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ART. 1233
A debt shall not be understood to have been paid unless the thing or
C HAPT E R 4 service in which the obligation consists has been completely delivered or
EXTINGUISHMENT OF OBLIGATIONS rendered, as the case may be.

GENERAL PROVISIONS
ART. 1234
If the obligation has been substantially performed in good faith, the
ART. 1231 obligor may recover as though there had been strict and complete
Obligations are extinguished: fulfillment, less damages suffered by the obligee.
1. By the payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debts;
4. By the confusion or merger of the rights of the creditor and
debtor; 5. By compensation;
6. By novation.
Other causes of extinguishment of obligations, such as annulment, ART. 1235
rescission, fulfillment of resolutory condition, and prescription, are When the obligee accepts the performance, knowing its incompleteness
governed elsewhere in this Code. or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with.

EXTINGUISHMENT OF OBLIGATIONS (PaL C3 NARF Pre)

1. Payment or performance GENERAL RULE
An obligation is understood to have been paid or performed when:
2. Loss of the thing due
• TO GIVE
3. Condonation or remission The debtor or obligor has completely delivered the thing which he
4. Confusion or merger had obligated himself to deliver.
5. Compensation • TO DO
6. Novation The obligor has completely rendered the service which he had
obligated himself to render.
7. Annulment • NOT TO DO
8. Rescission The obligor has completely refrained from doing that which he
9. Fulfillment of resolutory condition had obligated himself not to do.
10. Prescription
EXCEPTIONS [SAC]
OTHER FORMS OF EXTINGUISHMENT (FC - MAID) 1. When the obligation has been substantially performed in good
1. Happening of fortuitous event (Art. 1174) faith.
REASON: In the case of substantial performance, the obligee is
2. Compromise (Art. 2028)
benefited.
3. Mutual desistance or withdrawal
2. When the obligee accepts the performance, knowing its
4. Arrival of resolutory period (Art. 1193, par. 2) incompleteness or irregularity, and without expressing any protest
5. Impossibility of fulfillment of condition (Art 1266) or objection.
6. Death, for personal or intransmissible obligation. (Art. 1311 par. REASON: Base on the principle of estoppels.
1) 3. When the obligation to give, to do or not to do is converted into an
obligation to indemnify the obligee or creditor because of breach
Illustration of Death: or non-fulfillment.
On 1 Jan 2017, A promised to B the amount of P5M to be paid on 31 Dec.
2018. On 1 June 2017, A died leaving X as the only heir. B cannot compel X NOTE: For payment to properly exist, the creditor has to accept the same,
to pay the debt of his father for Art. 1178 states that only rights shall be expressly or implicitly. Payment, for valid reasons, may properly be rejected.
transmissible, obligation not included.
BURDEN OF PROVING PAYMENT
GENERAL RULE
Debtor has the burden of showing with legal certainty that the obligation has
been discharged by payment.
SECTION 1
PAYMENT OR PERFORMANCE EXCEPTION
When the debtor introduces evidences that the obligation has been
extinguished, the burden shifts to the creditor.

ART. 1232 REQUISITES OF PAYMENT [I3 FCM]

Payment means not only the delivery of money but also the performance, 1. Identity – only the prestation agreed upon and no other must be
in any other manner, of an obligation. complied with;
2. Integrity/Completeness – the thing or service must be completely
delivered or rendered;
CONCEPT OF PAYMENT AND PERFORMANCE 3. Intention – the debtor must have the intention to fulfill the
It consists in the normal and voluntary fulfillment of the obligation by the obligation;
realization of the purposes for which it was constituted. 4. Free and voluntary fulfilled.
5. The debtor and creditor must have the capacity to give and receive
the payment respectively;
6. Must be made by the proper payor to proper payee.

KINDS OF PAYMENT

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1. Normal – when the debtor voluntarily performs or pays NOTE If the value of the donation is P5,000 or less, the donation may be
2. Abnormal – the debtor is forced by means of a judicial proceeding made either orally or in writing. Should the donation exceed P5,000, the
either to comply with the prestation or pay indemnity. donation must be written in public or private document (see Art. 748).

PRINCIPLE OF INTEGRITY/COMPLETENESS OF PAYMENT PERSON WHO MAY PAY THE OBLIGATION

For debt to have been paid, the thing or service in which the obligation 1. Debtor himself
consists must have been completely delivered or rendered, as the case may 2. His legal representative
be. 3. Any third person interested in the fulfillment of obligation.

REQUISITES NOTE The rule on the third person does not apply in case a third person who
1. The very thing or service contemplated must be paid; pays the redemption price in sales with right of repurchase (pacto de retro)
2. Fulfillment must be complete. because the vendor a retro is not a debtor within the meaning of the law.

HOW PAYMENT IS MADE THIRD PERSON INTERESTED IN THE PARTY

DEBT PAYMENT 1. Co-debtor
Monetary Delivery of money. The amount 2. Sureties
paid must be full, unless otherwise 3. Guarantors
stipulated in the contract. 4. Owners of mortgages property or pledge
To give Delivery of the thing/s 5. When there is a stipulation to the contrary (JURADO, 235)
To do Performance of the personal
undertaking. EFFECTS OF PAYMENT
1. The obligation is extinguished;
Not to do Refraining from doing the action. 2. The debtor is to fully reimburse the third person who is an
interested party;
3. The third person interested is subrogated to the rights of the
creditor.
ART. 1236
The creditor is not bound to accept payment or performance by a third THIRD PERSON WHO IS NOT AN INTERESTED PARTY BUT
person who has no interest in the fulfillment of the obligation, unless WITH DEBTOR’S CONSENT
there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has GENERAL RULE
paid, except that if he paid without the knowledge or against the will of The creditor is not bound to accept payment or performance by a third person
the debtor, he can recover only insofar as the payment has been who has no interest in the fulfillment of the obligation.
beneficial to the debtor.
EXCEPTION
Unless there is a stipulation to the contrary.
NOTE In case the third person acquired the consent of the debtor, there arise
a new juridical relationship between the debtor and the third person. REASON
The creditor should have the right to insist on the liability of the debtor. The
NOTE Extinguishment of the principal obligation gives rise to creditor should not be compelled to accept payment from a third person
extinguishment of the accessory obligation such as mortgage, surety, and whom he may dislike or distrust. He may not desire to have any business
guarantee. dealings with a third person; or the creditor may not have confidence in the
honesty of the third person who might deliver a defective thing or pay with a
check which may not be honoured.

ART. 1237 EFFECTS OF PAYMENT

Whoever pays on behalf of the debtor without the knowledge or against 1. Third person is entitled to full reimbursement;
the will of the latter, cannot compel the creditor to subrogate him in his 2. There is legal subrogation as the third person, i.e., steps into the
rights, such as those arising from a mortgage, guaranty, or penalty. shoes of the creditor.

NOTE The creditor may refuse to accept payment.

NOTE Whether or not a third person secured the consent of the debtor, the
obligation with respect to the creditor is validly extinguished. THIRD PERSON, NOT INTERESTED AND WITHOUT CONSENT
GENERAL RULE
Whoever pays for another may demand from the debtor what he has paid.

ART. 1238 EXCEPTION

Payment made by a third person who does not intend to be reimbursed If payment was made without the knowledge or against the will of the debtor.
by the debtor is deemed to be a donation, which requires the debtor's In such case, he can only recover insofar as the payment has been beneficial
consent. But the payment is in any case valid as to the creditor who has to the debtor, also known as beneficial reimbursement.
accepted it.
EFFECT OF PAYMENT
Third person can only be reimbursed insofar as payment has been beneficial
NOTE If a third person intends to pay the debtor’s obligation as a donation to the debtor.
without securing first the debtor’s consent, the third person shall have the
right for reimbursement. Illustration:
A owes P5M to B payable on 31 Dec. 2018. C, the father of A, went to B and
NOTE A third person who intends to pay the debtor’s obligation must secure said, “compañero, I’m going to pay na yung debt ng magaling ko na son.” Is
the debtor’s consent (Art. 734) in order to eradicate the sense of obligation on B compelled to accept the same?
the part of the debtor to return the favour owed to the third person (to avoid No. C, though he may be the father of A, is not an interested party in the
the so called “utang na loob”). fulfillment of the obligation for he is not a party to the contract.

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Some instances wherein a third person can pay the obligation of the debtor: proper action in court at the instance of the payor or his legal representative,
In Arts. 94, 121, 146 of the Family Code. unless it falls within the purview of the exception expressly provided for in
Art. 1427.
SUBROGATION If the creditor refuses to accept the payment because he is aware of the
The person who pays for the debtor is put into the shoes of the creditor payor’s incapacity, the obligation still subsists.
thereby acquiring 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 the third persons, be they guarantors
or possessors of mortgages. ART. 1240
Only applies when the payment by a third person is with the knowledge of Payment shall be made to the person in whose favour the obligation has
the debtor. been constituted, or his successor in interest, or any person authorized to
receive it.

SUBROGATION REIMBURSEMENT
Third person is entitled to demand A simple personal action available to ART. 1241
reimbursement and exercise all the the third person or payor against the Payment to a person who is incapacitated to administer his property
rights which the creditor could have debtor to recover from the latter shall be valid if he has kept the thing delivered, or insofar as the payment
exercised against the debtor and what he has paid insofar as the has been beneficial to him.
against the third persons. payment has been beneficial to said Payment made to a third person shall also be valid insofar as it has
debtor. redounded to the benefit of the creditor. Such benefit to the creditor
need not be proved in the following cases:
Illustration: 1. If after the payment, the third person acquired the creditor’s
In 2018, A executed a promissory note promising to pay to B P1M within a rights;
period of 4 years. The payment of debt was guaranteed by C. In 2022, D, a 2. If the creditor ratifies the payment to the third person;
third person, paid the entire amount of the indebtedness with the knowledge 3. If the creditor’s conduct, the debtor has been led to believe
and consent of A. that the third person had authority to receive the payment.
D shall be subrogated to all the rights of B not only against A but also
against C. This is so because the law expressly states that if a third person
pays the obligation with the express or tacit approval of the debtor, he shall REASON FOR THE THIRD EXCEPTION
be legally subrogated to all the rights of the creditor, not only against the It is because of the principle of estoppel.
debtor, but even against third persons, be they guarantors or possessors of
mortgages.

