Extinguishment Of obligations

Question 1

Article 1231. When are obligations extinguished?
I,

Answer 1

, ART. 1231. Obligations are extinguished:
(1) Bypaymentorperformance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) Bycompensation;
(6) Bynovation.
Other causes of extinguishment of obligations, such as an- nulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.

Question 2

Causes of extinguishment of obligations other than Art. 1231

Answer 2

(1) Death of a party in case the obligation is a personal one (Art. 1311, par. 1.);
(2) Mutual desistance or withdrawal;
(3) Arrival of resolutory period (Art. 1193, par. 2.);
(4) Compromise (Art. 2028.);
(5) Impossibility of fulfillment (Art. 1266.); and
(6) Happening of a fortuitous event. (Art. 1174.)

Question 3

Article 1232 what is payment?

Answer 3

ART. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.

Question 4

Who has the burden of proving payment?

Answer 4

When the existence of a debt is fully established by the evidence, the settled rule is that the burden of proving extinguishment by payment devolves upon the debtor who pleads payment or offers such a defense to the claim of the creditor rather than on the latter to prove non-payment.

Question 5

Requisites of payment

Answer 5

ART. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.
1,integrity _ presentation beef filled completely -
2) identity - the very prestation due must b delivered or performed

Question 6

What are the exceptions to Article 1233?

Answer 6

ART. 1234. If the obligation has been substantially per- formed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suf- fered by the obligee.

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without ex- pressing any protest or objection, the obligation is deemed fully complied with. (n)

Question 7

What are the requisites for the application of Article 1234?

Answer 7

The requisites are:
(1) There must be substantial performance. Its existence depends upon the circumstances of each particular case; and
(2) The obligor must be in good faith. Good faith is presumed in the absence of proof to the contrary.

Question 8

S, as subdivision owner, agreed to sell under two contracts two lots to B on installments for a period of 10 years, covering 120 monthly installments. The contract provides that failure of B to pay the principal plus interest would mean the cancellation of the contract and the forfeiture of all the amounts paid. After the 95th installments for both lots, B did not make further payments. S cancelled the contract and forfeited the amounts paid. The amount paid by B on the principal alone (P1,682.00) was more than the value of one lot (P1,500.00).
The Court of Appeals ordered the cancellation of only one contract and the conveyance of one lot of B’s choice, while recognizing the right of S to retain the interests (P1,890.00) paid by B on both lots for eight (8) years.
Issue: Does the decision deny substantial justice to S?

Answer 8

Held: No. Under the decision, the interests paid by B are retained by S, and the other lot reverts to S by reason of the cancellation of the contract as to said lot. The judgment cannot be deemed to deny substantial justice to S nor to defeat his rights under the letter and spirit of the contracts in question. In the interest of justice and equity, the decision may be upheld upon the authority of Article 1234.2 (Legarda Hermanos vs. Saldana)

Question 9

Requisites for the application of Article 1235.

Answer 9

The requisites are:
(1) The obligee knows that the performance is incomplete or irregular; and
(2) He accepts the performance without expressing any protest or objection.

Question 10

What is the form of protest for Art. 1235 to apply?

Answer 10

Article 1235 does not require the protest or objection of the creditor to be made in a particular manner or at a particular time. So long as the acts of the creditor, at the time of the incomplete or irregular payment by the debtor, or within a reasonable time thereafter, evince that the former is not satisfied or agreeable to said payment or performance, the obligation shall not be deemed extinguished. (Esguerra vs. Villan- ueva, supra.)

Question 11

Article 1236. The creditor and payment

Answer 11

ART. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfill- ment of the obligation, unless there is a stipulation to the con- trary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

Question 12

Persons from whom the creditor must accept payment.

Answer 12

The creditor is bound to accept payment or ‘ performance from the following:
(1) Thedebtor;
(2) Any person who has an interest in the obligation (like a guarantor); or
(3) A third person who has no interest in the obligation when there is stipulation that he can make payment. (par. 1.)

Question 13

Effect of payment by a third person.

