onl y,’’ but t he buyer issued check p ayable to cash, w hich was rece ived by X’s salesrepresentative w ho encashed the ch eck bu t di d not rem it the m oney to X , the b uyer’s obli gation to pay thepurchase pri ce i s not ext inguished. (Wee Sion Ben vs. Semexco/Zest-O Marketing Corp., 536 SCRA 615 [2007].)

(4) Where a con tract of sal e do es not st ate t hat the pu rchase price s hould b e pa id by the bu yer t o a thir d p artyand the buyer failed to ad duce any evidence that t he owner h ad agreed, ver bally or in writ- ing, that thepurchase pri ce shou ld be p aid to the third party, i t w as held that t he payment t o the third party is no t t hepayment that w ould extinguish the b uyer’s ob ligation to the seller. Such breach gives t he seller a ri ght t o a sk forspecic pe rformance o r for ann ulment of t he o bligation to sell the pro perty. (Montecillo vs. Reyn es, 385 SC RA

244 [2002]. )

Under A rticle 1242, paym ent i n good fai th t o an y person in po ssession of t he cred it, is val id a lthoughsuch p erson m ay not be authori zed to r eceive the p ayment.

ILLUSTRATIVE CASES:1. Payment w as m ade to a pers on n ot authori zed by the sel ler t o rec eive paym ent.

Facts: B bought a cert ain elec tric plant from S. B paid C who was authori zed by C to look for buyers of

the plant. There w as no ev idence that C h ad authority to recei ve p ayment. S brou ght action to recover t he p rice.

Issue: Is there val id p ayment t o S?

Held: No. C was not dul y authorized by S to re ceive payment. Where a person in making paymentsolely relied upon the representation of an ag ent as t o h is authori ty to recei ve p ayment, such payment i s m adeat hi s ow n ri sk and where t he ag ent w as not so au thorized, s uch payment i s not a vali d defense agai nst t heprincipal. ( Keeler E lectric C o. vs. Rodriguez, 44 P hil. 20 [192 2] ; Ormachea T in Congco vs. Trillana, 13 P hil. 194[1907].)

2. Payment w as m ade t o the w idow of second m arriage of deceased, af ter de mand had been m ade byheirs of deceased by his rst m arri age.

Facts: C was a cre ditor of D . The rst w ife of C died and C married again. A fter t he d eath of C, t heplaintiffs, children of C by his rst marriage, demanded payment f rom D. D paid instead the widow of the

second marriage of C.

Issue: Is t here paym ent of t he d ebt?

Held: No. The w ife of t he second marriage h ad no right w hatever t o recei ve the paym ent, especially sothat a demand h ad already been made by t he plaintiffs. D made an u ndue payment. (Crisol vs. Claveron, [ CA] 38O.G. 3734.)

ART. 1241. Payment t o a p erson w ho is incapacitated t o ad minister his property sh all be v alid if hehas k ept t he thing d elivered, or i nsofar as the paym ent has been benecial to him .

Payment m ade to a t hird p erson shall also be vali d insofar as i t has redou nded to the ben et of t hecreditor. Such b enet t o the credit or need not be proved in the foll owing cases:(1) If af ter the p ayment, the third p erson acquires the cred itor’s ri ghts;(2) If the credit or rat ies the p ayment t o the third pe rson;

(3) I f by the creditor’s con duct, the debtor h as b een led to believe that the thir d person had authority toreceive the p ayment. (1163a)

Effect of paym ent t o an incapacitated person.Payment t o a person incapacitated to ad minister or m anage his propert y is not val id unless such

incapacitated person kept the thing paid or d elivered (so that i t i s n ot necessar y that i t shou ld have been


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invested in som e pro table ven ture) or w as bene ted by the p ayment. In the ab sence of t his benet, the d ebtormay be m ade to pay ag ain by the credi tor’s guardian or by the i ncapacitated p erson himself when he acqu iresor rec overs hi s capaci ty. Proof of such ben et i s i ncumbent up on the d ebtor w ho paid.

Under A rticle 1240 , payment sho uld b e made to his l egal representat ive; i f this i s no t possi ble, thedebtor m ay rel ieve h imself from respon sibility by the con signation in co urt of the t hing o r sum due. ( Art. 1256,par. 1. )

Effect of paym ent t o a thi rd person.

Payment t o a third person o r w rong party is not val id except i nsofar as i t has re dounded to the ben etof t he cred itor. It is i mmaterial t hat the de btor act ed in u tmost good faith an d b y m istake a s t o the p erson o f t hecreditor, or throu gh error i nduced by fraud of a thir d person if t he creditor is w ithout fault or n egligence. (Bankof t he P hil. Islands vs. Court of A ppeals, 232 SC RA 302 [1994]. )

That t he credi tor w as benete d by the p ayment m ade by the d ebtor t o a third p erson is not presumedand must, therefore, be sati sfactorily established by the p erson interest ed in proving this fact . I n the ab sence ofsuch proof, the pay ment t hereof in error and in g ood faith w ill not deprive t he cred itor of hi s ri ght to d emandpayment. (Panganiban vs. Cuevas, 7 Ph il. 477 [1906]. )When benet to creditor need no t be p roved by d ebtor.

The d ebtor i s rel ieved from proving b enet t o the credit or i n case o f:(1) subrogation o f the p ayer in the cred itor’s ri ghts;(2) rati cation by the cred itor;(3) or est oppel on the p art of t he creditor. (par. 2.)

In such cases, the benet to the cre ditor is to be presumed. Through estoppel, an admission orrepresentation is re ndered conclusi ve u pon the p erson making it and cannot be den ied or dis proved as agai nstthe p erson relying thereon. (A rt. 1431. )

Under t he law, the d ebtor w ho, before having k nowledge of the assignment of a credit t o a thi rdperson , pays the o riginal creditor, shall be released from the ob ligation. (Art. 1626.)

ART. 1242. Payment m ade in good faith to an y p erson in possession of t he credit shall r elease t hedebtor. (1164)

Payment t o thir d p erson in p ossession of cr edit.This ar ticle gives another inst ance w hen there i s vali d payment t o a thir d person .

It m ust be o bserved that t he “possession” referred to under the ab ove provision is p ossession of t hecredit itself and n ot m erely of t he d ocument or i nstrument evidencing the credit . Hence, mere possessi on of t he

instrument (unles s tr ansferable b y delivery) do es n ot enti tle the holder to p ayment no r d oes p ayment rel easethe d ebtor. Furthermore, the p ayer m ust act i n g ood faith, that i s, in the honest beli ef t hat h e i s m aking a vali dpayment and that t he p ayee i s t he o wner of t he credit . Good faith, how ever, is presum ed.

EXAMPLE:D is indebted to C in the am ount of P1,000.00 which indeb tedness is evidenced by a prom issory note

signed by D in favor of C. C los t the promissory note which was later found by X who demanded paymentfrom D.