Illustration: ART. 1242

If in the above problem, B had condoned one-half of the obligation in 2021, Payment made in good faith to any person in possession of the credit
and subsequently, in 2022, E, an epal third person, unaware of the partial shall release the debtor.
remission of the indebtedness, paid, without the knowledge and consent of A,
the entire amount to B, who accepted it. What would be the effect of payment
of the epal third person E upon the rights and obligations of the parties?
NOTE Good faith must be viewed on the part of the creditor in possession of
With respect to A, the only right which E has against him is to recover P500K
the credit.
because, it is only to that extent that he had been benefited by the payment.
With respect to C, if A cannot pay the P500K because of insolvency, E can no
longer proceed against him, because payment was made without the Illustration:
knowledge and consent of A, and consequently, he cannot be subrogated to If a third person stole the note of “order” from the creditor, and the debtor
paid the debt in good faith to the third person, it will be invalid for the note
the rights of B against C. With respect to B, E can still proceed against him
states “order,” in which case the creditor must endorse the note to the third
for the recovery of the P500K, applying the principle that no person can
person.
unjustly enrich himself at the expense of another.
The ruling would be otherwise if the note states that the payment should be
made to the “bearer” of the note.
GRATUITOUS PAYMENTS (Art. 1238)
1. Presumed to be a donation and must be with the consent of the TO WHOM PAYMENT MUST BE MADE
debtor;
1. The person whose favour the obligation has been constituted;
2. Once the consent of the debtor is secured, the rules on ordinary 2. The creditor’s successor;
donations will apply;
3. Any person authorized to receive it.
3. If the consent is not secured, Art. 1236 and 1237 will apply;
4. As far as the creditor who has accepted the payment is concerned, EFFECT OF PAYMENT TO UNAUTHORIZED PERSONS GENERAL
the debtor’s consent is immaterial; the payment is valid in any RULE
case. If the payment is made to a person other than those enumerated in Art.
1240, it shall not be valid.

EXCEPTIONS
ART. 1239 1. To a third person, provided that it has redounded to the benefit of
In obligation to give, payment made by one who does not have the free the creditor (Art. 1241, par. 2);
disposal of the thing due and capacity to alienate it shall not be valid, NOTE: The rule cannot be invoked without conclusive proof of
without prejudice to the provisions of Article 1427 under the Title on the benefit to the creditor. It cannot be presumed except in the
“Natural Obligations.” three cases specified in the second paragraph of Art 1241.

2. To the possessor of the credit, provided that it was made in good

CAPACITY TO MAKE PAYMENT
faith (Art. 1242).
The person who pays the obligation should have the necessary legal capacity
NOTE: The possession referred to in the above article is the
to effect such payment; it is essential for the validity of the payment that the
possession of the credit, not the possession of the document
payor should have the 1) free disposal of the thing due, and 2) the capacity to
evidencing it.
alienate it. The absence of one or the other will make the payment invalid.
3. “The debtor who, before having knowledge of the assignment,
Even if the creditor has already accepted it, it may still be annulled by a
pays his creditor shall be released from his obligation.” (Art.

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1626) 1. Dacion en Pago

2. Application of Payment
PAYMENT TO INCAPACITATED PERSONS 3. Cession
Payment made to an incapacitated person shall be valid:
4. Consignation
1. If he has kept the amount or thing paid or delivered; 2.
Payment has been beneficial to the incapacitated DATION (DACION EN PAGO)
person. The delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of obligation. A special
form of payment which is most analogous to a contract of sales. The law on
sales shall govern with the credit as the price of the thing.
ART. 1243
Payment made to the creditor by the debtor after the latter has been REQUISITES
judicially ordered to retain the debt shall not be valid. 1. Existence of a money obligation;
It is in obligations which are not money debts, in which the true
juridical nature of dation in payment becomes manifest. A prior
PAYMENT AFTER JUDICIAL ORDER OF RETENTION agreement of the parties on the delivery of the thing in lieu of the
If the debtor pays the creditor after he has been judicially ordered to retain original prestation shows that there is a novation which
the debt, such payment shall not be valid. After the debtor has received the extinguishes the original obligation, and the delivery is a mere
notice of attachment or garnishment, payment can no longer be made to the performance of the obligation. If the creditor is evicted from the
creditor whose credit has been attached to satisfy a judgment in favour of thing given in dation, the original obligation is not revived.
another person. 2. Alienation to the creditor of a property by the debtor with the
consent of the former;
3. Satisfaction of the money obligation of the debtor.

ART. 1244 Illustration:

The debtor of a thing cannot compel the creditor to receive a different If A executed a promissory note in 2018 promising to pay to B P1M with four
one, although the latter may be of the same value as, or more valuable years from the execution of the note, and in 2021 when the obligation became
than that which is due. demandable the two entered into an agreement by virtue of which A shall
In obligations to do or not to do, an act or forbearance cannot be deliver his automobile to C as the equivalent of the performance of the
substituted by another act or forbearance against the obligee’s will. obligation, the effect is the transformation of the previous contract into a
contract of sale with the automobile as the object and the loan of P1M as the
purchase price.
ART. 1245
Illustration:
Dation in payment, wherein property is alienated to the creditor in
A bound himself to pay B P5M on 31 Dec. 2018. The said date arrived and A
satisfaction of a debt in money shall be governed by the law of sales.
gave to B, instead of the P5M cash, a particular cellular phone which he
bought in the very lucrative and luxurious Divisoria amounting to P5M.
In this case, there is no dation of payment but rather novation.
ART. 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.

NOTE the rule stated in Art. 1246 is based on equity and justice.

WHAT MUST BE PAID

1. If the obligation is to give and the object is a thing which is
specific or determinate, the debtor cannot fulfill his obligation by
delivering a thing which is different from that which is due.
2. If the obligation is to do or not to do and the object is an act or
forbearance which is specific or determinate, the obligor cannot
fulfill his obligation by substituting another act or forbearance
against the obligee’s will.

GENERAL RULE
In both cases, the creditor cannot be compelled to accept the delivery of the
thing or the substitution of the act or forbearance.

EXCEPTION
If the creditor accepts the same, such acceptance shall give the same effect as
a fulfillment or performance of the obligation, which shall be governed by the
law on sales or dation (dacion en pago).

OTHER EXCEPTION
Aside from dacion en pago, a debtor can compel the creditor to accept
another thing or vice versa when:
1. There is an express stipulation by the contracting parties;
2. The nature of the obligation is facultative.

SPECIAL FORMS OF PAYMENT

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LAW ON SALES GOVERNS DACION EN PAGO MONETARY OBLIGATIONS

steps
Dacion en pago is governed by the law on sales for both have the same elements. RULE IN Must be made in the currency stipulated; if it is impossible to
in and
1. There is a consent on both parties; 1. deliver such or when there is no stipulation regarding the
currency, then in the Philippine currency.
2. There is a specific object stipulated to be delivered; For mercantile documents, it shall only produce the same effect
3. There is a price consideration.
2. only when:
a. They have been cashed;
DIFFERENCE OF DATION AND CONTRACT OF SALE
b. They have been impaired by the fault of the creditor.
• DATION - there is a pre-existing contract or obligation. SALE – REASON: For the 2nd rule, the reason behind is that the
there is none. creditor cannot be compelled to accept another thing other than
• DATION – once the dation is perfected, it results to extinguishment that agreed upon.
of the obligation.
The impairment of the negotiable instrument through the fault of r
SALE – once the contract of sale is perfected, it gives rise to 2 obligations: NOTE contemplated by Art. 1249 is applicable only to a document
to deliver the thing and to pay the price. executed
the creditoby a third person and delivered by the debtor to the creditor and does
not apply to instrument executed by debtor himself and delivered to the
EFFECT IF OBJECT IS GENERIC
If there is no precise declaration in the obligation with regard to the quality creditor.
and circumstances of the indeterminate thing which constitutes its object, the
creditor cannot demand a thing of the best quality; neither can the debtor
deliver a thing of the worst quality. If there is disagreement, the law
declares whether the obligation has been complied with or not, depending ART. 1249
upon the purpose of such obligation and other circumstances. 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
ART. 1247 other mercantile documents shall produce the effect of payment only
Unless it is other stipulated, the extrajudicial expenses required by the when they have been cashed, or when through the fault of the creditor
payment shall be for the account of the debtor. With regard to judicial they have been impaired.
costs, the Rules of Court shall govern. In the meantime, the action derived from the original obligation shall be
held in abeyance.

NOTE Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid (Art. 1243), unless
otherwise stipulated, extrajudicial expenses required by the payment shall be
for the account of the debtor (Art. 1247)

EXPENSES OF PAYMENT
If the debtor changes his domicile in bad faith or after he has
incurred in delay, the additional expenses shall be borne by him (Art. 1251).