Answer 13

1) If made without the knowledge or against the will of debtor. — The payer can recover from the debtor only in so far as the payment has been beneficial to the latter. (par. 2.) In other words, the recovery is only up to the extent or amount of the debt at the time of payment. Furthermore, the third person is not subrogated to the rights of the creditor, such as those arising from a mortgage, guarantee, or penalty. (Art. 1237; see Art. 1425.)
(2) If made with the knowledge of the debtor. — The payer shall have the rights of reimbursement and subrogation, that is, to recover what he has paid (not necessarily the amount of the debt) and to acquire all the rights of the creditor. (Arts. 1236, par. 2; 1237, 1302, 1303.)

Question 14

Facts: S sold a parcel of land with right to repurchase to B. S’s right which was annotated in the registry records, was later attached by C and sold under execution. Because of the failure of S to redeem the property within one year from the date of execution sale, a deed for the interest of S in the land was issued to C, who was the purchaser at said sale.
In the meantime, S repurchased the land from B, and the annotation of the right to redeem was cancelled. Subsequently, C, in turn, sold all his interests in the land to D who now seeks to have the land registered in his name claiming that under Article 1158 (now Art. 1236.) the repurchase by S was a payment for C and that S may recover from C the price paid.
Issue: Was the repurchase by S a payment for C?

Answer 14

Held: No. The only interest acquired by C at the sheriff’s sale was the right to repurchase from B because this was the only interest that S had at that time. D’s claim of ownership of the land based on his subsequent purchase from C, the judgment creditor, was invalid, as the latter did not acquire title by the repurchase of the land under the pacto de retro contract by S, the judgment debtor.
C was not a debtor of B, the pacto de retro vendee. He was under no obligation to repurchase the land from B. C had the right to do so but the exercise of the right was optional with him. Therefore, the repurchase by S (for himself) did not make C or D, C’s transferee, the owner of the land. Article 1236 is not applicable. (Gonzaga vs. Garcia, 27 Phil. 7 [1914].)

Question 15

Facts: A parcel of land belonging to M, etc., minors, was sold in execution to B. C, an uncle of M, etc. deposited with the sheriff in their behalf but without their knowledge, the redemption price and interest the last day for redemption. B refused to turn over the land on the ground that there was no valid redemption because C was not the legal guardian of the minors.
The guardian died a few days before the period of redemption expired.
Issue: Was the redemption valid?.

Answer 15

Held: Yes. Any person, whether he has an interest in the redemption or not can make payment in behalf of the minors, the debtors, without the knowledge of the latter. (Sison vs. Balgor, 34 Phil. 885 [1916].)

Question 16

Facts: For failure of the heirs of X, to pay the real estate taxes on the land in dispute, the same was forfeited to the government. To avoid its eventual sale at public auction, B, one of the heirs, asked C to pay the amount of said taxes which C did. Receipts for payment were issued to C “in behalf of the declared owner, X.”
C contends that he has acquired by virtue of said payment the rights of X in and to said property.
Issue: What is the effect of the payment made by C?

Answer 16

Held: The delinquent taxpayer in this case is the estate of X, not C, so that payment by C merely subrogated him into the rights of the government as creditor for said delinquent taxes under Article 1236. The fact that C accepted said receipts issued in the name of X, indicates that C understood that he was not thereby purchasing the property, but had made the payment for the account or benefit of X. C became a trustee for the benefit of X or his heirs. (Villarta vs. Cuyno, 17 SCRA 100 [1966].)

Question 17

Article 1237. Right of 3rd person to subrogation

Answer 17

ART. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those aris- ing from a mortgage, guaranty, or penalty.

Question 18

Subrogation and reimbursement distinguished.

Answer 18

(1) Insubrogation,thepersonwhopaysforthedebtorisputinto the shoes of the creditor. The payer acquires not only the right to be reimbursed for what he has paid but also all other rights which the creditor could have exercised pertaining to the credit either against the debtor or against third persons, be they guarantors or possessors of mortgages. (Art. 1303.)
(2) In reimbursement, the third person entitled by reason of payment has merely the bare right to be refunded to the extent provided in the second paragraph of Article 1236 without the right to the guarantees and securities of the original obligation. In subrogation, however, there is no real extinction of the obligation, but only a change of creditor.

Question 19

Art. 1238 payment by third person who does not intend to be reimbursed.

Answer 19

ART. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a dona- tion, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it.

Question 20

Article 1239.

