CHAPTER 4: EXTINGUISHMENT OF AN OBLIGATION
PERSONS WHO MAY PAY THE OBLIGATION:
I. PAYMENT OR PERFORMANCE (Art. 1232-1261)
Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (Art. 1232)
If the obligation is to draw a sketch, payment consists in the performance
of a service. If the obligation consists of delivering a certain laptop,
payment consists in the delivery of the thing.
KINDS OF PAYMENT
1. NORMAL- when the debtor voluntarily performs the prestation as
agreed upon.
2. ABNORMAL- when the debtor is forced by means of a judicial
proceeding either to comply with the prestation or pay indemnity.
CHARACTERISTICS OF A VALID PAYMENT
1. Only the prestation agreed upon and no other must be complied
2. The thing or service must be completely delivered
3. Payment or performance must be indivisible
COMPLETENESS OF PAYMENT/ PRINCIPLE INTEGRITY
GENERAL RULE: A debt shall not be understood to have been paid unless
the thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. (Art. 1233)
EXCEPTIONS:
1. When the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict complete
fulfillment, less damages suffered by the obligee. (Art. 1234)
2. When the obligee accepts performance, knowing its incompleteness or
irregularity & w/out expressing any protest or objection; (Art. 1235)
TAKE NOTE: Identity of Payment requires that the very thing, service or
forbearance, as the object of the prestation, must be performed or
observed
HOW PAYMENT IS MADE:
1. If the debt is a monetary obligation, by delivery of the money. The
amount must be full unless otherwise stipulated in the contract.
2. If the debt is the delivery of a thing, by the delivery of it.
3. If the debt is the doing of personal undertaking, by the performance
of the said undertaking.
4. If the debt is not doing something, by refraining to do it.
1. The debtor himself or his legal representative
2. Any third person
GENERAL RULE: Creditor is not bound to accept payment or
performance by a third person. (Art. 1236, par. 1)
EXCEPTIONS:
1. when made by a third person who has an interest in the fulfillment
of the obligation;
2. when there is a stipulation to the contrary
EFFECT OF PAYMENT BY THIRD PERSON:
General rule: Whoever pays for another may demand from the debtor
what he has paid. (Art. 1236, par 2)
Exceptions:
1. If payment was made with knowledge and consent of the debtor:
a. can recover entire amount paid
b. can be subrogated to all the rights of the creditor.
2. If payment was made without knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial
to the debtor.
Ex. If Y is indebted to U for 1000 and W paid 1000, he can recover
the whole amount but if 600 had already been paid by Y, W can only
reimbursed 400.
To whom payment must be made:
1. The person in whose favor the obligation has been constituted;
2. His successor in interest; or
3. Any person authorized to receive it. (Art. 1240)
PAYMENT TO UNAUTHORIZED PERSON IN AN OBLIGATION TO GIVE:
GENERAL RULE: If payment is made to a person other than those
enumerated in Art. 1240, it shall not be valid.
EXCEPTIONS:
1. Payment made to a 3rd person, provided that it has redounded to
the benefit of the creditor.
2. Payment made to the possessor of the credit, provided that it
was made in good faith. (Art. 1242)
Take note: This refers to the possession of credit not the
document evidencing it.