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 NOTE Pending the cashing of the mercantile document, the creditor cannot
consists. Neither may the debtor be required to make partial payments. bring an action against the debtor during the intervening period as the action
However, when the debt is in part liquidated and in part unliquidated, derived from the original obligation shall be held in abeyance.
the creditor may demand and the debtor may effect the payment of the
former without waiting for the liquidation of the latter. R.A. No. 529 (Sec. 1)
“Every provision contained in, or made with respect to any obligation which
provision purports to give the oblige the right to require payment…other than
GENERAL RULE Philippine currency…is hereby declared against public policy, and null, void
Art. 1248 (1) only applies to obligation where there is only one debtor and and of no effect…”
one creditor.
NOTE RA 529 was repealed by RA 8183. There is no longer any legal
RULES IN DELIVERY OF GENERIC THINGS impediment to having obligations or transactions paid in a foreign currency as
1. Creditor cannot demand a thing of superior quality but, he may long as the parties agree to such arrangement. (DBP v CA, 494 SCRA 25
demand and accept one of inferior quality; [2006])
2. Debtor cannot deliver a thing of inferior quality but he may
deliver one of superior quality, provided it is not of a different LEGAL TENDER
kind. Any currency which may be used for the payment of all debts, whether public
or private. Its significance is manifested by the fact that it is such which the
EXCEPTION debtor may compel a creditor to accept in payment of the debt.
1. When the obligation expressly stipulates the contrary;
2. When different prestations which constitute the object of NOTE Under BSP Circular No. 537 which took effect on 11 Aug. 2006, the
obligation are subject to different terms and conditions; maximum amount of coins to be considered legal is adjusted Sec. 25 of RA
7653 as follows:
3. When the obligation is part liquidated and in part unliquidated.
1. P1,000, for denominations P1, P5, and P10;
2. P100, for denominations P.01, P.05, P.10, P.15 and P.25.

R.A. No. 8183

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All monetary obligations shall be settled in the Philippine currency. Refers to the downward change in the value of one currency in terms of the
However, the parties may agree that the obligation or transaction shall be currency of other nations which occurs as a result of market forces in the
settled in any other currency at the time of payment. foreign exchange market.

PAYMENT BY MEANS OF INSTRUMENTS OF CREDITORS

Promissory notes, checks, bills of exchange and other commercial documents
are not legal tender and the creditor cannot be compelled to accept them. ART. 1251
Nevertheless, the creditor may accept them without producing the effect of Payment shall be made in the place designated in the obligation.
payment. There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made whenever the thing might
Illustration: be at the moment the obligation was constituted. In any other case, the
On 1 Jan. 2017, A borrowed money from B amounting to P5M to be paid on place of payment shall be the domicile of the debtor.
1 Mar. 2018. Upon the arrival of the stipulated date, A gave a personal If the debtor changes his domicile in bad faith or after he has incurred in
check to B to pay his debt. Is the obligation already extinguished? No. Art. delay, the additional expenses shall be borne by him These provisions
1249 (2) provides that monetary papers shall only extinguish the obligation if are without prejudice to venue under the Rules of
it was already converted to cash. Upon the delivery of the personal check of Court
A to B, the obligation still subsists.

NOTE Art. 1251 must be read with Art. 1521.

ART. 1250 NOTE Art. 1251 governs unilateral obligations. Reciprocal obligations are
In case an extraordinary inflation or deflation of the currency stipulated govern by special rules.
should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there NOTE The term “domicile,” as used in Art. 1251, connotes “actual” or
in an agreement to the contrary. “physical” habitation of a person as distinguished from “legal” residence (De
Leon, 320).

REASON It is a debt in value. Illustration:

A and B constituted a contract binding A to pay P5M to B. A is from
INFLATION Cagayan and B is from Sulo. In this case, the place of payment should be in
It is caused by an increase in the volume of money and credit relative to Cagayan.
available goods resulting in a substantial and continuing rise in the general
price level. Illustration:
A bound himself to give a specific motorcycle with the plate number FVCK
DEFLATION 1111 to B on 31 Dec 2018 . At the time of the constitution of the obligation,
It is the reduction in volume and circulation of the available money or credit, the car FVCK 1111 was parked in San Beda University. The said date
resulting in a decline of the general price level. arrived and for an unknown reason, the motorcycle is now parked on the roof
of the Manila City Hall. In this case, the place of payment must be in San
EXTRAORDINARY INFLATION OR DEFLATION Beda University for the law provides that payment of the determinate thing
It is the uncommon decrease or increase in the purchasing power of the must be at the place where the thing is during the time of constitution and not
currency which could not have been foreseen or which was manifestly the time of fulfillment of the obligation.
beyond the contemplation at the time when the obligation was established
NOTE In payment, any expenses incurred by the creditor must be borne by
REQUISITES the creditor alone for it is incumbent for him to do such.
1. There must be a decrease or increase in the purchasing power of
the currency which is unusual or beyond the common fluctuation NOTE In putting the thing to be deliverable state, the expenses must be borne
in the value of the currency; by the debtor.
2. Such decrease or increase could not have been reasonable foreseen
or which was manifestly beyond the contemplation of the parties
at the time the obligation was established; 3. The obligation is S U B S E C T I O N 1 APPLICATION OF PAYMENT
contractual in nature.
REASON From the employment of the words “extraordinary
inflation or deflation of the currency stipulated,” it can be
seen that the legal rule in Art. 1250 envisages ”contractual” ART. 1252
obligations where a currency is selected by the parties as the He who has various debts of the same kind in favour of one and the same
medium of payment. 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
NOTE The value of the currency at the time of the establishment of the the application of payment is made by the party for whose benefit the
obligation shall be the basis of payment. The law does not say it should be term has been constituted, application shall not be made as to debts
the amount paid. which are not yet due.

NOTE Even if the price index of the goods and services may have risen
during the intervening period, this increase, without more, cannot be
considered as resulting in “extraordinary inflation” as to justify the
application of Art. 1250. There must be a declaration of such extraordinary
inflation or deflation by the Bangko Sentral.

DEVALUATION
Involves an official reduction in the value of one currency from an officially
fixed level imposed by monetary authorities.

DEPRECIATION

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If the debtor accepts from the creditor a receipt in which an application is being paid. After applying the payment to a debt, he cannot
of the payment is made, the former cannot complain of the same, unless claim that it should be applied to another debt;
there is a cause for invalidating. 2. The right to make the application once exercise is irrevocable
unless the creditor consents to the change;
3. The debtor’s right to apply payment is not mandatory but merely
NOTE Art. 1252 must be read with Art. 1792. directory as evidenced by the word “may” rather than “shall” in
Art. 1252;
APPLICATION OF PAYMENT 4. If the creditor has not also made the application, or if the
It is the designation of the debt to which the payment must be applied when application is not valid (par. 2), the debt, which is most onerous to
the debtor has several obligations of the same kind in favour of the same the debtor among those due, shall be deemed to have been
creditor. satisfied (Art. 1254, par. 1);
5. If the debts due are of the same nature and burden, the payment
REQUISITES [12 AN] shall be applied to all of them proportionately (Art. 1252, par. 2);
1. There must be only one debtor and creditor; EXCEPTIONS: 6. If neither of the party has exercised the right or if there is a
1. Obligations with solidary debtors; 2. disagreement, the court will apply the payment according to the
Obligation with a guarantor; justice and equity of the case, taking into consideration all its
3. Partnership. circumstances.

Illustration Illustration
On 1 Jan 2017, A borrowed P5M from D payable on 1 Dec. A owes to B the following debts:
2018. On 5 Jan 2017, A, together with his best friends forever B 1. P1,500 payable on 1 Jan 2018;
and C borrowed P5M from D payable on 5 Dec. 2018. On 6 Dec. 2. P1,200 payable on 2 Jan 2018;
2018, A paid P5M to D. In this case, A can designate the payment
3. A specific table worth P2,000 to be delivered on 3 Jan 2018;
either to his debt (1 Jan 2017) or the solidary debt (5 Jan 2017).
Same thing with respect to an obligation with a guarantor. 4. P1,000 payable on 1 Sept 2018.

On 1 June 2018, A paid B P1,500. A may apply the P1,500 to debt 1,or to
2. There must be 2 or more debts of the same kind;
both debt 1 and 2 (partial payment only, provided that B does not object). If
It is also essential that each of the debt must be identical, the
A paid only P1,000, he cannot choose to apply his payment to debt 1 because
same in nature or of homogenous specie.
B cannot be compelled to receive partial payment (Art. 1248). A
cannot apply his payment to debt 3 because it is not the same kind for A must
EXCEPTION: When some of the obligations are not identical deliver the thing agreed upon (Art. 1244). Neither can A apply it to debt 4
specie at the time of their constitution, and at the time of because it is not yet due, unless there is a stipulation to the contrary or he has
designation or application is made, such obligation had already the benefit of the period.
been converted into obligations to indemnify with damages by If A does not make a choice, B can make the designation with the consent of
reason of breach or non-fulfillment A (“if the debtor accepts” in Art. 1252, par 2).
If B does not make the application in the receipt or no receipt was issued b
Illustration: him, then the legal rules in Art. 1254 will govern.
On 1 Jan 2017, A bound himself to give B P5M on 1 Dec
2018. On 5 Jan 2017, A bound himself again to give a specific
dog named “dog” which he bought at SM Savemore for P5M on
5 Dec 2018. On 5 Dec 2018, A paid B P5M. In this case, A
ART. 1253
cannot designate the payment whether the same should be for the
If the debt produces interest, payment of the principal shall not be
case or for the dog.
deemed to have been made until the interests have been covered.
Nevertheless, if on 1 June 2018, for no apparent reason A ate
the dog named “dog.” The obligation is thus converted into one
which indemnifies the creditor. On 5 Dec 2018, A paid B P5M. In
this case, A can designate the payment whether the same should NOTE In a contract where there is instalment payments with interest against
be for the case or for the dog named “dog.” the remaining balance, it is the duty of the creditor to inform the debtor of the
amount of interest that falls due and that he is applying the instalment to
NOTE The determination of the nature of the obligation is cover said interest.
determined at the time of payment and not at the time of the
constitution of the obligation. NOTE A party to a contract who unqualifiedly and unconditionally accepts
the settlement of his claim for damages without reservation as to interest or
any other further claim from the other party is estopped from claiming
3. All of the debts must be due;
interest thereafter. But accepting from a surety does not waive the right to
EXCEPTION:
recover interest from debtor.
a. When there is a stipulation to the contrary;
b. The application of payment is made by the party for
whose benefit the term or period has been constituted.
ART. 1254
4. The amount paid by the debtor must not be sufficient to cover the When the payment cannot be applied in accordance with the preceding
total amount of all the debts. rules, or if application cannot be inferred from other circumstances, the
debt which is most onerous to the debtor, among those due, shall be
APPLICATION AS TO DEBTS NOT YET DUE deemed to have been satisfied.
The application of payments as to debts not yet due cannot be made unless: If the debts due are of the same nature and burden, the payment shall be
1. There is a stipulation that the debtor may so apply; applied to all of them proportionately.
2. It is made by the debtor or creditor for whose benefit the period
has been constituted (Arts. 1196, 1792).
LEGAL APPLICATION OF PAYMENT
The debt which is more onerous to the debtor, among those due, shall e
RULES ON APPLICATION OF PAYMENTS (DE LEON, 321)
deemed to have been satisfied.
1. The debtor has the first choice, unless the debtor does not apply in
such case will the right be granted to the creditor, which must be 1. When the payment cannot be applied in accordance with the
indicated at the time of making payment which particular payment preceding rules;