Payment t o X is not val id because X is t he p ossessor m erely o f t he d ocument evi dencing the credit andnot of th e cred it itself.

If t he promissory n ote is payable t o b earer or hol der (N egotiable I nstruments Law [Act N o. 2031] , Sec.9.) t he o bligation will be ex tinguished if D pays X in g ood faith.

Similarly, if the p romissory note was indorsed by C to X, under a p rivate agree ment t hat X would notcollect from D, payment by D in good faith to X will al so exti nguish the debt. It i s i mmaterial t hat X acted in bad faith. The right of C will be against X.

ILLUSTRATIVE CASE:Property subject t o ri ght of re purchase was em bargoed by the governm ent and vendor a retro redee med the

property from said government and not from vendee a retro who subsequently sold the property.

Facts: S sol d in D ecember 1897 t o B a prop erty w ith ri ght of r epurchase w ithin si x (6) months. S was notable t o effect the repu rchase i n May 1898 by reason of t he fact that S w as absent f rom his pl ace of re sidence onaccount of t he w ar.

About that time, the revolution broke out and the property was seized by the revolutionarygovernment from B. The propert y was redeemed by S from said government in November 1898. Subsequently,B sold the p roperty to C . S brou ght action against C to recover t he p roperty.

Issue: Was t he sal e m ade b y the revol utionary governm ent t o S va lid w ith the resul t that B h ad n o rightto transf er t o C the pro perty i n q uestion?

Held: No. What S did w as t o att empt t o reacquir e the ow nership o f the p roperty tr ansferred to B fr om athird person to whom the property had not been tr ansferred by B in any manner w hatsoever. There fore, thepayment m ade by S to t he revolutionary governm ent which should have been m ade to B in order t o redeem theproperty, could not have exti nguished the ob ligation incurred by him in favor of the l atter.

The revol utionary governm ent w as not i n p ossession of t he credi t. A seizure or em bargo is not hing bu ta prohibition enjoining the ow ner fr om disposing of his propert y. By the m ere em bargo o f a propert y, theowner does n ot l ose h is ti tle thereto. So that A rticle 12 42 is no t app licable t o the case a t bar. (Panganiban vs.Cuevas, 7 P hil. 477 [190 6].)

ART. 1243. Payment m ade to the credit or by the debtor aft er t he latter has b een judicially o rdered to

retain the debt sha ll not be valid. ( 1165)

When payment t o creditor not va lid.In an action against t he debtor w ho is the cred itor o f ano ther, the lat ter ( the d ebtor-stranger), during the

pendency of t he case, may be ordered by the cou rt (or by an y com petent aut hority thou gh it be adm inistrative)to retain the debt u ntil t he right of t he plaintiff, t he creditor in the main li tigation, i s resol ved. Paym ent m ade


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subsequently by the d ebtor-stranger sha ll not be vali d if the plaintiff wins the case an d cannot col lect from thedebtor to w hom the paym ent i s m ade. Such payment is considered as m ade i n bad faith.

The benet grant ed by Article 1243 can on ly be invoked by the creditor w ho secures t he order ofretention. (see 8 M anresa 2 84.)

Garnishment of debtor’s credit.The p roceeding for t he p urpose of s ubjecting a d ebtor’s cr edit to the p ayment of hi s deb t to an other i s

known as garnishment. It i s an attachment4 by means o f w hich the plaintiff seeks t o su bject t o h is claim the

property of t he d efendant i n the han ds of a t hird p erson or m oney owed b y such third p erson or garni shee t othe d efendant. (Manila Remnant Co., Inc. vs. Court of A ppeals, 231 SCRA 281 [1994] .)

Garnishm ent i s in the n ature of an i nvoluntary n ovation by the su bstitution of one cred itor f or an other.(see A rt. 1291[2]. )

“It consists in the cit ation of som e str anger to the litigation who is d ebtor to on e o f t he parties to theaction. By this m eans, s uch debtor-stranger becom es a forced inte rvenor; and the court, havi ng acquired

jurisdiction over his person by means of the but to the new creditor who is creditor in ta

[1921]; s ee S ec. 37, Rule 39 ; Secs. 7, 8, 10, 15, Ru le 57 , Rules o f C ourt.)

It is a p roceeding in rem and, in effect, m eans that t he property att ached is an indebted thing an d a v irtualcondemnation of it to pay the ow ner’s deb t. The att aching cred itor acqu ires a speci c lien o n the p roperty att achedwhich ri pens into a j udgment agai nst t he res when the order of sal e is m ade. ( Biñan Steel Corpo ration vs. Court ofAppeals, 391 SCRA 90 [2002].) I t i nvolves m oney, s tock, cr edits an d other incorporeal propert y which belong to theparty bu t is in the p ossession or un der the con trol of a thi rd person . Garnishm ent i s thus a l evy o n p ersonal prop erty.(Caja vs. Nanquil, 438 SCRA 174 [2004]; see Sol idum vs. Court of A ppeals, 492 SCRA 261 [2007].)

ART. 12"". The debtor of a thing annot ompel the reditor to re eive a different one, althoughthe latter may be of the same value as, or more valuable than that whi h is due.

In obligations to do or not to do, an a t or forbearan e annot be substituted by another a t or forbearan e against the obligee's will. (11))a+

Very pre station d ue m ust be com plied w ith.(1) The rst paragraph refers t o a real obli gation to deliver a sp ecic thing. A thing differen t from that du ecannot be off ered or dem anded against t he w ill of t he credit or or deb tor, as t he case m ay be.

(2) The seco nd paragraph refers t o p ersonal ( positive an d negative) obli gations. The a ct to be p erformed or theact proh ibited cannot be su bstituted a gainst t he ob ligee’s w ill. (see A rt. 1167.)

When prestation may be sub stituted.Of course, substitution can be m ade if the ob ligee co nsents. In f acultative o bligations, the d ebtor i s

given the ri ght to rend er an other prestati on in su bstitution. (Art. 1206.)

Article 1244 will not als o apply in case of w aiver by the creditor o r sub stitution is all owed by

stipulation with the co nsent of the cred itor. (see A rts. 1245, 1291[1]. )

ART. 1245. Dation in payment, whereby property is ali en- ated to the credit or in sati sfaction of a d ebt inmoney, shall be g overned by the law of sal es. (n)

Special forms of payment.There ar e four s pecial forms of paym ent und er t he C ivil Code, namely:

(1) dation in p ayment (A rt. 1245.);(2) application of p ayments (A rt. 1253.);(3) payment by cession (Art. 1255.); and(4) tender of pay ment and consignation. (Arts. 1256-1261.)

Strictly sp eaking , application of paym ents i s not a special form of paym ent.