In obligations to give, payment to incapacitated person is valid
when:
a. The incapacitated has kept the amount or thing paid or
delivered
b. Payment has been beneficial to the incapacitated person. (Art.
1241, par. 1)
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 there is a stipulation to the contrary,
extrajudicial expenses required by the payment shall be for the
account of the debtor. (Art. 1247)
Obligation to Deliver a Generic Thing
If the 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. (Art. 1246)
Take note: The creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may the debtor
be required to take partial payments. (Art. 1248, par. 1)
Exceptions:
1. When there is a stipulation to the contrary.
2. When the obligation is subject to different terms and conditions
3. When the debt is in part liquidated and in part unliquidated; the
creditor may demand and the debtor may effect the payment of
the former without waiting for the liquidation of the latter. (Art.
1248, par.2)
Rules in Monetary Obligations (Art. 1249):
1. Payment in cash - must be made in the currency stipulated; if it is
not possible to deliver such currency, then in the currency which is
legal tender in the Philippines.
2. Payment in check or other negotiable instrument - not considered
payment; not considered legal tender and may be refused by the
creditor. It shall only produce the effect of payment:
a. when it has been cashed or
b. when it has been impaired through the fault of the creditor
LEGAL TENDER
Such currency which may be used for the payment of all debts,
whether private or public. The kind of currency which a debtor can
legally compel a creditor to accept in payment of a debt in money
when tendered by the debtor in the right amount.
Legal tender of the Philippines would be all notes and coins issued by
the Central Bank.
1. 25c and above, legal tender up to P50
2. 10c and below, legal tender up to P20
Note: Bills regardless of denomination, are legal tender up to what
amount.
Extraordinary inflation or deflation (Art. 1250)
It is the unusual or beyond the common fluctuation in the value of
currency, which the parties could not have reasonably foreseen or
which was manifestly beyond their contemplation at the time the
obligation was established.
Requisites:
a. The decrease in the value of the currency could not have been
reasonably foreseen by the parties or beyond their contemplation
at the time the obligation was established
b. There must be a decrease or increase in the purchasing power of
the currency which is unusual or beyond common fluctuation in
the value of currency.
Place of payment
1. Place stipulated by the parties.
2. No stipulation and the obligation is to deliver a determinate
thing, payment shall be made at the place where the thing might
be at the time the obligation was constituted.
3. In any other case, the payment shall be made at the domicile of Ex. Between a debt of 500 and a debt of 600 with interest rate of
the debtor. (Art. 1251) 20% , the latter is more onerous.

SPECIAL FORMS OF PAYMENT: B. DATION IN PAYMENT (DACION EN PAGO)

A. APPLICATION OF PAYMENT
Designation of the debt to which the payment must be applied
when the debtor has several obligations of the same kind in favor
of the same creditor. (Art. 1252)
REQUISITES:
a. there must be only 1 debtor & only 1 creditor;
b. there must be 2 or more debts of the same kind;
c. all of the debts must be due; except: if there’s stipulation to the
contrary; or application of payment is made by the party for whose
benefit the term has been constituted (Art.1196); and
d. amount paid by the debtor must not be sufficient to cover the
total amount of all the debts.
RULES IN APPLICATION OF PAYMENT:
GENERAL RULE: The right to designate the debt to which the
payment shall be applied primarily belongs to the debtor
Delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the
performance of the obligation.
REQUISITES:
a. existence of a money obligation
b. alienation to the creditor of a property by the debtor with the
consent of the former
c. satisfaction of the money obligation of the debtor
C. PAYMENT BY CESSION
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. (Art.1255)
Requisites:
a. plurality of debts
b. partial or relative insolvency of the debtor
c. abandonment of all debtor’s property
d.acceptance of the cession by the creditors

EXCEPTION: If the debtor does not avail of such right and he

accepts from the creditor a receipt in which the application is
made.
LEGAL APPLICATION OF PAYMENT (ART1254)
1. If neither the debtor nor the creditor makes any application of
payment, or if it cannot be inferred from other circumstances, the
debt which is most onerous to the debtor, among those which are
due, shall be deemed to have been satisfied.
2. If the debts due are of the same nature and burden, payment
shall be applied to all of them proportionately

NOTE! Interest bearing debts are more onerous then those which
do not. Between those debts, the debt with the highest rate is
more onerous. A secured debt is more onerous than one which is
not.

