Lecture

Extinguishment of Obligations Part I

General Provisions and Section 1: Payment

General Provisions
*Article 1231. Obligations are extinguished:
(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.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory

condition, and prescription, are governed elsewhere in this Code. (1156a)

Payment or Performance
*Article 1232. Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation. (n)

*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. (1157)

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

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

*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. (1158a)

*Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage,
guaranty, or penalty. (1159a)

*Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to
the creditor who has accepted it. (n)
*Article 1239. In obligations to give, payment made by one who does not have the free disposal of the
thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427
under the Title on "Natural Obligations." (1160a)

*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. (1162a)

*Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he
has kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the
creditor.

Such benefit to the creditor need not be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to
receive the payment. (1163a)

*Article 1242. Payment made in good faith to any person in possession of the credit shall release the
debtor. (1164)

*Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to
retain the debt shall not be valid. (1165)

*Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will. (1166a)

*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. (n)

*Article 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. (1167a)

*Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall
be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)
*Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor be required
to make partial payments.
However, 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. (1169a)

*Article 1249. 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 other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

*Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary. (n)

*Article 1251. Payment shall be made in the place designated in the obligation. There being no express
stipulation and if the undertaking 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 the place of payment
shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred
in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue
under the Rules of Court. (1171a)

SUBSECTION 1. Application of Payments

*Article 1252. He who has various debts of the same kind in favor of one and the same 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 the application of payment is made by the party for whose benefit the term
has been constituted, application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the
former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a)

*Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered. (1173)

*Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately. (1174a)
SUBSECTION 2. Payment by Cession
*Article 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This
cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for
the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made
between the debtor and his creditors shall be governed by special laws. (1175a)

SUBSECTION 3. Tender of Payment and Consignation

*Article 1256. If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.

Consignation 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;
(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 or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)

*Article 1257. In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation. The consignation shall be
ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177)

*Article 1258. Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and the announcement
of the consignation in other cases. The consignation having been made, the interested parties shall also
be notified thereof. (1178)

*Article 1259. The expenses of consignation, when properly made, shall be charged against the creditor.
(1179)

*Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may withdraw the thing or the
sum deposited, allowing the obligation to remain in force. (1180)

*Article 1261. If, the consignation having been made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors,
guarantors and sureties shall be released. (1181a)

Discussion
As an introduction to the chapter on Extinguishment, Art. 1231 enumerates some ways by which
obligations usually end, or in legalese, they are extinguished. Some, because there may have been other
causes that we have already touched, as is hinted in the second paragraph of the article.
The enumeration in Art. 1231 are those that are found and discussed only in Chapter 4 of Book IV of the
Civil Code. They are payment or performance, loss of the thing that is due, condonation/remission,
confusion or merger of rights, compensation, and novation.

A brief description is in order. Payment or performance is the accomplishment of the required

prestation, and hence is generally the principal way by which an obligation is ended or extinguished.
Loss of the thing that is due without the debtor’s fault ends in the latter’s freedom from liability.
Condonation or remission is actually forgiving the debt, hence doing away with the need for compliance.
Confusion or merger refers to the rights of creditor and debtor, when they combine in only one person,
who will no longer have to enforce the obligation upon himself. Compensation is the recognition of
mutual obligations, not reciprocal, but which are considered to be paid in view of the one party’s own
debt to the other. Novation is discarding an existing obligation for a new one, which takes the former’s
place, effectively ending it.

As already mentioned, there are other causes that may be discussed elsewhere in the Civil Code, such
but not limited to rescission (Art. 1191), fortuitous events (Art. 1174), the fulfillment of resolutory
conditions (1179), and the arrival of a resolutory period.

How to pay: Integrity of payment

As abovementioned, payment or performance is when prestation itself is done. In a real obligation, the
specific or generic thing is given. In a personal obligation, the act required is accomplished. As stated in
Art. 1232, “payment” is not limited to the usual understanding, that is, the delivery of money, “but also
the performance, in any other manner, of an obligation.”

However, in order to be considered such, the action should be that which is particularly described and
required by the obligation, and the same should be done or delivered completely (Art. 1233). Art. 1248
also states that neither party should be forced to accept or perform partial prestations – it is the
creditor’s right to expect a complete payment, and it is the debtor’s right to rid himself totally of liability
by performing completely if and when he can.

