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Chapter 4 LAW
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BOOK IV, TITLE I: OBLIGATIONS
Chapter 4: Extinguishment of Obligations
10 Modes of Extinguishing Obligations in the Civil Code (Art. 1231): 1. Payment or Performance 2. Loss of the thing due 3. Condonation or remission of debt 4. Confusion or merger of the rights of creditor and debtor 5. Compensation 6. Novation 7. Annulment* 8. Rescission* 9. Fulfillment of a resolutory condition* 10. Prescription* *other causes of extinguishment of obligations governed elsewhere in this Code NOTE: this is not an an EXCLUSIVE enumeration unlike Art. 1157.
Overseas Bank of MNL v. CA [GR No. L-45866, April 19, 1989] SC: a new mode to extinguish an obligation specifically by a BANK to deposit interest of the client : IF THERE IS AN ORDER FROM A COMPETENT AUTHORITY TO CEASE AND DESIST FROM CONTINUALLY OPERATING AS A BANK - The bank was asked to cease and desist from operations - They had the obligation to return distribute money - They were also required to pay interest - However, no interest was added to the deposits. They were obliged to pay interest from the cease and desist order - Interest- for profit and operation; no longer in operation therefore no need to pay interest
*One mode expected from the parties to extinguish obligation is through payment/performance in Art. 1232 – the other modes are only created due to supervening events
PAYMENT OR PERFORMANCE
What is Payment or performance? - Not only pay money but also thru delivery - Perform – broad enough to cover things to do and not to do Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) How is Payment / Performance done? - Obligation of the creditor to accept fulfillment of the debtor; otherwise, there is mora accipiendi - If the debtor performs in accordance with the how, creditor is obliged to accept it. Characteristics of a proper Payment/Performance [3 I’s] 1. Integrity 2. Identity 3. Indivisibility *Integrity and Identity are covered by Art. 1233: A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157)
NOTE: if any of the I’s would not be found in the HOW, creditor IS NOT OBLIGED TO ACCEPT.
Integrity - Refers to the completeness of the obligation Exceptions: - Art. 1234: Substantial performance If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) Requisites: 1. Debtor must be in good faith 2. There is a deficiency 3. Deficiency is insignifacnt or minimal Eg: I ordered 1000 breast chickens; there was a shortage of chickens; only delivered 900 chickens, can you compel me to accept? Yes. IF substantial perfeomance would be applicable SIGNIFICANCE: would dpend on the prestation - cannot apply if there is SUBSTANTIAL deficiency
- it also depends on the complication and Article 1245. Dation in payment, whereby property is if there has been no damage done to the alienated to the creditor in satisfaction of a debt in money,shall be governed by the law of sales. (n) creditor
- applies to reciprocal obligations Presented as payment to the debt Note: less suffered by the oblige; can Creditor is the buyer and the debtor is the accept but cannot compel to pay the seller entire amount Purchase price is the outstanding debt Art. 1235: Doctrine of estoppel When the obligee accepts the performance, knowing its NCC - Limited only: to the payment of sum incompleteness or irregularity, and without expressing any of money protest or objection, the obligation is deemed fully SC: any types of obligation complied with. (n)
- no reservation or objections This is clustered as a special mode of
- no need good faith and payment significance of deficiency Indivisibility
- must be obvious when delivered; Article 1248. Unless there is an express stipulation to that effect, the
- must show that the creditor is creditor cannot be compelled partially to receive the prestations in fully satisfied which the obligation consists. Neither may the debtor be required to make partial payments.
