Article 1267 of Obligations and Contracts

 by Nil Jay Perolina

CHAPTER 4 – EXTINGUISHMENT OF OBLIGATIONS

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. (n)

What is Article 1267 all about?

It is about the effect of difficulty of performance.

What is the meaning of Article 1267?

It means that when the performance of the service has become so difficult as to be manifestly beyond the contemplation of both parties, the court is authorized to release the obligor in whole or in part. It would be doing violence to the intention of the parties to hold the obligor still responsible. There is an element of the unforeseen or fortuitous event in the situation covered by Article 1267.

What is the reason behind Article 1267?

The parties to the contract must be presumed to have assumed the risk of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. 

What is effect of difficulty of performance?

Difficulty of service or performance authorizes the release of the obligor but does not authorize the courts to remake, modify or revise the contract stipulated with the force of law, so as to substitute its own terms for those covenanted by the parties themselves.

What is the doctrine of unforeseen events?

This is said to be based on the discredited theory of rebus sic stantibus  in public international law; 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.

What are the requirements for doctrine of unforeseen event to apply in an obligation?

It requires that:

• Prestation has become so difficult to render;

• Service has become manifestly beyond the contemplation of the parties.

Illustrations/Examples

Illustration 1:

X agreed to construct a road near a mountain. A very strong typhoon caused an avalanche making the construction of the road dangerous to human lives. (Note: The obligation is not impossible of performance.)

In this case, X may be released, in whole or in part, from his obligation to continue with the construction. (see Labayen vs. Talisay Silay Milling Co., 52 Phil. 440 [1928]

Illustration 2:

If A contracted B to construct deep well at P 50 000.00 but for some reasons A was not satisfied with the water source of the deep well. B explained that he cannot extract deeper than 100 feet anymore. Since the contracted price was only P 50 000.00 it was not enough to cover all expenses for reconstruction, B is released from the obligation.

Case Digest from Original Case

Citation:

Occena vs Jabson

Case Docket:

G.R. No. L-44349

Date:

October 29, 1976

Petitioners:

JESUS V. OCCEÑA and EFIGENIA C. OCCEÑA

Respondents:

HON. RAMON V. JABSON, Presiding Judge of the Court of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC.

Petitioner's Counsel:

Occeña Law Office

Respondent's Counsel:

Serrano, Diokno & Serrano

Ponente:

TEEHANKEE, J.

FACTS:

On February 25, 1975 private 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), making the following allegations:

"That due to the increase in price of oil and its derivatives and the concomitant worldwide spiraling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex ‘A’, have been totally changed.

ISSUE:

Whether or not Courts are authorized to modify or revise contracts between parties.

RULING:

The resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent’s complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. With costs in all instances against private Respondent.

The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent’s complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action.

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Thank you very much! :)

Article 1241 & 1242 of Obligations and Contracts

by Nil Jay Perolina

CHAPTER 4 – EXTINGUISHMENT OF OBLIGATIONS

Art. 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 creditor'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 payment. (1163a)

What is Article 1241 all about?

It is about the effect of payment to an incapacitated person and third person.

What is the meaning of Article 1241?

Person to whom payment is made must have the capacity and authority to receive it. Payment to anyone not the creditor or his successor or authorized representative is not effective payment. For incapacitated persons, guardians should handle their affairs. When the creditor is incapacitated to receive payment, this must be made to his legal representative if there is one. If there be none, then the debtor may relieve himself of responsibility by delivering the thing to the court in consignation, by virtue of Article 1256. 

What is the reason behind Article 1241?

If paying to such incapacitated and third persons has been allowed, it can be easily taken advantage of. By operation of law, as a general rule such incapacitated and third persons have no capacity and authority to receive payment.

1ST PARAGRAPH DISCUSSION:

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.

What is the effect of payment to incapacitated persons?

As a  general rule, in order that payment may be valid, the person to whom it is made must have the capacity to receive it. Accordingly, when the payment was made to a person who has no capacity to act or incapacitated to manage his property, the payment is not valid.

