Obligations

and
contracts
EXTINGUISHMENT
OF OBLIGATIONS
 01 02 03 04
payment or loss of the thing condonation; compensation;
performance due confusion novation
Modes of extinguishment:
(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of

creditor and debtor;

(5) By compensation;

(6) By novation.

- There are other causes of extinguishment

governed elsewhere in the civil code.

(Article 1231)
Payment or performance
• In an obligation, payment not only means delivery of money but also the performance of the
obligation. (Article 1232)

• Payment means the effective performance of the agreed prestation.

• There is payment, when the thing or service subject of the obligation has been completely
delivered or rendered, as the case may be. (Article 1233) . For example, In a contract of loan, once
the delivery of the sum due is made to the creditor, the debt is considered paid.
Rules for valid payment
• Completeness of Payment

• Payment must be made by the proper person only

• Payment must be made to the proper person only

• Correct Prestation must be paid.

• Payment must be made at the proper place.

 Provisions related to payor

Under Article 1236, Creditors are not bound to accept

payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there
is a stipulation to the contrary.
Instances when there is valid
payment
As a rule, a creditor cannot be compelled to accept payment from any person. (Art. 1236)

Below are the instances where creditor can be compelled to accept payment:

• When payment is made by the Debtor, his heirs, assignees, or duly authorized representative.

• When payment is made by a third person interested in the fulfillment of the obligation

• When payment is made by a third person not interested in the fulfillment of the obligation but
with the consent of the debtor.
Persons interested in the fulfillment of the obligation
• Guarantors

• Mortgagors

• Co-debtors
Payment made by a third person
• Who has an interest in the fulfilment of the obligation or when the debtor consents

Effects:

1. The creditor can be compelled to receive payment

2. The third party payor may demand reimbursement for the full amount

3. Results in subrogation: As such, the 3rd party payor may exercise rights belonging to the creditor,
such as going against the guarantor or foreclosure of mortgage (Article 1237)
Payment made by a third person
• One who has no interest in the fulfillment of the obligation or when the debtor had no
knowledge of or did not consent (against his will).

Effects:

1. The creditor cannot be compelled to receive payment.

2. If payment was made, 3rd party payor can only demand reimbursement up to the extent that has
been beneficial to the debtor. (Art. 1236)

3. No subrogation. As such, the third party payor cannot go against guarantors or foreclose the
mortgage.
Instances where a creditor is bound to accept payment from a third person

• When stipulated;

• When the 3rd party payor has an interest in the fulfilment of the obligation

• When the debtor gives his consent

Payment with intention to donate
• Under Article 1238, If a third person pays an obligation with no intent to be reimbursed, such
payment is considered a donation that requires the acceptance of the debtor. (See Article 725 of
the Civil Code)

• Acceptance by a creditor of the payment of the debtor under Article 1238 with or without the
consent of the debtor is a valid payment.
capacity and free disposal
• In obligations to give, the payor should have the capacity to alienate and the free disposal of the
thing due for payment to be effective. Such that minors (who don’t have capacity) and those
suffering the penalty of civil interdiction (no free disposal) cannot make a valid payment. (See
Article 1239)
 Provisions related to PAYEE

Under Article 1240, Payment shall be made to the person

in whose favor the obligation has been constituted, or
his successor in interest, or any person authorized to
receive it.
3 types of valid recipient/payee
• Person in whose favour the obligation has been constituted. (Creditor, Beneficiary in a Trust
transaction etc.)

• His successor in interest – who may not be creditors at the time of constitution, but may be
creditors at the time of fulfilment.

• Any person authorized to receive it – agents are creditors because they have the right to collect,
but not in their own right.
Payment to a wrong party
• As a rule, payment to anyone not authorized as provided under Art. 1240 is considered a void
payment. As such, the debtor may be compelled to pay again, his remedy being to run against the
person he made payment to. Except in the following circumstances:

1. It redounded to the benefit of the creditor;

Such benefit need not be proven if:

• a. after the payment, the third person acquires the creditor's rights;

• b. the creditor ratifies the payment to the third person;

• c. by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the
payment. (Article 1241)

2. Payment made in good faith to any person in possession of the credit. (Article 1242)

3. When the debtor w/o the knowledge of the assignment of credit, pays his creditor.
Things to be paid or delivered
• Money or Performance

• Creditor cannot be compelled to accept a different thing

• Creditor cannot be compelled to receive partial prestations. Except:

• When there is an express stipulation to the contrary.