Identity
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect Article 1244. The debtor of a thing cannot compel the creditor to the payment of the former without waiting for the liquidation of the receive a different one, although the latter may be of the same value latter. (1169a) as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. Exceptions: (1166a) 1. Stipulated by the parties Article 1246. When the obligation consists in the delivery of an 2. Required by the law indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior 3. Nature of the obligation quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into Who will make payment? consideration. (1167a) Effected by the person identified by the law
If you perform an obligation not in What if it is in accordance with the HOW but accordance With Articles 1244 and 1246, not with the WHO, to whom may not accept you do not comply with identity. 1. Debtors 2. Authorized representatives Exceptions: 3. 3 rd person WHO HAS AN INTEREST in the
- Art. 1206: Facultative obligations fulfillment of the obligation Article 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, Article 1236. The creditor is not bound to accept payment the obligation is called facultative. or performance by a third person who has no interest in The loss or deterioration of the thing intended as a the fulfillment of the obligation, unless there is a substitute, through the negligence of the obligor, does not stipulation to the contrary. render him liable. But once the substitution has been Whoever pays for another may demand from the debtor made, the obligor is liable for the loss of the substitute on what he has paid, except that if he paid without the account of his delay, negligence or fraud. (n) knowledge or against the will of the debtor, he can recover Debtor may compel to accept only insofar as the payment has been beneficial to the debtor. (1158a) payment although he may not Article 1237. Whoever pays on behalf of the debtor comply with identity because of the without the knowledge or against the will of the latter, SUBSTITUTE cannot compel the creditor to subrogate him in his rights,such as those arising from a mortgage, guaranty, or Not to alternative = because all of penalty. (1159a)
accepted it. (n)
Who has interest in the obligation? - What is the basis of interest? - If the continued existence of the obligation will be prejudicial or detrimental ot such parsen NOTE: any party NOT COVERED by the three may be rejected
Party with interest in the fulfillment of an obligation: - You and the heirs of your parents - Guarantors - Surety? NO. because they are actually SOLIDARY DEBTORS; they are principally liable; parties to the obligation
Is a solidary debtor a 3rd party in interest of a debtor? NO. They are actual parties to the obligation
How about a joint debtor? Yes. only principal to share
Will the continued existence of a debt of a joint debtor be prejudicial to the other joint debtor? Dean Ulan: NO.
Any other party not identified is a party whose payment may be refused. But still can opt to accept which will extinguish the obligation
REIMBURSEMENT & LEGAL SUBROGATION Art. 1302: Legal Subrogation Article 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a) - Reimburse only to the amount where debtor is benefited
Example: D, a girl, is indebted to C for 2 million pesos. With a condo to secure the debt as real estate mortgage. M is a suitor of D. When the obligation became due, she can only pay 300,
pesos. M came to save the day and paid 2M pesos. Already in excess of what is due
Questions: 1. Can C be compelled to accept payment by M? o Ans: depends if he is a party in interest. In this case,NO he is not. Thus, C may refuse the payment of M 2. C accepts, what happens to the obligation of D? o It is extinguished 3. M is going after D for the debt. What is the right of M against D? o Subgrogation or reimbursement o Depends: if with consent and knowledge of D o w/o consent: reimbursement only to the amount benefited. In this case,1 pesos; may go to the C for subrogation § D cannot pay 1 – remit the condo, initially as reimbursement § Can M consider the condo as his? NO. because reimbursement only o w/ consent: D can go after C. M may subrogate the mortgage. There is legal subrogation. 1302(2) o if is a party in interest- also subrogation whether or not with consent Rights of a 3rd party: 1. WITHOUT INTEREST - Without consent, reimbursement - With consent and knowledge, subrogation 2. WITH INTEREST - Always suborgation - With or without consent
TO WHOM SHALL PAYMENT BE MADE? 1. Creditor Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a)
- Successor in interest
Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) - Assignment - Succession (heirs) - Heir – only after the succession takes place; when parents die, property will go to the children; takes effect AFTER successional rights 3. Any person authorized to receive - Agent - When at the time of the payment is due, and not when it was constituted 4. 3 rd party who is in possession of the credit - not only possession of the document - Checks: payable to bearer – cash; payable to order- person; there exists a credit - EG: X acquires checks and presented it to BPI; enchased to X, is the obligation extinguished? IT DEPENDS: a. If in favor of creditor, even if gotten by X, possess document of credit- NO- liable BPI – C may run after D b. If check to CASH, and X encashed it with BPI – yes- justify- extinguished – payment in good faith of BPI. X entitled to the benefit of the credit 5. 3 rd party that redounds to the benefit of the creditor. EG: D owes 100,000 to C. C owes 100,000 to A. What if D pays A, can A refuse the payment of D? Yes. D is a 3 rd party without interest of the debt of C o If A accepts the payment of D, obligation is extinguished, there is a legal compensation. C was benefited.
