Section 6 – Obligations with a Penal Cause (Arts.

1126-1230)
I. Definitions

1. Obligation with a penal clause – is one which contains an accessory undertaking to pay
a previously stipulated indemnity in case of breach of the principal prestation intended
primarily to induce its fulfillment.
2. Penal clause – is an accessory undertaking attached to an obligation to assume greater
liability in case of breach, i.e., the obligation is not fulfilled, or is partly or irregularly
complied with.
3. Joint penal clause – when both the principal obligation and the penal clause can be
enforced.

II. Discussions

1. What are the purposes of incorporating a penal clause to an obligation?

PURPOSES OF PENAL CLAUSE
They are:
(1) To ensure their performance by creating an effective deterrent against breach, making
the consequences of such breach as onerous as it may be possible. This is the general
purpose of a penal clause; and
(2) To substitute a penalty for the indemnity for damages and the payment of interests in
case of non-compliance (Art. 1226); or to punish the debtor for the non-fulfillment of
violation of his obligation.

2. In an obligation with a penal clause, may the creditor still recover damages and
interests in addition to the stipulated penalty?
WHEN CREDITOR MAY RECOVER DAMAGES
The creditor, in addition to the penalty, may recover damages and interests:
(1) When so stipulated by the parties;
(2) When the obligor refuses to pay the penalty, in which case the creditor may recover
legal interest thereon; or
(3) When the obligor is guilty of fraud in the fulfillment of the obligation (Art. 1226), in
which case the creditor may recover damages caused by such fraud.

3. In what cases may the debtor validly object to the enforcement of the stipulated
penalty?
According to Art. 1127, debtor may object the enforcement of penalty if there is
performance on his part or if the creditor already required fulfillment of obligation.
 III. Problems
1. Has Y the right to refuse to accept the penalty in lieu of the horse?
Yes. According to Art. 1227, X cannot exempt himself from delivering the horse
by paying the penalty, unless this right was reserved for him.
2. Can Y still enforce the penalty?
Yes. According to Art.1228, Y does not have to prove that he suffered damages in
order to demand the penalty. Since X violated the obligation, Y can enforce the
penalty.
3. Is X liable for damages in addition to the penalty?
No. According to Art. 1226, X will only be liable for damages if the stipulations
so states. If X refuses to pay the penalty, or when there is fraud on X’s part. Since
there is only negligence and not fraud. Y cannot demand for damages in addition
to the penalty and X is only liable for the penalty.

CHAPTER 4 – EXTINGUISHMENT OF OBLIGATIONS

Section 1 – Payment or Performance (Arts. 1232-1261)
I. Definitions
1. Payment – may consist of not only in the delivery of money but also the giving of a thing
(other than money), the doing of an act, or not doing of an act.
2. Dation in payment – (adjudication or dacion en pago) is the conveyance of ownership of
a thing as an accepted equivalent of performance.
3. Application of payment – is the designation of the debt to which should be applied the
payment made by a debtor who has various debts of the same kind in favor of one (1) and
the same creditor.
4. Payment by cession – is another special form of payment. It is the assignment or
abandonment of all the properties of the debtor for the benefit of his creditors in order
that the latter may sell the same and apply the proceeds thereof to the satisfaction of their
credits.
5. Consignation – is the act of depositing the thing or amount due with the proper court
when the creditor does not desire or cannot receive it, after complying with the
formalities required by law.

II. Discussions
1. May an obligor recover although there has been no strict and complete fulfillment
by him of his obligation?
According to Article 1234, if the obligation has been substantially performed in
good faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the oblige.

2. What must be delivered when the obligation consists of:

(a) The delivery of a specific thing?
 The debtor of a thing cannot compel the creditor to receive a different one, although
the latter may be at the same value as, or more valuable than that which is due.
(b) The delivery of a generic thing?
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.

3. When is partial performance of an obligation allowed?

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.

4. What must a debtor do to be released from his obligation if the creditor refuses to
accept payment without any justifiable reason?
In the absence of prior notice to the persons interested in the fulfillment of the
obligation (such as guarantors, mortgagees, solidary debtors, solidary creditors), the
consignation, as payment, shall be void.
The purpose of the notice is to give the creditor a chance to reflect on his previous
refusal to accept payment considering that the expenses of consignation shall be charged
against him (Art. 1259.) and that in case of loss of the thing consigned, he shall bear the
risk thereof. (Art. 1262.)
Such being the object of the previous notice, it stands to reason that the same
should not contain a mere warning that the deposit of the thing tendered would be made
in court but should fi x the date and hour of the consignation and the name of the court
where the same would be made.
Tender of payment and notice of consignation may be done in the same act, e.q.,
sending a letter that should the creditor fail to accept the payment tendered, the debtor
would consign the amount in court.

