EXTINGUISHMENT OF

OBLIGATIONS
ATTY. JAMIE-LYN D. JAMIAS
 ARTICLE 1231.

Obligations are extinguished:

1. By payment or performance;
2. By 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. By compensation;
6. By novation.

Other causes of extinguishment of obligations, such as annulment,

rescission, fulfillment of resolutory condition, and prescription, are
governed elsewhere in this Code.
 ARTICLE 1231.

Other causes:
1. Death of a party for obligations requiring personal service
2. Mutual desistance or withdrawal
3. Arrival of resolutory period
4. Compromise
5. Impossibility of fulfillment
6. Happening of a fortuitous event
 PAYMENT
OR
PERFORMANCE
 ARTICLE 1232.

Payment means not only the delivery of money but

also the performance, in any other manner, of an
obligation.
 Payment does not only refer to the delivery of money, may also include:
• Giving of a thing
• Doing of an act
• Not doing of act

 Used synonymously with performance

 ARTICLE 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.

 DEBT – can mean any of the following obligation:

• Delivery of money
• Giving of a thing
• Doing of an act
• Not doing of act

 As a general rule: partial or irregular performance will not extinguish an

obligation
 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 obligee.
 Exception to Article 1233.
 Rationale: creditor benefited
 Requisites:
• Substantial compliance – when the important or essential part of the contract
was performed
• Obligor is in good faith – always presumed
ARTICLE 1234.

Example: Raine committed to deliver and administer flu

vaccine to the 100 employees of Rachel. Raine was only
able to deliver and administer 50 vaccines because of
shortage due to the pandemic.

• Raine is entitled to the payment of the 50 vaccines

 ARTICLE 1235.

When the obligee accepts the performance, knowing its

incompleteness or irregularity, and without expressing any protest
or objection, the obligation is deemed fully complied with.

 Another exception to Article 1233

 Founded on the principle of estoppel (prevents someone from arguing about
something previously agreed upon or by law)
 Requisites:
• Performance by the debtor is incomplete or irregular
• Creditor accepts without any protest or objection to the incompleteness or
irregularity
ARTICLE 1235.

Example: JM promised to deliver a 6-month old French

bulldog to Gianna. However, JM was able to deliver a 1-
year old American bulldog which Gianna accepted.
 ARTICLE 1236.

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.

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.
 ARTICLE 1236.

 From whom can a creditor accept payment?

• Debtor
• Any person with interest in the fulfillment of the obligation, i.e.
guarantor
• A 3rd person without interest in the obligation but there was a
stipulation that he can make the payment.

 Creditor has the option to refuse payment by a 3rd person –

distrust, dislike
 ARTICLE 1236.

Effect of payment by a 3rd person:

1. Without the knowledge or against the will of the debtor
• 3rd person can recover from the debtor only insofar as the
latter was benefitted
Example: Kahlil owes Niccolo P5,000. Without the knowledge of Kahlil, Nino paid the
said amount not knowing that Kahlil has already paid P2,000 and Niccolo accepted
the payment (also knowing that Kahlil has already partially paid).

• Nino can only recover P3,000 from Kahlil as this is the extent to which Kahlil was
benefitted
• Nino can recover P2,000 from Niccolo
• Niccolo is liable for damages if he acted in bad faith
 ARTICLE 1236.

2. With knowledge of the debtor

• 3rd person shall have the right to be reimbursed and
subrogation (to recover the amount he has paid)
• 3rd person shall acquire all the rights of the creditor –
mortgage, guaranty, penalty
 ARTICLE 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 his rights, such as those arising from a mortgage,
guaranty or penalty.
SUBROGATION REIMBURSEMENT
- Change of creditor - Payor merely acquires the bare
- Payor steps into the shoes of right to be refunded
the creditor
- Payor can exercise the rights
which the creditor had
 ARTICLE 1238.

Payment made by a third person who does not intend to be

reimbursed by the debtor is deemed to be a donation, which
requires the debtor’s consent. But the payment is in any case valid
as to the creditor who has accepted it.