Where shall payment be made? Article 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was
constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a)
Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) SPECIAL MODES OF PAYMENT: 1. Dacion en Pago – Art. 1245 2. Payment by Cession- Art. 1255 3. Application of Payment 4. Tender of Payment and Consignation
Compare & Contrast of Dacion & Cession DACION EN PAYMENT BY PAGO CESSIONS No. of Parties Only one Plurality of creditor creditors is essential As to sale There is a Forced sale contract of thru a public sale; no forced auction; sale; proceeds are remitted to the debt. As to The ownership Ownership not ownership is transferred transferred to to the creditor the creditor unless the creditor himself is the highest bidder Financial Debtor is not Debtor is in a Condition of necessarily in a state of partial Parties state of or relative financial insolvency difficulty As to Object A thing to be Universality of considered as all his property the equivalent of the performance of
at any time If 2M is subject to a term- sole benefit of C – all debts due so far as debtor is concerned; d may not choose for the choice belongs to C
debtor/ liability – but DEBTOR first before the guarantor With security (mortgage) > no security Secured by real estate > secured by chattel mortgage
Issue: if delegated to C, will all limits be applicable? To third persons? Will choice bind upon such limits? PRINCIPAL AMOUNT IS NEVER CONSIDERED. YES(?) If the same age, do not consider 3M because it is
- CREDITOR
the biggest; also because equal debts, apply pro rata Opportunity to propose payment It is not necessarily binding upon D unless 4. PRO RATA expressly or impliedly accepts Always bawas interest first If C acknowledges a receipt designating Divide the 2 equally to them; distribute where payment was made and accepted by C, deemed valid application of payment in TENDER OF PAYMENT accordance with the creditr. Ergo, binding. Note: UNLESS,there is a ground to invalidate the 1. Definition of Tender of Payment contract. Manifestation made by the debtor to What contract does the code refer to? the creditor of his decision to comply Accessorry contracts; not principal; immediately with his obligation impliedly entered into on how the payment Preparatory act is applied extrajudicial
3 ONEROUS DEBT
- Definition of Consignation Deposit of the object of the
- always bawas interest first!!! obligation in a competent court in Article 1245. Dation in payment, whereby property is alienated to accordance with the rules prescribed the creditor in satisfaction of a debt in money, shall be governed by by law after refusal or inability of the the law of sales. (n) creditor to accept the tender of What was the most burdensome to the payment debtor only Principal act The obligation that if continually existing will Judicial be the most difficult for the debtor to pay 3. Requisites of Tender of Payment JURISPRUDENCE: does not take into 4. Requisites of Consignation consideration the amount of the obligation a. There is a debt due RULES: b. Consignation has been made either
- AGE – older debtor is more onerous because the creditor to whom
- ACCESSORY OBLIGATION tender of payment was made Accessory to both or all refused to accept the payment Most onerous accessories without just cause or because of any With interest > without interest of the causes stated by the law for 20% interest > 5% interest effective consignation without surety > debt with guarantor c.
previous tender of payment exists o Surety- solidary liable; Previous notice of consignation had becomes a debtor himself been given to the persons interested o Guarantor- also a solidary
in the fulfillment of the obligation
d. Placed at the disposal of judicial authority e. After consignation had been made, persons interested in the fulfillment of the obligation had been notified thereof.