5. REQUISITES OF PAYMENT BY CESSION

(1) Two or more creditors;
 (2) Partially insolvent;
(3) Assignment must involve all the properties of the debtor;
(4) Must be accepted by the creditors.

III. Problems
1. A. Can C legally refuse to accept the payment?
Yes, C can refuse to accept the payment of T. The third person may have the payment of
P10,000 but the creditor may insist on his right on the liability of debtor. In Article 1236,
par. 1, “The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary.” It was not stated in the problem any specified requirement or stipulation for T,
C can refuse to accept the payment of T. Also, creditor should not be compelled to accept
payment from a third person due to personal reasons.
B. How about an offer of payment from G?
Yes, C can accept the payment from G. As G being the guarantor, which is a person who
has an interest in the obligation. Again, stated in Article 1236 par 1, the creditor may
refuse to accept payment to third person who has no interest in the fulfillment of an
obligation. The guarantor has the interest in the obligation which may lead to creditor’s
acceptance of payment from G.
2. Is M justified in paying T?
Yes. In Article 1242, “Payment in good faith to any person in possession of the credit
shall release the debtor.” With the possession of the promissory note. If M did not know
that P lost the note, so it will be under the payment in good faith. After paying the amount
of P10,000 to T, M is not liable anymore to any payments.
3. A. When is D liable to T?
- When there is a written agreement or content that D will reimburse or pay T the
P10,000.
B. When is D not liable to T?
- When it is verbally spoken with no witnesses. There should be a written agreement or
contract.
C. When is D liable for less than P10,000 to T?
- If there is a contract or agreement stating the amount in the contract.
D. May D be liable to T for P12,000 if that was the amount paid by him to C?
- Yes, if there is a written agreement or contract between D and T that D will pay or
reimburse T for the amount he paid to C.
4. Is D required by law to prove that the payment has been received by C in order to
be released from liability?
If T is an employee of C but by law D should acquired a note or a receipt to prove that
the payment has been received.
5. Is D justified in rejecting this demand of C?
Yes, as long as the check is cleared that it is a good will not bounced. It is considered as a
payment.
Section 2 – Loss of the Thing Due (Arts. 1262-1269)
I. Definitions
1. Legal impossibility – occurs when the obligation cannot be performed because it is
rendered impossible by provision of law, although physically it may be possible of
performance.
2. Loss of thing – is the equivalent of impossibility of performance in obligations to do
referred to in Article 1266.
3. Difficulty of performance – as to be manifestly beyond the contemplation of both
parties, the court is authorized to release the obligor in whole or in part.

II. Discussions
1. Give two (2) cases when a person may be released from an obligation validly entered
into.
(a) First case is in Article 1266, wherein a person may be released from an obligation to
do when the prestation becomes legally or physically impossible without the fault of
the debtor.
(b) Second case was stated in Article 1267, it states that a person may be released from
an obligation when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may be released in whole or in part.
2. Give the cases when loss of the specific thing to be delivered will not exempt the
obligor from liability even in the absence of fault or delay.
According to Article 1262, the obligor will not be exempted from the liability due to
the loss of the thing even there is an absence of fault or delay when it was stated by the
law, when it was stated in the stipulation, when the nature of the obligation requires the
assumption of risk and when the obligor deliver a specific thing that arises from a crime.
3. Will partial loss of the specific thing to be delivered extinguish the obligation?
Explain.
As stated in Article 1264, the courts will determine if the partial loss of the specific
object of the obligation is so important as to extinguish the obligation. There are some
cases when the partial loss is when only the portion of the thing is lost or destroyed or
when it suffers depreciation. In case of partial loss, the court will decide whether the
partial loss such as to be equivalent to a complete or total loss.

III. Problems
1. Is X liable to Y?
Yes, according to Article 1265, when the thing is lost in the possession of the
debtor, it was presumed that the loss was his fault unless he shows proof. In this case,
even though Y were not able to show proof that X was negligent, it was presumed that it
was X’s fault since it was in his possession when the specific carabao died, unless he
proves the contrary to the presumption of Y.
2. Does it mean that X is already exempt from liability?
 Yes, X is already exempt from liability. According to Article 1262, when a
determinate thing is lost or destroyed without the fault of the debtor, and before he
incurred delay, the obligation shall be extinguished. In this case, even though X lost the
specific thing, he is not liable since the specific thing lost without his fault and he has not
yet incurred delay.
3. State the effect of loss as far as X, Y, and Z are concerned.
According to Article 1269, the creditor shall have the all the rights of action
which the debtor may have against third persons by reason of the loss. In this case, X will
be extinguished in the obligation and he will not be held liable, but he cannot go after Z
also. However, Y which is the creditor, will have the right to bring an action against Z,
the third party, to recover the price of the specific thing together with the damages.