• Nobody should be compelled to accept the generosity of another

• Shall be deemed a donation but needs the consent of the debtor
• Without the consent of the debtor – it is still a valid payment if the
creditor accepted it
 ARTICLE 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.”
• free disposal of the thing due – not subject to any claim or
encumbrance or lien
• capacity to alienate – not incapacitated to enter into contracts
(minor, insane, etc.)
Example: Debtor paid the creditor with something that he does not
own
 ARTICLE 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.
To whom should payment be made?
• Person in whose favor the obligation was made – creditor/oblige
• His successor in interest – heir, assignee
• Any authorized person – authorized by the creditor or by law
(guardianship)
Example: Debtor paid the creditor with something that he does not
own
 ARTICLE 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 need not be
proved in the following cases:
1. If after the payment, the third person acquires the creditor’s rights; (subrogation)
2. If the creditor ratifies the payment to the third person;
3. If by the creditor’s conduct, the debtor was led to believe that the third person has
authority to receive the payment.
 ARTICLE 1241.

Example: Jamie paid the amount of P10,000 to Jaslene, a minor

who is under the guardianship of her mother. Upon receiving the
money, Jaslene deposited the same to her bank account. – VALID
PAYMENT

GENERAL RULE: payment to 3rd person or wrong party is NOT VALID

EXCEPTION: if it redounded to the benefit of the creditor which has
to be proven
 ARTICLE 1242.

Payment made in good faith to any person in possession of the

credit shall release the debtor.

• Another form of valid payment to a 3rd person

• “possession” pertains to the actual credit not mere evidence or
instrument of credit
• Payer must act in good faith and believing that he is making a
valid payment
 ARTICLE 1242.

Example: Ainna executed a promissory note in favor of Sofie for the

P10,000 she owed.

• If Sofie endorses the PN to Giada because she in turn owes

Giada P10,000, if Giada presented the PN to Ainna and Ainna
paid, it will be a valid payment
• If Sofie lost the PN and Giada found it, presented the same to
Ainna and Ainna paid, there is no valid payment since what
Giada has is a mere proof or evidence of credit
 ARTICLE 1243.

Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid.
• By virtue of court order
 ARTICLE 1244.

The debtor of a thing cannot compel the creditor to receive a

different one, although the latter may be of the same value as, or
more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be
substituted by another act or forbearance against the obligee’s will.
• 1st paragraph – real obligation to deliver a specific thing
• 2nd paragraph – personal obligation
 ARTICLE 1245.

Dation in payment whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law on
sales.
4 special forms of payment under the Civil Code:
• Dation in payment
• Application of payment
• Payment by cession
• Tender of payment of consignation
 ARTICLE 1245.

DATION IN PAYMENT – conveyance of ownership of a thing as an

accepted equivalent of performance
• It is a special form of payment because an existing monetary
debt is not paid in money but by alienation of property

Example: Bobby owed Simon P1million pesos. In fulfilling the

obligation, Simon delivered a brand new car with the consent of
Bobby.
 ARTICLE 1246.

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.
• Obligation to deliver a generic or indeterminate thing – principle
of equity
• Rule of medium quality
 ARTICLE 1247.

Unless it is otherwise stipulated, the extrajudicial expense required

by the payment shall be for the account of the debtor. With regard
to judicial costs, the Rules of Court shall govern.
• Why the debtor? – when payment is made, his/her obligation is
extinguished, he/she is the one primarily benefitted.
• Parties may stipulate on who will bear the costs
 ARTICLE 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.
 ARTICLE 1248.

• For payment to extinguish an obligation – complete

performance
• Creditor – cannot be compelled to accept partial fulfillment
• Debtor – duty to comply wholly BUT cannot be required to make
partial payment
• When is partial payment allowed?
 Express stipulation
 Debt is partially liquidated and partially unliquidated
 ARTICLE 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.
 ARTICLE 1249.

• Legal tender – currency offered by the debtor in the right

amount, the creditor must accept in payment of the debt
• In the Philippines – all notes and coins issued by the Central Bank
of the Philippines
Payment by means of instruments:
• PNs, checks, bills of exchange, other commercial documents – not legal tender,
hence, the creditor cannot be compelled to accept them
• If the creditor accepts the same, right to demand is suspended
• After acceptance, the creditor must cash the instrument
 If dishonored, bring an action for non-payment
 If cashed, obligation is extinguished
 If impaired due to creditor’s fault, obligation is extinguished – stale check
 ARTICLE 1250.

In case an extraordinary inflation or deflation of the 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.
• Inflation – sharp sudden increase of money or credit or both without a
corresponding increase in business transaction; value of money drops
• Deflation – reduction in volume and circulation of the available
money or credit – decline in price level
 ARTICLE 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.
 ARTICLE 1251.

Place of payment:
• Place agreed upon
• Place where the determinate thing was located at the time of the
contract
• Debtor’s habitual residence – if there is no agreement
 Creditor bears the expenses going to the place
 If debtor is in delay or changed residence in bad faith, he bears the
expenses
SUBSECTION 1. APPLICATION
OF PAYMENTS
 ARTICLE 1252.