- Effect of extinguishment is only after the approval of the court
- C does not accept payment in order; valid 3 I’s
- What will D do if C refuses without just case? Ans: effect consignation
- As long as there is consignation, obligation is extinguished; no need to wait for the termination for delay
- Interst will cease when approved by the court for consignation
- Interest will not cease when there is tender of payment; need to CONSIGN. TOP alone does not extinguish the obligation; must be followed by consignation
- Consignation will extinguish obligation but need TOP first
No need for TOP(Art. 1256) : Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
cause: mora accipiendi
REQUIRED NOTICES:
- initial notice for the intention to consign
- notice after approval of consignation by the
court.
Summons- consignation is approved by the court; will extinguish obligation’ no final judgment for damages needed
Art. 1249: Identity of the Currency in the Obligation Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) - legal tender of the PH - parties may stipulated another currency - D cannot compel legal tender if there is an agreement - Revised by BSP law: PD 72- suspended; all transactions should be made payable in legal tender - In the absence of stipulation, PH legal tender, Philippine Peso
LOSS OF THE THING DUE
- Only to give a specific thing
- Does not apply to generic things LOST:
- Perishes/ disappears
- Cannot be found or determined – may still exist but impossible to retrieve
- Goes out the commerce of man – no longer susceptible of private transactions; not subject to obligations; EG: expropriations, contraband –NOW LOST Note: the impossibility refers for TO DO
- No cause of action for damages when there is no fault on the part of the debtor; if with fault, extinguish obligation but with payment of damages
Art. 1264: Partial Loss Article 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n)
contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at the risk of the party in fault. (n) - Fortuitious loss before it is due - If sale is movable, RPD. If the case is personal, RPC. - Res perit domino applies
Art. 1655: Contract of Lease Article 1655. If the thing leased is totally destroyed by a fortuitous event, the lease is extinguished. If the destruction is partial, the lessee may choose between a proportional reduction of the rent and a rescission of the lease. (n) - Destruction of thing will extinguish the obligation to pay rent - Res perit domino applies
Art. 1717: Contracts for Piece of Work Article 1717. If the contractor bound himself to furnish the material, he shall suffer the loss if the work should be destroyed before its delivery, save when there has been delay in receiving it. (1589) - If destroyed before delivery, apply RPD
NOTE: If in reciprocal obligations, they do not fall within the three exceptions, ALWAYS APPLY RES PERIT CREDITORY.
Impossibility CASE: Julia Millan v. Rio y Olabarrieta [GR NO. L- 21087, FEBRUARY 23,1924] - Not prestation that has become impossible but the act to be performed after, the obligation is not extinguished - Sell a yacht for 5M pesos; 1M pesos of the 5M to use for the renovation of the yacht; before renovation, it was anchored in Manila Bay, stormed and ate the yacht; excused to pay the yacht? NO. What could no longer be done is AFTER the prestation has been effected; not the prestation itself
o If the fortuitous event is AFTER prestation, impossible to do the act will not render
the obligation impossible.
- Whether or not buyer still has to pay seller becaue of the loss of the thing due?