So a different prestation will not satisfy the requirements of an obligation, and neither will a prestation
that is not finished or only partially accomplished, unless the debtor or obligor is in good faith and at
least delivers the substance of the requirement (Art. 1234). This is the so-called substantial performance
rule. It is tricky as it is not quantifiable, and depends on the facts of each case. It also does not result in
complete performance despite the wording of Art. 1234, because the oblige may ask for recompense for
any damages he may suffer because of the incomplete performance, although such damages be less
than if the obligation was considered to be a complete breach. But if the creditor does not contest the
incompleteness or irregularity of the prestation, and tells the debtor the latter is free of the obligation
by such incomplete or irregular performance, Art. 1235 says the obligation is deemed fully complied
with.
The difference between Art. 1235 and the preceding article seems to be the perspective on what has
been done. Art. 1234 seems to be from the debtor’s perspective. It is hinted that the debtor is unable to
do a complete or regular performance, but that he is in good faith, that is, he does not willingly perform
incompletely or irregularly. Nevertheless, if he has given “the substance” of the prestation, e.g., the
thing is functional and usable despite lacking parts that are also required by the obligation but are
otherwise negligible for function or utility, he may use Art. 1234 in his defense if asked for the
remainder of the prestation, and just see to the creditor’s damages, seen to be minimal in this case. In
Art. 1235, we have no idea of the stage or level of accomplishment that the obligation is in. What seems
to matter is the creditor’s perspective. The creditor no “accepts” the incomplete or irregular
performance and does not require any more. We may say that there is an element of condonation in
this article, at least, partially. Of course, it may also be possible that the creditor does not arrive at this
perspective unilaterally, that is, by express stipulation or agreement, the parties state that the obligation
is done despite its incompleteness or irregularity. 1

How to pay: Identity of payment

Aside from being complete, the prestation should also be the same was that constituted in the
obligation, otherwise, the creditor cannot be forced to accept the performance for the purpose of
extinguishing the obligation. This is true, even if the new prestation involves something more valuable
(Art. 1244). If the obligation is to deliver a generic thing, “value” translates into “quality,” and since
there is no specificity here, the general rule is to give a thing of average quality. Unless there is a
stipulation, the creditor cannot demand a thing of superior quality, nor can the debtor deliver one of
substandard quality (Art. 1246).

Debts in money are paid in the stipulated currency, or in Philippine legal tender (the Peso) if the former
is unavailable. Commercial documents like promissory notes and bills of exchange only discharge the
debtor from liability when they have been converted into actual money, or “cashed.” (Art. 1249) 2

Reading Art. 1250 gives us an idea that money debts are not affected much by inflation or deflation of
the currency. The stipulated amount is generally what will be paid. Contracts usually put into place
measures that will answer for ordinary inflation or deflation (such as interest). Even in the case of
extraordinary inflation or deflation, “the value of the currency at the time of the establishment of the
obligation will be the basis of payment, unless there is an agreement to the contrary.”

Payment that are valid though irregular or not identical

There are three subsections under this chapter dealing with special forms of payment, and we would do
well to place them after the discussion on identity because they are not ordinary ways of payment.
Moreover, we may also place here dation in payment, mentioned in Art. 1245, which changes payment

1
Art. 1248 seems to provide another exception to the completeness rule: partial liquidation. As a matter of
accounting, the debtor cannot be required to deliver what has yet to be determined. But in this case, the
obligation itself will not be complete until the delivery of the entire obligation after everything has been liquidated.

2
Art. 1249 also states that the impairment of commercial documents releases the debtor, but this has more to do
with loss without the debtor’s fault rather than identity of payment.
in money into payment in property. The list, then, of irregular payments that are valid according to this
chapter is as follows:

1. Dation in payment
2. Application of payments
3. Payment by cession
4. Tender of payment and consignation

Dation in payment is from the Spanish “dacion,” which literally means “giving.” What you are giving here
is not money; instead, “property is alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales (Art. 1245).” Simply put, if the debtor owes money but does not have the
cash, he may give property instead. What is important to note here is that Art. 1245 mentions that this
situation is governed by the law on sales. A sale is a contract between a buyer and seller, who agree on
the object of the sale and the price. The money debt is therefore technically converted into a sale; the
money that was given as a loan and is supposed to be given back becomes the sale price, and the
property that is given in lieu of giving back thee money loaned becomes the thing bought. It does not
matter if the property is not of the exact same value as the money debt, because in a sale, the
consideration for what a buyer buys is subject to negotiation. So if the creditor says yes to the dation
and accepts the property, that is the end of the obligation, notwithstanding the higher or lower value of
the property.