Answer 20

ART. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on “Natural Obligations.’’

Question 21

Meaning of free disposal of thing due and capacity to alienate.

Answer 21

(1) Free disposal of the thing due means that the ‘ thing to be delivered must not be subject to any claim or lien or encumbrance of a third person.
(2) Capacity to alienate means that the person is not incapacitated to enter into contracts (Arts. 1327, 1329.) and for that matter, to make a disposition of the thing due.

Question 22

Article 1240. Person to whom payment shall be made.

Answer 22

ART. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a)
Person to whom payment shall be made.
(1) Payment shall be made to:
(a) the creditor or obligee (person in whose favor the obligation has been constituted);
(b) his successor in interest (like an heir or assignee); or
(c) any person authorized to receive it.

Question 23

When payment is made to the wrong party

Answer 23

When payment is made to the wrong party, the obligation is not extinguished as to the creditor who is without fault or negligence even if the debtor acted in outmost good faith and by mistake as to the person of the creditor or through error induced by fraud of a third person. (Cembrano vs. City of Butuan, 502 SCRA 494 [2006]; Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].)

Question 24

Facts: B bought a certain electric plant from S. B paid C who was authorized by C to look for buyers of the plant. There was no evidence that C had authority to receive payment. S brought action to recover the price.
Issue: Is there valid payment to S?

Answer 24

Held: No. C was not duly authorized by S to receive payment. Where a person in making payment solely relied upon the representation of an agent as to his authority to receive payment, such payment is made at his own risk and where the agent was not so authorized, such payment is not a valid defense against the principal. (Keeler Electric Co. vs. Rodriguez, 44 Phil. 20 [1922]; Ormachea Tin Congco vs. Trillana, 13 Phil. 194 [1907].)

Question 25

Facts: C was a creditor of D. The first wife of C died and C married again. After the death of C, the plaintiffs, children of C by his first marriage, demanded payment from D. D paid instead the widow of the second marriage of C.
Issue: Is there payment of the debt?

Answer 25

Held: No. The wife of the second marriage had no right whatever to receive the payment, especially so that a demand had already been made by the plaintiffs. D made an undue payment. (Crisol vs. Claveron, [CA] 38 O.G. 3734.)

Question 26

Article 1241

Answer 26

1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him.
      Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases:
      (1) If after the payment, the third person acquires the credi- tor’s rights;
      (2) If the creditor ratifies the payment to the third person;
      (3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the pay- ment. (1163a)

Question 27

Effect of payment to an incapacitated person.

Answer 27

Payment to a person incapacitated to administer or manage his property is not valid unless such incapacitated person kept the thing paid or delivered (so that it is not necessary that it should have been invested in some profitable venture) or was benefited by the payment. In the absence of this benefit, the debtor may be made to pay again by the creditor’s guardian or by the incapacitated person himself when he acquires or recovers his capacity. Proof of such benefit is incumbent upon the debtor who paid

Question 28

Effect of payment to a third person.

Answer 28

Payment to a third person or wrong party is not valid except insofar as it has redounded to the benefit of the creditor. It is immaterial that the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person if the creditor is without fault or negligence. (Bank of the Phil. Islands vs. Court of Appeals, 232 SCRA 302 [1994].)

Question 29

When benefit to creditor need not be proved by debtor.

Answer 29

The debtor is relieved from proving benefit to the creditor in case of:
(1) subrogation of the payer in the creditor’s rights;
(2) ratification by the creditor; or
(3) estoppel on the part of the creditor. (par. 2.)
In such cases, the benefit to the creditor is to be presumed. Through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. (Art. 1431.)
Under the law, the debtor who, before having knowledge of the assignment of a credit to a third person, pays the original creditor, shall be released from the obligation. (Art. 1626.)

Question 30

Article 1242. Payment to person in possession of the credit

Answer 30

ART. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164)

Question 31

Facts: S sold in December 1897 to B a property with right of repurchase within six (6) months. S was not able to effect the repurchase in May 1898 by reason of the fact that S was absent from his place of residence on account of the war.
About that time, the revolution broke out and the property was seized by the revolutionary government from B. The property was redeemed by S from said government in November 1898. Subsequently, B sold the property to C. S brought action against C to recover the property.
Issue: Was the sale made by the revolutionary government to S valid with the result that B had no right to transfer to C the property in question?

