Extinguishment of Obligations (1) Flashcards
Grounds for Extinguishment of Obligations
- Payment or Performance
- Loss of the Thing Due
- Condonation or Remission
- Confusion or Merger of Rights
- Compensation
- Novation
- Others (farm dat pig)
- fortuitous events
- annulment
- rescission
- mutual desistance
- death
- arrival of resolutory period
- termination (not included in 1231)
- prescription
- impossibility of performance
- guaranteed time (fulfilment of resolutory condition)
what is rescission?
the undoing of the creation of an obligation to the effect that as if the parties had never created the obligation to begin wiith
termination |v| rescission
[t]
- simply puts an end to the valid contract
- prior termination, ALL receipts and performances will have to be respected as valid
[r]
- art. 1191
- obligation created when effected, that is the mutual restitution between the contracting parties
Art 1191
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment [and] the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
what is fulfilment of resolutory condition
A gives B 10 million pesos under the condition that B starts a business. If B fulfills the condition by starting the business, then the obligation for B to return the 10 million pesos is extinguished. Once the resolutory condition is met (B starting the business)
A resolutory condition typically involves the termination of an ongoing obligation or contract once the condition is met
what is “the arrival of the resolutory period”
art. 1193 “xxx Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. xxx”
what does payment mean in the civil code?
Art. 1232
“Payment means not only the delivery of money but also the performance, in any other manner, of an obligation”
note
Even personal Obligations, if the obligation consists of the doing of something, like construction of a house, and the contractor fulfils the obligation, then there is payment. We also refer to it as payment, although the more appropriate term for it is, performance of an obligation.
Insofar as payment by the debtor to the creditor, what is the general effect of acceptance on part of the creditor?
As a general rule, “acceptance” (implied or expressed) by the creditor is required to extinguish the obligation, because the creditor also has the right to refuse payment for causes provided for by law.
Once a valid debt is established and proved by the creditor, the [debtor] has the “burden of proving”, by preponderance of evidence, that the obligation has been paid. Creditor has no obligation to prove non-payment (because negative allegation cannot be proven)
knowledge check:
what are positive allegations
what are negative alelgations
[+]
a claim that something DID HAPPEN or a certain condition DOES EXIST
[-]
a claim that something did NOT happen or a certain condition does NOT EXIST
note
the burden of proof typically falls on the party making the positive allegation. This means that if someone alleges that a certain event occurred or a condition exists (positively), they must provide evidence to support their claim
level of proof: preponderance of evidence
best evidence of payment is the receipt.
what are the factors to consider in PAYMENT/PERFORMANCE?
what - has been paid/delivered
how - was it paid, delivered, performed? (relevant w/ personal obli)
who - paid/delivered
who - accepted payment of delivery
when - was payment or delivery made
where - was payment or delivery made
- WHAT should be paid or delivered?
[[The]] Thing or Service contemplated by the parties should be delivered (1233)
note
—Not a Different one even if it is of the same value as, or more valuable than that which is due, or, in case of service, different act or forbearance, against the will of the creditor (1244).
—If the Creditor consents to a different thing or service, it could be a case of either: DACION EN PAGO or NOVATION, which also extinguishes an obligation
dacion en pago - payment in kind or payment by subsititution
insofar as NOVATION, what are the 3 ways of replacing an old obligation with a new one
- changing the person of the debtor
- changing the person of the creditor
- substituting or changing the very prestation or object of the contract. If there is consent, then the old obligation is extinguished and a new obligation is created.
- so if accepted by creditor, the rules of payment/performance (1232) does NOT apply but novation or dacion en pago
note
Dacion - under payment but is a special type of payment.
GENERIC THING
- whose quality & circumstances have not been stated
- whose kind & quantity have not been stated
what are the effects?
[quality & circumstance]
- creditor cannot demand a superior quality &
- debtor cannot deliver the thing of inferior quality
[quantity & kind]
- contract is void (1349)
note
- The minimum requirement of generality in identifying the thing is that, the thing must be generic only as to, [quality and circumstances.]
Art 1249 stipulates that
“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.”
what about checks or commercial instruments
Yes. It is to be emphasized that it is a well known and accepted practice in the business sector that a Cashier’s Check is deemed cash.
Hence, the exception provided in Section 63 of the Central Bank Act which states that checks which have been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash the amount equal to that which is credited to his account.
The Cashier’s Check and the cash are valid payment of the obligation of the petitioner
Aside from a Cashier’s Check, give other negotiable instruments
- bill of exchange
- negotiable promissory note
- manager’s/cashier’s check
all represent money
Art 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.”