An application of payments, meanwhile, does not really change the nature of the payment, but the law
imagines a scenario where the debtor has “various debts or the same kind in favor of one and the same
creditor (Art. 1252),” all due and demandable, and what the debtor has at hand is not enough to satisfy
all those debts (for example, cash on hand of P7,000 vs. two debts of P5,000 and P10,000). So Art. 1252
allows the debtor to declare to the creditor which debts the debtor wants to pay first, either wholly or
partially. This choice of debt may include those which are not yet due, if so desired and stipulated by the
parties. If the debtor does not make the choice, and the creditor finds that the payment does not and
cannot cover all of the debts, he may make the choice by writing a receipt for the particular debt and
giving that to the debtor. If the debtor accepts that receipt without any objection, the application is
thus made.3 If neither the debtor or the creditor made any application as already stated, and there is a
dispute later on which debt the initial payment should be applied to, the courts can come in and apply
Art. 1254, which considers the burden of the debt. More burdensome debts should be paid first, so
those with collateral, those with interest, or those with penalties should be paid before simple money
debts. And if there is no way to determine which debt is more onerous, or they all have the same
burden, the court can divide the payment among all debts, but proportionately (for example, the P7,000
divided into P2,000 for the P5,000 debt, and P5,000 for the bigger P10,000 debt).

The third way to pay for debts that does not follow the usual payment rules is cession, which involves
assigning property to the creditors, and allowing them to take hold of such property for the purpose of
auctioning them off. The cession does not transfer ownership of the property to the recipient (as it
would in dation, or indeed, a sale). Instead, after the costs of auction, the net proceeds shall be applied

3
Take note of Art. 1253, which states that the interest, if any, must be covered first before the rest of the payment
can be applied to the principal.
to the debt/s, and the debtor may cede as many properties as required if the first auction does not raise
enough to cover the debts. (See Art. 1255)

Finally, we have tender of payment and consignation. Consignation is a resort given to the debtor if the
creditor, unjustly, does not accept the former’s tender (offer) of payment. Once consignation is made,
the debtor is released from the debt (Art. 1256). The consignation is done in court, after proof that the
debtor offered to pay the creditor (Art. 1257) of tender and despite this, the creditor refused. 4 Likewise,
the court must implement the requirements of Art. 1257 and Art. 1258, that is, that the consignation
must first be announced (via notice or any other provable correspondence) to the people interested,
such as the creditor himself or his assigns, or any guarantor, surety, etc. before AND after consignation is
made. The first notice is for them to know that the debtor is consigning the debt, so they may still have a
chance to come after it before the court accepts. The second notice is to tell them that consignation has
been done and the payment has been accepted by the courts; it means that the debtor, along with co-
debtors, guarantors, and sureties (Art. 1261), is already free, and if the creditor wants the payment, he
should ask the court which already holds it. But consignation is not free, so before the payment is
released, the court must deduct whatever expenses should be charged (Art. 1259). But it is still possible
to withdraw the consigned payment, if the creditor has not yet accepted it, or the judge has not made a
declaration of consignation yet (Art. 1260). And if the creditor accepts the consignation but asks
(authorizes) the debtor to withdraw it for him, aside from the expenses mentioned in Art. 1259, the
creditor also loses any preference he may have had prior to the consignation (Art. 1261).

Who should pay

The debtor is the principal performer of his own obligation, and generally, only he can extinguish it by
payment. In all cases, he must have the legal capacity to act, and if the obligation is a real one, he must
have the free disposal of the thing due (Art. 1239).

Can another person pay on behalf of the debtor? It depends. Art. 1236 implies that there are third
persons who may be interested in – read: legally bound to – the obligation, although not as principal
debtor. Examples are guarantors and sureties, in the event that the debtor cannot pay, or persons with
vicarious liabilities, such as employers in certain instances, and parents of minors. In these examples,
payment by such third persons will be okay, and treated as if it was the principal debtor who paid,
therefore extinguishing the obligation. Without such interests, the creditor may refuse (a stipulation can
cure this, because then the creditor would have given his consent to such a setup in advance).