Meaning of dat ion in paym ent.Dation in paym ent ( adjudicat ion or dacion en pago) is t he con veyance o f ow nership of a t hing by the d ebtor

to credit or as an accepted eq uivalent of perf ormance of a m onetary ob ligation.

It is a speci al form of paym ent becau se i t is not t he o rdinary w ay of exti nguishing an o bligation. A debtin money is satised, not by p ayment of m oney (Art. 1244.), but by t he tr ansmission of ow nership of a t hing bythe d ebtor t o the cred itor.

Requisites of dati on in payment.In ord er t hat t here b e a v alid dation in p ayment, the fol lowing are t he requisites:

(1) There m ust be perf ormance of the prest ation in li eu of paym ent (animo sol vendi) which m ay consist in thedelivery of a co rporeal thi ng or a real r ight or a cred it against a t hird person;

(2) There m ust be som e d ifference betw een the p restation due and that w hich is gi ven in su bstitution (aliud proalio) ; and

(3) There must be an agreement between the creditor and debtor t hat the o bligation is immediatelyextinguished by reason o f the p erformance of a p restation different f rom that du e. (Lo vs. KJS Eco-FormworkSystem Phil., Inc., 413 SC RA 182 [2003] ; Aquintey vs. Tibong, 511 SC RA 414 [2006] .)

The undertaking really partakes in one sen se of the n ature of sal e, t hat i s, the credit or is r eally buyingthe thi ng or prop erty of t he d ebtor, payment f or w hich i s to be ch arged against the de btor’s deb t. As such, t hevendor in g ood faith sha ll be respo nsible, f or the ex istence and legality of the cred it at t he time o f t he sale b utnot for the sol vency o f t he d ebtor, in sp ecied circumstances.5 (Lo v s. KJS Eco-Form work S ystem Phil., Inc., 413SCRA 182 [2003].)

This m ode of paym ent presupp oses an exi sting debt which is extinguished to the ext ent of the v alue o fthe thing delivered or totally, i f such is the intention of the parties. ( Citizen Surety Ins. Co. vs. C ourt ofAppeals, 162 SC RA 738 [1988] ; Philippine Lawin Bus C o., Inc. vs. Court of A ppeals, 374 SC RA 332 [2002] .) I t i san objective n ovation of the o bligation. (see A rt. 1291[1].)


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EXAMPLE:D owes C P15,000.00. To fulll the ob ligation, D, with t he consent of C , delivers a piano . If the p iano,

however, is worth less t han P15,000.00, the conveyance m ust be d eemed to extinguish the o bligation to theextent only of t he v alue of the p iano as agreed o r as m ay be proved, unless t he parties have con sidered thepiano by their agree ment, express or i mplied, as ful l paym ent i n which case t he obligation of D is tot allyextinguished .

The co nveyance is , in effect, a n ovation of the co ntract . (see A rt. 1291[1].)

Governing law.The law of sales governs because dati on in p ayment m ay be con sidered a specie of s ale in which the

amount of t he money d ebt becom es the pri ce of t he thing a lienated. ( see A rt. 1619.) As such, t he essentialelements of a con tract (see A rt. 1318.) must be p resent.

In its modern con cept, what act ually takes p lace in dacion en pago is an objective novation of theobligation (see A rt. 1291[1].) where the thing offered as an accepted equivalent of the p erformance of anobligation is con sidered a s the ob ject of t he contract of sal e, while the d ebt i s con sidered a s the p urchase p rice.In an y case, com mon consent i s an essenti al prerequisi te, be i t sale or n ovation to have the eff ect of t otallyextinguishing the d ebt or o bligation. ( Filinvest Cred it C orp. vs. Ph il. Acetyl ene Co., I nc., 111 SCRA 421 [1982];Vda. De Jayme vs. Court of Ap peals, 390 SCRA 380 [2002].)

Art. 1628. The ven dor i n good faith shall be responsible f or the ex istence and legality o f t he credit at t he timeof t he sale, unless i t should h ave b een sold as d oubtful; but not f or the solvency of t he debtor, unless i t has been soexpressly st ipulated or un less t he insol vency w as pri or t o the sal e and of com mon knowledge. Xxx

Sale di stinguished from dation in payment.The distinctions are the foll owing:

(1) In sale, there is no pre-exi sting credit, while i n d ation in p ayment t here i s;(2) In sale, obligations are created, w hile in d ation in payment, obligations are ex tinguished ;(3) In sale, the cau se i s the p rice p aid from the v iewpoint of t he sell er, or the ac quisition of the thing sold, f romthe viewpoint of t he buyer, while i n dation in payment, the exti nguishment of t he d ebt, from the v iewpoint ofthe d ebtor, or the acq uisition of the ob ject i n li eu of t he cred it, from the v iewpoint of t he creditor;(4) In sal e, there i s m ore f reedom in xing the pri ce t han in da tion in p ayment;(5) In sal e, the bu yer h as st ill t o p ay the p rice, while in dation in p ayment, the p ayment i s recei ved before t hecontract is perfect ed which is t o b e cha rged against t he debtor’s d ebt; and(6) In sal e, the p arties d eliver an d receive the thing as sel ler and buyer, while in d ation in payment, as d ebtorand creditor.

Transmission of ow nership to cr editor.

Dation in payment requi res t he d elivery an d transmission of ow nership of a thi ng to the credit or w hoaccepts i t as equi valent of paym ent of an ou tstanding debt. Where the reposses sion of t he thi ng was m erely tosecure the pay ment of t he d ebtor’s loan obligation and n ot f or t he p urpose of t ransfer ring ownership thereof t othe cred itor i n satisfact ion said loan , no dacion en pago is accom plished. (Philippine National Bank vs. Pineda,197 SCRA 1 [1991] ; Fort Bonif acio D ev. Corp. vs . Yllas Len ding C orp., 567 SCRA 454 [2008] .)

Thus, an assi gnment by the m ortgagor of her l easehold rights on a shpond as sec urity to gu aranteethe payment of t he mortgage obligation is, in effect, a m ortgage. Bei ng but a securi ty for the p ayment of t heloan, the assignment does n ot const itute dati on in payment un der A rticle 1245. ( Development Ban k of thePhilippines v s. Court of A ppeals, 284 SCRA 14 [1998] .) Similarly, where the recei pts si gned by respondent(creditor) corporat ion’s repres entative, show that the vehicles o wned by petitioner com pany (debtor) w eredelivered to respo ndent i n o rder t hat the l atter w ould take cu stody for t he p urpose of sel ling the sam e as agen tof peti tioner w hereby the proceeds thereof w ould be applied in payment of peti tioner’s i ndebtedness, such anagreement n egates tr ansfer of ab solute ow nership over the property to respondent, as in a sale. ( PhilippineLawin Bus Co. vs. Court of Appeals, 374 SCRA 332 [2002].)

