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EXTINGUISHMENT OF OBLIGATIONS o Substitute – the debtor is substituted by a 3rd

person, at the expense of the debtor, if the
*Enumeration is non-exclusive obli is not personal to the debtor.
o Equivalent – the economic equivalent of the
Principal modes of extinguishing relationship between parties: obli is given.
PaLoCo3No
Requisites of a valid payment:
1. Payment
2. Loss of the thing due 1. Parties (debtor and creditor)
3. Condonation or remission 2. The thing to be paid
4. Confusion or merger of rights of the creditor and 3. Time, place, and manner of payment
debtor
5. Compensation Parties
6. Novation
- There must be at least two parties.
Other modes:
- What is required is the plurality of parties, not of persons,
1. Annulment of the contract such that a person who represents at least two parties may
2. Rescission of the obli effect a valid payment by himself.
3. Fulfillment of the resolutory condition
4. Prescription - Anyone can make payment – even a 3rd person.

*Death (not absolute) – refers to the death of the
debtor; may be applied only if the obligation is
personal to the obligor. Under the Law on
Succession, the estate of the deceased includes all the
rights, and oblis of that person which are not
extinguished by death.
*Mutual dissent – an agreement bet. the parties to
mutually withdraw from the contract. This should not
be confused with rescission. Rescission requires the
existence of either of the two grounds: lesion or
fraud, while mutual dissent requires none because its
basis is the agreement of both parties to withdraw.
Rescission always results in abrogation and, usually,
in mutual restitution, except in cases where the law
does not allow such, while in mutual dissent, the only
effect produced is abrogation; restitution depends
upon the agreement of the parties. Rescission may be
available to 3rd persons who suffer injury because of
the contract sought to be rescinded, while mutual
dissent is not available to 3rd persons.
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PAYMENT – Not only the delivery of money but includes
the performance of an obligation in any other manner.
Kinds of performance or payment:
1. Normal or voluntary – debtor paid obli on his own
volition, not because he was told to pay.
- Only those who have an interest in the fulfillment of the
obli can compel the creditor to accept payment. These are
the debtor, his heirs, successors-in-interest, assignee, or
anyone authorized by him to make payment. His co-
debtors, guarantor and surety are also included. The
persons enumerated have as much right or interest as the
debtor in fulfilling the obli because once the obli is
extinguished, they are relieved from their obli.
- Generally, payment must be made to the creditor, but
payments may also be made to his heirs, successors-in-
interest, or his agent.
- There is dispute as to the requirement of capacity of the
debtor and creditor for the validity of payment. Some say
the need for the capacity of both is absolute, while some
qualify and distinguish between obli to give and obli to do
or not to do.
o In obli to give, where there is a juridical transaction
where ownership, dominium or title of the thing
being given is involved, capacity becomes necessary
because incapacitated persons cannot effectively
transfer ownership from himself to the creditor.
- It can be said that the capacity of both the creditor and
debtor is essential. The capacity of the debtor is necessary
to be able to effectively transfer title of the object given to
the creditor. The capacity of the creditor is also equally
necessary to be able to give a valid release from the obli.

