iii. Legal and Conventional Subrogation

LEGAL REDEMPTION

It is the right to be subrogated upon the same terms and conditions stipulated in the contract, in the place of one who acquires the thing by purchase or by dacion en pago or by other transaction whereby ownership is transmitted by onerous title. (NCC, Art. 1619)

Exceptions to Right to Indemnity or Reimbursement

• If a guaranty is given without the principal debtor’s knowledge or against the debtor’s will, the guarantor may recover only to the extent that the payment benefited the debtor.
• A third person’s payment made without an intention to seek reimbursement is deemed a donation and requires the debtor’s consent. The payment remains valid as to a creditor who accepts it (Art. 1238).
• Waiver.

Guarantor’s right to subrogation (Art. 2067)

Subrogation transfers the credit and its accompanying rights against the debtor or third persons, including guarantors and possessors of mortgaged property, subject to any stipulation in conventional subrogation. When a guarantor pays, the guarantor is subrogated by operation of law to the creditor’s rights against the debtor, not to the debtor’s rights. This is not a contractual right; it enables the guarantor to enforce the right to indemnity under Art. 2066. It is unavailable where the guarantor has no right to reimbursement.

Payment without notice to the debtor (Art. 2068)

A guarantor should notify the debtor before paying. Without notice, the debtor may raise against the guarantor any defense that could have been raised against the creditor when payment was made, including prior extinguishment of the obligation by the debtor’s payment. The guarantor should not, through fault or negligence, impair the debtor’s rights or interests.

Unenforceable contract. If the debtor consents to the guarantor’s payment, the guarantor may seek reimbursement. Even without that consent, the guarantor may seek reimbursement to the extent the payment benefited the debtor, subject to the debtor’s defenses under Art. 2068.

Payment before maturity (Art. 2069)

An obligation subject to a period becomes demandable when the fixed day arrives. Because a guaranty is subsidiary, the guarantor is not liable before the debt becomes due. A guarantor who pays early cannot demand reimbursement until the period expires, unless the debtor ratifies the payment.

Repeat payment by the debtor (Art. 2070)

If the guarantor pays without notifying the debtor and the debtor, unaware of that payment, pays again, the guarantor has no remedy against the debtor and may recover only from the creditor. The debtor must reimburse the guarantor only if all three conditions are present: the guaranty was gratuitous, a fortuitous event prevented the guarantor from giving notice, and the creditor becomes insolvent.

Proceeding against the debtor before payment (Art. 2071)

Ordinarily, the guarantor proceeds against the debtor after paying. Before payment, the guarantor may proceed against the principal debtor in any of these cases:

• The guarantor is sued for payment.
• The principal debtor is insolvent.
• The debtor undertook to release the guarantor within a specified period, and that period has expired.
• The debt has become demandable because the period for payment has expired.
• Ten years have passed without a fixed maturity for the principal obligation, unless its nature prevents its extinguishment within a longer period.
• There are reasonable grounds to fear that the principal debtor intends to abscond.
• The principal debtor is in imminent danger of becoming insolvent.

In these cases, the guarantor may seek release from the guaranty or security against proceedings by the creditor and the danger of the debtor’s insolvency. This allows the guarantor to protect an interest that may be affected by a later demand for payment.

Rights of the new debtor

• With the debtor’s consent – Right of reimbursement and subrogation
• Without the consent of the old debtor or against his will – Right to beneficial reimbursement.

Subrogation

It is the active subjective novation characterized by the transfer to a third person of all rights appertaining to the creditor in the transaction concerned including the right to proceed against the guarantors or possessors of mortgages and similar others subject to any applicable legal provision or any stipulation agreed upon by the parties in conventional subrogation.

NOTE: 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 arising from a mortgage, guaranty, or penalty. (NCC, Art. 1237)

Kinds of subrogation

As to their creation

• Legal subrogation – Constituted by virtue of a law and does not proceed from an agreement of the parties (NCC, Articles 1300 and 1302);
• Voluntary or conventional subrogation – Created by the parties by their voluntary agreement (NCC, Art. 1300);

NOTE: In legal subrogation, the law which forms the basis of the subrogation must be clearly identified and invoked to enforce the rights pertinent thereto.

Conventional subrogation of a third person requires the consent of the original parties and of the third person. (NCC, Art. 1301)

As to their extent

• Total subrogation – Credits or rights of the creditor in the transaction are totally transferred to the third person.
• Partial subrogation – Only part of the credit or rights of the creditor in the transaction are transferred to the third person.

NOTE: A creditor, to whom partial payment has been made, may exercise his right for the remainder and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (NCC, Art. 1304)

Presumption of legal subrogation

GR: Legal subrogation is not presumed. (NCC, Art. 1300)

XPN: In cases expressly mentioned in the law:

• When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;
• When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
• When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. (NCC, Art. 1302)

Conventional Subrogation vs. Assignment of Credits

NOTE: In the law of subrogation, active subjective novation is stricter than passive subjective novation. In the latter, the consent of the old debtor is not even required in expromission.

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