EXTINGUISHMENT OF OBLIGATIONS (1996, 1998, 2001, 2002, 2003, 2008, 2009, 2016 BAR)

Q: Butch got a loan from Hagibis Corporation (Hagibis) but he defaulted in the payment. A case for collection of a sum of
money was filed against him. As a defense, Butch claims that there was already an arrangement with Hagibis on the
payment of the loan. To implement the same, Butch already surrendered five (5) service utility vehicles (SUVs) to the
company for it to sell and the proceeds to be credited to the loan as payment. Was the obligation of Butch extinguished
by reason of dacion en pago upon the surrender of the SUVs? Decide and explain.

A: No, the obligation of Butch to Hagibis was not extinguished by the mere surrender of the SUV’s to the latter. Dation in
payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law
on sales (Art. 1245). In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the
nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtor’s debt. As such, the essential elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In dacion en pago, there is in reality an objective novation of the obligation
where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the
contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential pre-
requisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation. (Filinvest Credit
Corporation v. Philippine Acetylene Company, G.R. No. L-50449, January 30, 1982) There being no mention in the facts
that Hagibis has given its consent to accept the SUVs as equivalent payment, the obligation of Butch is not thereby
extinguished be mere delivery of the SUVs.

----------------------------------------------------------------------------------------------------------

Q: Jerico, the project owner, entered into a Construction Contract with Ivan for the latter to construct his house. Jojo
executed a Surety undertaking to guarantee the performance of the work by Ivan. Jerico and Ivan later entered into a
Memorandum of Agreement (MOA) revising the work schedule of Ivan and the subcontractors. The MOA stated that all
the stipulations of the original contract not in conflict with said agreement shall remain valid and legally effective. Jojo
filed a suit to declare him relieved of his undertaking as a result of the MOA because of the change in the work schedule.
Jerico claims there is no novation of the Construction Contract. Decide the case and explain.

A: I will decide in favor of Jerico as there is no novation of the Construction Contract. Novation is never presumed, and
may only take place when the following are present: (1) a previous valid obligation; (2) the agreement of all the parties
to the new contract; (3) the extinguishment of the old contract; (4) validity of the new one. There must be consent of all
the parties to the substitution, resulting in the extinction of the old obligation and the creation of a new valid one. In this
case, the revision of the work schedule of Ivan and the subcontractors is not shown to be so substantial as to extinguish
the old contract, and there was also no irreconcilable incompatibility between the old and new obligations. It has also
been held in jurisprudence that a surety may only be relieved of his undertaking if there is a material change in the
principal contract and such would make the obligation of the surety onerous. The principal contract subject of the surety
agreement still exists, and Jojo is still bound as a surety.

ALTERNATIVE ANSWER: I will decide against Jerico. The provisions of the Civil Code on Guarantee, other than the benefit
of excusion (Art. 2059, CC), are applicable and available to the surety because a surety is a guarantor who binds himself
solidarily. [Art. 2047(2), CC] The Supreme Court has held that there is no reason why the provisions of Art. 2079 would
not apply to a surety. (Autocorp Group v. Intra Strata Assurance Corporation, 556 SCRA 250 [2008]) Article 2079 of the
Civil Code provides that an extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The changes in the work schedule amount to an extension granted the debtor without the
consent of the surety. Hence, Jojo’s obligation as a surety is extinguished. If the change of work schedule, on the other
hand, shortens the time of completion of the project, it will amount to a novation. The old obligation, where Jojo was
obligated as a surety is extinguished relatively as to him, leaving Ivan still bound.

----------------------------------------------------------------------------------------
Q: A, B, C, D and E made themselves solidarity indebted to X for the amount of P50, 000.00. When X demanded payment
from A, the latter refused to pay on the following grounds:

a) B is only 16 years old. b) C has already been condoned by X. c) D is insolvent. d) E was given by X an extension of 6
months without the consent of the other four co-debtors.

State the effect of each of the above defenses put up by A on his obligation to pay X, if such defenses are found to be
true. (2003 BAR)

A:

a) A may avail the minority of B as a defense, but only for B’s share of P 10, 000.00. A solidary debtor may avail himself
of any defense which personally belongs to a solidary co-debtor, but only as to the share of that co-debtor.

b) A may avail of the condonation by X of C’s share of P 10, 000.00. A solidary debtor may, in actions filed by the
creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are
personal to him or pertain to his own share. With respect to those which personally belong to others, he may avail
himself thereof only as regards that part of the debt for which the latter are responsible (Art. 1222).

c) A may not interpose the defense of insolvency of D as a defense. Applying the principle of mutual guaranty among
solidary debtors, A guaranteed the payment of D’s share and of all the other co-debtors. Hence, A cannot avail of the
defense of D’s insolvency.

d) The extension of six (6) months given by X to E may be availed of by A as a partial defense but only for the share of E,
there is no novation of the obligation but only an act of liberality granted to E alone.