He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of
them the same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the
term has been constituted, application shall not be made as to debts
which are not yet due.

If the debtor accepts from the creditor a receipt in which an application

of the payment is made, the former cannot complain of the same, unless
there is a cause for invalidating the contract. (1172a)
 ARTICLE 1252.

• Application of payments – designation of debt to which payment is being

made
• Requisites:
 1 debtor and 1 creditor
 2 or more debts
 Debts are of the same kind
 Debts to which payment made by the debtor has been applied must be
due
 Payment made was not sufficient to cover all debts
 ARTICLE 1252.

• RULES:
 Debtor has the 1st choice but he must indicate at the time of payment
 Once the right to make application is exercised, it is irrevocable unless
the creditor gave his consent
 If debtor does not indicate, creditor may make the designation by
specifying in the receipt
 If creditor also did not designate, debt which is most onerous
 If debts are of the same nature and burden – proportionate application
ARTICLE 1253.

If the debt produces interest, payment of the principal shall not be

deemed to have been made until the interests have been covered.

• Payment is first applied to the interest

 ARTICLE 1254.

When the payment cannot be applied in accordance with the preceding

rules, or if application cannot be inferred from other circumstances, the
debt which is most onerous to the debtor, among those due, shall be
deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately.
Onerous – burdensome
• Non-interest bearing versus interest bearing
• Sole debtor versus solidary debtor
• Secured debts versus unsecured debts
• Interest bearing versus interest bearing – higher interest
• With penalty versus without penalty
SUBSECTION 2. PAYMENT
BY CESSION
ARTICLE 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.

• Payment by cession – assignment or abandonment of all properties

of the debtor to be sold by creditors and apply the proceeds to the
payment of debts
ARTICLE 1255.

• Requisites:
 2 or more creditors
 Debtor must be partially insolvent
 Assignment must involve all properties of the debtor
 Cession must be accepted by the creditors
DATION IN PAYMENT PAYMENT BY CESSION
1 debtor, 1 creditor Several creditors

Insolvency of debtor Debtor is insolvent at the time of assignment

Does not involve all property of the debtor All property of the debtor subject of execution

Creditor becomes the owner Creditors acquire the right to sell

An act of novation Not an act of novation
 TENDER OF
SUBSECTION 3. PAYMENT AND
CONSIGNATION
ARTICLE 1256.

If the creditor to whom tender of payment has been made refuses

without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following
cases:
(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
ARTICLE 1256.

Tender of payment – act of the debtor of offering to the creditor the thing or amount
due:
• Tender of payment must comply with the rules of payment (articles 1256-1258)
• Unconditional and for the whole amount due and in legal tender
• Must be actually made

Consignation – act of depositing the thing or amount due with the proper court when
the creditor does not desire or cannot receive it
• There is a valid debt which is due
• Tender of payment by the debtor and unjustifiable refusal of creditor
• Previous notice of consignation to persons interested in the fulfillment of the
obligation
• Consignation of the thing or amount due
• Subsequent notice of consignation made to interested parties
ARTICLE 1257.

In order that the consignation of the thing due may release the obligor,
it must first be announced to the persons interested in the fulfillment of
the obligation.
The consignation shall be ineffectual if it is not made strictly in
consonance with the provisions which regulate payment.
• Rationale: to give the creditor a chance to reflect on his refusal
because the expenses of consignation will be charged against him
• Persons interested – guarantors, mortgagees, solidary
debtors/creditors)
ARTICLE 1258.

Consignation shall be made by depositing the things due at the

disposal of judicial authority, before whom the tender of payment shall
be proved, in a proper case, and the announcement of the
consignation in other cases.
The consignation having been made, the interested parties shall also
be notified thereof.
• Consignation must be with the proper judicial authority
• Purpose of notification – enable the creditor to withdraw in case he
accepts the consignation
ARTICLE 1259.

The expenses of consignation, when properly made, shall be charged

against the creditor.
When is a consignation deemed properly done?
• When the creditor accepts the same as payment without objection
• When the creditor questions its validity but the court declares
otherwise
• When the creditor neither accepts or rejects and the court cancels
the obligation
ARTICLE 1260.

Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial

declaration that the consignation has been properly made, the debtor
may withdraw the thing or the sum deposited, allowing the obligation
to remain in force.
• Withdrawal of the consignation by the debtor
ARTICLE 1261.

If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which
he may have over the thing. The co-debtors, guarantors and sureties
shall be released.