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2. If the application cannot be inferred from the circumstances. 4. Abandonment of all debtor’s property not exempt from execution
in favor of creditors, unless exemption is validly waived by the
REASON In making the application of payment, the law considers debtor;
particularly the interest of the debtor. It is assumed that if the debtor had 5. Acceptance of the cession by the creditors.
chosen the debt to be paid, he would have relieved himself first of the most
burdensome debt. Illustration:
A owes P5M to B payable on or before 31 Dec 2018. On 28 Feb 2018, A
RULES WHEN DEBTS ARE NOT OF SAME BURDEN went to B to deliver a personal check amounting to P5M. B refused to accept
The most onerous to the debtor shall be deemed to have been satisfied. the same. Can A go to court to compel B to accept the personal check? No.
1. The oldest are more onerous to the debtor than the more recent (see Art. 1249).
ones.
2. Interest bearing debts are more onerous than those which do not, NOTE In case the creditors do not accept the cession, a similar result may be
even if the latter were incurred at an earlier date. obtained by proceeding in accordance with the Insolvency Law, Act No.
3. As between two debts with interest, that with higher interest rate is 1956.
more onerous.
4. A secured debt is more onerous than that which is not. EFFECT OF PAYMENT BY CESSION
The assignment does not make the creditors the owners of the property and
5. A debt in which the debtor is principally bound is more onerous the debtor is released from obligation only up to the net proceeds of the sale
than that which he is merely a guarantor or surety. of the property assigned. Unless there is a stipulation to the contrary.
6. A debt in which he is solidarily bound is more onerous than that
which he is only a sole debtor. KINDS OF CESSIONS
7. An obligation for indemnity is more onerous than that which is by 1. Contractual (Art. 1255)
way of penalty. NOTE Refers to voluntary or contractual assignment which
8. Liquidated debts are more onerous than unliquidated ones. requires the consent of all the creditors. It involves a change of
the object of the obligation by agreement of the parties and at the
NOTE When it is fairly impossible to determine which of the debts due is the same time fulfilling the same voluntarily.
most onerous or burdensome to the debtor, or when the debts due are of the 2. Judicial (regulated by Insolvency Law)
same nature and burden, payment shall be applied proportionately or pro rata, a. Voluntary
in accordance to the general rules on payment in Arts. 1232-1251.
b. Involuntary
NOTE If the debt produces interests, payment of the principal shall not be
[#FOE3N]
deemed to have been made until the interests have been covered (Art. 1253);
applies only in the absence of an agreement to the contrary and is merely DATION CESSION
directory and not mandatory, hence, the benefits of Art. 1253 may be waived As to number of parties
by way of stipulation. One creditor Plurality of creditors
As to financial condition of parties
Illustration: Debtor is not necessarily in state of Debtor must be insolvent.
The debtor owes his creditor several debts, all of them due: 1) an unsecured financial difficulty or insolvency.
debt; 2) a debt secured with mortgage of the debtor’s property; 3) a debt As to object
bearing interest; 4) a debt in which the debtor is solidarily liable with Thing delivered is considered as Universality of property of debtor is
another. Partial payment was made by the debtor. Assuming that the debtor equivalent of performance. what is ceded.
had not specified the debts to which the payment should be applied and, on As to effect to the obligation
the other hand, the creditor had not specified in the receipt he issued the Extinguishes obligation to the extent Merely releases debtor for net of
application of payment, the order of payment should be: 4, 2, 3 and 1. the value of the thing delivered as proceeds of things ceded or
agreed upon; implied from the assigned, unless there is contrary
conduct of the creditor. intention.
S U B S E C T I O N 2 PAYMENT BY CESSION

As to the extent of properties involved

Does not involve all properties of Involves all the properties of the
ART. 1255 debtor. debtor.
The debtor may cede or assign his property to his creditors in payment As to the effect to the creditor
of his debts. This cession, unless there is stipulation to the contrary, shall Creditor becomes owner of the The creditors only acquire the right
only release the debtor from responsibility for the net proceeds of the property of the debtor. to sell the thing and apply the
thing assigned. The agreements which, on the effect of the cession, are proceeds to their credits pro rata.
made between the debtor and his creditors shall be governed by special As to nature
laws. An act of novation (Art. 1291 [1]) Not an act of novation.

NOTE Both are substitute forms of payment or performance. They are

CESSION OR ASSIGNMENT governed by the law on sales.
A special form of payment whereby the debtor abandons all of his property
for the benefit of his creditors in order that from the proceeds thereof the
latter may obtain payment of their credits.
S U B S E C T I O N 3 TENDER OF PAYMENT AND
CONSIGNATION
NOTE What is transferred in cession, unlike dacion en pago which transfers
ownership, is the management and/or administration of the property in order
to sell the thing of the debtor for the fulfillment of obligation.
ART. 1256
REQUISITES [22 – IAA]
If the creditor to whom tender of payment has been made refuses
1. 2 or more debts; without just cause to accept it, the debtor shall be released from
2. 2 or more creditors; responsibility by the consignation of the thing or sum due. Consignation
3. Insolvency of the debtor; 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;
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2. When he is incapacitated to receive the payment at the time it

is due; CONSIGNATION
3. When, without just cause, he refuses to give a receipt; 4. The act of depositing the thing or amount due with the proper court when the
When two or more persons claim the same right to creditor does not desire, or refuses to accept payment, or cannot receive it,
collect; after complying with the formalities required by law.
5. When the title of the obligation has been lost.
NOTE Consignation, being a form of payment, presupposes that there must
be a debt that must be paid. Tender of payment alone would be sufficient to
NOTE For the 2nd enumeration, kindly read Art. 1241. preserve the right of the redemptioner or the vendee a retro.

NATURE OF CONSIGNATION
A facultative remedy which the debtor may or may not avail of. If made by
ART. 1257 the debtor, the creditor merely accepts it if he wishes; or the court declares
In order that the consignation of the thing due may release the obligor, it that it has been properly made, in either of which events the obligation is
must first be announced to the person interested in the fulfillment of the extinguished. The debtor can withdraw the thing before acceptance by the
obligation. creditor or cancellation by the court.
The consignation shall be ineffectual if it is not made strictly in The debtor has the right to refuse to make the deposit and has the right to
consonance with the provisions which regulate payment. withdrawal. If he refuses, the creditor must fall back on the proper coercive
processes provided by law to secure or satisfy his credit.

RATIONALE OF CONSIGNATION
ART. 1258 Tender of payment and consignation produces the effect of payment and
Consignation shall be made by depositing the things due at the disposal extinguishes an obligation in order to avoid greater liability.
of judicial authority, before whom the tender of payment shall be proved, 1. Failure to consign, the debtor may become liable for damages
in a proper case, and the announcement of the consignation in other and/or interest but such failure is not tantamount to a breach where
cases. by the fact of tendering payment he was willing and able to
The consignation having been made, the interested parties shall be comply with his obligation (see Art. 1260).
notified thereof.
2. The matter of suspension of the running of interest on the loan is
governed by principles which regard reality rather than
technicality, substance rather than form. Good faith of the offeror
TENDER OF PAYMENT or ability to make good the offer should in simple justice excuse
It consists in the manifestation made by the debtor to the creditor of his the debtor from paying interest after the offer was rejected.
intention to comply immediately with his obligation. Even if it is valid, it (Gregorio Araneta, Inc. v De Palerno, 91 Phil. 786 [1952]).
does not by itself produce legal payment, unless it is completed by
consignation.
It is the act, on the part of the part of the debtor, of offering to the creditor the
TENDER OF PAYMENT CONSIGNATION
thing or amount due. It is an act preparatory to consignation, which is the
principal, and from which are derived the immediate consequences which the As to description
debtor desires or seeks to obtain. Manifestation of the debtor to the Deposit of the object of the
creditor of his decision to comply obligation in a competent court in
NOTE There must be a fusion of intent, ability and capability to make good immediately with his obligation. accordance with the rules prescribed
such offer, which must be absolute and must cover the amount due. by law, after refusal or inability of
the creditor to accept the tender of
REQUIREMENTS FOR VALID TENDER OF PAYMENT [CUA] payment.
As to the at involved
1. Must comply with the rules on payment (Arts. 1256-1258);
Preparatory act Principal act
2. Must be unconditional and for the whole amount; As to character
3. Must be actually made for manifestation of a desire or intention Extrajudicial Judicial
to pay is not enough;
GENERAL REQUISITE OF CONSIGNATION
EFFECTS ON INTEREST Refers to those requisites in connection with payment in general (Art. 1232-
1. When a tender of payment is followed by consignation – accrual of 1251) such as person who pays, the person to whom payment is made, the
interest on the obligation will be suspended from the date of such object of the obligation which must be paid or performed, and the time when
tender; obligation or performance becomes demandable.
2. When the tender of payment is not accompanied by consignation –
then interest is not suspended from the time of such tender. SPECIAL REQUISITES OF CONSIGNATION [VRP - PlaceS]
1. There is a valid debt (Art 1256, par. 1);
EXERCISE OF RIGHT OF REPURCHASE
In case of exercise of right of repurchase by tender of check, such tender is 2. The creditor refused to accept the payment without just cause, or
valid because it is an exercise of a right and not made as a mode of payment because any of the causes stated by law for effective consignation
of an obligation. Art. 1249 is not applicable. without previous tender of payment exists (Ibid.);