ART. 1246. When the ob ligation consists i n the d elivery of an ind eterminate or generi c t hing, w hose qu alityand circumstances h ave n ot been stated, t he creditor cann ot dem and a thi ng of sup erior qu ality. Neithercan the debtor de liver a thing of i nferior qu ality. The purpose o f t he obligation and other ci r- cumstancesshall be tak en into conside ration. (1167a)

Rule of the m edium quality.If the ob ligation consists i n the d elivery of a specic thing, t he very thing due m ust be d elivered. (Art.

1244.) H owever, i f the obligation is to deliver a generic thi ng, t he purpose of the obligation and othercircumstances shall be taken into con sideration to d etermine the qu ality o r ki nd of t hing to b e d elivered.Article 12 46 is a p rinciple o f equ ity in that i t sup plies j ustice in cases w here there is l ack of p recise d eclarat ionin the ob ligation of t he quality or kind of thi ng to b e d elivered. It is al ways h ard to nd one thing that is exact lysimilar to an other. I f t here is dis agreement betw een the parties, the law steps in and determines whether the

contract has been com plied w ith or not according to t he cir cumstances. (see 8 M anresa 280-281.)

The ben et of t his ar ticle m ay be waived by the cred itor by accepting a thi ng of inferior qu ality and by the debtor by delivering a thing of superior quality.

EXAMPLES:S p romised to d eliver t o B a h orse. B cannot c ompel S to deli ver a p rice-winning race h orse. Neither

can S require B to accept an o ld sickl y h orse.

(1) If B owns a stabl e of race horses and horse-racing is his m ain d iversion in li fe, which fact is kn own to S, andthe price agreed u pon is t he reason able pri ce of a race horse, then S must deli ver a race horse.

(2) If B hap pens to be a “calesa” driver and B agreed t o pay S for t he h orse an am ount w hich is the reasonableprice of a h orse for “calesa, ” then that ki nd of horse m ay be d elivered.

(3) If B is a veter inary d octor and his only pu rpose i n b uying a ho rse i s t o exa mine it s organ s in co nnection withhis work, this, and other r elevant circumstances m ay sho w that the ol d sic kly horse w as intend ed by the parti esto b e d elivered.


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ART. 12"#. nless it is otherwise stipulated, the e/tra!udi ial e/penses re0uired by thepayment shall be for the a ount of the debtor. ith regard to !udi ial osts, the Rules of ourt shallgovern. (11) a+

Debtor p aysfor ext rajudicial expen ses.The extr ajudicial expenses of p ayment are for t he account of the d ebtor. The reason is that t he

obligation is exti nguished when payment i s m ade and it i s, therefore, the debtor w ho is pri marily beneted.

If the p arties hav e m ade a sti pulation as to w ho will bear t he expenses, t hen their st ipulation shall befollowed.

Article 1247 d oes n ot app ly to exp enses incurred by the credit or i n g oing to the de btor’s do micile tocollect. ( Art. 1251.)

Losing p arty gen erally p ays jud icial costs. Judicial costs are t he stat utory am ounts al lowed to a p arty to an acti on for his expenses i ncurred in the

action. Under the R ules of C ourt (Sec. 1, Ru le 14 2.), the costs of an a ction shall, as a ru le, be p aid by the losi ngparty. The cou rt may, however, for special reasons, adj udge tha t ei ther party sha ll pay the costs, or that t hesame be divi ded, as m ay be equ itable.

No cost s ar e al lowed ag ainst t he G overnment, unless ot herwise provi ded by law.

ART. 12" . nless there is an e/press stipulation to that effe t, the reditor annot beompelled partially to re eive the prestations in whi h the obligation onsists. %either may the debtor

be re0uired to ma4e partial payments.

5owever, when the debt is in part li0uidated and in part un- li0uidated, the reditor maydemand and the debtor may effe t the payment of the former without waiting for the li0uidation of thelatter. (11)9a+

Complete p erformance of ob ligation necessary.The abo ve p rovision contemplates obli gations where ther e is on ly one creditor and only one d ebtor.

Joint and several obligations are governed by Ar i.e., the o bject ofthe obligation, must be p erformed in one act , not i n parts. (Barons M arketing Corp. vs. Court of A ppeals, 286SCRA 76 [1998].)

In order that paym ent m ay extinguish an obligation, i t i s necessary that ther e be completeperformance o f the prest ation. (Art. 1233.) The credit or m ay accep t but he can not be com pelled to accept parti alpayment or perf ormance. The debtor has t he d uty t o com ply w ith the w hole of the ob ligation but he cann ot berequired to m ake p artial payments i f he does n ot w ish t o d o so.

When partial per formance of ob ligation allowed.There are cas es, however, when partial perf ormance m ay b e ei ther requir ed or i nsisted. A mong these cases ar e:(1) when th ere i s an e xpress st ipulation to t hat effe ct (par. 1.);

(2) w hen the debt i s i n part l iquidated (denitely determined or d eterminable) and in part un liquidated (par.2.);

(3) when the d ifferent prest ations in w hich the ob ligation consists are subject to d ifferent t erms or con ditionswhich affect some of them . (8 M anresa 288. ) I n obligations w hich comprehend several di stinct prest ations ( e.gobligation to p ay debt i n installments.), it i s eviden t t hat the p restations n eed not be execu ted simultaneously

but each successive execution thereof must be complete;

(4) w hen the p arties kno w that t he o bligation reasonably can not be exp ected to b e p erformed completely at on etime; and

(5) when there i s abu se of ri ght or i f goo d faith req uires acc eptance.

EXAMPLES:(1) D is indebted to C for P5,000. 00 d ue tod ay. D cannot com pel C to recei ve P 4,000.00 i n p artial payment of theobligation and n either can C require D to p ay on ly P4,000.00 un less t here i s an ag reement t o the con trary.

(2) If D owes C P5,000.00 plus the share of C from the p rot of a busi ness w hich, how ever, has n ot yet beenliquidated or det ermined, C may demand and D may effect, the payment of the P5,000.00 which is alreadyknown.

(3) If P4,000.00 of the debt of D is du e today and P1,000.00 tom orrow, t he obligation can b e com plied withpartially. Similarly, partial perf ormance may b e eff ected in case the payment of the P 1,000.00 i s sub ject t o thefulllment of a con dition.

(4) S obliged himself t o d eliver 50,000 bag s of cem ent t o B at t he construction site of a bu ilding. S m akes a rst

delivery of 5, 000 bags, informing B that conti nuous d eliveries w ill f ollow. In this case, B cannot, in good faith,refuse to accept the p artial deli veries as long as they are suffi cient for his constr uction needs.

ILLUSTRATIVE CASE:Debtor cl aims that credi tor abu sed it s ri ghts w hen it rejected the form er’s off er of se ttlement of i ts outstanding

obligations an d su bsequ ently led the action for coll ection.