- Buyer’s obligation becomes impossible because of a loss, no more renovation; but that is not the prestation
- The renovation is an act to be done after the execution of the obligation
- AGREEMENT TO DO A THING AFTER THE FULFILLMENT OF AN OBLIGATION
- RENOVATION is to be done after the delivery of the yacht
- Commitment to perform act after the performance of the ORIGINAL obligation
- The original prestation is already extinguished by performance
Art. 1267: difficulty of performance Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) - Also known as the: o DOCTRINE OF UNFORESEEN EVENTS o FRUSTRATION OF ENTERPRISE o Theory of impre-visibility o Theory of lack of Bac...? International law: rebus sic stantibus -parties tipulate in the light of certain prevailing conditions and once these conditions cease to exist, the contract also ceases to exist
- Obligation is not rendered impossible if only difficult o Not just physical difficulty but also the enforcement or performance will lead to an inequitable situation
- Enforcement- inequitable situation not contemplated
Requisites of Difficulty: 1. It involves an obligation to do 2. Event/change of circumstances never foreseen or contemplated by parties at the time of the constitution of the
obligation/execution of the contract 3. It makes the performance of the obligation extremely difficult but not impossible 4. Event must not be due to any act of the parties 5. Contract is for a long period of time
Case: Naga Telephone Co. V. CA, February 24, - Difficulty not - only actual execution but the enforcement - EG: Bus A and Bus B have their own respective bus stations; for a 20-year period, they allow each other to use each other’s bus stations. However, B’s bus station is lost; to allow B to use A’s station would be inequitable; no longer reciprocal
Art. 1268: Exemption to Fortuitous Event Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) - Obligations arising from criminal offenses are not exempted
CONDONATION
- Just really means DONATION
- Except in implied condonation
- In all other cases, to be valid, must comply with the requisites of DONATION= IN WRITING.
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187)
Remission: an act of liberality by which the oblige, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in the part or aspect of the same to which the remission refers - it is a gratuitous abandonment by the creditor of his right As to form, it may be:
a. Express- it is made in accordance with the formalities prescribed by law for donations b. Implied- although it is not made in accordance with the formalities prescribed by law for donatons, it can b deduced from the acts of the obligee or creditor.
As to extent, it may be: a. Total – entire obligation is extinguished b. Partial- it refers only to the principal or to the accessory obligation or to an aspect thereof which affects the debtor as for instance solidarity
As to constitution, it may be: a. Inter Vivos – constituted by agreement of the oblige or obligor b. Mortis Causa – last will and testament
*Provisions on Donation: Article 748. The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing. Otherwise, the donation shall be void. (632a) Article 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (633) Article 750. The donation may comprehend all the present property of the donor, or part thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the support of himself, and of all relatives who, at the time of the acceptance of the donation, are by law entitled to be supported by the donor. Without such reservation, the donation shall be reduced in petition of any person affected. (634a) Article 751. Donations cannot comprehend future property. By future property is understood anything which the donor cannot dispose of at the time of the donation. (635) Article 752. The provisions of article 750 notwithstanding, no person may give or receive, by way of donation, more than he may give or receive by will. The donation shall be inofficious in all that it may exceed this limitation. (636) Article 771. Donations which in accordance with the provisions of article 752, are inofficious, bearing in mind the estimated net value of the donor's property at the time of his death, shall be reduced with regard to the excess; but this reduction shall not prevent the donations from taking effect during the life of the donor, nor shall it
bar the donee from appropriating the fruits. For the reduction of donations the provisions of this Chapter and of articles 911 and 912 of this Code shall govern. (654)
Requisites of Condonation: 1. Gratuitous 2. Accepted by the Obligor 3. Obligation must be demandable
Article 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188)
CONFUSION
- Merger and consolidation
- 2 into 1 new
- one eats the identity of the other; swallowed
- creditors and debtors of each other
- BPI + RCBC = New Bank Definition:
- merger of the characters of creditor and debtor in one and the same person by virtue of which the obligation is extinguished
- the meeting in one and the same person of the qualities of the creditor and debtor with respect to one and the same obligation
Requisites: 1. Merger of the characters of 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 3. It must be complete and definite
Article 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a)
Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193)
Article 1277. Confusion does not extinguish a joint
obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194)
COMPENSATION
- “Quits na tayo”
Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)
Definition: - mode of extinguishing in their concurrent amount those obligations of persons who in their own right are creditor and debtors of each other - figurative operation of weighing two obligations simultaneously in order to extinguish them to the extent in which the amount of one is covered by the amount of the other - a more convenient and less expensive method of effecting the payments of two obligations - simplified payment : pago abreviado
Requisites (ART. 1279): 1. There must be two parties, who in their own right, are principal creditors and principal debtors of each other 2. Both debts must consist in money or if the things due are fungibles(consummables), they must be of the same kind and quality 3. Both debts must be due 4. Both debts must be liquidated and demandable 5. There must be no retention or controversity commenced by third persons over either of the debts and communicated in due time to the debtor 6. Compensation must not be prohibited by law.