• Where the obligation is partly liquidated and partly unliquidated.

• Where different prestations are subject to different conditions or terms.

• Payment must be made in the currency stipulated. If it is impossible to deliver such, then in the
currency which is legal tender in the Philippines
Legal tender
• All notes and coins issued by the Central Bank (BSP) shall be legal tender in the Philippines for
all debts, both private and public. Provided:

• 1. P1, P5 and P10 coins shall be legal tender in amounts not exceeding P1,000;

• 2. Coins below P1 – legal tender not exceeding P100

Place of payment
• Designated in the Obligation

• No designation and the prestation is to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation was constituted

• In any other case, Domicile of the DEBTOR

Dation in payment/Dacion en pago
• Under Article 1245, Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law of sales.

• The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against the debtor's
debt. As such, the essential elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present.

• There has to be delivery of the thing and prior acceptance and a consequent transfer of
ownership to consider it a dation in payment
EFFECTS OF COMPLETE PAYMENT or
PERFORMANCE
• The obligation is extinguished. However, there are instances where incomplete performance or
substantial performance extinguishes an obligation. To wit:

• When the obligation has been substantially performed in good faith, the debtor may recover as
though there had been strict and complete fulfillment less damages suffered by the creditor. (Art.
1234)

• When the creditor accepts the performance knowing its incompleteness and irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with. (Art.
1235)
Special forms of payments
(1) Application of Payments

(2) Payment by Cession

(3) Tender of Payment and Consignation

Application of payments
• the designation of the debt which is being paid by a debtor who has several obligations of the
same kind in favor of the creditor to whom payment is made.

• Requisites:

1. There is only one debtor;

2. There are several debts;

3. The debts are of the same kind;

4. There is only one and the same creditor.

Application of payments
• Due and demandable debts: as a general rule, all debts must be due and demandable.
EXCEPTION: when there is a mutual agreement or when the consent of the party for whose
benefit the term was constituted was obtained.
Limitations to right to apply
• Generally, the debtor has the right to apply the payment at the time of making the payment,
subject to the following LIMITATIONS:

1. Creditor cannot be compelled to accept partial payment. (Article 1248)

2. Debtor cannot apply payment to principal if interest has not been paid. (Art. 1253)

3. The debt must be liquidated, except when the parties agree otherwise

4. Cannot be made when the period has not arrived and such period was constituted in favour of the
creditor, except with the consent of the creditor (Art. 1252);

5. When there is agreement as to which debt must be paid first.

Rules if there is no designation
• If the debts are of different nature and burden – to that debt which is most onerous to the
debtor;

• IF the debts are of the same nature and burden – applied proportionately.
Debts which are considered more onerous
• Principal in an obligation and surety in another – debt where he is the PRINCIPAL

• Sole debtor in one obligation and solidary debtor in another – debt where he is the Sole Debtor

• When there are various debts (all without interest) – the Oldest debt

• When there are various debts (some with interest) – that with the HIGHEST interest rate

• Liquidated debts over unliquidated ones

Payment by cession
• It is the assignment of debtor’s property to his creditors for payment of the former’s debt.

• Debtor is only released from responsibility for the net proceeds of the thing assigned, unless there
is a stipulation to the contrary
Dacion vs payment by cession
Tender of payment and consignation
• Tender of Payment is the manifestation made by the debtor to the creditor of his desire to
comply with his obligation, with the offer of immediate performance. It is a PREPARATORY
ACT to consignation and in itself DOES NOT extinguish the obligation.

• Consignation is the deposit of the object of the obligation in a competent court in accordance
with rules prescribed by law, AFTER the tender of payment has been refused or because of
circumstances that render direct payment to the creditor impossible. It extinguishes the
obligation.

`
Tender of payment and consignation (REQUISITES)
• There is a debt due

• There is a legal cause to consign

• There is a previous notice to consign to the persons having interest in the fulfillment of the
obligation (Art. 1257). Otherwise, consignation is void.

• The amount or thing due is deposited in court. (Art. 1258)

`
Withdrawal of the thing deposited
• Withdrawal as a matter of right: debtor withdraws before acceptance by the creditor or before
the judicial declaration of propriety of consignation (Art. 1260 par 2). In this case, no
extinguishment yet of the obligation. As such, no revival since the obligation has not been
extinguished to begin with.

• Withdrawal after acceptance or declaration: obligation is revived. As such, the creditor can no
longer run after the guarantor, unless the latter consents. This is because the obligation has been
extinguished. The revival did not revive the guaranty.