Facts: Respondent ( plaintiff) com pany, PDP, appointed p etitioner (def endant) BMC as one of t he d ealersof electrical wires and cables. As such dealer, BMC was given by PDP 60 days credi t for i ts pu rchases ofelectrical produ cts. The credi t t erm was to be reckoned from the date of d elivery by PDP of i ts p roducts todefendant.

On several occasions, PDP wrote BMC demanding payments of i ts outstanding obli gations d ue PDP.PDP rejected BMC’s offer to pay its outstanding account in monthly inst allments of P500, 000.00 plus 1%interest per m onth u ntil full payment, and reit erated it s dem and for the f ull payment of defend ant’s accoun t.

PDP led a complaint agai nst BM C for the rec overy o f P3, 802,478.20 represent ing the value of t he wiresand cables t he former ha d delivered to the lat ter, including interest . It l ikewise p rayed that i t be aw ardedattorney’s fees at the rate of 25% of the amount demanded, exemplary damages amounting to at leastP100,000.00, t he exp enses of l itigation, and the co sts of suit .


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Petitioner i n its answ er, adm itted purchasing the wires and cables fr om private res pondent bu tdisputed the amount clai med by the latter. Pet itioner li kewise int erposed a counterclaim against p rivaterespon dent, alleging that i t suff ered injury to it s repu tation due to latter’s acts . Such acts w ere p urportedlycalculated to h umiliate peti tioner and constituted an abuse of ri ghts.

Issues: The instant peti tion raises t wo is sues on e of w hich i s w hether or n ot PD P is guil ty of abu se ofright.

Held: (1) Limitati on of abu se of ri ght. — The ri ght of t he creditor u nder A rticle 124 8 h as i ts l imitations.“Since the cred itor can not be com pelled to a ccept parti al perf ormance, un less otherw ise st ipulated, t he creditorwho refuses to accept pa rtial prest ations do es no t i ncur i n d elay o r mora acci piendi, except when there i s abuseof ri ght or i f good faith requ ires acceptance. (citing IV Tolentino, Commentaries an d Jurisprudence o n the CivilCode o f t he Phils., 1990 E d., p. 298.)

Indeed, the law , as set f orth in A rticle 19 of the C ivil Code, prescr ibes a “primordial l imitation on allrights’’ by sett ing certain standards that m ust be o bserved in the exerci se thereof. Thus:

‘Art. 19. Every person must, in the exerci se of his ri ghts an d in the p erformance of his du ties, act w ith justice, give everyone his due, and obse

Petitioner i nvokes A rticle 19 an d Article 216 of t he C ivil Code cl aiming that pri vate r espondentabused its r ights when it r ejected p etitioner’s off er of set tlement an d subsequently led the acti on forcollection. It asks t hat t he C ourt that i t be a llowed to l iquidate i ts obligation to private respo ndent, withoutinterest s, in eigh t (8) equal m onthly instal lments.

Both p arties agree that t o co nstitute an abuse of ri ghts un der A rticle 19, t he defend ant m ust act with bad faith or intent to prejudice

‘Test of Abuse of Right. — Modern jurisprudence do es not permit acts which, although not unlawful, areanti-social. There i s u ndoubtedl y an abuse o f ri ght w hen it i s exerci sed for t he on ly purpose of prej udicing or inj uringanother . When the o bjective of the actor is i llegitimate, the il licit act canno t be co ncealed under the g uise ofexercising a right. The principle d oes not permit act s w hich, w ithout u tility or legitimate purpose, causedamage to an other, because t hey violate t he co ncept of social s olidarity w hich con siders l aw as rat ional and

just. Hence, every abnormal exercise of a rigive rise to liabili ty.

The exerci se of a ri ght m ust be i n accordance w ith t he pu rpose f or w hich it was establ ished, and m ust not beexcessi ve or u nduly ha rsh; there m ust be n o intenti on to i njure an other . Ultimately, however, and in p racti ce, courts, inthe sou nd exercise of t heir dis cretion, will have to d etermine all t he facts and circumstances w hen the exerci se

of a ri ght i s un just, or w hen th ere h as be en an abuse of ri ght.’ (citing, I Tolentino, pp . 61-62.) ’’

Art. 21. Any p erson w ho willfully cau ses l oss or i njury t o an other i n a m anner t hat i s contrar y to m orals,good customs or pub lic poli cy shall compensate the lat ter for t he d amage.

(2) Good fai th p resumed. — “The question therefore, is whether pri vate re spondent intended to p rejudice or

injure pe titioner w hen it rejected p etitioner’s off er an d led the ac tion for col lection.

We h old in the neg ative. I t is an elem entary rule i n this j urisdiction that good faith i s presum ed andthat t he b urden of prov ing bad faith rests upon the p arty a lleging the sam e. In the case at bar, petitioner hasfailed to p rove b ad faith on the p art of pri vate respon dent. Petitioner’s all egation that pri vate respon dent w asmotivated by a d esire t o term inate it s agen cy relat ionship w ith p etitioner so that pri vate respon dent i tself m aydeal dir ectly with Meralco is s imply no t supported by the evidence. At most, such supposition is merelyspeculati ve.’’

(3) Rejection of offer base d o n very legi timate r easons. — “Moreover, we nd that private respondent was dri ven byvery legitimate reason s for rej ecting petitioner’s off er an d instituting th e acti on for coll ection before the tri alcourt. As po inted o ut by privat e respon dent, the corp oration had its own ‘cash p osition to p rotect i n o rder f or i tto pay its ow n obligations.’ Th is i s no t such ‘a lam e an d poor rat ionalization’ as peti tioner p urports i t t o b e. Forif pri vate respon dent w ere t o b e requ ired to accep t peti tioner’s off er, there w ould be n o reason for the lat ter t oreject si milar off ers fr om its ot her debtors. Clearly, t his w ould be inimical t o the inter ests o f any enterpri se,especially a p rot-oriented o ne like private res pondent. It i s p lain to see that w hat w e have here is a m ereexercise of ri ghts, not an abuse thereo f.

Under these ci rcumstances, we do not deem private r espondent to have acted i n a m anner contrary t omorals, good customs or pu blic po licy as to viol ate t he provisions of A rticle 21 o f t he Civil Code.’’

(4) Petitioner not enti tled to m oral and exemplary dam ages. — “Conse- quen tly, petitioner’s p rayer f or m oral andexemplary damages m ust t hus be rejected. Pet itioner’s cl aim for m oral damages i s ancho red on Article 2219(10)of t he C ivil Code w hich st ates:

‘ART. 2219. Moral damages m ay be recover ed in t he fol lowing an d an alogous cases :x x x.(

10) A cts and actions ref erred to i n Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Having ruled that p rivate respon dent’s acts di d not t ransgress the p rovisions of A rticle 21, peti tionercannot be ent itled to m oral damages or, for t hat m atter, exemplary d amages. While the am ount of exemplarydamages need not be p roved, pet itioner m ust s how that he is entitled to moral, temperate or com pensatorydamages before t he court m ay consider t he q uestion of w hether or not ex emplary dam ages s hould be aw arded.As w e hav e ob served a bove, petitioner has fai led to d ischarge this burden.’’