Answer 31

Held: No. What S did was to attempt to reacquire the ownership of the property transferred to B from a third person to whom the property had not been transferred by B in any manner whatsoever. Therefore, the payment made by S to the revolutionary government which should have been made to B in order to redeem the property, could not have extinguished the obligation incurred by him in favor of the latter.
The revolutionary government was not in possession of the credit. A seizure or embargo is nothing but a prohibition enjoining the owner from disposing of his property. By the mere embargo of a property, the owner does not lose his title thereto. So that Article 1242 is not applicable to the case at bar. (Panganiban vs. Cuevas, 7 Phil. 477 [1906].)

Question 32

When payment to creditor not valid.

Answer 32

ART. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.

Question 33

• What is garnishment?

Answer 33

The proceeding for the purpose of subjecting a debtor’s credit to the payment of his debt to another is known as garnishment.

Question 34

What one the special forms of payment?

Answer 34

There are four special forms of payment under the Civil Code, namely:
(1) dation in payment (Art. 1245.);
(2) application of payments (Art. 1253.);
(3) payment by cession (Art. 1255.); and
(4) tender of payment and consignation. (Arts. 1256-1261.)
Strictly speaking, application of payments is not a special form of payment.

Question 35

What is dation in payment?

Answer 35

Dation in payment (adjudication or dacion en pago) is the conveyance of ownership of a thing by the debtor to creditor as an accepted equivalent of performance of a monetary obligation.

It is a special form of payment because it is not the ordinary way of extinguishing an obligation. A debt in money is satisfied, not by payment of money (Art. 1244.), but by the transmission of ownership of a thing by the debtor to the creditor.

Question 36

Requisites of dation in payment.

Answer 36

In order that there be a valid dation in payment, the following are
the requisites:
(1) There must be performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against a third person;
(2) There must be some difference between the prestation due and
that which is given in substitution (aliud pro alio); and
(3) There must be an agreement between the creditor and
debtor that the obligation is immediately extinguished by reason of
the performance of a prestation different from that due. (Lo vs. KJS
Eco-Formwork System Phil., Inc., 413 SCRA 182 [2003]; Aquintey vs.
Tibong, 511 SCRA 414 [2006].)

Question 37

Sale distinguished from dation
in payment.

Answer 37

The distinctions are the following:
(1) In sale, there is no pre-existing credit, while in dation in
payment there is;
(2) In sale, obligations are created, while in dation in payment,
obligations are extinguished;
(3) In sale, the cause is the price paid from the viewpoint of the
seller, or the acquisition of the thing sold, from the viewpoint of the
buyer, while in dation in payment, the extinguishment of the debt,
from the viewpoint of the debtor, or the acquisition of the object in lieu
of the credit, from the viewpoint of the creditor;
(4) In sale, there is more freedom in fi xing the price than in dation
in payment;
(5) In sale, the buyer has still to pay the price, while in dation
in payment, the payment is received before the contract is perfected
which is to be charged against the debtor’s debt; and
(6) In sale, the parties deliver and receive the thing as seller and
buyer, while in dation in payment, as debtor and creditor.

Question 38

ART. 1246. Quality of performance/payment

Answer 38

When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances
shall be taken into consideration. (1167a)

Question 39

Article 1247 Debtor pays for extrajudicial expenses.

Answer 39

Unless it is otherwise stipulated, the extrajudicial
expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall
govern. (1168a)

Question 40

what are Judicial costs?

Answer 40

Judicial costs are the statutory amounts allowed to a party to an action for his expenses incurred in the action. Under the Rules of Court (Sec. 1, Rule 142.), the costs of an action shall, as a rule, be paid by the
losing party. The court may, however, for special reasons, adjudge that either party shall pay the costs, or that the same be divided, as may be equitable.

Question 41

ART. 1248.Complete performance of obligation
necessary

Answer 41

ART. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)

Question 42

When partial performance of obligation
allowed.