Alice & Pedro entered into a contract where Pedro must give 10k USD to Alice by tomorrow. Can Pedro give the Philippine equivalent instead?
No.
If the obligation to pay money stipulates the currency, then, the currency stipulated must be delivered. So if the contract says, what is to be paid is 10 thousand US DOLLARS, then that should be delivered when the obligation is due and demandable.
In the past, stipulation as to currency other than the Philippine Peso, have been declared as against public policy. This is however a rule, that we have already changed, specially upon our active participation in international trade.
is 1249 absolute?
NO.
if the currency stipulated is not available, it maybe that, for some reason or another, there is no available kind of dollar which is seldom in a locality, then you cannot force the obligor to deliver which he cannot deliver. 1249 says that if it is not possible, then Philippine peso, but it shall have the same effect in extinguishing the obligation
note
USD can be unavailable while a never-heard of currency can be the prestation.
ex. due to unforeseen circumstances such as currency exchange restrictions or a shortage of US dollars in Philippines.
They say, that a manager’s or a cashier’s check is as good as cash. This is true, to the extent, that when you PRESENT such checks, there is an assurance, legally speaking, that there is funding to the check. BUT what is the caveat with the manager’s or cashier’s check
? - case where C refuses a certified check not a legal ground of refusal
because it is NOT a legal tender, the creditor MAY refuse to accept it.
You cannot ask for the reason of the refusal. Simply because it is not a legal tender, then the creditor may refuse to accept the check. So, if the creditor demands that the payment should be in cash, now even if you have to ask the bank to produce how 100m, and it will probably take you 2 days for the bank to look for that cash, the creditor has the right. Because, a check is not a legal tender
note
legal tender - All COINS and NOTES issued by the Bangko Sentral Ng Pilipinas (BSP)/Philippine Peso.
When can a check extinguish an obligation?
A. When accepted by the creditor without protest [and] after the same had been cashed or cleared and credited to the creditor’s account. (RA 265)
B. It has been impaired through the fault of the creditor (1249, par 2) [e.g. check deposited only after ten (10) years have lapsed;
ordinary check |v| certified check
[OC]
- NOT legal tender, hence creditor is justified if he refuses
- if accepted, there is still NO payment and obligation is not yet extinguished
- if creditor presents this to the bank, and provided it is cleared and credited to creditor’s account, payment happens hence the obligation is extinguished
- if creditor accepted the OC but has not encashed it, the obligation is merely suspended on part of the debtor so that he will not be placed in default
[CC]
- work as cash as it is a legal tender
- since legal tender, creditor NOT justified if he refuses to accept
- mere acceptance has the effect of payment regardless if presented in bank or not.
What happens when the check has not been presented after [[6 months]] from its due date?
a. prescription applies and the obligation is extinguished
b. the check is impaired (1249, par. 2) thus extinguishing the obligation
c. the check becomes stale and the drawer (debtor/payer) is not released from his obligation
C. the check becomes stale and the drawer (debtor/payer) is NOT released from his obligation (obli suspended so D won’t be in default)
the creditor cannot claim the funds from the bank using that check anymore, but the drawer (debtor) is still obligated to fulfill their payment obligation to the creditor.
will extinguishment of obligation take place at the time the ORDINARY check is received by the creditor without protest?
No. Obligation is extinguished only as a later time, not at the time the check is accepted by the creditor.
So if the creditor receives the check, let us say, today, and the creditor will encash the check 30 days after. The obligation is extinguished only at the time that it is en-cashed.
done in (2) two ways
- First if the creditor goes to your bank, or any of the branches of your bank, and you issued a check, China bank for instance. The creditor then goes to China bank and have it encashed. If the creditor goes the bank and have the check in cashed, he had presented it for payment. When it is encashed, then the obligation is extinguished
- The creditor may only deposit it in his own bank, let us say BDO, so the creditor, instead of going to China bank, the creditor will go to his bank and have his check deposited there. This will now require clearing.
- once deposited, obligation is NOT YET extinguished. Once the check is cleared and credited to the creditor’s account, then will the obligation be extinguished. (deposited in BDO, **honored by Chinabank)
- This way of dealing with the check is NOT presenting it for payment, NOR have it encashed over the counter
What if the check is considered a stale check and is presented for encashment or deposited?
insofar as bank
insofar as D
remedy of C
- it only extinguishes the obligation of the DRAWEE BANK to honor the check, it does NOT discharge the obligor (the drawer) in this case from his monetary liability to the creditor.