(5) Contract has f orce of law. — “It may n ot be am iss t o stat e that peti tioner’s con tract w ith p rivate respon denthas the force of l aw between them. Pet itioner is thus bound to fulll w hat h as been expressly stipulatedtherein.’ ’

(6) Parti al per formance of obli gation not all owed. — “In the absence o f any abuse of ri ght, pri vate re spondentcannot be al lowed to p erform its obligation under such co ntract in p arts. Otherwise, private respon dent’s ri ghtunder Article 1248 will be negated, the sanctity of it s con tract w ith petitioner d eled. Th e principle o fautonomy o f contracts must be respect- ed.’’ (Barons M arketing Corp. vs. Court of Appeals, 286 S CRA 96 [1998]. )


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ART. 1249. The p ayment of debts i n money shall be m ade in the curr ency st ipulated, a nd if i t i snot possi ble to deli ver such currency, t hen in the currency w hich is l egal t ender i n the Philippines.

The delivery of promissory notes payable to order, or bills of e/ hange or other mer antiledo uments shall produ e the effe t of payment only when they have been ashed, or when through thefault of the reditor they have been impaired.

In the meantime, the a tion derived from the original obligation shall be held in abeyan e.(11#*+

Payment of debts in m oney payable i n Philippine currency.The rst paragraph of A rticle 1249 is no t applicable w here the con tract bet ween the pa rties i s t o p ay in

Philippine cu rrency. (Haw Pia vs. China B anking Corp., 80 Phil. 604 [1948]. ) The p hrase “currency stipulated”used in Article 124 9 ref ers t o money different f rom that w hich is the legal t ender or legal ly current i n thePhilippines. (see D el Rosario v s. Sandico, 85 Ph il. 170 [1949]. )

The rst paragraph of the above article w as m odied by Republic Act No. 529 which took effect on June 16, 1950. (infra.) This law requires t he p ayment of dom estic obli gations in m oney in Philippine currency

and declares as “agai nst pu blic p olicy, and null and void, and of no effect” any provision in a con tract oragreement requir ing the payment of such o bligations in a currency other than P hilippine currency. Theobligation itself is no t declar ed void. Th e vo id provision does n ot defeat a credit or’s cl aim for p ayment inPhilippine currency, as i t is prov ided in Section 1 of the Act t hat such obligation “shall be d ischarged uponpayment i n any coin or currency w hich at t he ti me of paym ent i s l egal t ender f or pu blic and private debts. ” Acontrary rule w ould allow a p erson to prot or enri ch h imself inequitably at another’ s expen se. (Ponce vs.Court of Appeals, 90 SCRA 535 [1979]; San Buenaventura vs. Court of Appeals, 181 SCRA 197 [1990]; RepublicResources D ev’t. Corp. vs . Court of A ppeals, 203 SCRA 164 [1991] .)

Note: R.A. No. 529 was r epealed by R .A. No. 8183, approved on June 11, 1996. There i s no longer anylegal i mpediment t o h aving o bligations or t ransacti ons paid in a forei gn currency as l ong as the p arties agree tosuch arrangem ent. (Development Bank of t he P hils. vs. Court of Appeals, 494 SCRA 25 [2006].)

Meaning of l egal t ender.Legal tender is t hat curr ency which a d ebtor can legal ly compel a cre ditor t o accept i n payment of a deb t

in m oney when tendered by the d ebtor i n the ri ght am ount.7 (see Bl ack’s Law Dictionary.)

Legal t ender i n the Philippines.In the P hilippines, all coins and notes i ssued by the Bangko Sentral ng P ilipinas constitute l egal tend er

for all debts, both p ublic or p rivate. Unless ot herwise x ed by its Monetary Board, coins are l egal t ender f oramounts not exc eeding P 50.00 for den ominations of P0. 25 and above, and in am ounts not exceedi ng P20.00, fordenominations of P0 .10 o r l ess. (Sec. 52, R.A . No. 7653. )

All c oins an d bills abo ve P 1.00 are, t herefore, valid legal t enders f or an y amount.

As t o v alidity o f paym ents of pre -war obli gations m ade in Japanese w ar notes and the rules re payment afterthe w ar of obli gations incurred d uring the Japan ese occup ation, see H i- lado vs. D e la C osta, 83 Phil. 471 (1949); HawPia vs. Ch ina Banking Corp., 80 P hil. 602 (1948); Phil Trust Co. vs. Araneta, 83 P hil. 132 (1949); Larroza and Enterezo

vs. Bañez , 84 P hil. 354 (1969); Gomez vs. Tabia, 84 P hil. 269 (1949); Roño v s. Gomez, 83 P hil. 890 (1949).Under BSP Circular No. 537 (July 18, 20 06) which took effect on August 11, 2006, the maximum amount of

coins to be considered legal i s ad justed a s fol lows: (1) P1,000.00 for d enominations P 1.00, P5. 00, and P10.00 co ins, and(2) P100. 00 for d enominations of P.01, P.05, P. 10 a nd P.25 coins.

Payment by m eans of i nstruments of cr edits.(1) Right of credi tor to ref use or accept. — Promissory notes, checks, bills of e xchange and other c ommercialdocuments are not legal tender and , t herefore, the creditor cann ot be compelled to accept t hem. This i s tr ueeven though the check is certied (see N egotiable I nstruments Law [Act No. 2031] , Sec. 189.), or i s a m anager’scheck. (Cuaycong vs. Ruiz, 80 Phil. 170 [1948]; De Legarda vs. M iailhe, 88 Ph il. 637 [1951]; Far E ast Bank an dTrust Co mpany v s. Diaz R ealty, Inc., 363 SCRA 659 [2001] .)

(a) The credi tor, if he cho oses, may accept them , without the accept ance p roducing the effect ofpayment. In the m eantime, the d emandability of t he original obli gation is suspen ded until t he pay- m ent by thecommercial docum ent i s act ually realized. Th e credi tor m ust cas h the instrument, and it is on ly when it isdishonored, t hat he can bring an a ction for no n-payment of t he d ebt. (par. 3.)

(b) The C ivil Code p rovisions on payment of ob ligations, particularly A rticle 1245 , are ap plicable w herewhat i s i nvolved is the p ayment of a j udgment obli gation. (Biana vs. Gimenez, 469 SC RA 486 [2005] .)

(2) Payment f or purpose of redemption. — “A redemption of prop erty sold under executi on is no t r endered inval id by reason of the fact that the payment to the sheriff for the purpose of redemption is effected by means of a

check for the am ount d ue.” ( Javellana v s. Mirasol, 40 P hil. 761 [1919].)