Section 3 – Condonation or Remission of Debt (Arts. 1270-1274)

I. Definitions
1. Condonation or remission of debt – is the gratuitous abandonment by the creditor of his
right against the debtor. It is thus a form of donation.
2. Inofficious remission – As a rule, testamentary dispositions which impair the legitime
shall be reduced on petition of the heirs insofar as they are inofficious or excessive.

II. Discussions

1. REQUISITES OF CONDONATION OR REMISSION

(1) It must be gratuitous;
(2) It must be accepted by the obligor;
(3) The parties must have capacity;
(4) It must not be inofficious; and
(5) If made expressly, it must comply with the forms of donation

2. EFFECT OF INOFFICIOUS REMISSION

While a person may make donations, no one can give more than that which he can
give more than that which he can give by will; otherwise, the excess shall be inofficious
and shall be reduced by the court accordingly.
As a rule, testamentary dispositions which impair the legitime shall be reduced on
petition of the heirs insofar as they are inofficious or excessive.

III. Problems
1. D (debtor) borrowed money from C (creditor) evidenced by promissory note signed
by D.
(a) What presumption arises if:
(1) The promissory note is voluntarily given by C to D?
The presumption is that C is renouncing his right from the credit.
 (2) It is found in the possession of D?
The presumption is that it was voluntarily delivered by C
(b) When will the presumption of remission arise?
The presumption of remission will arise when the private document in which the debt
appears is found in the possession of the debtor.
2. What presumption arises if:
A. The debt of D is condoned by C?
It is presumed that only the accessory obligation of pledge, which is the. D shall continue to
be indebted but does not have to return the thing pledged.
B. The certificate is later found in the possession of D?
According to Art. 1271, it is presumed that the accessory obligation of pledges has been
remitted when the thing pledged after its delivery to the creditor, is found in the possession of
the debtor.

Section 4 – Confusion of Merger (Arts. 1275-1277)

I. Definitions
1. Confusion or merger – is the meeting in one (1) person of the qualities of creditor and
debtor with respect to the same obligation.

II. Discussions

1. REASON OR BASIS FOR CONFUSION

(1) The law treats confusion or merger as a mode of extinguishing obligations because if
a debtor is his own creditor, enforcement of the obligation becomes absurd since a
person cannot claim payment from himself.
(2) Furthermore, when there is a confusion of rights, the purposes for which the
obligation may have been created are deemed realized.

2. EFFECT OF MERGER WHEN IT TAKES PLACE:

(a) Effect of merger in the person of principal debtor or creditor
Merger in the person of the principal debtor or creditor extinguishes the
obligation. Hence, the accessory obligation of guaranty is also extinguished in
accordance with the principle that the accessory follows the principal.
(b) Effect of merger in the person of guarantor
The extinguishment of the accessory obligation does not carry with it that of the
principal that of the principal obligation. Consequently, merger, which takes place in
 the person of the guarantor, while it extinguishes the guaranty, leaves the principal
obligation in force.

III. Problems
1. According to Art.1277, confusion does not extinguish a joint obligation. Since C,
who is originally a joint debtor, becomes the creditor, then A and B are now liable to
him for their share of P5000 each.
2. According to Art.1277, merger in the person of one of the solidary debtors shall
extinguish the entire obligation. Thus, the solidary obligation of A, B, and C to D is
extinguished. However, C can still ask for reimbursement from A and B of their share
in the obligation of P5000 each.

Section 5 – Compensation (Arts. 1278-1290)

I. Definitions
1. Compensation – is the extinguishment to the concurrent amount of the debts of two
persons who, in their own right, are debtors and creditors of each other.
2. Legal compensation – when it takes place by operation of law even without the
knowledge of the parties.
3. Facultative compensation – when it can be set up only by one of the parties.

