#CASE TITLEBRIEFDOCTRINEPROVISIONS APPLIED

71 Arrieta vs NARICArrieta won a bid called by NARIC for the supply of 20k metric tons of Burmese rice. Arietta told NARIC to open the letter of credit, which NARIC failed to do, leading to the forfeiture of the space on the ship for the rice. NARIC was held liable for contravention of tenor because it shouldn't have contracted with Arrieta knowing its financial incapacity.

The RTC awarded the amount of $286,000 as damages to plaintiffs for breach of contract. However, in view of RA 529, the dispositive portion of the decision appeal insofar as it expresses the amount of damages in US currency and not in Philippine peso. The question is what rate of exchange should apply in the conversion: the rate at the time of the breach, or the rate prevailing on the promulgation of the decision. Citing Eastboard Navidation, Ltd. v. Juan Ysmael & Co., Inc., any agreement to pay an obligation in a currency other than Philippine legal tender is null and void as contrary to public policy, and the most that could demanded is to pay said obligation in Philippine currency ""to be measured in the prevailing rate of exchange at the time the obligation was incurred."Any agreement to pay an obligation in a currency other than Philippine legal tender is null and void as contrary to public policy, and the most that could demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred.RA 529 - Under this Act, payments of all monetary obligations should be made in currency which is legal tender in the Philippines. A stipulation providing payment in a foreign currency is null and void but does not invalidate the entire contract.

72 Kalalo vs. LuzEngr. Kalalo had an agreement with Architect Luz that he would render some engineering services to the said architect in exchange for a certain fee (per project). After the completion of the projects, Kalalo sent the sum for payment to Luz. However, Luz claimed that it should be another amount (lower), so he sent a check with his claimed amount, and Kalalo promptly rejected this check. The court said that Luz should pay Kalalo the agreed 20% of his $ 140,000 paid by the International Rice Inst. (for one of their projects). However, this should be paid in Pesos and not in Dollars, as per RA 529.RA 529 states that all obligations in dollars or other currencies should be paid in Pesos, based on the currency exchange rate prevailing at the time of the payment of contracts.RA 529 - All obligations after June 16, 1950 (the date of the enactment of the RA), which require payment in a particular kind of coin or currency other than the Philippine currency, shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred.

73 St. Paul Fire v. Macondray"Winthrop Products, Inc. in New York shipped aboard the SS ""Tai Ping"", owned and operated by Wilhelm Wilhelmsen (carrier) 218 cartons and drums of drugs and medicine, with the freight prepaid, to Winthrop-Stearns Inc. Manila (consignee). When the shipment was discharged, one drum and several cartons were in bad condition. Winthrop-Searns demanded P1,109.67 representing the C.I.F. value of the damaged drum and cartons of medicine with the carrier, Macondray and the Manila Port Service. Since the shipment was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine Insurance Company, said company paid the value of the damaged goods. Now St. Paul fire instituted action against Macondray for the said amount. Court held that the liability of the carrier to the consignee is limited to the C.I.F. value of the goods which were lost or damaged and the insurer should be reimbursed on the date of the discharge. "A stipulation fixing or limiting the sum that may be recovered from the carrier on the loss or deterioration of the goods is valid, provided it is: (1) reasonable and just under the circumstances; and (2) has been fairly and freely agreed upon."[Pertinent contract terms in the bill of lading]Whenever the value of the goods is less than $500 per package or other freight unit, their value in the calculation and adjustment of claims for which the Carrier may be liable shall for the purpose of avoiding uncertainties and difficulties in fixing value be deemed to be the invoice value, plus frieght and insurance if paid, irrespective of whether any other value is greater or less. The limitation of liability and other provisions herein shall inure not only to the benefit of the carrier, its agents, servants and employees, but also to the benefit of any independent contractor performing services including stevedoring in connection with the goods covered hereunder.->The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the insurance, is subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is recoverable by the latter. Since the right of the assured, in case of loss or damage to the goods, is limited or restricted by the provisions in the bill of lading. "

74 Papa v AU ValenciaMyron Papa is the administrator of the estate of Angela Butte. In 1973, he sold a portion of said estate to Felix Pearroyo through A.U. Valencia and Co., Inc. Pearroyo gave Papa P5,000.00 plus a check worth P40,000.00. However, Papa was not able to deliver the certificate of title to Pearroyo. A litigation ensued and ten years after, Papa argued that the sale between him and Pearroyo was never consummated because he did not encash the P40,000.00 check and that the P5,000.00 cash was merely earnest money.

The Court denied the petition ruling that after more than 10 years from the payment in part by cash and in part by check, the presumption is that the check had been encashed. Granting that Papa had never encashed the check, his failure to do so for more than 10 years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay. Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner to deliver to them the peaceful possession and enjoyment of the lot in question.While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Article 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditors unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given.

CC 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.

*The Court said that although encashment is required as a general rule, the exception is if the creditor unreasonably delays in presentment. The payee of a check would be a creditor under this provision and if its non-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged.

75 PAL v. CAIn the case of Amelia Tan, et al v PAL, the trial court ruled in favor of Tan and ordered PAL to pay indemnities to respondent. Tan filed a motion for the issuance of a writ of execution of the judgment. The trial court issued the writ and was referred to Deputy Sheriff Emilio Z. Reyes for enforcement. 4 months later Amelia Tan moved for the issuance of an alias writ of execution because the judgment was still unsatisfied. PAL filed an opposition to the motion because they had already paid its obligation through Emilio Z. Reyes, evidenced by cash vouchers properly signed and receipted. Court denied the writ for being premature and asked Emilio Reyes to appear and explain the reason why he failed to surrender the payment. He however has absconded or disappeared. Amelia Tan filed for Alias Writ of Execution which was granted by the courts. The money was collected by a new Sheriff, over the protest of PAL and hence this petition to the SC.A judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. The absence of an executing officer's return will not preclude a judgment from being treated as discharged or being executed through an alias writ of execution as the case may be. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of execution. It is a well known legal maxim that he who cannot prosecute his judgment with effect, sues his case vainly."CC 1240 Payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular payment.

In this case the payment was made to an absconding officer, not even through cash but through checks which were not issued to the name of the respondent Amila Tan but to the name of the sheriff himself, Emilio Z. Reyes.

CC 1249 The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance.

Payments made to public officers in order to satisfy debts are only valid if there has been authority vested in him by law or by judgment or by consent of the obligee. In the case at bar, the officer was duly authorized to do so but it was through the fault of PAL, by signing the checks to the absconding officer, that Tan was unable to receive the satisfaction of payment."

76 Reparations Commission v Universal Deep Sea Fishing"Reparations committee awarded Universal six trawl-boats and delivered these two at a time (3 deliveries). For each delivery, Reparations and Universal executed a contract for the latter to first pay 10% of the pairs price as the deliverys initial payment (due 1961) Universal will then pay the rest of the balance in 10 equal yearly installments (beginning 1962). Universal enlisted Manila Surety as its surety, the two signing an indemnity agreement stating that the former will indemnify the latter for any loss, damage etc. it may incur as Universals surety.