2. Abnormal or involuntary – obligor is ordered to pay. o GR: Payment to incapacitated creditor is invalid.
- Classification: o XPN: Such remains valid if:
o Specific – obligor is compelled to perform a 1. The payment redounds to the benefit of the
specific act; applies to only to give. creditor, and;
2. The creditor retains or keeps the thing paid
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- “Benefit” in XPN #1 refers to any kind of benefit
EXCEPT sensual benefit.
- Payment made by an incapacitated person will not be
valid, neither will it be void. It is simply voidable.
- There can be recovery if what has been paid has not been
consumed. In other words, payment is annullable. But
there can be no recovery if the payment has been
consumed in good faith, in which case, the payment
becomes valid.
- Payment made by a 3rd person is valid only if accepted by
the creditor. Consent of debtor is not necessary for the
validity of such payment, but it becomes essential in
determining the rights of the 3rd person against the debtor.
- Effect of payment by 3rd person: Payment is valid if
accepted by the creditor.
- Rights of the 3rd person:
*If the 3rd person made the payment without the
knowledge of the debtor, he acquires only the right to
reimburse only up to the extent that the debtor may
have been benefited (conditional reimbursement).
*If payment was made with the consent of the debtor,
the 3rd person acquires the right of absolute
reimbursement and he is subrogated into the rights of
the creditor.
- Kinds of subrogation:
o Conventional – never presumed; agreement of the
parties
o Legal – GR: cannot be presumed. XPN: (a) when a
creditor pays another creditor who is preferred; (b) 3 rd
person who is not interested in the fulfillment of the
obli pays with the consent of the debtor; (c) 3 rd
person who has an interest in the fulfillment pays
even without the consent of the debtor.
- Rights of guarantor against the debtor: absolute
reimbursement and subrogation.
- Payment made to a 3rd person is invalid, except if such
payment redounded to the benefit of the creditor. Debtor
must prove such benefit, except if:
 After payment, the 3rd person acquires the creditor’s
rights.
 Creditor ratifies the payment to the 3rd person.
 By the creditor’s conduct, the debtor has been led to
believe that the 3rd person had authority to revive the
payment.
- If a 3rd person pays without intention of seeking
reimbursement, such payment is considered by law as a
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donation which must be accepted by the debtor. If debtor
does not give his consent, there is no donation, and the 3rd
person acquires the right to reimbursement and
subrogation. If debtor opposes, there will be no donation,
and the 3rd person acquires the right to reimburse to the
extent which the debtor was benefited.
- The debtor cannot compel the 3rd person to accept
reimbursement.
- Payment made in good faith to a person in possession of
the credit shall extinguish obli.
Thing to be paid
- This refers to the object of the prestation, not the obli. The
object to be paid cannot be another object that is merely
similar to that contemplated by the parties.
- If the object is specific, the very same thing promised
should be paid. If the object is generic, the thing paid
must belong to the class of the thing agreed upon in the
contract.
- The debtor cannot compel the creditor to accept
something of inferior quality. In the same manner, the
creditor cannot compel the debtor to deliver something of
superior quality.
 XPN: Dation in payment
Time of payment
- GR: Payment must be made on the day the obli falls due,
even if it be a Sunday or holiday. XPN: When the
instrument presented for payment is covered by the
Negotiable Instruments Law which provides that when an
obli falls due on a Sunday or holiday, the instrument must
be presented for payment on the succeeding business day.
 Requisites for negotiability:
o Must be in writing and signed by the maker or
drawer
o Contains an unconditional promise or order to
pay a sum certain in money
o Payable on demand or at a fixed, future time
o Payable to order or to bearer
o Instrument is addressed to a drawee who must be
named or otherwise indicated therein with
reasonable certainty.
- An obli falls due when it becomes demandable, such that
the creditor acquires the right to enforce the obli.
Place of payment
- No provision of law that dictates where demand must
be made, but the law provides for the place of
payment. (Art. 1251)
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- If creditor demands payment in a place other than the
proper place, debtor can refuse to pay w/o incurring
delay. Likewise, if debtor offers to pay in a place
other than the proper place, creditor can refuse w/o
incurring delay.
Manner of payment
- Manner of payment must be in accordance with the
tenor of the obli.
- Checks do not produce payment until encashed
because checks are not legal tender. They are mere
representations of money. The validity of payments
made with checks depends on the kind. If the check
used is certified, as the SC held in the case of New
Pacific Timber v. Sener, the payment is valid. The SC
also ruled in Co v. PNB that payment by manager’s
check is valid.
- Legal tender is that currency which when offered as
payment for a debt, whether public of private, the
creditor cannot refuse to accept.
- Under RA 8183, which repealed the Uniform
Currency Act, parties may agree on the currency to
be used in the payment of an obli.
Characteristics of payment:
1. Integrity – GR: complete performance is necessary to
extinguish obli.
XPN: (a) Substantial performance. There must be
attempt in good faith to comply and the deviation is
not substantial. Creditor does not lose the right to
recover damages.
(b)Waiver/estoppel on the part of the creditor. There