D. TENDER OF PAYMENT AND CONSIGNATION (Art. 1256)
TENDER OF PAYMENT
Manifestation of the debtor to the creditor of his decision to comply
immediately with his obligation.
It is the preparatory act and extrajudicial in character.
CONSIGNATION
Deposit of the object of the obligation in a competent court in
accordance with the rules prescribed by law, after the tender of payment
has been refused or because of circumstances which render direct payment
to the creditor impossible or inadvisable.
Special Requisites:
a. The debt sought to be paid must be due;
b. There must be a valid and unconditional tender of payment or any of
the causes stated by law for effective consignation without previous
tender of payment exists;
c. The consignation of the thing due must first be announced to the
persons interested in the fulfillment of the obligation;
d. Consignation shall be made by depositing the things due at the
disposal of judicial authority; and
e. The consignation having been made, the interested parties shall also
be notified thereof.
EFFECTS OF CONSIGNATION:
1. If the creditor accepts the thing or amount deposited without
contesting the validity or efficacy of the consignation, the obligation is
extinguished. (Art.1261)
2. If the creditor contests the validity or efficacy of the consignation or if
the creditor is not interested or unknown or is absent, the result is a
litigation. If the debtor complied with all the requisites, the obligation is
extinguished.
NOTES:
It is the consignation which constitutes a form of payment and must
follow, supplement or complete the tender of payment in order to
discharge the obligation.
A valid tender of payment has the effect of exempting the debtor
from payment of interest and/or damages.
If tender is made by means of a check, such tender is valid because
it is an exercise of a right. Article 1249 is not applicable.
II. LOST OF THE THING DUE
It is understood that a thing is lost when it perishes ( physical loss),
goes out of commerce (legal loss), or disappears in such a way that its
existence is unknown or it cannot be recovered. (Civil loss).(Art. 1189,
par. 2)
In Determinate Obligations to Give Obligation is extinguished.
(Art.1262)
Requisites:
1. The thing which is lost is determinate;
2. The thing is lost without the fault of the debtor; and
3. The thing is lost before the debtor has incurred in delay
EXCEPTIONS:
1. When by law, obligor is liable even for fortuitous event;
2. When by stipulation, obligor is liable even for fortuitous event;
3. When the nature of the obligation requires the assumption of risk;
4. When the loss of the thing is due partly to the fault of the debtor;
5. When the loss of the thing occurs after the debtor incurred in delay;
6. When the debtor promised to deliver the same thing to two or more
persons who do not have the same interest(Art. 1165, par. 3); and
 7. When the debt of a certain and determinate thing proceeds from a
criminal offense (Art.1268)
NOTE: In Generic Obligations to Give Obligation is not extinguished
because the genus of a thing cannot perish. (Art. 1263)
EFFECT OF RELATIVE IMPOSSIBILITY OR DOCTRINE OF UNFORESEEN
EVENTS (ART 1267)
When the service has become difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
Requisites:
1. The event or change in circumstances could not have been foreseen at the
time of the execution of the contract;
2. It makes the performance of the contract extremely difficult but not
impossible;
3. The event must not be due to the act of any of the parties; and
4. The contract is for a future prestation.
III. CONDONATION OR REMISSION OF THE DEBT
An act of pure liberality by virtue of which the obligee, without receiving
any price or equivalent, renounces the enforcement of the obligation, as a
result of which it is extinguished in its entirety or in that part or aspect of
the same to which the remission refers. It is the gratuitous abandonment
by the creditor of his right. (Art. 1270)
Requisites:
a. It must be gratuitous
b. It must be accepted by the debtor
c. The parties must have the capacity
d. It must not be inofficious; and
e. If made expressly, it must comply with the forms of donations.
NOTE: Whether expressed or implied, the extent of remission or
condonation shall be governed by the rules regarding inofficious donation.
(Art. 1270, par. 2)
KINDS OF REMISSION OR CONDONATION
1. AS TO FORM
A. EXPRESS –when it is made verbally or in writing
B. IMPLIED--when it can only be inferred from conduct
2. AS TO EXTENT
A. COMPLETE—when it covers the entire obligation
B. PARTIAL—when it does not cover the entire obligation
3. AS TO DATE OF EFFECTIVENESS
A. INTER VIVOS—when it will take effect during the lifetime of the
donor
B. MORTIS CAUSA—when it will become effective upon the death
of the donor. It must comply with the formalities of the will.
NOTE: If the creditor voluntarily delivers the private document
evidencing the credit to the debtor, there is a presumption that he
renounces his right of action against the latter for the collection of
the said credit. (Art.1271). When such private document is found in
possession of the debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary proved. (Art. 1272)
IV.CONFUSION OR MERGER OF RIGHTS
Merger of the characters of the creditor and the debtor in one and the
same person by virtue of which the obligation is extinguished. (Art. 1275)
Requisites:
 that the characters of creditor & debtor must be in the same person;
 that it must take place in the person of either the principal creditor
or the principal debtor; and
 it must be complete & definite
Example.
 Joey Kaye

Ally
Joey owes Kaye 50000 pesos with a promissory note. Kaye is obliged to
deliver a phone to Ally in exchange for her service but instead of delivering
it, she hand Ally the promissory note which the latter accept. Ally, bought a
dress in a boutique shop owned by Joey and instead of paying a sum of
money, she hand Ally the promissory note.