WHEN TENDER OF PAYMENT NOT REQUIRED BEFORE DEBTOR In order that consignation will be effective, there must have
CAN CONSIGN THE THING DUE WITH THE COURT been a tender of payment made by the debtor to the creditor. It is
1. When the creditor waives payment on the date when the payment required [PUR]
will be due (Kapisanan Banahaw v Dejarme and Alvero, 55 Phil a. That tender of payment must have been made prior to
229 [1930]); the consignation;
2. When the mortgagee had long foreclosed the mortgage b. That it must have been unconditional;
extrajudicially and the sale of the mortgaged property had already
been scheduled for non-payment of the obligation, and that despite c. That the creditor must have refused to accept the
the fact that mortgagee already knew of the deposit made by the payment without just cause
mortgagor because the receipt of the deposit was already attached
to the record of the case. (Rural Bank of Caloocan v CA, 104 3. That previous notice of the consignation had been given to the
SCRA 151 [1981]). persons interested in the fulfillment of the obligation;

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NOTE Lack of prior or previous notice will not make the NOTE The consignation is made necessary because of the fault or unjust
obligation void or invalid; the debtor will bear all the expenses refusal of the creditor to accept payment; it is but just that the expenses
for the consignation was not made properly (see Art. 1259). should be charged against him. But it will be chargeable to the debtor if the
consignation is not properly made.
NOTE 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) ART. 1260
Once the consignation has been duly made, the debtor may ask the judge
4. That the thing or amount due had been placed at the disposal of or order the cancellation of the obligation.
judicial authority; Before the creditor has accepted the consignation, or before a judicial
This requirement is complied with if the debtor declaration that the consignation has been properly made the debtor may
deposits the thing or amount, which the creditor had refused or withdraw the thing or the sum deposited, allowing the obligation to
had been unable to accept, with the Clerk of Court. remain in force.

5. Subsequent notice made to the person interested with the

fulfillment of the obligation ART. 1261
REASON To enable the creditor to withdraw the goods or money If the consignation having been made, the creditor should authorize the
deposited. debtor to withdraw the same, he shall lose every preference which he
may have over the thing. The co-debtors, guarantors and sureties shall
NOTE The court gives the subsequent notice in order to acquire be released.
the jurisdiction over the parties particularly the defendant
creditor. Hence, lack of subsequent notice will render the
consignation void for lack of jurisdiction of the court.
NOTE Kindly read alongside with Art. 1261 the provisions of Art. 2079.
NOTE The absence of any of the requisites is enough ground to render CONSIGNATION, WHEN PROPERLY MADE
consignation ineffective. Compliance with the requirements is mandatory.
The law speaks of “thing.” It makes no distinction between real and personal 1. When creditor accepts the thing or amount deposited as payment
property. of the obligation without contesting the efficacy or validity of the
consignation (Art. 1260, par. 2);
VALID CONSIGNATION WITHOUT PRIOR TENDER OF 2. When the creditor contests the efficacy or validity of the
PAYMENT [AIR – TL] consignation and the court finally decides that it has been properly
made or cancels the obligation at the instance of the debtor in
1. Creditor is absent or unknown, or does not appear at the place of
accordance with the provision of Art. 1260 (1).
payment;
NOTE absence need not be judicially declared. He must, however, have no
legal representative to accept the payment. NOTE The creditor may accept the consignation with reservation or
qualification; therefore, he is not barred from raising the claims he reserved
against the debtor.
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 EFFECTS OF CONSIGNATION
or more persons claim the right to collect; 1. If the creditor accepts the thing without contesting the validity of
5. When the title of the obligation has been lost. the consignation, it is logical that the obligation is extinguished;
2. It will be litigation should the creditor contest the validity of the
NOTE The list is not exclusive. The rule also applies if the creditor, prior to same, is not interested, or is unknown or absent. If during the
the tender of payment, intimidated that he will not accept the debtor’s trial, the plaintiff-debtor is able to establish that all the requisites
payment. of consignation have been complied with, the obligation is
extinguished.
EFFECT OF VALID TENDER OF PAYMENT
The obligation is not extinguished, unless it is completed by consignation. It EFFECTS OF WITHDRAWAL
exempts the debtor from payment of interest and/or damages. 1. Before acceptance or judicial declaration of valid consignation
a. Obligation remains in force;
NOTE Consignation must be with proper judicial authority (i.e., court) and b. Withdrawal by the debtor at this stage is a matter of
not elsewhere (e.g., bank) unless otherwise prescribed by special law. right because he still owns the thing.
2. With the consent of the creditor
NOTE A written tender of payment alone, without consignation in court of
the sum due, does not suspend the accruing of regular or monetary interest. a. Creditor loses every preference which he may have
Tender of payment must be accompanied or followed by consignation in over the thing;
order that the effects of payment may be produced. b. Solidary co-debtors, guarantors and sureties are
released;
NOTE The consignation has a retroactive effect. The payment is deemed to c. Solidary debtors are released only from their solidary
have been made at the time of the deposit of the thing in court or when it was liability but not from their shares of their obligation;
placed at the disposal of the judicial authority. d. The obligation is revived but without prejudice to other
interested parties.
NOTE Property deposited with court is exempt from attachment and not e. Withdrawal by the debtor at this stage is a matter of
subject to execution. privilege.

Q Before the creditor has accepted the consignation or before judicial

declaration of valid consignation, the debtor opted not to withdraw the thing.
ART. 1259 Can the creditor attach the same property since the debtor still owns the
The expenses of consignation, when properly made, shall be charged thing?
against the creditor.
A No. Property deposited with court is exempt from attachment and not
subject to execution; it is said to be in custodia legis and cannot be withdrawn
without an express order from the court.
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6. When the debtor promised to deliver the same thing to two person
RISK OF LOSS OF THING OR SUM CONSIGNED who do not have the same interest (Art. 1165);
1. To be suffered by the creditor; 7. When the obligation to deliver arises from a criminal offense (Art.
All the requisites for a valid consignation have been complied 1268);
with and the debtor is without fault before the acceptance or 8. When the obligation is generic (Art. 1263).
approval of the consignation.
2. To be suffered by the debtor. NOTE If the loss is through theft, the debtor is considered negligent having
The risk of loss before acceptance or approval is mutual because placed the thing within the reach of thieves and not in a secure and safe place.
if it be determined that there was no valid consignation, the loss In theft, taking is accomplished without the use of violence or force.
must be suffered by the debtor. (Sia v CA, 91 Phil. 355, [1952])

NOTE To have the effect of payment, the law requires the twin acts of tender
of payment and consignation. Tender of payment without consignation only ART. 1263
frees the debtor from the obligation to pay interest on the outstanding amount In an obligation to deliver a generic thing, the loss or destruction of
from the time the unjustified refusal takes place. anything of the same kind does not extinguish the obligation.

NOTE Creditor can be held liable for damages under Art 19 for unjustified
refusal to accept. GENERAL RULE
The loss or destruction of anything of the same kind even without the
debtor’s fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.
SECTION 2 REASON The genus of a thing can never perish (genus nunquam peruit).
LOSS OF THE THING DUE Hence, the debtor can still be compelled to deliver a thing which must be
neither of superior nor inferior quality.

EXCEPTION
Art. 1262 Delimited Generic Thing – when there is a limitation of the generic object to
An obligation which consists in the delivery of a determinate thing shall a particular existing mass or a particular group of things, the obligation is
be extinguished if it should be lost or destroyed without the fault of the extinguished by the loss of the particular mass or group or limited quantity
debtor, and before he has incurred in delay. from which the prestation has to be taken.
When by law or stipulation, the obligor is liable even for fortuitous
events, the loss of the thing does not extinguish the obligation, and he
shall be responsible for damages. The same rule applies when the nature
of the obligation requires the assumption of risk. ART. 1264
The Courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to extinguish
NOTE Kindly read alongside with Art. 1262 the provisions of Art. 1174. the obligation.

LOSS OF THE THING DUE

The thing which constitutes the object of the obligation EFFECT OF PARTIAL LOSS GENERAL
RULE
1. Perishes;
Partial loss does not extinguish the obligation.
2. Goes out of the commerce of man;
3. Disappears in such a way that its existence is unknown or it cannot EXCEPTION
be recovered. When the partial loss or destruction of the thing is of such importance that
It means impossibility of compliance with the obligation through any cause would be tantamount to a complete loss or destruction.
(see Art. 1266). It extends to both obligations to give and obligations to do.
Illustration:
EFFECTS OF LOSS IN DETERMINATE OBLIGATIONS TO GIVE A obliged himself to deliver to B a specific race horse. The horse met an
The obligation is extinguished. accident as a result of which it suffered a broken leg. The injury is
permanent. Here, the partial loss is so important as to extinguish the
REQUISITES obligation.
1. The thing which is lost must be determinate; If the loss is due to the fault of A, he shall be obliged to pay the value of the
2. The thing is lost without any fault of the debtor; otherwise, it will horse with indemnity for damages.
not be extinguished but will be converted into one with indemnity If the horse to be delivered is to be slaughtered by B, the injury is clearly not
for damages; important. Even if there was fault on the part of A, he can still deliver the
3. The thing is lost before the debtor has incurred in delay. horse with liability for damages, if any, suffered by B.