Modes of Compensation: 1. Legal – takes effect by operation of law from the moment all of the requisites are present (art. 1278 & art. 1279)
- Voluntary – parties are mutually creditors and debtors agree to compensate their respective obligations, even though all of the requisites for companesation may not then be present a. Facultative Compensation – effected by a party who is entitled to oppose the compensation because he would be prejudiced thereby.
Can there be compensation with depositor and bank? Ans: yes since they are creditors and debtors of each other
CASE: Garcia v. Lim Chiu Sing, 59 Phil 562 - Stockholders are not creditors of the corporation - No creditor and debtor requirement - Stockholder is in fact an investor; corporation is not obligated to pay him
NOVATION
Definition: - It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by: 1. changing its object or principal conditions 2. Substituting the person of the debtor 3. Subrogating a third person in the rights of the creditor (Art. 1291)
Distinctive feature: although it extinguishes the obligation, it also gives birth to another obligation. It has a two-fold purpose: 1. extinguishment of an old obligation 2. giving birth to a new obligation to take the place of the old
- Art. 1291 provides the term “modified”; not extinguish
TYPES OF NOVATION 1. REAL NOVATION / OBJECTIVE NOVATION a. there is a change in the object b. change in the principal obligation c. change in the cause of the obligation
- PERSONAL NOVATION / SUBJECTIVE NOVATION a. change of old debtor to a new one b. subrogating a third person in the rights of the creditor
- MIXED NOVATION
- combination of objective and subjective novations
Requisites of Novation: 1. Previous valid obligation 2. Agreement of parties to new obligation 3. Extinguishment of old obligation 4. Validity of new obligation
Defect: #3 is not a requisite; it is an event after the fact; requisites should be before the effect. NO. 3 IS AN EFFECT – NOT A REQUISITE *Novation is NEVER PRESUMED
NOTE: Castan- Proper enumeration: 1. Valid old obligation 2. Valid new obligation 3. Substantial difference of no. 1 and no. 2 4. Capacity of the parties 5. Animus novandi: Intent to extinguish old obligation and make a new obligation
ART. 1292: REAL NOVATION 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. (1204)
this is the only mode that results to a SIMULTANEOUS CREATION of a NEW OBLIGATION
old obligation is extinguished and replaced by a new
modification of old obligation
Objective novation There is a change in:
- Object – prestation o To give then now to do o If novation takes place, no cause of action for the old obligation
- Cause – source of obligation
No novation – there is a cuase of action? effected; risk on his part and it’s his None? responsibility but because the law is explicit = apply Case: Hodges v. Rey 111 Phil 219 2. Insolvency existing and known to the Alleged that there is novation debtor at the delegation of the debt; C SC: no novation; even if consent but what did not know and D knows; BAD FAITH actually transpired is a contract of agency where P authorized PNB to pay in his own Art. 1296 : Effect on Accessory Obligation behalf Article 1296 of a novation, accessory obligations may subsist only When the principal obligation is extinguished in
Example:
insofar as they may benefit third persons who did not give their consent. (1207) X sued Y for estafa, pending court; while the case is pending, Y entered into a contract with X where Y Extinguishment on principal obligation by promised to pay X in installment of what was novation will also extinguish the accessory embezzled; when contract was consummated- obligations Court refused to recognize it and proceeded with Exceptions: the action; ruled that Y is guilty. The defense that 1. Parties agree to be bound by the same there is no cause of action for estafa because its accessory obligation with the new obligation basis no longer existed because of the installment IS 2. Accessory obligation consists of surety or UNTENABLE guaranty and they agree to still continue SC: no cannot be. Conviction is upheld. Y’s theory with the same in regard to the new may apply prior to the filing of the criminal case. obligation Trust relation may be convertent into 3. Accessory obligation extends to a third party another tie o Stipulated to benefit a 3rd party Offended party may no longer ask o Must be with consent of the prosecution to divert authority beneficiary Effective if only for civil liability o If did not give consent to extinguish the obligation, not extinguished.