- It will only discharge the DRAWER (debtor) from any damages, occasioned by the creditor’s delay in the presentment for payment, but it will not result in the discharge of the obligation of the DRAWER (obligor)
- creditor can demand for the replacement of the check.
what is redemption by check
A check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price.
may the sheriff, who will receive the redemption money, and probably upon the advice of the mortgagee creditor, or whoever won in the bidding, to refuse on receiving it, on the ground that, a check is not a legal tender?
No, there is no basis for refusal
in the case of Fortunado v. CA
the creditor cannot avail of payments in 1249, because these refer to payments of debts in money. Here, it is a tender of redemption amount, which is an exercise of a right.
Because if the tender of a check, or commercial document for that matter, is for the purpose of exercising a right, not fulfillment of an obligation, then it may have a legal effect.
So such rule, of a check being, not being a legal tender, is irrelevant here. This is illustrated to us, in the case of tendering a check to the sheriff for instance, for the purpose of exercising the right of redemption.
Obligations in foreign currency may be discharged in Philippine currency based on?
the prevailing rate of exchange at the time of payment
ex.
Juan owes John $1000 on Jan 1 2023. The obligation is due on year 2024
$1 = 50 pesos (2023)
$1 = 100 pesos (2024)
Juan owes John 100,000 pesos by 2024
C.F. Sharp vs Northwest Airlines (2002)
In Contractual Obligations to pay money:
In case EXTRAORDINARY INFLATION OR DEFLATION of the currency supervenes, the value of the currency
is at the time of ESTABLISHMENT of the obligations shall be the basis (1250)
When is there an extraordinary inflation?
- when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and
- such increase or decrease could NOT have been reasonably foreseen [or] was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.
[Singson v. Caltex (2000)]
note
- The supervening of extraordinary inflation is NEVER ASSUMED. The party alleging it must lay down the factual basis for the application of Article 1250.
a.Filipino Pipe case - able to submit proof but the downward fall was not considered ‘extraordinary’ but a simply a universal trend that has not spared the country.
b. Huibonhoa’s case - court dismissed the unsubstantiated allegation of Aquino’s assassination in 1983 causing construction costs to double during a July 1983 to February 1984 (7 mnths)
Juan and John entered into a contract on January 1, 2023, wherein John agreed to sell his vintage car to Juan for $10,000, payable on January 1, 2024. Due to economic conditions, there was a significant inflation rate of 50% over the year, resulting in a change in the exchange rate between the Philippine peso (PHP) and the US dollar (USD).
On January 1, 2024, Juan, citing Article 1250 of the Civil Code, argued that the inflation rate should be taken into account, and therefore, the price of the vintage car should be adjusted based on the exchange rate at the time of the establishment of the obligation. John disagreed, asserting that the Article 1250 contemplates extraordinary inflation.
John states, absent of any stipulation in the contract, the default is provided for by law which is the prevailing rate of exchange AT THE TIME OF [PAYMENT] (this is true)
As the court, how will you rule in applying Article 1250 of the Civil Code?
note
- 1250 also applies to local currency between two parties
I shall deny the petition of Juan
[A]
In the case of Serra & Huibonhoa, the court adopted the approval of the CA on petitioner’s evidence especially the National Economical Development Authority (NEDA) certification of inflation rates based on consumer price index
a. from 1966 - 1986, the official inflation rate never exceeded 100%, in any single year.
b. highest inflation rate recorded was in 1984 only reaching 50.34%
c. over a span of 21 years, the Philippines experienced a single-digit inflation in ten years and when the experienced only a double-digit inflation average of 20.88%
d. while there was decline in 1966-1986, it cannot be considered as extraordinary; rather a normal erosion of the value of the Philippine peso.
[B]
This court holds the effects of extraordinary inflation are not to be applied WITHOUT AN OFFICIAL DECLARATION THEREOF by competent authorities.
Applying the facts to the case, the inflation of 50% of the USD is NOT an extraordinary inflation as it did not exceed 100% as outlined provision ‘a.’ Moreover, there are no official declarations submitted by the party warranting the application of the extraordinary inflation
Therefore, the petition should is dismissed.
SPECIAL FORMS OF PAYMENT:
affecting
things or services
(a) enumerate
(b) define
Dacion en Pago (1245) - Novation
“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.”