Universal failed to pay the 10% installment. In 1962, Reparations instituted an action for collection. Universal argued that there was confusion in the contract: that there were two first installments and there were differences in the amount asked from them (sabi ni Universal, alin ba talaga ang first installment? Yung 10% downpayment, or yung una sa 10 yearly installments? Also, bakit magka-iba ang amount asked for in the first 10% instalment from the amount asked in the 10 other installments? - example: in the first pair the initial 10%was P53k, but the 10 yearly instalments were P56k each)

COURT: there is only ONE first installment - the initial 10%, the other 10 yearly instalments were subsequent payments for the remaining balance. So yung #1 sa 10 yearly installments is NOT part of the first instalment, but a part of the subsequent payment.

Manila Surety: The Trial Court erred in not awarding us premiums for the bonds we have released in behalf of Universal to answer their debt.

COURT: RTC did err, as the indemnity agreement expressly states that Manila Surety will be paid premiums for the bonds it executes for Universal.

Manila Surety: Universal had paid P10,000 for the first two boats. Based on NCC Art. 1254, if hindi sure kung saan ibabawas ang payment, ibabawas na lang ito sa most onerous in this case the most immediate, which is the 10% instalment sa first two boats. So instead of needing to pay Reparations P53k, P43k na lang ang ilalabas ni Manila Surety.

COURT: No. Universals debts as regards the first two boats is no longer limited to the first installment but now covers the first of the 10 as well (kasi past due na rin ito) so the P10k cannot simply be deducted from the first. ALSO, Articles 1252 1254 applies only to persons owing several debts of judgment NOT to those whose obligation is a mere surety.""When it is expressly stated that an amount is the first installment, all other installments after it (obviously) are subsequent installments.

The rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular,.""Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a)

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173)

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately"

77 Paculdo v RegaladoPaculdo and Regalado entered into a contract of lease over a parcel of land with a wet market. Aside from this, Regalado also leased property and sold equipment to Paculdo. Regalado filed an ejectment complaint against Paculdo, saying that the latter failed to pay for 3 months' worth of rent (on the wet market land) despite him sending two letters of demand. Paculdo asserts that he sent the rental payments, but Regalado used them for his two other obligations. Regalado sent Paculdo two letters, informing him of the application of the money sent to those two other obligations, and Paculdo did not object. SC ruled in favor of Paculdo. At the time of the payments, he made it clear that they were for the wet market property. Furthermore, the payment for the equipment was not yet due. Art. 1252 grants the right to specify which among various obligations is to be satisfied first to the debtor. Only with the consent of the debtor can the creditor choose.The right to specify which among various obligations to satisfy first belongs to the debtor. Only with the consent of the debtor can the creditor choose. (Also, application of payments shall not be made as to debts which are not yet due.)CC 1252. At the time Paculdo made the payments, he made it clear to Regalado that they were to be applied to his rental obligations on the Fairview wet market property.

78 DBP v CALydia Cuba is a grantee of Fishpond Lease Agreement from the government. She obtained a loan from DBP, for which she executed a promissory note and two Deeds of Assignment of her Leasehold Rights. She failed to pay her loan so DBP, without foreclosure proceedings, appropriated the Leasehold Rights over the fishpond. Cuba, wanting to get back the fishpond, negotiated with DBP for a Deed of Conditional Sale of the Leasehold Rights. However, she was unable to pay the amortization. DBP then sold the Leasehold Rights to a third person, Caperal.

Cuba argued that the Deed of Assignment of Leasehold Rights was a mortgage, and not a dation in payment nor a cession. Therefore, according to Art 2088 of CC, DBP as the creditor cannot appropriate the mortgage. DBP argued that it was a dation in payment (if not, a cession), whose appropriation was allowed. SC held that it was not dation nor cession (based on some provisions in Deed of Assignment of Leasehold Rights). These provisions are:

1. ""In the event of foreclosure of the MORTGAGE securing this note, I/We further bind ourselves to pay..."" 2. ""Failure to comply with the terms and condition of any of the loans shall cause other loans to become due and demandable and all other MORTGAGES shall be foreclosed.""

Difference between Dation in payment and Cession

1. Whereas dation in payment transfers the ownership over the thing alienated to the creditor, in assignment under cession, only the possession and administration are transferred to the creditors

2. While dation in payment may totally extinguish the obligation and release the debtor, the assignment only extinguishes the credits to the extent of the amount realized from the properties assigned, unless otherwise agreed upon

3. While dation in payment is the cession of only some specific thing, the assignment involves all the property of the debtor

4. While in former, the transfer is only in favor of one creditor to satisfy a debt, in the latter there are various creditors

Mortgage and Dation

The essence of mortgage is security, while for dation it is the satisfaction of indebtedness. CC 1245: Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.

79 Filinvest Credit Corp vs Phil Acetylene Co. Inc.Phil. Acetylene purchased a Chevrolet from Alexander Lim payable in installment. As a security for the payment, Phil. Acetylene executed a chattel mortgage over the same motor vehicle.

Alexander Lim subsequently executed a Deed of Assignment in favor of Filinvest assigning all his rights, title and interests in the chattel mortgage.

Phil. Acetylene, however, defaulted in the payment of nine successive installments which prompted Filinvest to send a demand letter ordering petitioner to return the mortgaged property. This was done by petitioner together with the document ""Voluntary Surrender with Special Power to Sell."" However, since the Chevrolet still had unpaid taxes, Filinvest can't sell the motor and requested Phil. Acetylene to update its account. Phil. Acetylene refused and argues that its obligation is already extinguised by virtue of his Voluntary surrender."Mere return of the mortgaged Chevrolet does not constitute dation in payment in the absence of an express or implied intention of the parties. Filinvest, in this case, merely acts as an agent to sell the property because his power to dispose the property is limited by the Special Power of Attorney.

Delivery of possession of the mortgaged property to the mortgagee can only extinguish liability if the mortgagee had actually caused the foreclosure sale of the mortgaged property.""Art 1245. 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.