Art. 1294/1295: INSOLVENCY Article 1294. If the substitution is without the knowledge or against Art. 1297: Effect of Validity the will of the debtor, the new debtor's insolvency or non- fulfillment Article 1297. If the new obligation is void, the original one shall of the obligations shall not give rise to any liability on the part of the subsist, unless the parties intended that the former relation should original debtor. (n) be extinguished in any event. (n) Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except o Voidable new obligation when said insolvency was already existing and of public knowledge, o Exists until annulled or known to the debtor, when the delegated his debt. (1206a) o Yes- novation
In expromision, subsequent insolvency will
o But note, as soon as the obligation is annulled, extinguished also the new - NOT REVIVE the old obligation novation is ineffective In delegacion, the general rule is NO- it will *it revives the old: not revive the old obligation o Ineffective is novation – not the obligation Exceptions: o Unless parties had intention to extinguish
- Insolvency already existing and of public the obligation knowledge when the debt made not only to D but the whole world Art. 1298 Opinion of Caguiao: not revive; C now Article 1298. The novation is void if the original obligation was void, estopped to allege the existence of except when annulment may be claimed only by the debtor or when insolvency before the delegation was ratification validates acts which are voidable. (1208a)
- Old obligation void and new obligation is valid
- No novation
- Fails to meet the requisites
- Same if the new obligation is void, no novation
- What if the old obligation is voidable? o There is still a valid novation if there is a ratification of old obligation -- changing or curing the defects o old obligation when ratified is now valid o no ratification yet, valid novation? NO NOT VALID. Defect can only be ascertained by the debtor. If D acceded to the novation, ratification also of the obligation o also ratified because entered into a completely new one – only in DELEGACION – NOT EXPROMISION
TEST: If in the facts that novation is that of a new obligation, voidable old and took place, not change the object and cause but PERSONAL change, novation take place?
- expromision – initiative of the 3rd party
- delegacion- initiated by the debtor and did not object to the novation – acceded to the defect
Art. 1299: Effect of Novation of the Condition
Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n)
Old obligation with CONDITION and New obligation PURE - Novation depends in the fulfillment of the condition attached to the old - If condition is not fulfilled, no obligation to talk about, no novation.
Old obligation PURE and New obligation with CONDITION
- Novation depends on the fulfillment of the obligation attached to the new obligation
- If not fulfilled, no novation , no valid subsequent obligation
Both NEW and OLD obligations have CONDITIONS - Determine whether or not the obligation in the new and old are incompatible o If incompatible, old obligation extinguished, new one is subject to the fulfillment of the condition o IF new does not exist yet, and the old exists, already a cuase of action - If the old obligation with a condition and the new obligation with a condition are INCOMPATIBLE, they cannot exist together. We do not need to wait for the conditions to be fulfilled. The old obligation is disregarded and the new condition is the subject. - Fulfillment of the condition in the new is necessary for the enforcement of the obligation - If condition of the old is fulfilled, still enforce the old obligation? NO. - NOTE: it is the conditions that are incompatible, not the obligations. If the conditions are incompatible, the obligations can still stand together. Effectivity will depend on the fulfillment of ALL ocnditions.
Objects of the NEW obligation is to REMOVE THE CONDITION OF THE OLD OBLIGATION
Legal Subrogation Article 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) Article 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of
Chapter 4 LAW
Course: Accounting
University: University of Manila
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