is full compliance but not in accordance with the obli,
and the creditor, being aware of such irregularity,
accepts it and does not protest it.
2. Identity – GR: Obli is fulfilled or performed only by
giving that which has been agreed upon.
XPN: Dation in payment.
3. Indivisibility – GR: Debtor cannot compel the
creditor to accept partial payment, neither may the
creditor compel the debtor to render partial
performance.
XPN: (a) parties have agreed on partial performance
(b) Obli is partly liquidated and partly unliquidated
Dation in Payment – debtor alienates property in
payment of a debt in money.
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- Does not apply only to debts in money; governed by
the Law on Sales; Barter is also covered by the Law
on Sales.
- Eviction will not revive the orig obli. Remedy of the
creditor who is evicted is to enforce the right of the
vendee under the Law on Sales – right to recover the
price paid plus interest thereon.
- Deprivation in law (deprivation by virtue of a final
judgment) will fall under the Law on Sales and gives
rise to the enforcement of warranty against eviction.
- There can be no dation in payment without the
consent of the creditor because it involves a
substitution or change in the object of the obli.
*Art. 1250 speaks of extraordinary inflation or deflation. The
value of the currency at the time of the establishment of the
obli shall be the basis of determining the payment EXCEPT
when the parties agreed otherwise.
*The SC held in Spouses Suapangco v. Manotoc Realty Corp.
that Art. 1250 does not apply when the obli is payable in Phil.
legal tender, bec. the article refers to “currency”, which means
that the law is not referring to Phil. peso but a foreign
currency.
Application of Payment
- Designation of debt when there are several debts to a
creditor.
- Principally, it is the debtor who can make an
application of payment. Failure of the debtor to make
application automatically allows the creditor to make
application.
- If both parties fail to make application, the More
Burdensome Rule will apply.
- Limitations on the right to apply:
 Debtor can’t make application of payment in a
manner as to compel the creditor to accept partial
payment.
 If there is a stipulation on how to apply payment,
such must be followed.
 If obli is interest-earning, payment shall not be
applied to the principal without first applying it
on the interest.
 GR: Application on payment can’t be made on
debts that are not due. XPN: (a) parties so
stipulate; (b) when the application is made by the
party for whose benefit the term has been
constituted.
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Cession
- Debtor abandons property in favor of the creditor so
that the latter may dispose of the property in order to
apply the same to the debts.
- If one creditor objects to the payment by cession, the
remedy for the debtor is voluntary insolvency to
attain the same objective.
Tender of Payment and Consignation
- Tender of payment is the offer to pay.
- Consignation is the act of depositing the thing due or
placing the same under judicial authority/disposal
when the creditor refuses to accept payment without
just cause.
- Requisites: (a) valid tender of payment (satisfies the
requisites of payment); (b) depositing the thing due to
judicial disposal.
- There may be consignation without valid tender of
payment (Art. 1256):
 Creditor is absent, unknown, or does not appear
at the place of payment. (He must have had no
legal representative)
 Creditor is incapacitated at the time the obli falls
due, or at the time payment, or offer of payment,
is made. (Also, there must have been no legal
representative)
 Creditor, without just cause, refuses to give a
receipt.
 2 or more persons claim the right to collect.
 Title of the obli has been lost.
- Obli is extinguished when (a) creditor claims the
thing consigned, or (b) the court declares that the
consignation was properly made.
- 2-notice rule: 1st notice: notice of the intent to
consign. 2nd notice: notification informing the
creditor of the consignation of the thing. Absence of
one of these notices will constitute a valid defect and
will invalidate the consignation.
- Consignation may be made judicially or extra-
judicially. Extra-judicial consignation, is governed by
BP 25, which refers to rentals in arrears. Extra-j is
done through opening an account in a bank in the
name of the creditor or lessor to enable such person
to withdraw/claim what has been deposited. In extra-
j, the debtor can’t withdraw the thing. Judicial
consignation is obviously done with the court.
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- If deposit is made in a place that is not the proper
place of payment, the court held in the case of Chua
Kay v. Lim Chang that in case of loss of the thing,
even if due to fortuitous event, such will not
extinguish the obli.
- The debtor may withdraw what has been deposited
during the pendency of the case because he still owns
the thing. However, the obli will subsist. He may also
withdraw even after the consignation is declared
proper, provided that the creditor consents to the
withdrawal. In this case, the obli will remain but the
creditor will lose his preference over the object and
the parties interested in the fulfillment of the obli will
have to be released from the obli.
- The creditor may prevent the debtor from
withdrawing by claiming what has been deposited.
- If the creditor claims the thing w/o reservation, it will
extinguish obli. If he claims it w/ certain reservations,
then his withdrawal will only partially extinguish the
obli.
- Consignation is not proper if what is involved is the
right of option or the right of redemption because
there is no debt due.
Loss of the thing due
- Effect depends:
o Specific – (a) due to the fault of debtor – not
extinguished; (b) not due to the fault of