Answer 42

There are cases, however, when partial performance may be either required or insisted. Among these cases are:
(1) when there is an express stipulation to that effect (par. 1.);
(2) when the debt is in part liquidated (defi nitely determined or determinable) and in part unliquidated (par. 2.);
(3) when the different prestations in which the obligation consists are subject to different terms or conditions which affect some of them.
(8 Manresa 288.) In obligations which comprehend several distinct prestations (e.g., obligation to pay debt in installments.), it is evident that the prestations need not be executed simultaneously but each successive execution thereof must be complete;
(4) when the parties know that the obligation reasonably cannot be expected to be performed completely at one time; and
(5) when there is abuse of right or if good faith requires acceptance.

Question 43

Facts: Respondent (plaintiff) company, PDP, appointed petitioner (defendant) BMC as one of the dealers of electrical wires and cables. As such dealer, BMC was given by PDP 60 days credit for its purchases of electrical products. The credit term was to be reckoned from the date of delivery by PDP of its products to defendant.
On several occasions, PDP wrote BMC demanding payments of its outstanding obligations due PDP. PDP rejected BMC’s offer to pay its outstanding account in monthly installments of P500,000.00 plus 1%
interest per month until full payment, and reiterated its demand for the full payment of defendant’s account.
PDP filed a complaint against BMC for the recovery of P3,802,478.20 representing the value of the wires and cables the former had delivered to the latter, including interest. It likewise prayed that it be awarded attorney’s fees at the rate of 25% of the amount demanded, exemplary damages amounting to at least P100,000.00, the expenses of litigation,
and the costs of suit.
Petitioner in its answer, admitted purchasing the wires and cables from private respondent but disputed the amount claimed by the latter.
Petitioner likewise interposed a counterclaim against private respondent, alleging that it suffered injury to its reputation due to latter’s acts. Such acts were purportedly calculated to humiliate petitioner and constituted an abuse of rights.
Issues: The instant petition raises two issues one of which is whether or not PDP is guilty of abuse of right.

Answer 43

Held: (1) Limitation of abuse of right. — The right of the creditor under Article 1248 has its limitations. “Since the creditor cannot be compelled
to accept partial performance, unless otherwise stipulated, the creditor who refuses to accept partial prestations does not incur in delay or mora accipiendi, except when there is abuse of right or if good faith requires acceptance. (citing IV Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Phils., 1990 Ed., p. 298.)
(6) Partial performance of obligation not allowed. — “In the absence of any abuse of right, private respondent cannot be allowed to perform its
obligation under such contract in parts. Otherwise, private respondent’s right under Article 1248 will be negated, the sanctity of its contract with
petitioner defiled. The principle of autonomy of contracts must be respected.’’
(Barons Marketing Corp. vs. Court of Appeals, 286 SCRA 96 [1998].)

Question 44

ART. 1249. Currency

Answer 44

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.
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. (1170)

Question 45

Meaning of legal tender.

Answer 45

Legal tender is that currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount.7 (see Black’s Law Dictionary.)

Question 46

what is Legal tender in the Philippines?

Answer 46

In the Philippines, all coins and notes issued by the Bangko Sentral ng Pilipinas constitute legal tender for all debts, both public or private.
Unless otherwise fixed by its Monetary Board, coins are legal tender for amounts not exceeding P50.00 for denominations of P0.25 and above, and in amounts not exceeding P20.00, for denominations of P0.10 or less. All coins and bills above P1.00 are, therefore, valid legal tenders
for any amount.

Question 47

Payment by means of mercantile
documents does not extinguish the obligation when?

Answer 47

Payment by means of mercantile documents does not extinguish the obligation —
(a) until they have been cashed (see Crystal vs. Court of Appeals, 62 SCRA 501 [1975].); or
(b) unless they have been impaired through the fault of the creditor. (par. 2.)
Art. 1249

Question 48

Facts: S sold goods to B for P2,200.00. For the purpose of paying the sum, B delivered to S a bill of exchange for P2,700.00 purporting to be drawn by C to the order of D on E. When the bill was delivered to S it was indorsed by D, and apparently accepted by E. S took the bill and paid B P500.00 in cash, the difference between P2,700.00 and P2,200.00, the value of the goods sold. E refused to pay the bill on the ground that his signature thereto was a forgery. S neglected to have the bill of exchange protested for nonpayment. Nothing was ever realized on the bill. Issue: Is B liable for the full value of the goods sold?