EFFECTS OF FORTUITOUS EVENT

If the thing which constitutes the object of obligation is lost or destroyed
through a fortuitous event, the debtor cannot be held responsible ; the ART. 1265
obligation is extinguished. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
EXCEPTIONS [PLAS - OTOG] contrary, and without prejudice to the provisions of Art. 1165. This
presumption does not apply in case of earthquake, flood, storm or other
1. Loss of thing is partly due to the fault of the debtor;
natural calamity.
2. When the law so provides (Art. 1262);
3. When the nature of the obligation requires an assumption of risk
(Art. 1262); RULE IF THING IS IN DEBTOR’S POSSESSION
4. When the stipulation so provides (Art. 1262); GENERAL RULE
5. Loss of the thing occurs after the debtor incurred in delay (Art. If the thing is lost while in the possession of the debtor it shall be presumed
1262); that the loss was due to his fault, unless there is proof to the contrary and
without prejudice to the provisions of Art. 1165.

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The impossibility is relative because the difficulty of performance triggers a

EXCEPTION manifest disequilibrium in the prestations, such that one party would be
No such presumption in case of earthquake, flood, storm or other natural placed at a disadvantage by the unforeseen event.
calamity. Lack of fault on the part of the debtor is more likely. So it is unjust Impossibility shall release the obligor.
to presume negligence on his part. There is no physical or legal loss but the object of the obligation belongs to
another, the performance by the debtor becomes impossible. Failure of
Illustration: performance is imputable to the debtor. Thus, the debtor must indemnify the
A borrowed a specific car from B. on the due date of the obligation, A told A creditor for the damages suffered by the latter.
that the car was stolen and that he was not at fault. That is not enough to
extinguish A’s obligation. It is presumed that the loss was due to his fault. NOTE Under Art. 1267, the remedy of the obligor is not annulment but to
Hence, he is liable unless he proves the contrary. be released from his obligation, in whole or in part.
Suppose the house of B was destroyed because of fire. It is admitted that
there was a fire and it was accidental and that the car was in the house at the DOCTRINE OF UNFORESEEN EVENTS/ FRUSTRATION OF
time it occurred. Here, A is not liable unless B proves fault on the part of A. ENTERPRISE
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the
obligor in whole or in part. The intention of the parties should govern and if
ART. 1266 it appears that the service turns out to be so difficult as to have been beyond
The debtor in obligations to do shall also be released when the prestation their contemplation, it would be doing violence to that intention to hold the
becomes legally or physically impossible without the fault of the obligor. obligor still responsible.

DOCTRINE OF REBUS SIC STANTIBUS

The prestation constituting the object of the obligation must have become Things thus standing. The parties stipulate in the light of certain prevailing
legally or physically impossible of compliance without the fault of the obligor conditions and once these conditions cease to exist, the contract also ceases to
and before he has incurred in delay, otherwise, the obligation shall be exist.
converted into one of indemnity for damages. Impossibility must have
occurred after the constitution of the obligation. NOTE Art. 1267 speaks of a “service,” – a personal obligation. Thus real
obligations are not within its scope. It refers to the “performance” of the
KINDS OF IMPOSSIBILITY obligation.
1. Legal impossibility – the law imposes duties of a superior
character upon the obligor which are incompatible with the work EFFECT OF LOSS ON RECIPROCAL OBLIGATIONS
agreed upon, although the latter may be perfectly licit. • If an obligation is extinguished by the loss of the thing or
2. Physical impossibility – arises principally from the death of the impossibility of performance through fortuitous events, the
obligor, when the act to be performed requires his personal counter-prestation is also extinguished. The debtor is released
qualifications, or from the death of the obligee, when the act can from the liability but he cannot demand the prestation which has
be of possible benefit only to him. been stipulated for his benefit. He who gives nothing has no
reason to demand.
NOTE Does not apply to obligations to give. • The loss or impossibility of performance must be due to the fault
of the debtor. In this case, the injured party may ask for rescission
NATURAL IMPOSSIBILITY IMPOSSIBILITY IN FACT under Art. 1191 plus damages. if the loss or impossibility was due
to a fortuitous event, the other party is still obliged to give the
As to the thing prestation due to the other.
Must consist in the nature of the In the absence of inherent
thing to be done and not the inability impossibility in the nature of the
of the party to do so. thing stipulated to be performed,
which is only improbable or out of ART. 1268
the power of the obligor. When the debt of a thing certain and determinate proceeds from a
As to the effect criminal offense, the debtor shall not be exempted from the payment of
Renders the contract void. Does not render the contract void. its price whatever may be the cause for the loss, unless the thing having
been offered by him to the person who should receive it, the latter
refused without justification to accept it.
NOTE Natural impossibility is reckoned from the time of constitution of the
obligation. Thus, the obligation remains void even if the prestation
subsequently becomes possible.
NOTE Kindly read alongside Art. 1268 the provisions of Art. 552
NOTE In subsequent partial impossibility, Art. 1264 applies.
RULE IF OBLIGATION ARISES FROM CRIMINAL OFFENSE
Applicable not only to the case where there is an obligation of restitution of a
NOTE Temporary impossibility does not extinguish the obligation but merely certain and determinate thing on the part of the person criminally liable as
delays its fulfillment. This presupposes that the duration of impossibility has provided for in the Penal Code, but also to the case where such obligation
been contemplated by the parties; otherwise, the same may extinguish the arises by virtue of reparation or indemnification. Also applies to those
obligation under Art. 1267. In the latter case, the fact that the prestation later subsidiarily liable.
becomes possible does not revive the obligation.
GENERAL RULE
Debtor shall not be exempted from the payment of the price whatever may be
the cause for the loss.
ART. 1267
When the service has become so difficult as to be manifestly beyond the EXCEPTION
contemplation of the parties, the obligor may also be released therefrom, When the thing having been offered by the debtor to the person who should
in whole or in part. receive it, the latter refused without justification.

NOTE The offer referred in Art. 1268 should not be confused with
consignation; the latter refers only to the payment of the obligation, the
EFFECT OF RELATIVE IMPOSSIBILITY former refers to the extinguishment of the obligation through loss by
fortuitous event.

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• Art. 752. The provisions of Art. 750 notwithstanding, no person

NOTE When the offer was refused to be accepted without justification, the may give or receive by way of donation, more than he may give or
debtor may either: receive by will. Donation shall be inofficious in all that it may
1. Make a consignation of the thing and thereby completely relieve exceed this limit.
himself of further liability; • Art. 771. Donations which in accordance with the provisions of
2. He may keep the thing in his possession, in which the case, the Art. 751, are inofficious, bearing in mind the estimated net value
obligation shall still subsist but if the thing is lost through of the donor’s property at the time of his death, shall be reduced
fortuitous event, Arts. 1262 and 1265 shall govern. with regard to the excess, but this reduction shall not prevent the
donations from taking effect during the life of the donor, nor shall
NOTE Art. 1268 specifically applies only to determinate things. it bar the done from appropriating the fruits.

Illustration:
A is indebted of a certain amount of money to B. On the payment should be
ART. 1269 made, B condoned the debt of A because of their friendship. A refused to be
The obligation having been extinguished by the loss of the thing, the condone and he intends to pay B because he just won the “jueteng”
creditor shall have all the rights of action which the debtor may have In this case, A can go to court for consignation due to the refusal of B to
against the third persons by reason of the loss. accept the payment.

EVIDENCE REQUIRED TO PROVE REMISSION

RIGHT OF THE CREDITOR TO PROCEED AGAINST THIRD Remission, being an act of liberality, should be proved by cleared and more
PERSON convincing evidence than what is required to establish payment.
The creditor is given the right to proceed against the third person responsible
REMISSION MUST BE GRATUITOUS
for the loss. There is no need for an assignment by the debtor. The rights of
It is an essential characteristic of remission that there is no equivalent
action of the debtor are transferred to the creditor from the moment the
received for the benefit given, otherwise it would be:
obligation is extinguished, by operation of law to protect the interest of the
latter by reason of the loss. 1. Dation in payment, if a thing is received by the creditor instead of
the amount due (Art. 1245);
2. Cession, if the assignment of property is for the benefit of the
creditors (Art. 1255);
3. Novation, if the object or circumstances of the obligation are
SECTION 3 changed (Art. 1291);
CONDONATION OR REMISSION OF DEBT 4. Compromise, if what is renounced is a doubtful or litigious right
in exchange of other concessions obtained by the creditor.
Compromise – a contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an end to one
ART. 1270 already commenced. (Art. 2028)
Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly. One Q Can the creditor renounce his credit even against the will of the debtor?
and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the A Yes. Such unilateral renunciation is allowed. Art. 6 provides that “Rights
forms of donation. may be waived, unless the waiver is contrary to law, public order, public
policy, morals or good customs, or prejudicial to a third person with a right
recognized by law.” In such case, the debtor may consign the payment at the
CONDONATION disposal of the judicial authority.
It is an act of liberality by virtue of which the obligee, without receiving any
price or equivalent, renounces the enforcement of the obligation, as a result of KINDS OF REMISSION
which it is extinguished in its entirety or in that part or aspect of the same to 1. As to extent
which the remission refers.
a. Complete/total – when it covers the entire obligation;
It is the gratuitous abandonment by the creditor of his right.
b. Partial – when it does not cover the entire obligation.
REQUISITES [GAD-PIC] 2. As to its form
1. Must be gratuitous; a. Express – when it is made either verbally or in writing;
2. The obligor must accept the same; b. Implied – When it can only be inferred from the
conduct.
3. Obligation must be due; 3. As to its constitution
4. Parties must be capacitated; a. Inter vivos – when it is constituted by the agreement of
5. Must not be inofficious; the obligee and obligor;
6. If made expressly, it must comply with the forms of donation. b. Mortis cause – when it constituted by law will and
testament.
EXTENT OF REMISSION
Whether express or implied, the extent of remission or condonation shall be INOFFICIOUS REMISSION
governed by the rules regarding inofficious donation. Hence, the following No one can give more than that which he can give by will, otherwise, the
rules are applicable: excess shall be inofficious and shall be reduced by the court accordingly.
• Art. 750. The donation may comprehend all the present property Those which are prejudicial to the legitimes of the compulsory heirs.
of the donor, or part thereof, provided he reserves, in full
ownership or in usufruct, sufficient means for the support of EFFECT OF INOFFICIOUS REMISSION
himself, and of all relatives who, at the time of the acceptance of Testamentary dispositions which impair the legitime shall be reduced on
the donation, are by law entitled to be supported by the donor. petition of the heirs (see. Art. 887) insofar as they are inofficious or excessive.
Without such reservation, the donation shall be reduced on Legitime is that part of the testator’s property which he cannot dispose of
petition of any person affected. because the law has reserved it for certain heirs.
• Art. 751. Donations cannot comprehend future property. By future
property is understood anything which the donor cannot dispose of FORM OF EXPRESS REMISSION
at the time of the donation. The following provisions are applicable:

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• Art. 748. The donation of a movable object may be made orally or

in writing.
An oral donation requires the simultaneous delivery of the thing
ART. 1274
or of the document representing the right donated.
It is presumed that the accessory obligation of pledge has been remitted
If the value of the personal property donated exceeds P5,000, the
when the thing pledged, after its delivery to the creditor, is found in the
donation and the acceptance shall be made in writing.
possession of the debtor, or of a third person who owns the thing.
Otherwise, the donation shall be void.
• Art. 749. In order that the donation of an immovable may be valid,
it must be made in a public document, specifying therein the NOTE While the accessory obligations cannot exist without the principal
property donated and the value of the charges which the done must obligation, the latter may exist without the former.
satisfy.
The acceptance may be made in the same deed of donation or in a
NOTE If obligation is joint, the remission can only affect the share of the
separate public document, but is shall not take effect unless it is
creditor who makes the remission and the corresponding share of the debtor
done during the lifetime of the donor.
in whose favor the remission is made. If the obligation is solidary, the
If the acceptance is made in a separate instrument, the donor shall
provisions of Arts. 1215, 1219 and 1220 shall govern.
be notified thereof in an authentic form, and this step shall be
noted in both instruments.
RULE IN PLEDGE
It is presumed that the accessory obligation of pledge has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession
of the debtor or of a third person who owns the thing.
ART. 1271
The delivery of a private document evidencing a credit, made voluntarily Illustration:
by the creditor to the debtor, implies the renunciation of the action which
If A pledged his watch to B as security for an indebtedness of P1,000, and
the former had against the latter.
subsequently, the watch is found in his possession, there arises a presumption
If in order to nullify this waiver it should be claimed to be inofficious, the of remission of the accessory obligation of pledge. The debt of P1,000,
debtor and his heirs may uphold it by proving that the delivery of the however, is not affected. B may disapprove the remission by proving the he
document was made in virtue of payment of the debt. gave the watch temporarily to the debtor to be repaired or that A was able to
take possession thereof without his consent or authority.

ART. 1272
Whenever the private document in which the debt appears is found in
the possession of the debtor, it shall be presumed that the creditor SECTION 4
delivered it voluntarily, unless the contrary is proved. CONFUSION OR MERGER OF RIGHTS

PRESUMPTION OF IMPLIED REMISSION

In order that the presumption established by this article may be applicable, it ART. 1275
is necessary that the delivery of the private document be a voluntary act of the The obligation is extinguished from the time the character of creditors
creditor. and debtor are merged in the same person.
REQUISITES FOR PRESUMPTION OF IMPLIED REMISSION
[DePriV] CONFUSION
1. The document evidencing the credit must have been delivered by the It is the merger of the character of the creditor and debtor in one and the
creditor to the debtor; 2. The document must be a private document; same person by virtue of which the obligation is extinguished. It is the
3. The delivery must be voluntary. meeting in one and the same person of the qualities of creditor and debtor
with respect to one and the same obligation.
EXTENT OF REMISSION
If the obligation is joint, the presumption of remission, when applicable, REASON OR BASIS FOR CONFUSION
pertains only to the share of the debtor who is in possession of the document; Obligation is presumed extinguished for if a debtor is his own creditor,
if solidary, to the total obligation. enforcement of the obligation becomes absurd since a person cannot claim
payment from himself. Furthermore, the purposes of the obligation are
NOTE Presumption is applicable only to private document and does not deemed realized.
apply to a public document because it is easy to obtain a copy of the same,
being a public record. REQUISITES [SEC]
1. The merger of the character of creditor and debtor must be in the
IF THE DOCUMENT IS IN THE POSSESSION OF THE DEBTOR same person;
Ordinarily, the document evidencing the debt is in the possession of the 2. It must take place in the person of either the principal creditor or
creditor. He has in his favour the legal presumption that his credit is yet the principal debtor;
uncollected, unless the debtor proves satisfactorily, by one of the rules
3. It must be complete and definite.
recognized by law, that he has already paid the claim.
NOTE A confusion or merger is complete if the obligation is
If it is not known how the debtor came into possession of the same, the
extinguished.
presumption is that it was voluntarily delivered by the creditor, thus gives rise
the presumption of remission.
Illustration:
A owes B P5M for which A executed a negotiable promissory note in favor of
NOTE Whether the remission or condonation is expressed or implied, the
B. B indorsed the note to C who, in turn, indorsed it to D. Now, D bought
same must be accepted by the debtor.
goods from the store of A. Instead of paying cash, D just indorsed the
promissory note to A.
In the case at bar, A owes himself. Consequently, his obligation is
extinguished by merger or confusion.
ART. 1273
The renunciation of the principal debt shall extinguish the accessory KINDS OF CONFUSION
obligations; but the waiver of the latter shall leave the former in force. As to cause or constitutions
1. Inter Vivos – constituted by agreement of the parties;

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2. Mortis Causa – constituted by succession. Confusion which takes place in the person of B benefits C because the
extinction of the principal obligation carries with it that of the accessory
As to extent or effect obligation of guaranty.
1. Total – if it results in the extinguishment of the entire obligation;
EFFECT OF MERGER IN THE PERSON OF GUARANTOR
2. Partial – if it results in the extinguishment of only the part of the
obligation or when obligation is joint. The extinguishment of the accessory obligation does not carry with it that of
the principal obligation. Consequently, merger which takes place in the
person of the guarantor, while it extinguishes the guaranty, leaves the
EFFECT OF TRANSFER OF RIGHTS
principal obligation in force.
Mere transfer to a third person of rights belonging to both the debtor and the
creditor but not the credit as against the debt does not result in merger.
Illustration:
Suppose, in the example above, B assigns his credit to D, who, in turn,
Illustration:
assigns the credit to C, the guarantor.
A and B were co-owners of a piece of property worth P5M. B paid P200,000
for some repairs thereof. Since they were co-owners, A had to share in said In this case, the contract of guaranty is extinguished. However, A’s obligation
expenses, and so A owed B P100,000. A and B sold their shares to the to pay the principal obligation subsists. C now, as the new creditor, can
property to C. Later, B brought this action to recover P100,000 from A but A demand payment from A.
refused contending that since C is now the owner, C owes himself.
In the case at bar, A should pay B, since there was really no merger. What
had been sold to C were the half shares of each of the co-owners. C did not
acquired the indebtedness of P100,000 for the repairs, hence there can be no ART. 1277
merger with reference to that debt. Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two
EXTINCTION OF REAL RIGHTS characters concur.
Real rights like usufruct may be extinguished by merger when any of such
rights is merged with ownership which is the most comprehensive real right,
or when the owner himself become the usufructuary. CONFUSION IN JOINT OBLIGATIONS
Confusion with takes place in one of the debtors shall only refer to the share
NOTE This is also denominated “consolidation of ownership” which may which corresponds to him. Consequently, there is a partial extinguishment of
take place by any of the causes which are sufficient to transmit title to an the debt. The creditor can still proceed against the other debtors.
obligation.
Illustration:
Illustration: A and B jointly owe C P5M. If C assigns the entire credit to A, A’s share is
A had two brothers B and C. A gave a parcel of land to B in usufruct extinguished, but B’s share remains. In other words, B would still owe A the
(Usufruct gives a right to enjoy the property of another with the obligation of sum of P2.5M. In a joint obligation, the debts are distinct and separate from
preserving its form and substance, unless the title constituting it or the law each other.
otherwise provides. [Art. 562]), and the same parcel to C in naked ownership
(ownership of a property which is subject to the usufructuary’s rights). If CONFUSION IN SOLIDARY OBLIGATIONS
later C donates the naked ownership of the land to B, B will now have the full The provision of Art. 1215 shall apply: the entire obligation is extinguished,
ownership, and it is as if merger had resulted. without prejudice to the rights and obligations of the solidary creditors and
solidary debtors among themselves.
NOTE If the reason for the confusion ceases, the obligation is revived
(PARAS, 457).

MORTGAGEE BECOMES THE OWNER OF THE MORTGAGED

PROPERTY
If the mortgagee becomes the owner of the property that had been mortgaged
to him, the mortgage is naturally extinguished, but the principal obligation
may remain (See Yek Ton Lin Five v Yusingco, 64 Phil. 1062). In this case,
there is a confusion or merger, but not complete or total.

Illustration:
A borrowed P5M from his brother B, and as security, A mortgaged his land
in B’s favor. Later A sold the parcel to B. The mortgage is extinguished but A
still owe B P5M.

ART. 1276
Merger which takes place in the person of the principal debtor or
creditor benefits the guarantors. Confusion which takes place in the
person of any of the latter does not extinguish the obligation.