debtor – extinguished
XPN: Exceptions to loss due to fortuitous
event.
o Generic – not extinguished.
- Loss of obli to do occurs when there is impossibility
of performance or difficulty of performance.
- Impossibility of performance happens when such
performance is impossible because it is against laws
(legal impossibility) or the laws of nature (physical
impossibility).
- There is difficulty of performance when the obli
requires extraordinary effort that goes beyond the
contemplation of the parties.
Condonation or remission of the debt
- It is an act of liberality; it is in the nature of a
donation.
- Not the same as renunciation because renunciation or
waiver is a unilateral act while condonation or
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remission requires bilateral act because the law
requires acceptance of the condonation.
- Condonation may be done impliedly (in any form), or
expressly (must satisfy the requisites prescribed by
law with respect to form under the law on donation).
Effect of condonation:
- If the obli condoned entirely was a joint or solidary
obli, there is total extinguishment of the obli. If only
a part of the obli has been condoned, it will give rise
to partial extinguishment only.
- If what was condoned was merely the solidary tie,
then the effect is extinguishment of that solidary tie,
and result in the conversion of the solidary obli to
joint.
Confusion or merger of rights
- The characters of debtor and creditor meet in one and
the same person.
Effect of confusion that occurs in the person of the debtor
- If there is only one debtor and one creditor, the obli is
automatically extinguished.
- If there is plurality of debtors, and the confusion
occurs in the person of a debtor, depends on the
nature of the obli:
o Joint obli – what is extinguished is only the
share of that debtor in the obli.
o Solidary obli – obli is extinguished
- If confusion takes place in the person of the
guarantor, this shall extinguish only the contract of
guaranty, but not the principal obli.
Compensation
- Two persons or two parties are debtors and creditors
of each other. (Not necessarily reciprocal, but it is
bilateral)
- Not the same as confusion. In confusion, there is only
one obli involved, while in compensation, there are at
least two oblis involved. In confusion, there is only
one party involved because the characters of debtor
and creditor meet in one and the same person.
Whereas in compensation, there are two parties
involved.
Kinds of Compensation
- Legal – takes place by operation of law
- Conventional – takes place by agreement of the
parties
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- Judicial – decreed by the court
- Facultative – a party is entitled to oppose it when
compensation is invoked by the other but the one
who can oppose is not precluded from invoking
compensation.
Requisites of Compensation
- Parties must be bound principally in their own rights
(XPN: Guarantor who is allowed by law to claim
compensation with respect to what the creditor owes
the principal debtor)
- Both debts must consist of a sum of money or if
fungible goods, although the law uses “consumable”,
they must be the same kind and quality (Not
necessary that they be of the same amount for
compensation may be partial or total. If one of the
debts is in money and the other is in goods, there can
be no compensation, only dation)
- Both debts must be due
- They be liquidated and demandable
- Over neither of them there be any retention or
controversy, commenced by 3rd persons and
communicated in due time to the debtor
*In legal compensation, it is necessary that all requisites
must concur in order for compensation to take place. But
in conventional compensation, no, because the law allows
compensation even if one debt is not due or liquidated as
long as both parties agree.
Facultative compensation – Kinds of oblis that come under it:
Obli arising from:
- Deposits
- Commodatum
- Support
- Civil liability arising from crime
Novation
- Not an absolute mode of extinguishment, it is only
relative because it plays a dual role. While it
extinguishes an obli, it creates a new one to take the
place of the extinguished one.
- Also includes the simple case of modification.
Novation may either be:
- Extinctive – old obli is extinguished and a new one
is created
- Modificatory – no extinguishment of obli. It simply
modified the obli.
3 ways by which novation may take place:
- Changing the object or any other principal
conditions of the obli – principal, not accessory
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condition. This is called real or objective novation,

which refers to a change in the (a) cause of the obli;
(b) object of the obli; (c) any of the principal
conditions of the obli

- Subsititution of the person of the debtor:

o Expromision – initiative for the change of

debtor comes from the 3rd person. Consent
of creditor is necessary.
o Delegacion – initiative comes from the
debtor himself. Consent of all parties is
necessary.

*Effect of insolvency of substitute:

*In expromision, the old obli will not be revived.

*In delegacion, GR is the old obli will also not be

revived, XPNs are: (1) if at the time of substitution, the
new debtor is already insolvent and such is of public
knowledge; and (2) if at the time of the substitution,
insolvency of the new debtor was already existing,
although such is not publicly known, yet it is known to
the debtor.

- Subrogating a 3rd person into the rights of the

creditor

Requisites of a valid novation:

- Old valid obli

- New valid obli
- Substantial difference between the two
- Parties to both oblis must be capacitated. Capacity
must be possessed at the time of the constitution of
the old obli and at the time of the establishment of the
new one.

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