--------------------------------------------------------------------------------------------------------------------

Q: Felipe borrowed $100 from Gustavo in 1998, when the Phil P - US$ exchange rate was P56 - US$1. On March 1, 2008,
Felipe tendered to Gustavo a cashier's check in the amount of P4,135 in payment of his US$ 100 debt, based on the Phil
P - US$ exchange rate at that time. Gustavo accepted the check, but forgot to deposit it until Sept. 12, 2008. His bank
refused to accept the check because it had become stale. Gustavo now wants Felipe to pay him in cash in the amount of
P5, 600. Claiming that the previous payment was not in legal tender, and that there has been extraordinary deflation
since 1998, and therefore, Felipe should pay him the value of the debt at the time it was incurred. Felipe refused to pay
him again, claiming that Gustavo is estopped from raising the issue of legal tender, having accepted the check in March,
and that it was Gustavo's negligence in not depositing the check immediately that caused the check to become stale.

a) Can Gustavo now raised the issue that the cashier's check is not legal tender?

b) Can Felipe validly refuse to pay Gustavo again?

c) Can Felipe compel Gustavo to receive US$100 instead? (2008 BAR)

A:

a) No, because Gustavo is guilty of estoppel by laches. He led Felipe to believe he could pay by cashier’s check, and
Felipe relied that such cashier’s check would be encashed thus extinguishing his obligation. Because of Gustavo’s
inaction of more than six months the check became stale and Felipe will be prejudiced if he will be required to pay $100
at the exchange rate of P56 to $1.00. The exchange should be the rate at the time of payment.
b) Yes, if the payment is valid. Since the bank considered the cashier’s check as being stale for not having been encashed
on time, then the cashier’s check may be issued again. At any rate, non-payment of the amount to Gustavo would
constitute unjust enrichment.

c) Yes, Felipe can compel Gustavo to pay US$100 instead. Under the prior law, RA 529, as amended by R.A.4100,
payment can only be in Philippine currency as it would be against public policy, null and void and of no effect. However,
under RA8183, payment may be made in the currency agreed upon by the parties, and the rate of exchange to be
followed is at the time of payment. (C.F. Sharp & Co. Inc. vs. Northwest Airlines, Inc., 381 SCRA 314 [2002]).

----------------------------------------------------------------------------------------------------------------

Q: X, who has a savings deposit with Y Bank in the sum of P1, 000, 000.00, incurs a loan obligation with the said Bank in
the sum of P800, 000.00 which has become due. When X tries to withdraw his deposit, Y Bank allows only P200, 000.00
to be withdrawn, less service charges, claiming that compensation has extinguished its obligation under the savings
account to the concurrent amount of X’s debt. X contends that compensation is improper when one of the debts, as
here, arises from a contract of deposit. Assuming that the promissory note signed by X to evidence the loan does not
provide for compensation between said loan and his savings deposit, who is correct? (1998 BAR)

A: Y bank is correct. Art. 1287, Civil Code, does not apply. All the requisites of Art. 1279, Civil Code are present. IN the
case of Gullas vs. PNB (62 Phil. 519), the Supreme Court held: “The Civil Code contains provisions regarding
compensation (set off) and deposit. These portions of Philippine law provide that compensation shall take place when
two persons are reciprocally creditor and debtor of each other. In this connection, it has been held that the relation
existing between a depositor and a bank is that of creditor and debtor. xxx As a general rule, a bank has a right of set off
of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor.” Hence, compensation
took place between the mutual obligations of X and Y bank.

----------------------------------------------------------------------------------------------

Q: Stockton is a stockholder of Core Corp. He desires to sell his shares in Core Corp. In view of a court suit that Core
Corp. has filed against him for damages in the amount of P10 million, plus attorney’s fees of P1 million, as a result of
statements published by Stockton which are allegedly defamatory because it was calculated to injure and damage the
corporation’s reputation and goodwill. The articles of incorporation of Core Corp. provide for a right of first refusal in
favor of the corporation. Accordingly, Stockton gave written notice to the corporation of his offer to sell his shares of
P10 million. The response of Core corp. was an acceptance of the offer in the exercise of its rights of first refusal,
offering for the purpose payment in form of compensation or set-off against the amount of damages it is claiming
against him, exclusive of the claim for attorney’s fees. Stockton rejected the offer of the corporation, arguing that
compensation between the value of the shares and the amount of damages demanded by the corporation cannot legally
take effect. Is Stockton correct? Give reason for your answer. (1998, 2002 BAR)

A: Stockton is correct. There is no right of compensation between his price of P10 million and Core Corp.’s unliquidated
claim for damages. In order that compensation may be proper, the two debts must be liquidated and demandable. The
case for the P10 million damages being still pending in court, the corporation has as yet no claim which is due and
demandable against Stockton.

