Course: Obligations and Contracts

Topic: Extinguishment of Obligations

Report Coverage: Article 1231 – Article 1236 of the New Civil Code of the Philippines

Article 1231. Obligations are extinguished:

1. By payment of 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

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code.

In addition to those enumerated in Article1231, other causes are:

1. Death of a party in case of the obligation is a personal one (Art. 1311, par.1);
2. Mutual desistance or withdrawal;
3. Arrival of resolutory period (Article 1193, par. 2);
4. Compromise (Art. 2028);
5. Impossibility of fulfillment (Art. 1266) and;
6. Happening of a fortuitous event (Art. 1266)

These causes as well as those enumerated in the second paragraph or Artcile 1231 are governed under other chapters of
the Civil Code.

Note:

 Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. The term is a
financial accounting concept that allows for the reduction in value of an asset or earnings by the amount of an
expense or loss. Neither is it a condonation nor can it be likened to a novation.

Modes of extinguishment of obligations classified.

1. Voluntary :
a. Performance
i. Payment; and
ii. Consignation
b. Substitution:
i. Dacion en pago (conveyance for payment); and
ii. Novation
c. By release agreement:
i. Agreement subsequent to the constitution of the obligation:
1. Mutual waiver;
2. Unilateral waiver;
3. Remission.
ii. Agreement simultaneous to the constitution of the obligation:
1. Resolutory condition; and
2. Extinctive period.
2. Involuntary :
a. By reason of the subject
i. Confusion; and
ii. Death of the contracting parties in the cases where the obligations are personal.
b. By reason of the object:
i. Loss of the thing due or impossibility of performance; and
c. By failure to exercise (right of action)
i. Extinctive prescription

Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.
  Payment may consist of not only in the delivery of money but also the giving of a thing (other than money), the
doing of an act, or not doing of an act.
 In law, payment and performance are synonymous (see Article 1191).

Elements of Payment

1. Persons, who may pay and to whom payment may be made;

2. Thing or object in which payment must consist;
3. The cause thereof;
4. The mode of form thereof;
5. The place and the time in which it must be made;

Burden of proving payment

When the existence of a debt is fully established by the evidence, the settled rule is that the burden of proving
extinguishment by payment devolves upon the debtor who pleads payment or offers such a defense to the claim of the creditor
rather than on the latter to prove non-payment. The debtor has the burden of showing with preponderance of evidence (in civil
cases) that the obligation has been discharged by payment by documentary or parol evidence. By the nature of things,
the creditor who denies payment by the debtor, cannot produce any proof of non-payment. Only when the debtor introduces
evidence that the obligation has been extinguished does the burden to the creditor.

There is a disputable presumption that money paid by one to another was due to the latter. (Rules of Court,
Rule 131, Sec. 5(f).)

Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been
completely delivered or rendered, as the case may be.

 Debt may refer to an obligation to deliver money, to deliver a thing (other than money), to do an act, or not to do
an act.

When debt considered paid.

1. Integrity of the prestation – this requisite means that the prestation be fulfilled completely. (Alonzo vs. San Juan, 451
SCRA 45. 2005).

a.) A debt to deliver a thing (including money) or to render service is not understood to have been paid unless the
thing or service has been completely delivered or rendered, as the case may be.

b.) Partial or irregular performance will not produce the extinguishment of an obligation as a general rule. Neither
a late partial payment forestall a long-expired maturity date. (Selegna Management & Development Corp. vs.
United Coconut Planters Bank, 489 SCRA 125. 2006).

2. Identity of the prestation – this requisite means that the very prestation due must be delivered or performed. (see
Article 1244).

Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been
strict and complete fulfillment, less damages suffered by the oblige.

Recovery allowed in caseof substantial performance in good faith. Article 1234 is the first exception to the rule laid down
in Article 1233. Pursuant to the Report of the Code Commission, p.131:

‘’The above rule is adopted from American Law. Its fairness is evident. In case of substantial performance,
the oblige is benefited. So, the obligor should be allowed to recover as if there had been strict and complete fulfillment less
damages suffered by the obligee. This last condition affords a just compensation for the relative breach committed by the
obligor.’’