- because it is law on sale, and sale is consensual contract, it requires consent of BOTH parties, not just C
Payment by Cession (1255)
“Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws”
SPECIAL FORMS OF PAYMENT:
affecting money
- application of payments
- tender of payment and consignation
X and Y are friends. Wanting to infuse more capital to a struggling business venture, X borrowed P2M from Y payable after (2) years. Three (3) years have passed but X never paid Y his loan obligation.
One day, Y asked X if he could borrow X’s brand new Mercedez Benz C Class (valued at P4M) for he will be fetching his father-in-law in the airport. Weeks have passed and Y never returned X’s Benz.
When X demanded for the return of his car, Y invoked dacion en pago. May X legally recover his car? Why or Why not?
Atty Largo: For dacion en pago, there is an obligation to pay money, but the creditor instead or money, receives delivery of a thing.
There is NO dacion en pago.
X may legally recover his car. Dacion en Pago requires the consent of the Creditor (in this case, Y is the creditor)
Elements of Dacion En Pago
- Consent of Both Parties
- Should not Prejudice/Defraud other creditors
- Debtor has not been declared judicially insolvent
note
(1)
- because it is law on sale, and sale is consensual contract, it requires consent of BOTH parties, not just C
(2)
- defense of creditor defrauded: accion pauliana
(3)
- once insolvent, C are barred from collecting from the debtor.
- all payments are SUSPENDED. primary purpose in insolvency proceedings is to determine won a debtor may still rehabilitate.
- since Dacion en Pago (Novation) is a form of payment, it cannot be done with an insolvent debtor.
Knowledge Check: Accion Pauliana
Unpaid creditors. If the debtors would enter into contracts that would prejudice the interests of the creditor. The latter can go after those contracts, after the creditor has no longer any other remedy. (it can have the contracts entered into by the debtor, that have prejudiced the creditor as rescinded.)
Let’s say Juan owes money to several creditors but is unable to pay his debts. Despite his financial difficulties, Juan decides to transfer his property to his friend Pedro for a very low price. Juan does this to prevent his creditors from seizing the property to settle his debts. However, this transfer of property prejudices the interests of Juan’s creditors because it diminishes the assets available for them to recover their debts.
In this scenario:
Juan: The debtor who owes money to several creditors.
Pedro: Juan’s friend who receives the property from Juan for a very low price.
Creditors: Individuals or entities to whom Juan owes money.
The creditors, seeing that Juan is transferring his property to Pedro at a low price to avoid paying his debts, can invoke Accion Pauliana. They can take legal action against Juan and Pedro to rescind the transfer of property. This means that the transfer of property from Juan to Pedro would be declared null and void, and the property would be considered as part of Juan’s assets available for the creditors to recover their debts.
Accion Pauliana allows creditors to protect their interests by challenging transactions made by debtors that prejudice their ability to recover what is owed to them. It ensures that debtors cannot unfairly dispose of their assets to the detriment of their creditors.
X and Y are friends. Wanting to infuse more capital to a struggling business venture, X borrowed P2M from Y payable after (2) years. Three (3) years have passed but X never paid Y his loan obligation.
One day, Y asked X if he could borrow X’s brand new Mercedez Benz C Class (valued at P4M) for he will be fetching his father-in-law in the airport. Weeks have passed and Y never returned X’s Benz.
When X demanded for the return of his car, Y invoked dacion en pago. May X legally recover his car? Why or Why not?
Will your answer be the same if X agreed to the dacion en pago but the car involved is worth P1M only?
Atty Largo: For dacion en pago, there is an obligation to pay MONEY, but the creditor instead or money, receives delivery of a THING.
Yes, you don’t really determine the value of the object. It is all about whether the creditor having the right to demand for money, will accept something else. That is in lieu of the money, regardless of the value of the object. This is still dacion en pago. It all boils down to whether, the creditor is stupid enough to accept the object, less than his credit.
(UNLESS he puts there, that such dacion is only partial or of partial extinguishment)
CESSION (1255)
CESSION (1255)
special payment affecting things or services
Elements of Cession
- more than one debt
- more than one creditor
- insolvency of debtor
- abandonment of all debtor’s property NOT exempt from execution.
- consent of creditors
- abandonment of all debtor’s property NOT exempt from execution.
One of the several creditors is entitled to 20 million. He may accept the fact that because of the insolvency, he cannot recover the full amount of 20 million.
So, if the creditor observes that by abandoning all of the debtor’s property, creditor gets paid as a result of 15 million which is better than nothing.
This means that the debtor gives up ownership and control of their property to satisfy their outstanding debts.