-----------------------------------------------------------------------------------------

Q: Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of five million pesos (P5, 000,
000.00). To buy a new car, she obtained a loan from the same bank in the amount of P1, 200, 000.00, payable in twelve
monthly installments. Sarah issued in favor of the bank post-dated checks, each in the amount of P100,

000.00, to cover the twelve monthly installment payments. On the third, fourth and fifth months, the corresponding
checks bounced.

The bank then declared the whole obligation due, and proceeded to deduct the amount of one million pesos (P1, 000,
000.00) from Sarah’s deposit after notice to her that this is a form of compensation allowed by law. Is the bank correct?
Explain. (2009 BAR)
A: No, the bank is not correct. While the Bank is correct about the applicability of compensation, it was not correct as to
the amount compensated. A bank deposit is a contract of loan, where the depositor is the creditor and the bank the
debtor. Since Sarah is also the debtor of the bank with respect to the loan, both are mutually principal debtors and
creditors of each other. Both obligation are due, demandable and liquidated but only up to the extent of P300, 000.00
(covering the unpaid third, fourth and fifth monthly installments). The entire one million was not yet due because the
loan has no acceleration clause in case of default. And since there is no retention or controversy commenced by third
person and communicated in due time to the debtor, then all the requisites of legal compensation are present but only
up to the amount of P300, 000.00. The bank, therefore, may deduct P300, 000.00 from Sarah’s bank deposit by way of
compensation.

------------------------------------------------------------------------------------

Q: In 1978, Bobby borrowed P1 ,000, 000.00 form Chito payable in two years. The loan, which was evidenced by a
promissory note, was secured by a mortgage on real property. No action was filed by Chito to collect the loan or to
foreclose the mortgage. But in 1991, Bobby, without receiving any amount from Chito, executed another promissory
note, except for the date thereof, which was the date of its execution.

1) Can Chito demand payment on the 1991 promissory note in 1994? 2) Can Chito foreclose the real estate mortgage if
Bobby fails to make good his obligation under the 1991 promissory note?

A:

1) Yes, Chito can demand payment on the 1991 promissory note in 1994. Although the 1978 promissory note for P1
million payable two years later or in 1980 became a natural obligation after the lapse of ten (10) years, such natural
obligation can be a valid consideration of a novated promissory note dated in 1991 and payable two years later, or in
1993.

All the elements of an implied real novation are present: a) An old valid obligation; b) A new valid obligation; c) Capacity
of the parties; d) Animus novandi or intention to novate; and e) The old and the new obligation should be incompatible
with each other on all material points (Article 1292). The two promissory notes cannot stand together, hence, the period
of prescription of ten (10) years has not yet lapsed.

2) No. The mortgage being an accessory contract prescribed with the loan. The novation of the loan, however, did not
expressly include the mortgage, hence, the mortgage is extinguished under Article 1296 of the NCC. The contract has
been extinguished by the novation or extinction of the principal obligation insofar as third parties are concerned.

---------------------------------------------------------------------------

Q: Baldomero leased his house with a telephone to Jose. The lease contract provided that Jose shall pay for all
electricity, water and telephone services in the leased premises during the period of the lease. Six months later, Jose
surreptitiously vacated the premises. He left behind unpaid telephone bills for overseas telephone calls amounting to
over P20, 000.00. Baldomero refused to pay the said bills on the ground that Jose had already substituted him as the
customer of the telephone company. The latter maintained that Baldomero remained as his customer as far as their
service contract was concerned, notwithstanding the lease contract between Baldomero and Jose. Who is correct,
Baldomero or the telephone company? Explain. (1996 BAR)

A: The telephone company is correct because as far as it is concerned, the only person it contracted with was
Baldomero. The telephone company has no contract with Jose. Baldomero cannot substitute Jose in his stead without
the consent of the telephone company (ART. 1293, NCC). Baldomero is, therefore, liable under the contract.

--------------------------------------------------------------------------
Q: The sugar cane planters of Batangas entered into a long-term milling contract with the Central Azucarera de Don
Pedro Inc. Ten years later, the Central assigned its rights to the said milling contract to a Taiwanese group which would
take over the operations of the sugar mill. The planters filed an action to annul the said assignment on the ground that
the Taiwanese group was not registered with the Board of Investments. Will the action prosper or not? Explain briefly. (

A: The action will prosper not on the ground invoked but on the ground that the farmers have not given their consent to
the assignment. The milling contract imposes reciprocal obligations on the parties. The sugar central has the obligation
to mill the sugar cane of the farmers while the latter have the obligation to deliver their sugar cane to the sugar central.
As to the obligation to mill the sugar cane, the sugar central is a debtor of the farmers. In assigning its rights under the
contract, the sugar central will also transfer to the Taiwanese its obligation to mill the sugar cane of the farmers. This
will amount to a novation of the contract by substituting the debtor with a third party. Under Article 1293 of the Civil
Code, such substitution cannot take effect without the consent of the creditor. The farmers, who are creditors as far as
the obligation to mill their sugar cane is concerned, may annul such assignment for not having given their consent
thereto.