Since payment is not valid, the debtor may be made to pay again by the incapacitated himself when he attains capacity, or his legal representative during such incapacity

What is the debtor's option if the creditor is incapacitated to receive payment?

For incapacitated persons, guardians should handle their affairs. When the creditor is incapacitated to receive payment, this must be made to his legal representative if there is one. If there be none, then the debtor may relieve himself of responsibility by delivering the thing to the court in consignation, by virtue of Article 1256.

When are payments to incapacitated persons valid?

It is only valid if the incapacitated person kept the thing delivered; or insofar as the payment has been beneficial to him.

Illustration/ Example:

D obtained a loan of P10,000 from C who was in his right mind at the time he granted the loan. On due date, D paid his obligation of P10,000 to C who had since become insane. C lost P4,000 of the amount he received and spent P6,000 for his food and other necessary expenses. Was the obligation extinguished?

By the rationale of this article, the obligation is extinguished up to P6,000 only. Payment of an obligation to an incapacitated person shall be valid when the person has kept the thing delivered and only insofar as the payment has been beneficial to him. Php 4,000 shall still be payable to legal representative or guardian provided that creditor has not regain his capacity yet

2ND PARAGRAPH DISCUSSION:

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 creditor’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 payment. (1163a)

What is the effect of payment made to third persons?

In effect, debtor is not released from liability by a payment to one who is not the creditor nor one authorized to receive the payment, even if the debtor believed in good faith that he is the creditor, except to the extent that the payment extends to the benefit of the creditor.

What are the instances which make payment to third persons valid under Article 1241?

Under Article 1241, benefit to the creditor for payment made by the debtor to a third person must be proven, except:

1. When the third person acquires the creditor’s rights (Legal subrogation); 

2. When the creditor ratifies payment to the originally unauthorized third person (ratification); or

3. When the debtor has been led to believe that the third person has authority to receive the payment. (Estoppel) 

Illustrations/Examples:

Illustration 1:

In case of car insurances, when an insured driver's car is totaled through the fault of another driver, the insurance company reimburses the covered driver under the terms of the policy and then pursues legal action against the driver at fault. This is legal subrogation.

Illustration 2:

In a simple obligation wherein debtor is to pay creditor but debtor on the other hand made payment to third person X who has no authority to act as creditor’s agent and collect payment, as a general rule such payment by the debtor is invalid. But by virtue of this provision, if creditor has ratified such payment to third person X be valid then debtor’s obligation will be extinguished. This is ratification.

Illustration 3:

In our example earlier, debtor is to pay creditor but this time creditor on the other hand assigned third person X as agent to collect payment to debtor and then payment is made to X, debtor’s obligation will be extinguished but in this case creditor is asserting a claim or right that contradicts what he said before wherein he said that he didn’t assigned X, in effect debtor has been led to believe that the third person has authority to receive the payment then obligation of debtor is extinguished. This is estoppel.

What are the other instances which make payment to third persons valid aside from instances under Article 1241? 

In the following cases, in addition to those enumerated by this article, payment to a third person releases the debtor:

1. When, without notice of the assignment of the credit, he pays to the original creditor (Article 1626)

2. When in good faith he pays to one in possession of the credit (Article 1242)

Illustration/Example:

Debtor owes Creditor P10,000. Creditor assigns his credit right (right to collect) to A for a consideration with notice to debtor. Parties to the obligation are the original creditor which is the assignor, A which is the assignee and the Debtor. The effect of the assignment of credit is that debtor will have to make his payment to A (assignee) and no longer to the original creditor (assignor). This is the situation of assignment of credit.

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

What is article 1242 all about?

It is about the effect of payment to person in possession of credit.

What is the meaning of Article 1242?