Answer 48

Held: No. Where a bill of exchange is delivered by the debtor to the
creditor and the drawee (the addressee of a bill of exchange, that is, the
person who is commanded or ordered by the drawer to pay.) of the bill
refused to make payment and the creditor neglected to have the bill
protested for non-payment as required by law, the delivery of the bill
by the debtor to the creditor operates as a valid payment and he must
suffer the loss occasioned by its nonpayment. The sum of P2,200.00 was
deducted from the sum allowed S. (Quiros vs. Tan Guinlay, 5 Phil. 675
[1906]; see U.S. vs. Beduya, 14 Phil. 397 [1906].)

Question 49

Petitioner MP, acting as attorney-in-fact of the late AMB sold to
respondent FP, a parcel of land. FP had given MP the amounts of P5,000
in cash on May 24, 1973 and P40,000 in check on June 16, 1973 in payment
of the purchase price of the subject lot.
MP, while admitting having received only P5,000 and issued receipts
for both amounts, asserts that he never encashed the aforesaid check and,
therefore, the sale was not consummated. There was no evidence at all
that MP did not, in fact, encash said check. On the other hand, respondent
FP testifi ed in court that petitioner MP had received the amount of
P45,000.00 and issued receipts therefor. According to respondent court,
the presumption is that the check was encashed, especially since the
payment by check was not denied by defendant-appellant (herein
petitioner) who, in his Answer, merely alleged that he “can no longer
recall the transaction which is supposed to have happened 10 years
ago.’’MP contends that such a conclusion is based on the erroneous
presumption that the check (in the amount of P40,000.00) had been
cashed, citing Art. 1249 of the Civil Code, which provides, in part, that
payment by checks shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor they have
been impaired. He insists that he never cashed said check; and, such
being the case, its delivery never produced the effect of payment.
While admitting that he had issued receipts for the payments, he
asserts that said receipts, particularly the receipt of the check in the
amount of P40,000.00, do not prove payment. He avers that there must be
a showing that said check had been encashed. If, according to petitioner,
the check had been encashed, respondent FP should have presented the
check duly stamped received by the payee, or at least its microfi lm copy.
Issue: Was there a consummation of the sale of the subject property?

Answer 49

Held: Yes. (1) Presumption is that check had been cashed. — “Petitioner’s assertion that he never encashed the aforesaid check is not substantiated
and is at odds with his statement in his answer that “he can no longer recall the transaction which is supposed to have happened 10 years ago.’’
After more than ten (10) years from the payment in part by cash and in part by check, the presumption is that the check had been encashed. As already stated, he even waived the presentation of oral evidence.’’
(2) Petitioner’s fault resulted in the impairment of check. — “Granting that petitioner had never encashed the check, his failure to do so for more
than ten (10) years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor’s
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.
It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. 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 theobligation for which the check was given as conditional payment will be discharged. (Papa vs. A.U. Valencia and Co., Inc., 284 SCRA 643 [1998].)

Question 50

Meaning of infl ation and defl ation.

Answer 50

(1) Infl ation is a sharp sudden increase of money or credit or both
without a corresponding increase in business transactions. (Webster’s
Dictionary.) Infl ation causes a drop in the value of money, resulting in
rise of the general price level.
There is infl ation when there is an increase in the volume of money
and credit relative to available goods resulting in a substantial and
continuing rise in the general price level. (Huibonhoa vs. Court of
Appeals, 320 SCRA 625 [1999], citing Paras, Civil Code of the Phils.,
Annotated [1994], Vol. IV, p. 394; see Citibank, N.A. vs. Sabeniano, 514
SCRA 441 [2007].)
(2) Defl ation is the reduction in volume and circulation of the
available money or credit, resulting in a decline of the general price
level; it is the opposite of infl ation.
For lack of an express provision on the question in the old Civil
Code, there was a great deal of uncertainty and confusion as a result
of contracts entered into during the last world war which saw an
extraordinary infl ation of currency. According to the Code Commission,
the rule in Article 1250 provides a just solution for future cases. (see
Report of the Code Commission, pp. 132-133.)

Question 51

ART. 1250.

Answer 51

In case an extraordinary infl ation or defl ation ofthe currency stipulated should supervene, the value of the currency
at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the
contrary. (

Question 52

Requisites for application of Article 1250.