Article 1249 d eals w ith a m ode of ext inction of deb ts, while the right t o rede em is not an o bligation butthe ex ercise of a right; nor i s i t i ntend ed to d ischarge a pre-exist ing d ebt. It is the p olicy o f t he law to be li beralin red emption cases, to aid rather t han to d efeat t he right of redemption. (Fortunato vs. Court of A ppeals, 196SCRA 269 [1991].) Accordingly, the C ivil Code provis ions on p ayment of obligations m ay no t be ap plied w herewhat app lies i s the sett led ru le that a m ere t ender of a check s is suffi cient t o com pel redemption.

In o ther w ords, the d elivery of t he p aper or do cument s hall produce the effect of a vali d payment onl ywhen either si tuation has taken place. In the rst case, the instrument m ay h ave been executed by the d ebtorhimself or by a thi rd p erson. The second case i s app licable on ly w here the i nstrument w as execute d by a thi rd

person .

Applicability o f i mpairment cl ause of A rticle 1249.Article 124 9 (par. 2.) i s ap plicable no t only to t hose i nstruments execu ted by third p ersons, w hich the

debtor deli vers t o the cred itor, but al so to a n ote executed by the d ebtor him self and delivered to the cred itor.(Cia G en. D e Tab acos vs. Molina, 5 Phil. 142 [1905]. )

It has been held, how ever, that the clause relative to impairment of the negotiable charact er ofcommercial pap er by the fault of t he creditor is app licable on ly to the rst class of i nstruments, i.e ., tho seexecuted by third persons an d delivered by the debtor to t he credit or, and does not ap ply t o inst rumentsexecuted by the debtor h imself and delivered to the creditor. (National M arketing Corp. vs. Federation of


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United Namarco Distributors, Inc., 49 SC RA 238 [1973] .)

Acceptance o f a check im plies an undertaking of d ue diligence o n the p art of t he payee in p resenting itfor p ayment. If no such presentment w as m ade, t he drawer canno t be held li able i rrespective o f loss or i njurysustained by the payee. ( Papa v s. A.U. Valencia, 284 SC RA 643 [1998] ; s ee P io Barretto Dev. Corp. vs. Court ofAppeals, 360 SCRA 127 [2001].)

ILLUSTRATIVE CASES:1. Credit or neglecte d to have a bil l of exchan ge protest ed as require d by law for no n-pa yment by the draw ee.

Facts: S sold g oods to B for P2 ,200.00. For the p urpose of paying the su m, B delivered to S a b ill ofexchange for P2, 700.00 purporting to be d rawn by C to the order of D on E. When the b ill was deli vered to S i twas indorsed by D , and apparently accepted by E. S t ook the b ill and paid B P500.00 in cash, t he d ifference

between P2,700.00 and P2,200.00, the value of the

E refused to p ay the b ill on the grou nd that hi s si gnature t hereto w as a f orgery. S neglected to h ave the bill of exchange protested for non- payment. ot .

Issue: Is B li able for t he full value of the go ods sold?

Held: No. Where a b ill of e xchange is del ivered by the debtor to t he creditor an d the drawee (t headdressee of a bi ll of exchange, t hat i s, the p erson who is com manded or ordered by the d rawer t o p ay.) of t he

bill refused to make payment and the creditor neg by law, the delivery of the bill

loss occ asioned by its nonp ayment. The sum of P2,200.00 was dedu cted fr om the sum allowed S. ( Quiros vs. TanGuinlay, 5 P hil. 675 [1906] ; see U .S. vs. Beduya, 14 P hil. 397 [1906]. )

2. Seller accepted (PN B) l etters of credi t m erely to insure pa yment of goods by buyer w ho clai med that the f ailure of sel lerto present t o bu yer f or his accept ance the si ght draf ts draw n u nder and as required by the le tters di scharged h im of hi s debt.

Facts: N (Namarco) and F entered into a contract of sale whereby F agreed to pay N on cash basiscertain merchandise to be imported by N upon delivery of t he d uly indorsed negotiable shi pping documentcovering the sam e.

To insure the paym ent of t he goods by F, N accepted three ( 3) PNB (Phil. N ational Bank) dom esticletters of credit in favor of N for t he account of F, available by sight draft s cove ring th e full invoice va lue of thegoods. After N had delivered a great po rtion of t he goods l isted in the contract, it r efused to d eliver the othergoods. The com mon condition of t he three ( 3) letters of credit is t hat t he sight draf ts draw n on them must beduly accepted by F. Although PNB informed N that t he former could not negoti ate and effect payment on the

sight d rafts d rawn under it s letters of cr edit as the requir ements cover ing the same h ad not been compliedwith, s aid drafts w ere not present ed by N to F for accept ance.

N brought act ion to recover the cost of t he merchandise. The theory o f F is t hat the fai lure o f N topresen t t he sight draf ts to the form er f or acceptan ce d eprives N of a cau se of act ion against F.

Issue: Did the d elivery o f t he domestic l etters of cr edit t o N operate to discharge the d ebt of F?

Held: No. N ’s acti on is no t based on the let ters of credi t but on its l egal ri ght t o the cost of t he goodsdelivered. N accepted the let ters “t o insure the p ayment of t he g oods by F. ” It was given, t herefore, as a m ereguarantee for t he p ayment of the m erchandise.

The delivery o f prom issory n otes payab le to ord er, or bil ls of exchan ge, et c., shall produce the eff ect ofpayment on ly w hen realized, or w hen by the fault of t he creditor, the privileges inheren t in their neg otiablecharacter have been impaired. The clai m in Article 1249 relat ive to i mpairment of t he n egotiable charact er ofthe commercial paper i s app licable on ly to inst ruments exec uted by third persons an d delivered by the debtorto the credit or, and d oes n ot app ly to i nstruments executed b y the d ebtor him self and d elivered to the credit or.

In the case a t bar, it i s n ot even pretended that t he negotiable character of t he sight draft was i mpairedas a res ult of the faul t of N . There w as no ag reement t hat t hey sh ould be accept ed as p ayment. A mere at temptto collect or enf orce a b ill or note fr om which no payment res ults i s no t such an appropriation of i t as t odischarge the debt. (National M arketing Corp. vs. Federat ion of U nited N amarco D istributors, Inc., supra. )

3. When p ayment by check cannot be re fused to e ffect a re purchase.

Facts: B told S, et c. that he (B) w ould accept the repu rchase by S, et c., of a cert ain land by check and that by reason of such repurchase, S, etc., could return to their home. The following day S, etc., offered payment by

check.

Issue: Has B the ri ght t o ref use to accept such p ayment?

Held: No. B is gu ilty of est oppel ( see A rt. 1431.) because h e indu ced S, et c., to a ct up on the b elief t hat hehad consented to sai d manner of paym ent. (Gutierr ez vs. Carpio, 53 P hil. 334 [19 29].)