II. Discussions
1. What are the distinctions between confusion and compensation as modes for
extinguishing an obligation?
A compensation as distinguished from a confusion: a compensation requires two
persons to be mutually debtor and creditor each other, while a confusion requires only
one person to be both the debtor and creditor. a compensation covers two obligations,
while a confusion covers only one obligation.
2. In what way is compensation similar to payment?
According to Art. 1289, compensation and payment is similar in way dueto the
fact that application of payments can be applied to compensation.
3. May there be compensation although the things due are not consumable? Explain.
None, because according to paragraph 2 of article 1279 in order that compensation may
be proper it is necessary 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.
4. When may compensation take place when only one of the debts is due?
According to Art. 1279, compensation may take place when A has not yet paid B on the
date that B's obligation is due.
 III. Problems
1. Has the bank the right to apply the deposit to the payment of D's debt?
Yes, according to article 1287, since the other party is a bank deposit. It may apply the
deposit to the payment of D's debt.
2. Can compensation also take place although the debts are not payable on the same
date? According to article 1282, the parties may agree upon the compensation of the
debts which are not yet due. Thus, if C and D would agree, compensation can take place.
It can also happen if by October 20 D hasn't paid C yet.
3. Illustrate compensation which can be set up only by one party.
According to articles 1287, 1288, if A deposited an object to B, B the depository cannot
claim compensation. However, A can set up his deposit as a compensation to B. Also, if
B borrowed the thing, only A can set up the compensation.
4. Assuming that both obligations are now due, may the two debts be compensated
against each other? What is the effect if the debt of C is later annulled in court at
the instance of D?
According to article 1284, they may be compensated, However, when C's debt is later
annulled, D is still liable to C because the annulment will make it seem like as if there
had been no compensation.

Section 6 – Novation (Arts. 1291-1304)

I. Definitions
1. Novation – is the total or partial extinction of an obligation through the creation of a new
one which substitutes it.
2. Mixed novation – when the object and/or principal conditions of the obligation and the
debtor or the creditor, or both the parties, are changed. It is a combination of real and
personal novations.
3. Expromision – payment by the new debtor gives him the right to beneficial
reimbursement under the second paragraph of Article 1236.
4. Delegacion – all the parties, the old debtor, the new debtor, and the creditor must agree.
II. Discussions

1. REQUISITES OF NOVATION
(1) a previous valid obligation;
(2) the agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and
(4) validity of the new one

2. When there is subrogation, what rights are acquired by the new creditor?
The effect of legal subrogation is to transfer to the new creditor the credit and all the
rights and actions that could have been exercised by the former creditor either against the
debtor or against third persons, be they guarantors or mortgagors. Simply stated except
 only for the change in the person of the creditor, the obligation subsists in all respects as
before the novation. (See Art. 1237)

3. In novation, give the effect where:

(a) The new obligation is voidable;
Article 1297 stresses one of the essential requirements of a novation, to wit: the
new obligation must be valid. The general rule is that there is no novation if the new
obligation is void and, therefore, the original one shall subsist for the reason that the
second obligation being inexistent, it cannot extinguish or modify the first.
If the new obligation is only voidable, novation can take place. But the moment it
is annulled, the novation must be considered as not having taken place, and the
original one can been forced, unless the intention of the parties is otherwise.
(b) The old obligation is voidable.
(Art. 1298) The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification validates acts
which are voidable. A void obligation cannot be novated because there is nothing to
novate. However, if the original obligation is only voidable or if the voidable
obligation is validated by ratification (see Arts. 1392, 1396), the novation is valid.

4. In novation, are accessory obligations necessary extinguished?

The general rule is that the extinguishment of the principal obligation carries with it
that of accessory obligations. (see Arts. 1230, 1273, 1280)
It provides, however, an exception in the case of an accessory obligation created in
favor of a third person which remains in force unless said third person gives his consent
to the novation. This is so because a person should not be prejudiced by the act of another
without his consent.

III. Problems

1. Is D released from his obligation to C?

According to Art.1293, there is expromission only if D is released from his obligation to
C. If T and C didn’t agree as to such, D is not liable because T paid without his
knowledge or consent.
2. Is D still liable to C in case of insolvency of T?
No. According to Art.1295, the insolvency of the new debtor will not revive the
creditor’s actions against the original one. Old debtor is not liable in non-fulfillment of
the new debtor.
As a general rule, old debtor is not liable for insolvency of new debtor except:
(1) The said insolvency was already existing and of public knowledge at the time of
delegacion
(2) The insolvency was already existing and known to debtor at the time of delegacion.
3. What are the rights of T?
According to Art.1302, There is a legal subrogation if the creditor pays another creditor
who is preferred without the debtor’s knowledge. Therefore, T has the all the previous
rights that C had.
4. Illustrate a mixed novation.
Louie will deliver a sundae cone to Nico. In the agreement of the parties, Louie will
instead deliver a tetra pack of juice to Nico.