**Common consent is an essential prerequisite for there to a be a valid dation in payment."

80 De Guzman v. CA (and Singh)On February 17, 1971, petitioners (together with Sps. Gestuvo) executed a contract to sell with Singh covering two parcels of land in Pasay. Repondent was to pay P133,640 on or before February 17, 1975. Two days before the due date, Singh requested several documents (statement of accounts of balance due, copies of Certificates of Land Title, and Special Power of Attorney executed by Rolando Gestuvo in favor of Pilar De Guzman). Petitioners did not respond to the request which led to a filing of a complaint for specific performance with damages against the them. Thereafter, the parties entered into a compromise agreement which the Court approved. On January 28, 1978, petitioners filed a motion for the issuance of a writ of execution, claiming that respondents failed to abide by the terms of the compromise agreement. The Court However, ordered the release of the deposited P250,000 for the petitioners and the transfer of the land titles in favor of the private respondents.The Court, in this case, focused only on the substantial fulfillment of the compromise agreement and did not pass upon the validity of the consignation made by the private respondents. The court held that there was fulfillment on the part of the Singhs when they went to the sala of Judge Bautista on the set due date when the payment should have been made. However, the petitioners were not thereto receive it. It was only their legal counsel who was there, who was not even authorized to receive the payment. They went to the house of the petitioners, and still they weren;t there to receive payment. When they went to the court to deposit the balance, it they were unable to do so since it was a Saturday. The Court held that the deposit was done in good faith and that respondent had no fault for their failure to pay on the specifeied date and that there was substantial fulfillment on their end.NA

81 TLG Intl Continental Enterprising Inc. vs Flores (1972)"Respondent Judge Flores granted petitioner TLGs motion to intervene in Beacon Trading Co. vs Fabella (about rights as lessees of property) with the purpose of protecting its rights as sublessee of Bearcon and to enable it to make a consignation of monthly rentals since they do not know who is lawfully entitled to receive their monthly rentals. TLG deposited with the CFI Rizal P3,750 by way of consignation. When the Bearcon case was later dismissed, TLG filed to withdraw its deposit. Flores denied their motion stating that his court has not ordered TLG to make any deposit and is thus not authorized to order the withdrawal of deposits.

The issue in this case is WON the respondent judge could authorize the withdrawal of deposits. SC: YES. According to Art. 1260, CC, in consignation, the debtor is entitled as a matter of a right to withdraw the deposit made with the court."In cases of consignation, the debtor is entitled as a matter of a right to withdraw the deposit made with the court, before the consignation is accepted by the creditor or prior to the judicial approval of such consignation."Art. 1260 (2), CC states that ""Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force"".

In this case, since the Bearcon case was dismissed before the amount deposited was either accepted by the creditor or a declaration made by court, the consignation is rendered ineffectual. It is then incumbent for the respondent judge to allow the withdrawal by TLG. Morevoer, according to Art. 1258, CC: ""Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, ..."". The amount was officially received by the clerk of court and thus the money was under the control and jurisdiction of the court. Hence, Flores can order its return."

82 McLaughlin vs CAPetitioneer and respondent Flores entered into a contract of conditional sale of real property. When respondent couldn't pay, they entered into a compromise agreement with a penal clause that says if the respondent fails to pay all his obligations, and a writ of execution is granted, all previous payments paid will be forfeited to the petitioner as liquidated damages. When respondent didn't pay, petitioner filed for a Writ of Execution, which made respondent tender a Pacific Banking Corporation certified manager's check. But petitioner refused it. The SC held that it would be inequitable to cancel the contract and forfeit all payments made by respondent and that the tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment.Where an obligor fails to follow a valid tender of payment with a court consignation, the court may allow him time to pay his obligation without rescinding the deed of sale.Art. 1259 according to syllabus but it wasn't mentioned in the case. It did cite Articles 1256-58. Although respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court. Since respondent did not consign with the court, his obligation was not paid and he is liable in addition for the payment of the monthly rentals.

83 Soco v MilitanteSoco (lessor+plaintiff) and Francisco (lessee+defendant) entered into a contract of lease covering a commercial building and the lot on which it stands (P800 monthly rental over a period of 10 years). Some time before the civil case occurred, Soco stopped sending the collector of rental payments to Francisco, prompting the latter to write the former a letter and thereafter send him payment for the rentals through checks. Soco admitted having received these checks, except for the ones covering payments for the months of May to August 1977. Soon after, Soco learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than P3K (way higher than the lease). Lugi sya so she sought a way to terminate the contract leading her to file an illegal detainer case with the City Court of Cebu, which ruled in her favor, but which ruling was thereafter reversed by the CFI. The reversal by the CFI was due to its conclusion that there was in fact a tender of payment of the rentals covering the dues for May to August 1977 made by Francisco to Soco only that Soco refused them impelling Francisco to DEPOSIT THE RENTALS with the Clerk of Court of the City Court of Cebu. SC ruled that the consignation was invalid as it is amiss of the requirements of a valid consignation (proof of both notification and tender of payment). Francisco has violated the terms of the lease contract and may thus be judicially ejected from the premises of Socos building.Failure in the full and strict compliance in any of the requirements for a valid consignation enough ground to render a such ineffective."Requisites for a valid consignation:(1) that there was a debt due;(2) that the consignation of the obligation had been made because the creditor to whom tender payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, CC);(3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, CC);(4) that the amount due was placed at the disposal of the court (Art. 1178, CC); and(5) that after the consignation had been made the person interested was notified thereof (Art. 1178, CC).Further, the Court ruled that the essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law. Substantial compliance, which prompted the CFI to rule in Franciscos favour, is not enough."

84 Sotto vs MijaresThis is an appeal taken by defendants from a portion of the order of the Court of First Instance of Negros Occidental which requires them to deposit with the Clerk of Court the amount of P5,106.00 within ten (10) days from receipt of said order. Originally appealed to the Court of Appeals, this case was subsequently certified to this Court, the only issue being one of law.Whether or not to deposit at all the amount of an admitted indebtedness, or to do so under certain conditions, is a right which belongs to the debtor exclusively. If he refuses he may not be compelled to do so, and the creditor must fall back on the proper coercive processes provided by law to secure or satisfy his credit, as by attachment, judgment and execution.CC 1260. The law says that "before the creditor has accepted the consignation or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force." If the debtor has such right of withdrawal, he surely has the right to refuse to make the deposit in the first place. For the court to compel him to do so was a grave abuse of discretion amounting to excess of jurisdiction.

85 Reisenbeck v CARiesenbeck filed a complaint for consignation and damages against respondent Juergen Maile. He consigned and deposited with the Clerk of Court of the Regional Trial Court of Cebu the sum of P113,750. The private respondent subsequently filed a Manifestation Accepting Consignation and Motion to Dismiss wherein he stated, that "without necessarily admitting the correctness of obligation of plaintiff to defendant, the latter hereby manifests to accept the said amount of P113,750 which is consigned by plaintiff, provided that the present complaint be dismissed outright with cost against plaintiff." The petitioner opposed the manifestation. The court ruled that as respondent-creditor's acceptance of the amount consigned was with reservations, it did not completely extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note here that consignation is completed at the time the creditor accepts the same without objections, or, if he objects, at the time the court declares that it has been validly made in accordance with law.A sensu contrario, when the creditor's acceptance of the money consigned is conditional and with reservations, he is not deemed to have waived the claims he reserved against his debtor. Thus, when the amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the balancePrivate respondent's acceptance of the amount consigned by the petitioner-debtor with a reservation or qualification as to the correctness of the petitioner's obligation, is legally permissible. There is authority for the view that before a consignation can be judicially declared proper, the creditor may prevent the withdrawal of the amount consigned by the debtor, by accepting the consignation, even with reservations.