There are also legal ways by which the debtor himself may voluntarily or involuntarily pass on a debt,
such as assignment, succession, and/or sale of business, and in these cases, the creditor must also honor
the payment of the successors-in-interest as if it was the original debtor who paid. But suppose there is
no such transfer, and a third party, presumably without interest, still arranges for the payment of a
4
Art. 1256 frees the debtor from the responsibility of proving that he offered payment in the following instances:
1. If the creditor is absent, unknown, or does not appear at the place of payment
2. If the creditor is incapacitated to receive the payment at the time it is due
3. When the creditor unjustly refuses to give a receipt
4. When there is another person who claims that he should be the one to get paid
5. When the creditor does not have proof of credit (title of the obligation)
debtor’s obligation without the latter’s knowledge or consent. Is the payment valid? It may be, if the
creditor accepts it. Art. 1236 uses the permissive “may” as regards the creditor’s possible refusal of such
payments, which means he may also accept instead of refuse. However, in case the creditor accepts, the
second paragraph of Art. 1236 states that such a payor cannot expect to be repaid by the debtor unless
the payment did benefit the latter (i.e., extinguish his obligation). Further, such a payor cannot force the
creditor to concede any rights that may be connected to the credit, such as enforcing a mortgage,
guaranty, or penalty (Art. 1237). It is implied by both articles that only payors that are legally interested
in the obligation or those who pay with knowledge and consent of the debtor may demand
reimbursement from the latter, and be subrogated to the creditor’s rights when applicable.

It does not get any easier if the payor (without the knowledge or consent of the debtor) does not intend
to get any reimbursement from the debtor. According to Art. 1238, this situation is technically a
donation, which, being a contract, requires the debtor’s consent. So what happens if the debtor does
not consent? Since the article also considers the payment valid in this case, the creditor is already out of
the picture. Therefore, a debtor that does not consent to the donation may reimburse the third party for
what the latter spent to take care of the obligation, in effect, negating the donation.

Who should be paid

Meanwhile, the person who should be paid is generally the creditor. He is the, according to Art. 1240,
“the person in whose favor the obligation has been constituted.” But the article also allows for other
persons to receive payment and cause the extinguishment of the obligation. These are “successors in
interest, or any person authorized to receive” the payment. In all cases the recipient should have legal
capacity, and in particular, to administer his property (Art. 1241). This specificity is intentional, because
payment received becomes the creditor’s property. If he legally cannot, or is not legally recognized as
capable (such in the case of minors or the insane), the payment is invalid. It is not the fault of an insane
creditor if he is not cognizant of an act as one which is payment for an obligation, and therefore cause
its extinquishment by his receipt of the thing; a minor simply does not have legal capacity yet.

Of course, payment is also invalid if made to a third person that is not one of the exceptions already
mentioned. But the law makes an exception to the foregoing cases – if the payment has at least
“redounded to the benefit of the creditor.” In the case of the incapacitated, their keeping of the thing –
not wasting, destroying, or disposing it – can also cure the payment defect.

However, such benefit must be proven by the debtor in case the payment is later contested or
questioned, unless the creditor ratifies the same or is estopped as to the seeming authority of the third
party to receive payment, or the third party later legally acquires the creditor’s rights (Art. 1241). In any
case, if the third person holds evidence of the credit and enforces it, and the debtor in good faith pays
that person, the obligation is also extinguished (Art. 1242).

Where to pay
Art. 1251 is pretty straightforward: “payment shall be made in the place designated in the obligation.”
So the first thing to look at is whether there is a stipulated place of payment. If there is none, the article
says it would now depend on the kind of thing that is the object of the payment. If it is specific or
determinate, the parties should proceed to the place where the specific thing was found when the
obligation was constituted. But if the thing is generic, or in any other case, the creditor can follow the
debtor to his house (domicile) or where he habitually resides. Any attempt to escape payment that
causes the creditor to spend more in finding the debtor will be charged to the latter. Thus, the debtor
must always notify the creditor of any change in address. All extrajudicial expenses required by the
payment is charged to the debtor (Art. 1247). But if a case is filed, the Rules of Court on venue of suit
allows the creditor to file the case in the courts of the place where he (creditor resides), if it is
inconvenient for him to file a case in the place where the debtor lives (Art. 1251).