EFFECT OF MERGER IN THE PERSON OF PRINCIPAL DEBTOR

OR CREDITOR
“Accessory follows the principal” (the guaranty being considered the
accessory obligation); hence, if there is merger with respect to the principal
debt, the guaranty is extinguished.

Illustration:
A owes B with C as guarantor. The merger of the characters of debtor and
creditor in A shall free C from liability as guarantor.

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EFFECT OF REVOCATION OF CONFUSION NOTE There may be compensation in joint and solidary obligations (see
• Confusion is constituted by agreement – may be revoked by the Arts. 1207, 1208, and 1215).
presence of any of the causes for the rescission, annulment, nullity or
inexistence of contracts or by some special cause such as liquidated.
redemption;
• Confusion is constituted by inheritance – may be revoked by the
nullity of the will, or by the subsequent appearance of an heir with a
better right, or by any other cause which will nullify the merger. In
both cases, the original obligation is recreated in the same form and KINDS OF COMPENSATION
under the same condition before confusion took place. The period As to effect or extent
which has elapsed from the moment the merger took place until its 1. Total – both obligations are of the same amount and are entirely
revocation cannot be computed in the determination of the period of extinguished (Art. 1281);
prescription, because during such period the creditor could not
2. Partial – the two obligations are of different amounts and a
possibly have made a demand for the fulfillment of the obligation.
balance remains (Ibid.). The extinctive effect of compensation
will be partial only as regards the larger debt.

As to cause or origin
SECTION 5 1. Legal – when it takes place by operation of law when all the
requisites are present even without the knowledge of the parties
COMPENSATION (Arts. 1279, 1290);
2. Conventional or voluntary – when it takes place by agreement of
the parties (Art. 1282);
ART. 1278 3. Judicial – when it takes place by order from a court in a litigation
(Art. 1283). Merely a form of legal or voluntary compensation
Compensation shall take place when two persons, in their own right, are
when declared by the courts by virtue of an action by one of the
creditors and debtors of each other.
parties, who refuses to admit it, and by the defense of the other
who invokes it;
COMPENSATION 4. Facultative – when it can be set up only by one of the parties
From the Latin word cum ponder, which means “to weigh together.” (Arts. 1287, par. 1; 1288).
It is a mode of extinguishing in their concurrent amount those obligations of
persons who in their own right are creditors and debtors of each other. Illustration:
It is a figurative operation of weighing two obligations simultaneously in A owes B P5M demandable and due on 1 Dec 2018. B owes A
order to extinguish them to the extent in which the amount of one is covered P5M demandable and due on or before 31 Dec 2018. On 1 Dec
by the amount of the other. 2018 B, who was given the benefit of the term, may claim
compensation because he could then choose to pay his debt on
Illustration: said date, which is “on or before 31 Dec 2018.” If, upon the
A owes B the amount of P5M. B owes A the amount of P4M. Both debts are other hand A claims compensation, B can properly oppose it
due and payable today. Here the compensation takes place partially to the because B could not be made to pay until 31 Dec 2018.
concurrent amount of P4M. So, A shall be liable to B for only P1M. If the
two debts are of the same amount, there is total compensation (see Art. NOTE Under the law, the two persons concerned are creditors and debtors of
1281) each other; therefore, a debtor of a corporation cannot compensate his debt
with his share of stock in the corporation since the corporation is not
IMPORTANCE OF COMPENSATION considered his debtor.
Simplified payment; a more convenient and less expensive realization of two
payments.

COMPENSATION PAYMENT ART. 1279

In order that compensation may be proper, it is necessary:
Partial extinguishment is permitted; Must be complete and indivisible;
1. That each one of the obligors be bound principally, and that
Takes place by operation of law; Involves action or delivery; he be at the same time a principal creditor of the other;
It is not required that the parties have The parties must have the free 2. That both debts consist in a sum of money, or if the things due
the capacity to give or to receive disposal of the thing due and are consumable, they be of the same kind, and also of the same
(see Art. 1290). capacity to alienate it (see Art. quality if the latter has been stated;
1239), and to receive payments (see 3. That the two debts be due;
Arts. 1240-1241). 4. That they be liquidated and demandable;
5. That over neither of them there be any retention or
COMPENSATION CONFUSION controversy, commenced by third persons and communicated
in due time to the debtor.
There must be two person who are There is only one person in whom is
mutually creditor and debtor to each merged the qualities of creditor and
other; debtor;
NOTE The requisites enumerated under Art. 1279 are those for Legal
There must be two obligations; There can be only one obligation;
Compensation. Voluntary Compensation in general requires no requisites
There is indirect payment. There is impossibility of payment. except that the agreement be voluntarily and validly entered into.

REQUISITES OF COMPENSATION [BCD - LCR]

1. The parties are principally bound as principal creditors and
principal debtors each other;
2. Both debts consist in a sum of money, or of consumable things of
the same kind and quality;
3. Both debts must be due;
4. Both debts must be liquidated and demandable;

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5. There must be no retention or controversy commenced by third persons NOTE If there is an excess or balance remaining after the application of the

COMPENSATION COUNTERCLAIM the debtor;

Takes place by mere operation of 6. There must be no waiver of the compensation (PARAS,
Must be pleaded to be effectual;
law, and extinguishes reciprocally 466); 7. The compensation must not be prohibited by law
the two debts as soon as they exist (JURADO, 313).
simultaneously, to the amount of
their respective sums;
PROHIBITED COMPENSATION OF DEBTS
Requires that both debts consist in Such requirement is not provided;
1. Debts arising from depositum (except bank deposits which are by law
money, or if the things due are considered as loans to bank) (Arts. 1287, 1980);
consumable, they be of the same
a. There must be a relationship of debtor and creditor;
kind and quality (Art. 1279);
Requires that two debts must be Such requirement is not provided. b. There must be two debts and two credits;
c. The debtor and creditor must be generally be bound as
principals and not in their representative capacity.
over either of the debts and communicated in due time to Illustration: credit, compensation will still take place, but only to the extent that the credit
A owes B P5M which is guaranteed by C. B owes C P5M. A cannot claim is not affected by the retention.
compensation.
2. Debts arising from the obligations of a depository (Art. 1287); CONTROVERSY
3. Debts arising from the obligations of a bailee in commodatum Refers to a case in which a third person claims to be the creditor. The party
(Ibid.); interested in the compensation and the third person each claims that he is the
real creditor. Effect would be suspension of compensation.
4. Debts arising from a claim for future support due by gratuitous
title (Ibid.); • Credit is adjudicated to the third person – compensation takes
place;
5. Debts consisting in civil liability arising from a penal offense
(Art. 1288); • Credit is adjudicated to the read creditor – compensation cannot
take place.
6. Damages suffered by a partnership through the fault of a partner
cannot be compensated with profits and benefits which he may
COMPENSATION AGAINST THE GOVERNMENT
have earned for the partnership by his industry (Art. 1794)
REASON Since the partner has the duty to obtain benefits for 1. Taxes – cannot be subject to compensation, being obligations of
the firm, and a duty not to be at fault, there can be no public interest, unless when both the claims of the government
compensation because both are duties, and the partner is the and the taxpayer against each other have already become due and
debtor in both instances. demandable as well as fully liquidated.
2. Contractual obligations – may be compensated, but claims must
CONSUMABLE involve the same office, agency or subdivision of the government.
Must be taken to mean fungible (susceptible of substitution, if such be the
intention). This is evident because of the fact that consumables are those
movables which cannot be used in a manner appropriate to their nature
without being consumed, while fungibles are those which may be exchanged ART. 1280
or compensated by another of the same kind and quality. Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the
DUE principal debtor.
It means that the period has arrived, or the condition has been fulfilled. It
means that the debt is now presently or immediately matured and NOTE This is an exception to Art. 1279, par. 1, because a guarantor is
enforceable, or that it matured at some time in the past and yet remains subsidiarily, not principally, bound.
unsatisfied.
REASON Extinguishment of principal obligation extinguishes the guaranty.
NOTE A natural obligations, conditional obligations before the fulfillment of
the event, and obligations with a period before the expiration of the period, Illustration:
cannot be compensated. A owes B P5M. C is the guarantor of A. B owes A P1M. When B sues A and
A cannot pay, C will only be liable for P4M, because he can set up the P1M
DEMANDABLE credit of A as the basis for partial compensation.
Refers to the fact that neither of the debts has prescribed, or that the
obligation is not invalid or illegal.
Enforceable in court (TOLENTINO, 378). EFFECT OF TOTAL SUBROGATION
Total subrogation transfers to the new creditor the credit and all the rights
NOTE If one of the debts has been already prescribed, there can be no and actions that could have been exercised by the former creditors against the
compensation because said debt is no longer demandable. debtor or other persons interested in the fulfillment of the obligation.
Accessory obligations are not extinguished because in such obligations the
LIQUIDATED person subrogated also acquires all the rights which the original creditor had
Those where the exact amount has already been determined, though not against third persons.
necessarily in figures since capacity of being arrived at by simple arithmetical
processes would be enough. NOTE The stated above only applies to legal subrogation. However, with
respect to conventional subrogation, accessory obligations may be increased
NOTE If damages are asked for, and the amount is disputed, the debt cannot or reduced depending upon the agreement of the parties.
be said to be already liquidated.

RETENTION
Consists in the application of the credit on one of the parties to the ART. 1304
satisfaction of the claims of a third person. 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.

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EFFECT OF PARTIAL SUBROGATION

The creditor to whom partial payment has been made by the new creditor
remains a creditor to the extent of the balance of the debt.
When debtor is insolvent, he is given a preferential right under the above
article to recover the remainder as against the new creditor.

Illustration:
A is indebted to B for P5M. C pays B P3M with the consent of A.
There is here partial subrogation as to the amount of P3M. B remains the
creditor with respect to the balance of P2M. Thus, two credits subsist. In
case of insolvency of A, B is preferred to C, that is, he shall be paid from the
assets of B ahead of C.

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