86 Rural Bank of Caloocan Inc. (and Jose Desiderio Jr.) vs CA (and Maxima Castro)Respondent Maxima Castro (aged 70), accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino who arranged everything about the loan with the bank. Castro signed a promissory note corresponding to her 3k loan in favor of the bank. On the same day, the Valencias also obtained from the bank a 3k loan and they had Castro affixed thereon her signature as co-maker in their promissory note. The two loans were secured by a real-estate mortgage on Castro's house and lot. The sheriff of Manila sold the property at a public auction sale to satisfy the obligation covering the two promissory notes plus interest and attorney's fees after sending a letter to Castro. Castro alleged that it was only when she received the letter that she learned for the first time that the mortgage contract which was an encumbrance on her property was for 6k and not for 3k and that she was made to sign as co-maker of the promissory note without her being informed of this and was just made to sign without her understanding the already prepared forms. Castro filed a case alleging that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note and to constitute a mortgage on her house. At the time of filing her complaint, respondent Castro deposited the amount of P3,383 with the court a quo in full payment of her personal loan plus interest. The CA affirmed the lower court in declaring the promissory note invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract valid up to the amount of 3k only. SC affirmed the CA decision in toto.Consignation the deposit of the object of obligation in a competent court in accordance with the rules prescribed by law after refusal or inability of the creditor to accept the tender of payment. "Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due...--->The Court held Castro's consignation valid. The Bank had long foreclosed the mortgage extrajudicially and the sale of the mortgage property had already been scheduled for non-payment of the obligation, and that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to the record of the case, said Bank had not made any claim of such deposit, and therefore, Castro was right in thinking that it was futile to pay directly to the bank.

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. --> As a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias, both Castro and the bank committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. "

87 Leonila Licuanan vs Hon. Ricardo Diaz, Judge of Court of First Instance of Manila and Aida Pineda, private respondent.Petitioner owned an apartment in Manila which was rented out to private respondent Pineda. The lease contract stipulated that P180 be paid during the first 5 days of every month. After alleging that Pineda was occupying her garage which was not part of the lease contract, petitioner demanded she vacate the premises. Both parties appeared before the AFP Hearing Officer on Civil Relations but no compromise agreement was reached. Pineda filed a case for unlawful detainer. Petitioner alleged that Pineda had not paid her rentals from April 1978 to September 1978. Respondent answered that she had deposited her rentals at the Civil Office of the AFP. Lower Court ruled in favor of respondent. SC reverses and rules for petitioner as they find the respondent's deposit with the AFP is not a valid consignation.Articles 1252-1261 on consignation must be given mandatory construction. (Soco v. Militante) THEY MUST BE STRICTLY FOLLOWED.

In Landicho V. Tensuan, it was stated that consignation must be done with the Court or under Batas Pambansa Blg. 25. AFP Office of Civil Relations is not one of the allowed offices.Article 1178 which says that after consignation has been made, the person interested was notified thereof. Private respondent failed to do this. Granting both petitioner and respondent were present when the AFP officer on civil relations instructed respondent to deposit rentals, respondent never actually informed petitioner after he had actually deposited the rentals.

The reason for this provision is so that the petitioner can withdraw the money of the deposits. It would be unjust for him to risk deteroriation, depreciation of loss for lack of knowledge of consignation.

88 Chan vs. CAChan and Cu entered into a contract of lease whereby the latter will occupy (for residential purposes) Room 401 and the rooftop of Room 442 of a building in Urbiztondo, Manila. After some time there was no longer a contract between the two parties, but Cu still occupied the premises mentioned. There was difficulty for Chan collecting rent because a dispute arose between the two. Cu tendered a check but Chan refused to accept it. Cu filed a civil case for consignation which won but was reversed du to lack of merit hence this appealA consignation is valid if it complies with the requisites laid down; (1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent for incapacitated, or because several persons claimed to be entitled to receive the amount due; (3) that previous notice of the consignation have been given to the person interested in the performance of the obligation; (4) that the amount due was placed at the disposal of the court; and (5) that after the consignation had been made the person interested was notified thereof."Requisites of a Consignation:(1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent for incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation have been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code)."

89 Meat Packing Corporation of the Philippines vs Sandiganbayan 2001Meat Packing Corp of Phil (MPCP) entered into a lease to purchase agreement (28 years) with PIMECOstipulates that the contract is automatically deemed cancelled and forfeited upon default in payments of rental equivalent to the cumulative total of 3 annual payments. (at P3.3M per year)

In 1986, PCGG sequestered all assets of PIMECO including the leased property MPCP sent PIMECO a notice of rescission for non-payment of rentals. PCGG tendered to MPCP checks amounting to P5M which the MPCP refused arguing that the agreement already rescinded since the outstanding debt of more than P12M is already more than 3 years worth of installments.

Held: MPCPs ground for refusal of tender of payment is the rescission clause. However, since PCGGs tender and consignation of P5M was approved by Sandiganbayan and is therefore a valid tender, the accumulated back rental were reduced to around P7M, which is less than 3 years worth of installments. As such rescission cannot lie. Consignation act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept paymentgenerally requires a prior tender of paymentnecessarily judicial

Tender of Paymentantecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. may be extrajudicialpriority of the tender is the attempt to make aprivate settlement before proceeding to the solemnities of consignation

Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligationArticle 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases:(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)

90 Occena vs CAPrivate Respondent Tropical Homes Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City) alleging that increase in oil price and its derivatives and the rising prices of all commodities were not within contemplation of parties at the time of agreement. Under the subdivision contract, respondent guaranteed (petitioners as landowners) as the latters fixed and sole share and participation an amount equivalent to forty (40%) per cent of all cash receipts from the sale of the subdivision lots." CFI Rizal rendered judgment modifying terms and conditions of contract. The Court held however that worldwide increases in prices do not constitute a sufficient cause of action for modification of subdivision contract.Difficulty of service authorizes release of obligor but does not authorizes courts to modify or revise contract between the parties, in case a party desires to be excused from performance in the event of such contingencies arising, it is his duty to provide therefore in the contract."ART. 1267. When the service has become so difficult as to bemanifestly beyond the contemplation of the parties, the obligormay also be released therefrom, in whole or in part.

Respondent in the Case seeks not the release from the contract but modifying the terms and conditions of the contract."