Requisites for application of Article 1234

1. There must be substantial performance. Its existence depends upon the circumstances of each case; and

2. The obligor must be in good faith. Good faith is presumed in the absence of proof to the contrary.

Existence of substantial performance

There is substantial performance or compliance when there is “compliance with the essential requirements,
whether of a contract or a statute.’’ (Alvarez vs. People, 677 SCRA 673. 2012).
 1. If the breach is of inconsequential nature that causes no serious harm to the boligee, the law deems the performance
as substantial, making it the obligee’s duty to pay.

2. Conversely, the principle of substantial performance is inappropriate when the incomplete performance constitutes a
material breach of the contract and is not slight or technical and unimportant (International Hotel Corporation vs. Joaquin, Jr., 695
SCRA 382), especially when the failure is inexcusable.

Article 1235. When the oblige accepts the performance, knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.

 This provision is the other exception to Article 1233. It is founded on the principle of estoppels. In case of
acceptance, the law considers that the creditor waives his right. The whole obligation is distinguished.
 If the payment is incomplete or irregular the creditor may properly reject it.

The verb accept as used in this article means to take as “satisfactory or sufficient,’’ or “to give assent to,’’ or to ‘’agree”
or ‘’accede” to an incomplete or irregular performance. The mere receipt of partial payment is not equivalent to acceptance of
performance within the purview of Article 1235 as would extinguish the whole obligation. (Esguerra vs. Villanueva, 21 SCRA
1314. 1967).

Requisites for the application of Article 1235

1. The oblige knows that the performance is incomplete or irregular; and

2. He accepts the performance without expressing any protest or objection.

Form of protest of creditor. This article does not require the protest or objection of the creditor to be made in a particular
manner or at a particular time. So long as the acts of the creditor, at the time of the incomplete or irregular payment by the
debtor, or within areasonable time thereafter, evince that the former is not satisfied or agreeable to said payment or
performance, the obligation shall not deemed extinguished. (Esguerra vs. Villanueva, supra).
Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of
the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or
against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

Persons from whom the creditor must accept payment:

1. The debtor;
2. Any person who has an interest in the obligation (like aguarantor) or;
3. A third person who has no interest in the obligation when there is stipulation that he can make payment.

Creditor may refuse payment by a third person. Under the old Civil Code, the creditor cannot refuse payment by a third
person but the Commission believes that the creditor should have a right to insist on the liability of the debtor. Moreover, the
creditor should should not be compelledto accept payment from a third person whom he may dislike or distrust. The creditor
may not, for personal reasons, desire to have any business 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
honored. (Report of the Code of Commission, p. 132)

Effect of the payment of a third person:

1. If made without the knowledge or against the will of the debtor. – The payer can recover from the debtor only in
so far as the payment has been beneficial to the latter. In other words, the recovery is only up to the extent or amount of
the debt at the time of payment. Furthermore, the third person is not subrogated to the rights of the creditor, such as those
arising from a mortgage, guarantee, or penalty.

This defense may only be availed by the debtor, not by the creditor, for it affects solely the rights of the former.
Once the creditor has accepted payment, his status and rights as such, become automatically extinguished. (Rehabilitation Finance
Corp. vs. CA, 94 Phil. 984. 1954).

2. If made with the knowledge of the debtor. – The payer shall have the rights of reimbursement and subrogation,
that is, to recover what he has paid (not necessarily the amount of the debt) and to acquire all the rights of the creditor.

If the third person pays with the knowledge of the debtor, the latter must oppose the payment before or at the time the
same was made, not subsequently, in order that the rights of the payor may be subject to the above provisions. It is only
fair that the effect of said payment be determined at the time it was made, and that the rights then acquired by the payor be
not dependent upon or subject to modification by subsequent unilateral acts of the debtor.

The question whether the payment was beneficial or not to the debtor, depends upon the law, not upon his will.