It must be observed that the “possession” referred in the provision is possession of the credit itself and not merely of the document or instrument evidencing the credit. Hence, mere possession of the instrument (unless transferable by delivery) does not entitle the holder to payment nor does payment release the debtor. Furthermore, the payer must act in good faith, that is, in the honest belief that he is making a valid payment and that the payee is the owner of the credit. Good faith, however, is presumed.

What is the reason behind Article 1242?

A person in possession of credit is presumed to own it. Debtor who pays such person in good faith shall be released from debt. If the creditor allows another person to possess the credit, the risk and burden shifts to him, provided the debtor is in good faith

What is the effect of payment to a person in possession of credit?

Payment to the possessor of the document or title does not necessarily extinguish the credit except when done in good faith. The good faith of the debtor consists in the belief that the party who presents the title of the obligation is the true creditor, or that the person to whom the payment is made is the owner of the credit.

Illustration/Example:

D is indebted to C in the amount of P1,000.00 which indebtedness is evidenced by a promissory note signed by D in favor of C. C lost the promissory note which was later found by X who demanded payment from D.

Payment to X is not valid because X is the possessor merely of the document evidencing the credit and not of the credit itself. If the promissory note is payable to bearer or holder (Negotiable Instruments Law [Act No. 2031], Sec. 9.) the obligation will be extinguished if D pays X in good faith. Similarly, if the promissory note was indorsed by C to X, under a private agreement that X would not collect from D, payment by D in good faith to X will also extinguish the debt. It is immaterial that X acted in bad faith. The right of C will be against X.

Case Digest from the Original Case 

Citation:

Aranas v Tutaan, February 29, 1984

Case Docket:

G.R. No. L-52807

Date:

February 29, 1984

Petitioner:

JOSE ARAÑAS and LUISA QUIJENCIO ARAÑAS

Respondents:

HON. EDUARDO C. TUTAAN, as Judge of the Court of First Instance of Quezon City, and UNIVERSAL TEXTILE MILLS, INC.

Counsel for Petitioner: 

Jose R. Francisco

Counsel for Respondent: 

Reyes, Santayana, Tayao & Picazo Law Office

Ponente:

TEEHANKEE, J.

FACTS:

Petitioner Luisa Quijencio as plaintiff (assisted by her spouse co-petitioner Jose Arañas) was the owner of 400 shares of stock of respondent Universal Textile Mills, Inc. (UTEX) as defendant issued "in the names of its co-defendants Gene Manuel and B.R. Castañeda, including the stock dividends that accrued to said shares, and ordering defendant Universal Textile Mills, Inc. to cancel said certificates and issue new ones in the name of said plaintiff Luisa Quijencio Arañas and to deliver to her all dividends appertaining to same, whether in cash or in stocks.

At petitioners’ instance, the lower court issued a writ of execution and a specific order of December 5, 1979 directing UTEX:

"1. To effect the cancellation of the certificates of stock in question in the names of B.R. Castañeda and Gene G. Manuel and the issuance of new ones in the names of the plaintiffs;

"2. To pay the amount of P100,701.45 representing the cash dividends that accrued to the same stocks from 1972 to 1979 with interest thereon at the rate of 12% per annum from the date of the service of the writ of execution on October 3, 1979 until fully paid."

ISSUE:

Whether the payment of judgment debt to wrong party does not extinguish judgment debtor’s obligation to rightful party.

RULING:

Yes, if UTEX chose to pay the wrong parties, notwithstanding its full knowledge and understanding of the final judgment, that it was liable to pay all dividends after the trial court’s judgment in 1971 to petitioners as the lawfully declared owners of the questioned shares of stock (but which could not be enforced against it pending the outcome of the appeal filed by the co-defendants Castañeda and Manuel in the Court of Appeals), it only had itself to blame therefor. The burden of recovery the supposed payment of the cash dividends made by UTEX to the wrong parties Castañeda and Manuel squarely falls upon itself by its own action and cannot be passed by it to petitioners as innocent parties. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the judgment obligation of such debtor to its creditor.

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Thank you very much! :)