91 Naga Tel Co. v. CANatelco (telephone company in Naga) and Casureco (provides electricity) entered into a contact, where Natelco would use Casurecos electric light posts in Naga City, and Natelco would provide free use of 10 telephone connections. The contact provided, That the term or period of this contract shall be as long as the party of the 1st party (Natelco) has need for the electric light posts of the party of the 2nd part (Casureco), it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned its operation as a public service and it becomes necessary to remove the electric light post." After 10 years, Casureco filed against Natelco for reformation of the contract with damages on the ground that the contact had become too one-sided for Natelco. RTC: in favor of Casureco. CA and SC affirmed.Art. 1267 says it all; when the performance of a service or delivery of a thing becomes so difficult to fulfill or deliver as to go beyond what the parties contemplated it to entail, the debtor can be released from performance, either partially or completely."Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

The provision of the service had become so grossly disadvantageous for Casureco to the point that Natelco was being unjustly enriched, making it a service which ""has become so difficult"". ""Beyond the contemplation"" applies to the fact that neither party could've foreseen that Natelco would've been able to expand its then-limited operations."

92 PNCC v. CARespondents (lessors) entered into a lease contract with petitioners (lessee). Petitioners were supposed to conduct rock crushing projects on the land leased. When respondents came to collect on the 1st annual payment, petitioners refused to do so on the basis that the payment of rentals would commence on the date of the issuance of an industrial clearance by the Ministry of Human Settlements, and not from the date of signing of the contract. They also wished to terminate the contract because of financial and technical reasons. Respondent refused to terminate the contract and subsequently initiated a suit for specific performance and damages."(Relevant to impossibility of performance) Petitioner used two defenses: Art. 1266 and the principle of rebus sic stantibus.

Art. 1266 does not apply to this case. It is an exception to the principle of the obligatory force of contracts. The principle only applies to obligations to do. Since this case involves an obligation to pay rentals, thus an obligation to give, the article does not apply.

The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.This theory is said to be the basis of Article 1267 of the Civil Code.

The article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor.

In this case, petitioner's excuse was the abrupt change in the political climate of the country after the EDSA Revolution. The Court did not appreciate this defrnse, since it was established that petitioners entered into the contract with open eyes of the deteriorating conditions of the country. ""CC 1266 ""The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.""

CC 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."""

93 YAM v. CALoan Agreement whereby petitioners were given a loan of P500,000 by private respondent. Loan was secured by a chattel mortgage on the printing machinery in petitioners establishment. Petitioners acquired a second loan of P300,000 as evidenced by two promissory notes. They fully paid their first loan of P500,000 on Apr. 2, 1985. As of February 11, 1999, petitioners paid a total of P410,854.47, comprised of the principal (P295,469.47) and the interest (P165,385.00) less the partial payment of P50,000. This payment was made by mean of a Pilipinas Bank Check bearing the notation full payment of IGLF loan. Petitioners claimed that they had fully paid their obligation; that sometime after receiving private respondents letter concerning the conditional offer to reduce the penalty charges, the petitioner and his wife met with Carlos Sobrepenas, president of the respondent corporation. The latter agreed to waive the penalties and service charges, provided that petitioners pay the principal and interest.In order for condonation to take effect (conditional offer made by private respondent to reduce penalty), such donation/acceptance of a movable property (second loan) must be made in writing."Art. 1270, par. 2 of CC provides that express condonation must comply with the forms of donation.Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000, must be made in writing.

According to the court, if private respondent really condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation, as they did on their first loan. Also, Desejo, by countersigning the voucher, did no more than acknowledge receipt of payment. It was obvious that she had no authority to condone any indebtedness, her duties being limited to issuing official receipts, preparing check vouchers and documentation. Sobrepenas had no authority to condone the debt. In fact, Mrs. Yam herself testified that they were told that only the Central Bank may authorize the release of the chattel mortgage over their property

94 Gan Tion v. CA and Ong Wan SiengGan Tion has property in which Ong Wan Sieng was the tenant. In 1961, Gan filed an ejectment case against Ong for alleged failure to pay rental fees. Ong asserted that Gan's demand for Php180 a month was in fact not what they had agreed upon which was only Php160. Ong obtained a favorable judgment upon appeal to the CFI. Thus Gan was ordered to pay Ong Php500 in attorney's fees. Gan later properly increased the fee to Php180. In 1963, he sought to demand the rents in arrears from Ong for a total of Php4,320. Ong, on the other hand, obtained the writ of execution for the judgment order in the previous case. Thus, Gan went to the Court of Appeals to plead legal compensation to set off the award of atty's fees against Ong's debt to him. CA denied as the requisites for legal compensation in CC Art. 1278-79 were absent (the creditor is the atty, not Ong). SC reversed the CA. CC Art 2208 shows that the award of attorney's fees is made in favor of the litigant, not of the attorney. Thus, the credit may properly be set off as legal compensation.It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. The judgment credit, therefore, may properly be the subject of legal compensation."Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:(list of situations where such may be recovered such as (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest;)

--> CA held that in the award for attorney's fees, the requisites in Art. 1278-79 for legal compensation are absent because they are not creditors and debtors of each other (1279 par 1). SC reversed saying that this requisite is complied with because the it is the litigant who is awarded the fees, not the counsel. The former is the creditor. Art 2208 shows that the award of attorney's fees is granted to indemnify the party himself."

95 BPI v. ReyesEdvin Reyes held two joint savings accounts at BPI Cubao: (1) with his wife, Sonia; and (2) with his grandmother, Emeteria Fernandez. He regularly deposited in the joint account with Fernandez the US Treasury Warrants payable to her order as her monthly pension. Fernandez died on Dec. 28, 1989, without the knowledge of the US Treasury Department. She was thus still sent a US Treasury Warrant dated Jan. 1, 1990 in the amount of P10,556. Reyes deposited the said treasury check in the savings account with Fernandez. Two months later (March 8, 1990), Reyes closed the savings account with Fernandez and transferred its funds to the joint account with his wife. On Jan. 16, 1991, the Treasury Warrant was dishonored as it was discovered that Fernandez had died 3 days prior to its issuance. The US Department of Treasury requested a refund from BPI. This was the first time BPI came to know of the death of Fernandez. BPI sent Reyes a telegram requesting that he contact the bank's manager or assistant manager. Reyes assured BPI he would drop by to look into the matter, and verbally authorized them to debit from his other joint account (the account with his wife) the amount stated in the dishonored US Treasury Warrant. When Reyes visited BPI with his lawyer and the refund documents were shown to them, he demanded from BPI the restitution of the debited amount, claiming that he failed to withdraw his money when he needed it due to the debit.Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. CC 1290 provides that "when all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation." Legal compensation operates even against the will of the interested parties and even without the consent of them. Since this compensation takes place ipso jure, its effects arise on the very day on which all its requisites concur. When used as a defense, it retroacts to the date when its requisites are fulfilled."CC 1279 - in order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due;(4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

The elements of legal compensation are all present in this case. (1) The obligors bound principally are at the same time creditors of each other. BPI is a debtor of Reyes, a depositor. At the same time, BPI is the creditor of Reyes with respect to the dishonored U.S. Treasury Warrant. (2) The debts involved consist of a sum of money. (3-4) They are due, liquidated, and demandable. (5) They are not claimed by a third person.