In the above example, the obligation will be extinguished—it is the general

effect of merger or confusion,

V. COMPENSATION

Extinguishment in the concurrent amount of the obligation of those

persons who are reciprocally debtors and creditors of each other. (Art. 1279)

Requisites:

 there must be 2 parties, who, in their own right, are principal creditors
& principal debtors of each other (except in case of guarantor, Article
1280);
 both debts must consist in money, or if the things due are fungibles,
they must be of the same kind & quality;
 both debts must be due;
 both debts must be liquidated & demandable;
 there must be no retention or controversy commenced by 3rd persons
over either of the debts & communicated in due time to the debtor;
and
 compensation must not be prohibited by law.
KINDS OF COMPENSATION
1. Legal – takes effect by operation of law (Art. 1290)
2. Voluntary – agreed upon by the parties (Art. 1282)
3. Judicial – takes effect by judicial decree (Art. 1283)
4. Facultative – when it can be claimed by one of the parties who,
however, has the right to object to it
DEBTS NOT SUBJECT TO COMPENSATION:
 debts arising from contracts of deposit
 debts arising from contracts of commodatum
 claims for support due by gratuitous title
 obligations arising from criminal offenses
 certain obligations in favor of government
VI.NOVATION
Substitution or change of an obligation by another, resulting in its
extinguishment or modification, either by changing its object or principal
conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. (Art. 1291)
REQUISITES:
o a previous valid obligation;
o agreement of the parties to the new obligation;
o extinguishment of the old obligation; and
o validity of the new obligation.
KINDS:
1. As to its essence
a. Objective/Real - refers to the change either in the cause, object or
principal conditions of the obligations
b. Subjective/Personal - refers to the substitution of the person of the
debtor or to the subrogation of a 3rd person in the rights of the credito
c. Mixed
2. As to its form/constitution
a. Express - when it is declared in unequivocal terms that the old
obligation is extinguished by a new one w/c substitutes the same.
b. Implied - when the old & new obligation are incompatible w/ each
other on every point.
Test of Incompatibility
Whether or not the old and new obligations can stand together, each
having its own independent existence. If they can stand together, there is
no incompatibility; consequently, there is no novation. If they cannot
stand together, there is incompatibility; consequently, there is novation.
FORMS OF SUBSTITUTION OF DEBTORS:
1.Expromision - effected with the consent of the creditor at the instance
of the new debtor even without the consent or even against the will
of the old debtor. (Art. 1293)
Requisites:
a. Initiative for substitution must emanate from the new debtor
b. Consent of the creditor to the substitution
2. Delegacion - effected with the consent of the creditor at the instance
of the old debtor, with the concurrence of the new debtor.
Requisites:
a. Initiative for substitution must emanate from the old debtor
b. Consent of the new debtor
c. Acceptance by the creditor
EFFECT OF INSOLVENCY OF NEW DEBTOR
1. Expromision – the new debtor’s insolvency or nonfulfillment of the
obligation shall not revive the original debtor’s liability to the creditor
whether the substitution is effected with or without the knowledge
or against the will of the original debtor.
2. Delegacion – the creditor can sue the old debtor only when the
insolvency was prior to the delegation and publicly known or when
the old debtor knew of such insolvency at the time he delegated the
obligation.
 EFFECTS OF SUBROGATION (Art. 1303-1304)
1. Total Subrogation- transfers to the person subrogated the credit
with all the rights the original creditor had against the debtor or
third persons
NOTE: Accessory obligations are not extinguished; the person
subrogated acquires all the rights the original creditor had against
the third persons and the rule is absolute with respect to legal
subrogation. In conventional subrogation, the accessory may be
increased or decreased depending upon the stipulation.
2. Partial Subrogation- 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.

Ex. Lino owes Jade 4000. With the consent of both, Jackie pays Jade
2000. Now, Jade and Jackie are the creditors of Lino to the amount
of 2000 each.

NOVATION BY SUBROGATION
A personal novation effected by subrogation a third person in the
rights of the creditor. (Art.1300)
Kinds of Subrogation
1. Conventional – takes place by agreement of the parties; this kind
of subrogation requires the intervention and consent of 3 persons:
the original creditor, the new creditor and the debtor. (Art. 1301)
2. Legal – takes place without agreement but by operation of law
because of certain acts (Article 1302).

TAKE NOTE: Legal subrogation cannot be presumed. (Art 1302)

EXCEPTIONS:
1. Creditor pays another creditor who is preferred, without debtor’s
knowledge;
2. A third person not interested in the obligation pays with the
express or tacit approval of the debtor; or
3. Even without debtor’s knowledge, a person interested in the
fulfillment of the obligation pays without prejudice to the effects of
confusion as to the latter’s share.