4. Seller di d not encash the check f or m ore t han 10 years, contending that by reason there of, no sal e w asconsummated.

Facts: Petitioner M P, acting as att orney-in-fact of the l ate A MB sold to respon dent FP, aparcel of land. FP had given M P the am ounts of P5,000 in cash on May 24, 1973 and P40,000in check on June 16, 1973 in p ayment of t he purchase p rice of t he subject lot.

MP, while ad mitting having received only P5,000 an d is sued receipts for both am ounts,asserts that he never en cashed the aforesaid check and, therefore, the sale was notconsummated. There w as no evidence at all that M P did n ot, in fact, encash sai d check. Onthe other h and, respondent FP testied in court t hat peti tioner M P had received the amountof P 45,000.00 and issued receipts t herefor. According to respondent cou rt, the presumption isthat t he check was encashed, especially since the p ayment by check was not d enied by


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defendant-appellant ( herein petitioner) who, in his A nswer, merely alleged that he “can nolonger rec all the transaction which i s sup posed to h ave h appened 10 years ago .’’

MP contends that such a conclusion is based on the erroneous p resumption that t he check (in theamount of P40, 000.00) had been cashed, ci ting Art. 1249 of the Civil Code, w hich provides, in part, thatpayment by chec ks shal l produce the effect of payment only w hen they have been cashed or w hen through thefault of the credit or they h ave b een im paired. H e insists that he nev er cashed said ch eck; and, such b eing thecase, its deli very n ever prod uced the effect of payment.

While ad mitting that he had issued receipts for t he payments, he asserts that sai d receipts, particularlythe recei pt of t he ch eck in the am ount of P40, 000.00, do not prove p ayment. He avers t hat t here m ust be ashowing that sai d check h ad been encashed. If , according to petitioner, the check h ad been encashed,respondent FP should have p resented the check d uly st amped received by the p ayee, or at l east its m icrolmcopy.

Issue: Was t here a consu mmation of t he sal e of t he su bject property?

Held: Yes. ( 1) Presumption is that check had been cashed. — “Petitioner’s asser tion that he nev er encash edthe afores aid check is not substanti ated an d is at odds w ith his statement i n h is answ er t hat “he can n o longe rrecall the t ransacti on which i s sup posed to have h appened 1 0 years ago.’ ’ After more t han ten (10) years f romthe payment i n part b y cash and in part by check, the presumption is that the check had been encashed. A salready stat ed, he ev en waived the p resentat ion of oral eviden ce.’’

(2) Petit ioner’s fault res ulted in the im pairm ent o f check. — “Granting that peti tioner had n ever encas hed the check,his f ailure to do so for m ore than ten (10) year s un doubtedly res ulted in the impairment of t he check throug hhis unreasonable and u nexplained delay.

While it is t rue that t he delivery o f a check p roduces t he effect of paym ent on ly w hen it is cashed,pursuant to Art. 1249 of t he Civil Code, the rule i s otherw ise i f the debtor i s prej udiced by the credit or’sunreasonable delay in p resentment. The accept ance o f a check im plies an undertaking o f du e diligence inpresen ting it f or p ayment, and if he, from whom it i s recei ved, sustains loss by w ant of such diligence, it w ill beheld to op erate as act ual payment of t he d ebt or obli gation for w hich i t was given.

It has, l ikewise, been held that i f no presentment i s m ade at al l, t he drawer cann ot be held li ableirrespective of l oss or i njury u nless presentm ent i s otherw ise excused . This is in h armony w ith A rticle 1249 o fthe Civil Cod e u nder w hich p ayment by way o f check or other negot iable ins trument i s cond itioned on its

being cashed, except when through the fault of the would be a creditor un der thi s provis ion and if its non -payment i s caused by h is negli gence, paym ent w ill bedeemed effected an d the obli gation for w hich the check w as given as cond itional payment w ill be d ischarged.(Papa vs. A.U. Valencia and C o., Inc., 284 S CRA 643 [199 8].)

ART. 126*. In ase an e/traordinary inflation or deflation of the urren y stipulated shouldsupervene, the value of the urren y at the time of the establishment of the obligation shall be the

basis of payment, unless there is an agreement to the ontrary. (n+

Meaning of ination an d deation.(1) Inati on is a sharp sudden increase of m oney or credi t or bot h without a corr esponding increase i n businesstransactions. (Webster’s D ictionary.) Ination causes a d rop in the va lue of m oney, resulting in rise of thegeneral price l evel.

There i s ination when there is an incre ase i n the volume o f m oney an d credit r elative to avail ablegoods res ulting in a su bstanti al and continuing rise i n the g eneral price l evel. (Huibonhoa vs. Court of A ppeals,320 SCRA 625 [1999], citing Paras, Civil Code of the P hils., Annotated [1994], Vol. IV, p. 394; s ee C itibank, N .A.vs. Sabeniano, 514 SCRA 441 [2007] .)

(2) Deation is the redu ction in volume an d circulat ion of t he available m oney o r credi t, resulting in a decline ofthe g eneral price l evel; it i s the o pposite o f i nation.

For lac k of an exp ress provis ion on the question in the old Civil Code, t here w as a g reat deal ofuncertainty an d confusion as a resul t of c ontracts enter ed into d uring the last world war w hich saw anextraordinary i nation of currency. According to t he C ode Commission, the rul e in A rticle 1250 p rovides a j ustsolution for f uture cases. (see Report of t he C ode Commission, pp. 132-133.)

Requisites f or ap plication of A rticle 1250.The fol lowing requisites m ust be p roven:

(1) Th ere i s an official decl aration of ext raordinary ination or d eation from the Bangko Sen tral ng Pilipinas(BSP).(2) The ob ligati on is con tractua l in n ature; and(3) The p arties exp ressly a greed to co nsider the eff ects of t he extraordinary in ation or d eation. (see E quitablePCI Bank vs. Sheung N gor, 541 SCRA 223 [2007].)

A contractual agreem ent i s need ed for t he eff ects of ext raordinary in ation to be taken into accou nt t oalter t he value of t he currency. (Nepomuceno v s. City o f Suri gao, 560 SC RA 41 [2008] .)

From the em ployment of the words “ext raordinary i nation or deati on of the currency stipulated, ”can be seen that t he legal rule i n Article 125 0 en visages contract ual obligations w here a currency is sel ected bythe parties as t he medium of paym ent. Hence, it i s app licable on ly to cases w here a con tract or agreem ent i sinvolved. M ore im portantly, t he parties m ust agree to recognize the effects of extr aordinary inati on ordeation, as t he case m ay be.

The Article does no t apply w here t he obligation to pay arises from other s ources independent ofcontract, such as law, qu asi-contract, tort, or cri me. The taking of privat e p roperty

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