(Additionally: SC held that the presence of Reyes' wife does not negate the element of mutuality of parties, i.e., that they must be creditors and debtors of each other in their own right. Sonia Reyes is not a party in the case at bar. She never asserted any right to the debited U.S. Treasury Warrant. To frustrate the application of legal compensation on the ground that the parties are not all mutually obligated would result in unjust enrichment on the part of Reyes and his wife who herself out of honesty has not objected to the debit. The rule as to mutuality is strictly applied at law. But not in equity, where to allow the same would defeat a clear right or permit irremediable injustice.)"

96 PNB v Sapphire ShippingSapphire's account with PNB was doubly credited with the amounts of $5,679.23 and $5,885.38. PNB, acting as local correspondent bank, intercepted funds telexed from Jeddah and Libya to be credited to Sapphire's Citibank account (Greenhills Branch). PNB deducted the value of $2,627.11 claiming legal compensation. Court held that there could be no legal compensation as PNB and Sapphire are not creditors and debtors of each other (Art.1278) with respect to the telexed funds. Such a relationship only exists between them with respect to the double payments. It is Citibank and Sapphire that are creditor and debtor to each other as regards the telexed funds.Requisite for legal compensation: parties must be creditors and debtors to each otherArt. 1278. Compensation shall not take place when two persons, in their own right, are creditors and debtors of each other.

97 CKH vs CA"CKH Industrial Devt owned by deceased Cheng Kim Heng executed a Deed of Absolute Sale in favor of Century-Well for two parcels of land at the price of P800,000. After obtaining the Deed from Ruby Saw, the respondents failed to pay the P700,000 balance and claimed that they are not obliged to pay the amount in money since it is deemed legally compensated with the debt owed by CKH to the sons of Century-Well's owners. The parties differ as to the events which occurred leading to the execution of the Deed of Sale.

CHK and Ruby Saw: Saw claims that Lourdes Chong and Uy Chi Kim should pay the P700,000 balance since there was no stipulation in the Sale that the balance was to be compensated with another debt she had with Century-Well.

Century-Well and Lourdes Chong: Other circumstances not stated in the contract should be taken into consideration in its interpretation and execution. The balance to be paid by them should be legally compensated with the debt owed to two of Century-Well's stockholders (Chong Tak Choi and Chong Tak Kei) by CKH.

The Court held that the balance may not be legally compensated with the debt owed by CKH to the Chong Tak brothers. They are merely stockholders of Century-Well and are not bound principally, not even in a representative capacity, in the contract of sale. Their interest in the promissory notes cannot be off-set against the obligations between CKH and Century-Well arising out of the deed of absolute sale. Corporations, such as Century-Well, have personalities separate and distinct from their stockholders, except only when the law sees it fit to pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or business conduit of a person. "Without the confluence of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds contracting parties to their obligations would be absent. At least one party would be binding himself under an authority he does not possess. As observed by a noted author, the requirements of conventional compensation are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits."CC Article 1279. In order that compensation may be proper, it is necessary:(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable;(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

The SC held that the 1st requisite is not present. CKH and Century-Well are not both principally creditors of each other. The debts as acknowledged by their owners are not the debts by the corporations themselves hence the debts may not be legally compensated."

98 Mirasol v CA"Under a crop loan financing scheme for crop years 1973-1974 and 1974-1975, the Mirasols signed a Chattel Mortgage which empowered PNB to sell their sugar and to apply the proceeds as payment of their obligations to PNB. Thereafter, petitioners continued to avail of other loans from and make unfunded withdrawals from their accounts with PNB. PNB foreclosed their mortgaged properties for their failure to pay. Petitioners claim that the foreclosure is invalid since their debt has been fully paid by virtue of legal compensation, that is, it should be offset by the amount PNB owes them from the sale of sugar. PNB contends that under PD 579 issued by Marcos in 1974, all earnings from the export sales of sugar pertained to the National Government and were subject to the Presidents disposition for public purposes. The Court ruled that the CA did not err in upholding the validity of the foreclosure on petitioners property. Set-off or compensation cannot take place because:(1)neither of the parties are mutually creditors and debtors of each other. (see Art 1279[1])Under PD579, which provides that the balance of the proceeds of sugar trading operations shall be set aside by the Philippine Exchange Company as profits which shall be paid to a special fund.., neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold. there was nothing with which PNB was supposed to have off-set the Mirasols indebtedness.(2)Compensation cannot take place where one claim, as in the instant case, is still the subject of litigation as the same cannot be deemed liquidated. (see Art 1279[4])

NOTE: The court could not rule on the constitutionality of PD579 since it was not the lis mota of the case. The case was instituted for accounting and specific performance. PNBs obligation to render an accounting is an issue, which can be determined, without having to rule on the constitutionality of PD579. In fact, PNBs refusing to give an accounting is not governed by PD 579, but by the law on agency since PNB acted as petitioners agent."[Requisites of Legal Compensation]Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

"see doctrine

99 Associated Bank v. TanRespondent Tan deposited a postdated UCPB check for Php101k in petitioner Associated Bank making his current balance Php297k. Upon advice by petitioner Bank that the check has cleared, petitioner withdrew Php240k on the same day, making his balance Php57k. The next day, respondent Tan deposited Php50k because he issued checks to his business partners in the amount of Php47k. The checks bounced because apparently, Tan's funds were insufficient.

Turns out, petitioner Associated Bank debited the Php101k initially deposited because that check did not clear. Respondent Tan is now suing for moral and exemplary damages, because he lost daw clients and sleep and there is pain involved.

Trial Court, CA, and SC all ruled in favor of Tan.Though banks have the right to setoff, which is the right of a collecting bank to debit a clients account for the value of a dishonored check that has previously been credited to the same client, the issue in this case is not the existence of such right, but the manner of exercising it. Did the bank exercise the right properly? The answer is no.

First, a bank should exercise diligence more than that of a good father of a family, because of its fiduciary nature (meaning, a bank prudently takes care of the money of creditors). In this case, the bank did not even give notice to respondent Tan that the UCPB check was dishonored and therefore, they are debiting Php101k to his account. A notice of dishonor is necessary under the provisions of the Negotiable Instruments Law so that the general indorser (Tan, in this case) may be charged.

An admission of the staff of Associated Bank that it breached bank policies when they allowed Tan to withdraw Php240k prior to the clearing of the check was also taken against the bank, with the Court saying that the bank should have exercised diligence in choosing its employees.

Lastly, Tan is suing for moral and exempary damages because the checks he issued was dishonored. The Court ruled that the proximate cause of such was the bank's negligence in telling Tan that the check has cleared because if not for the bank advising Tan that the check has cleared, Tan would not have withdrawn Php240k, and he would still have enough funds for the Php47k worth of checks that he issued.