Answer 52

The following requisites must be proven:
(1) There is an offi cial declaration of extraordinary infl ation or
defl ation from the Bangko Sentral ng Pilipinas (BSP).
(2) The obligation is contractual in nature; and
(3) The parties expressly agreed to consider the effects of the extraordinary inflation or deflation. (see Equitable PCI Bank vs.
Sheung Ngor, 541 SCRA 223 [2007].)
From the employment of the words “extraordinary infl ation or
defl ation of the currency stipulated,” it can be seen that the legal rule
in Article 1250 envisages contractual obligations where a currency
is selected by the parties as the medium of payment. Hence, it is
applicable only to cases where a contract or agreement is involved.
More importantly, the parties must agree to recognize the effects of
extraordinary inflation or deflation, as the case may be.

Question 53

Basis of payment in case of extraordinary
inflation or deflation.

Answer 53

Under Article 1250, the purchasing value of the currency at the time
of the establishment of the obligation shall be the basis of payment, in
case of any extraordinary increase or decrease in the purchasing power
of the currency which the parties could not have reasonably foreseen.
This is, however, subject to the agreement of the parties to the contrary.
The burden of proving that there had been extraordinary infl ation
or defl ation of the currency is upon the party that alleges it.

Question 54

Facts: Under the collective bargaining agreement between Pan Am
Airways and PAA Employees’ Association, the parties agreed to renegotiate
on wage rates (1) if during the term of the agreement a law
be passed diminishing the value of the Philippine Currency and (2) as a
result thereof Pan Am is granted the necessary authority to increase its
rates. No law had been passed by Congress diminishing the value of the
Philippine Currency.
Pursuant to law (R.A. No. 2609; Sec. 79, R.A. No. 265.), and during the life of the agreement, the Central Bank of the Philippines fixed the rate
of exchange between the peso and the dollar at P3.20 to $1.00 and later to P3.00 to $1.00 and authorized the sale of airline tickets at the rate of P3.20 to $1.00.9 The (defunct) Court of Industrial Relations found the two conditions in the agreement present and reopened the said agreement for negotiation on wage rates.

Issue: Do the fixing of the rate of exchange between the peso and the dollar and the authority to sell airline tickets referred to amount to a law diminishing the value of the currency?

Answer 54

Held: Yes. The purchasing power or value of money or currency does
not depend upon, cannot come into being, be created or brought about
by a law enacted by the legislative department of the Government. If by
law or treaty the rate of exchange between two currencies should be fixed
or stipulated, such law or treaty could not give the money or currency
the purchasing power or value fi xed or stipulated but would bind the
Government enacting the law or contracting parties to a treaty to pay
or supply the difference between the value fi xed or stipulated and the
real value of the currency should the latter be lower than the fi xed or
stipulated rate of exchange between the two currencies by drawing upon
its international reserves.
To prevent depletion of its reserve the Government could impose
restrictions to discourage payment at the value fi xed or rate of exchange
stipulated which would drain its reserve. So that when the parties agreed
to negotiate on wage rates during the term of the agreement, should a
law be passed diminishing the value of the currency, they did not literally
mean a law enacted by Congress which, as already explained, would not
really diminish the purchasing power or value of the currency but would
just confi rm the real value or actual purchasing power of the currency.
The adherence to the letter of the collective bargaining agreement
was not the intent of the contracting parties when they entered into it.
(Pan American World Airways vs. PAA Employees’ Association, 10 SCRA 21
[1964].)

Question 55

When inflation or deflation extraordinary.

Answer 55

It has been suggested that a better test as to when inflation or deflation is extraordinary is “one that neither party had reason to
foresee when the obligation was established” or “manifestly beyond the contemplation of the parties” at the time of the establishment of
the obligation as stated in Article 1267 (infra.) or a similar case. (JusticeJ.B.L. Reyes, Observations on the New Civil Code, XVI L.J., p. 48, Jan.
31, 1951.)

Extraordinary inflation or deflation is said to exist where there is an unimaginable increase or decrease in the purchasing power of the
Philippine currency, or fl uctuation in the value of pesos which could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.

Question 56

Where shall payment be made?

Answer 56

ART. 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.