HELD: Petition wthout merit. Moral damages of Php100k, exemplary damages of Php75k, and attorney's fees of Php25k against petitioner bank retained. "Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

The relationship between the bank and its depositors is that of creditor and debtor, as per Art. 1980, which states [f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.' Therefore, legal compensation in Art 1278 may only take place if the requisites mentioned in Art 1279 are present. "

100 Villanueva v TantuicoRomulo Villanueva authorized the disbursement of funds for the seminars of the Bureau of Records Management even though the same were already charged against the appropriations of the participants' respective offices.

After its discovery, Emiliana Cruz, the Auditor of the Bureau, disallowed the disbursement and withheld Villanueva's salaries and other allowances to apply the same for the satisfaction of the latter's indebtedness.

The Court ruled, however, that there is no indebtedness as there is neither admission by Villanueva nor final adjudication by a competent court (see Doctrine). The record also shows that the disbursement was made in good faith - that Villanueva had no idea that some participants had already collected funds for the expenses from their agencies. The liability, therefore, should be exacted from the participants concerned, not from Villanueva.(Legal Compensation)

Indebtedness (Sec. 624 of the Revised Administrative Code) must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court.

In such a case, the person and the Government are in their own right both debtors and creditors of each other, and compensation takes place by operation of law in accordance with Article 1278 of the Civil Code.

Absent any such categorical admission by an obligor or final adjudication, no legal compensation can take place."Art 1278, CC: Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Sec. 624, RAC: When any person is indebted to the Government of the Philippine Islands, the Insular Auditor may direct the proper officer to withhold the payment of any money due him or his estate, the same to be applied in satisfaction of such indebtedness.

*Villanueva is a creditor of the government as he collects his salaries and other allowances from the government. If his indebtedness by virtue of his aforesaid act were upheld by the Court, he would've become a debtor of the government as well."

101 Perez vs. CACONGENERIC owed Mojica a sum of money. MEVER owed CONGENERIC a sum of money. CONGENERIC owed money to Perez, and so CONGENERIC transferred to Perez what was owed to it (CONGENERIC) by MEVER, as payment for its (CONGENERIC's) debt to Perez. However, Mojica assigned his credit against CONGENERIC, to MEVER, and now MEVER is both a creditor and debtor of CONGENERIC. MEVER surrendered CONGENERIC's debt to it (MEVER, by way of Mojica) as payment for its (MEVER's) own debt to CONGENERIC. But Perez went after MEVER since she is supposed to claim her payment from CONGENERIC, through MEVER.

MEVER claimed that there was compensation, however the debt of CONGENERIC to Mojica was not yet due and demandable because the payment of the principal was rolled over to October 4 and 11, and Mojica assigned its rights to MEVER on September 9. The debts must both be due and demandable, otherwise there can be no compensation. It was also held that MEVER necessarily consented to the transferring of rights, because of the nature of the business that CONGENERIC is involved in, that of money-marketing.Art. 1279. In order that compensation may be proper, it is necessary:(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

Article 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment.

102 Silahis Marketing Corp. v IACDe Leon (Mark Industrial Sales) sold and delivered merchandise items covered by several invoices (P 22 213.75) to Silahis payable within 30 days from invoice dates. Silahis did not pay claiming: 1. a debit memo (P 22 200) as unrealized profit & that they should have commission from De Leon's DIRECT sale of sprockets (P 111 000) to Dole Philipppines, Inc. (without coursing thorough Silahis), and 2. cancellation of P 6 000 due to defective stainless steel screen found by its client. CFI: Silahis has liability but it is partially offset by the counterclaim contained in the debit memo for unrealized profit and commission (P 13.75 with 12% interest). Stainless steel screen claim too late. IAC: Reversed CFI. No obligation prohibiting direct sales. SC: Affirmed IAC. No obligation to compensate the alleged unrealized commission.Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract. Art 1279 states the requisites for (legal) compensation.CC Art 1279: In order that compensation may be proper, it is necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; [2] that both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

When all requisites are present, compensation takes effect by operation of law, even without the consent or knowledge of the creditors and debtors. Art 1279 requires, among others, that in order that legal compensation shall take place, ""the two debts be due"" and ""they be liquidated and demandable."" Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract.

103 *

104 Millar vs CAMillar obtained a favorable judgment condemning Antonio P. Gabriel to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. The lower court issued the writ of execution, on the basis of which the sheriff seized the respondent's Willy's Ford jeep. The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties executed a chattel mortgage on the jeep. Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation.The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place."Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it may be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

There was no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment payment in two equal installments. The chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent."

105 Dormitorio vs. FernandezLazalita bought Lot No. 1 from the Municipality of Victorias, Negros Occidental, and he planted trees and erected a house. Spouses Dormitorio then bought Lot No. 2. It was later found out through a surveyor that Lazalita's lot was part of a municipal road and that he was actually sitting on Dormitorio's lot. The spouses filed an ejectment case from which they won. However, the judge later set aside the order of execution because the spouses and Lazalita already had an "Agreed stipulation of facts" wherein the spouses would reimburse the expenses of Lazalita when he transfers to another place. The spouses contested on the setting aside of the order of execution. The SC laid down that the "agreed stipulation of facts" between the spouses and Lazalita superseded the order of execution (Novation).Execution of a final judgment or order may be stayed or precluded when the said judgment has been novated by the parties.Art. 1292, NCC. - 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.

106 Magdalena v RodriguezRodriguez bought from Magdalena Estates, Inc. a parcel of land in Quezon City, and executed a promissory note for P5000 for the unpaid balance of P5000. In the promissory note, the appellants (Rodriguez) stated that they would pay said amount with interest of 9% per annum. Luzon Surety Co. executed a surety bond in favor of Magdalena Estates, in which they would pay only the P5000 balance (they won't pay the interest). When the obligation became due and demandable and Luzon Surety paid to Magdalena the P5000, Magdalena Estates demanded the payment of the interest (P655,89), to which the Rodriguezes refused, saying that the acceptance of the surety agreement novated their earlier contract. The Court held that the surety bond is not a new and separate contract but an accessory of the promissory note, hence the contract is not novated.Novation is never presumed, and must be established by showing either: 1) That the old and new contracts are incompatible in all points, or 2) That the will to novate appears by express agreement of the parties or in acts of similar import. "ART. 1235. When the obligee accepts the performance knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. - Rodriguezes misapplied this provision. Court held that Magdalena Estates did not object when it accepted the payment of P5000 because it knew that was the complete amount undertaken by the surety. The payment for the accrued interest was provided for in the original promissory note, which the bond merely supplemented."

107 Reyes v CA, SoJEurotrust and Bermic entered into a loan agreement where Eurotrust extended to Bermic an amount to finance the construction of the latters condominium and park. In turn, Bermic issued 21 postdated checks to cover payments of the loan packages which were dishonored by RCBC, due to stop payment order made by Eleazar. Despite Eurotrusts notices and repeated demands to pay, Eleazar failed to make good the dishonored checks.

Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government securities, found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to return them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others.

When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to AFP-MBAI, as President of Bermic, she requested a meeting with Eurotrust representatives. The representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the real owners of the fund-AFP-MBAI and DECS-IMC. This agreement was formalized in two letters dated March 19, 1991. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the latter.

The Court ruled that there was no new novation because the foregoing elements to which are found wanting. In order that a novation can take place, the concurrence of the following requisites is indispensable:

1. there must be a previous valid obligation,

2. there must be an agreement of the parties concerned to a new contract,

3. there must be the extinguishment of the old contract, and

4. there must be the validity of the new contract.

*2, 3, and 4 were lacking in this case. No new agreement for substitution of creditor was forged among the parties concerned which would take the place of the preceding contract.*

Novation by substitution of creditor requires an agreement among the three parties concerned - the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Hence, there is no novation if no new contract was executed by the parties.

CC 1300 Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect.

CC 1301 Conventional subrogation of a third person requires the consent of the original parties and of the third person.

108 Conchingyan vs. RB Surety and Insurance"On November 1963, Pacific Agricultural Suppliers (PAGRICO) applied for and granted an increase in line of credit with PNB. In compliance with this requirement, PAGRICO submitted a Surety Bond issued by R&B Surety. Under the terms of the Surety Bond, PAGRICO and R&B bound themselves jointly and severally to comply with the terms and conditions of the advance line of credit established by PNB; PNB had the right to proceed directly v R&B without the necessity of first exhausting assets of PAGRICO. In consideration of R&B's issuance of the Surety Bond, two identical indemnity agreements were entered into w/ R&B: one with Jose Cochingyan and another with Jose Villanueva, wherein they bound themselves jointly and severally to R&B Surety.2 years after that, a Trust Agreement (TA) between Cochingyan as Trustors, Tomas Besa of PNB as Trustee and PNB as beneficiary.PAGRICO failed to comply with Principal Obligation to PNB -> PNB demanded payment from R&B -> R&B made series of payments to PNB. R&B in turn sent formal demand letters to Conchingyan and Villanueva for reimbursement of the payments made by it to PNB as well as the discharge of its liability to PNB under surety bond. R&B thereafter brought suit against those who signed the Indemnity Agreements.""Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of an old one, or by subrogating a 3rd person to the rights of the creditor.If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one.If subjective novation is to occur, essential that the old debtor be released from the obligation, and the new debtor take his place in the new relation. If not released, no novation, new debtor becomes merely co-debtor or surety""CC 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.

In this case, under paragraph 9 of the Trust Agreement is states that ""This agreement shall not in any manner release the R&B..from their respective liabilities under the bonds mentioned above""

Applying CC 1292, the Trust Agreement does not terminate obligation of R&B under Surety Bond

No implied novation as well: parties to new obligation expressly recognize the continuing existence and validity of the old obligation"

109 Broadway Centrum Condominium Corp. v. Tropical Hut Food MarketPetitioner and private respondent executed on 28 November 1980 a contract of lease. Broadway, as lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex for a period of ten (10) years, commencing from 1 February 1981 and expiring on 1 February 1991, "renewable for a like period upon the mutual agreement of both parties." Due to low sales volume, Tropical proposed to reduce the rental rates. A letter of agreement was executed in April 1982 regarding the reduction of the rates and it also stated that any reduction in rental extended is merely temporary suspension of the original rate of rental stipulated in the lease contract and not an amendment thereto. However, in December 1982, Tropical again proposed further rent reductions but Broadway cannot afford it anymore since it absorbed Tropical's losses already in the prior months and it now wants to raise back the rents to what was originally stipulated. Tropical opposed and so petitioner wanted to implement penalty clause of the contract (Sec. 5 - 2% penalty on delayed payments). Issue - WON the letter agreement (April 20, 1982) had novated the contract of lease (Nov. 28, 1980).An essential requirement for an objective novation is the express declaration that the old obligation is extinguished, or that the new obligation be incompatible on every point with the old one. Novation is never presumed.Article 1292

110 Molino v Security Diners International Corporation (SDIC)"Danilo Alto applied for a Regular (credit) Card with SDIC with his sister-in-law Jeanette Molino as surety. By signing a Surety Undertaking, Molino bound herself jointly and severally with Alto to pay whatever debts he may incur against SDIC and that any changes to the agreement shall not release her from her obligation. After a few months, Alto upgraded his credit card into one without a limit, and asked Molino for her approval which she gave. After a few months, Alto incurred P160k debt and defaulted. When he could not pay SDIC filed an action for collection against the two. Danilo moved to have the case dismissed against him and left Molino as the sole defendant.

Molino said that she was not liable as her liability only extended up to P10,000 (the limit of the regular card), as such any liability under the Diamond Card (the one without limit) and those beyond P10k should not be charged against her. Also, since Alto was no longer a defendant, she should not be held liable as well. SC said that the upgrade was a form of a novation to the contract as there was intent to dissolve the old obligation (the regular card) in favour of a new one (the Diamond Card). Since the Surety Undertaking expressly stated that any novation will not release her from the contract, Molino is still liable after the upgrade. As she is solidarily bound, it is deemed to be the same as being bound as the debtor and SDIC was correct in filing against her. ""Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material incompatibility (implied novation). xxx The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Novation must be established either by the express terms of the new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their acts which are too clear or unequivocal to be mistaken.

A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable Although the contract of a surety is in essence secondary, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom

""Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Art. 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."

111 Romeo Garcia v Dionisio Llamas"Garcia and de Jesus borrowed P400k from Llamas, and executed a promissory note in which they bound themselves to pay jointly and severally. After the loan was long overdue, Garcia and de Jesus still failed and refused to pay Llamas, who then brought this suit to recover the sum from the former. In his resistance to the complaint, Garcia says he only signed on as an accommodation party, and that de Jesus had already issued a check to cover the loan (it bounced). According to Garcia, the issuance and Llamas's acceptance constituted a novation of the original loan. The SC ruled that this was not a novation.

Re: substitution of de Jesus as the sole debtor (personal novation)Changes in persons of the debtor must be clear and express; in this case, there was no express change. And besides, the loan was binding on them solidarily (Llamas could demand satisfaction from any of them).

Re: checkThis was not a novation. First, there is no unequivocal declaration of the original loan being extinguished by the acceptance of the check. Second, the check was issued precisely for the loan, making it completely compatible with the ""original"" obligation."Novation cannot be presumed; it must be clearly shown either by the express assent of the parties or by the complete incompatibility between the old and the new agreements."Art. 1293. There was no actual substitution because there was no unequivocal agreement to it; and the loan was solidarily undertaken.

(Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.)"

112 California Bus Line v State Investment I