EXTINGUISHMENT OF OBLIGATIONS

Chapter IV

Art. 1231

Obligation 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 confusion or merger of the rights of creditor and debtor
5. by compensation
6. by novation
7. Other causes i.e. annulment, rescission, fulfillment of a resolutory condition, and
prescription
8. death of the party in case of personal obligation
9. mutual desistance or withdrawal
10. arrival of resolutory period
11. compromise
12. impossibility of fulfillment
13. happening of fortuitous event

PAYMENT OR PERFORMANCE

Art. 1232

Payment- means not only the delivery of money but also the performance, in any other
manner, of an obligation.

Payment (or performance in legal parlance):

1. giving of a thing, including delivery of money and paying penalty or damages
2. doing of an act
3. not doing of an act

Art. 1233

A debt is paid when the thing or service in which the obligation consists has been completely
delivered or rendered.

Exception:

1. Art. 1234: (Substantial Compliance) 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.
2. Art. 1235: (Principle of Estoppel) When the obligee accepts performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with.
Art. 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. debtor
2. any person who has an interest in the obligation like, the guarantor
3. a third person who has no interest in the obligation when there is stipulation that he can
make payment

Effects of payment by third person

1. (Art. 1237) If made without knowledge or against the will of the debtor. He can recover
up to the amount paid. Payment by third person without the consent or against the will
of the debtor: Effect: the third person cannot compel the creditor to subrogate him in
the creditor's accessory rights of mortgage, guaranty or penalty;

2. If made with knowledge of the debtor. Payer shall have the right to reimbursement and
subrogation and to acquire rights of the creditor.

Art. 1238

Payment made by 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.

Art. 1239

In obligation to give: Payment of one who has no free disposal of the thing due and capacity to
alienate SHALL NOT BE VALID, without prejudice of Art. 1427 under Natural Obligations.

Art. 1407: In a contract where both parties are incapable of giving consent, express or
implied ratification by the parent, or guardian, as the case may be, of one of the contracting
parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting
parties, the contract shall be validated from the inception.

The creditor cannot be compelled to accept payment where the person paying has no capacity
to make it.

Art. 1240
Payment shall be made to the following:

1. creditor or obligee (creditor at the time of payment NOT at the time of constitution)
2. successors in interest
3. any person authorized to receive it (authority may come from the creditor or by law)

Art. 1241

Payment to incapacitated to administer property: Effect- VALID if he kept the thing Or insofar
as the payment has been beneficial to him.

Payment to third person: Effect- VALID insofar as it redounded to the benefit of the creditor.
BENEFIT MUST BE PROVEN except:

1. if after payment, the third person acquires the creditor's right

2. if the creditor ratifies the payment to third person
3. if by creditor's conduct, the debtor has been led to believe that the third person has
authority to receive payment.

Art. 1242

Payment in good faith to any person in good faith of the credit shall release the debtor.
(Possession of credit is possession of credit itself and not merely the document or instrument
evidencing the credit.)

Art. 1243

Payment made to creditor by debtor after the latter has been judicially ordered to retain the
debt shall not be valid.

Art. 1244

The debtor of a thing cannot compel a 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 so, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will.

When prestation may be substituted:

1. consent by the creditor

2. faculatative obligation
3. waiver by creditor
4. substitution is allowed with consent of creditor

Art. 1245
Dation in payment (where the property is alienated to the creditor in satisfaction of a debt in
money), shall be governed by the law on sales.

Special Forms of Payment

1. dation en pago (1245)

2. application of payment (1253)
3. payment by cession (1255)
4. tender of payment and consignation (1256-1261)

Art. 1246

When the obligation consist 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.

Art. 1247

UNLESS otherwise stipulated, extrajudicial expenses required by the payment shall be for the
account of the debtor. With regard to judicial costs, the Rules of Court govern.

Judicial cost- statutory amounts allowed to a party to an action for his expenses incurred in the
action. As a general rule, cost of suit shall be for the account of the losing party.

Art. 1248

General Rule: Creditor cannot be compelled partially to receive the prestations. Neither may the
debtor be required to make partial payments.

This contemplates obligations with only one debtor and one creditor.

When partial performance is allowed:

1. when expressly stipulated

2. when the debt is in part liquidated (1248 2nd par) and in part unliquidated
3. when the different prestations in which the obligation consists are subject to different
terms or conditions which affect some of them.

Art. 1249

Payment of monetary debt: in the currency stipulated. If not possible to deliver, the currency
which is legal tender in the Philippines.

The delivery of the following shall produce effect only after encashment, or when through the
fault of the creditor they have been impaired:
1. promissory note
 2. bill of exchange
3. other mercantile documents

In the meantime the action derived from the original obligation shall be held in abeyance.

Legal currency is that currency which a debtor can legally compel a creditor to accept payment
of a debt in money when tendered by the debtor in the right amount.

Art. 1250

in cases 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.

Inflation- sharp sudden increase in money or credit or both without a corresponding increase in
business transactions. Inflation cause a drop in the value of money, resulting in the rise of the
price level.

Deflation is the reduction in volume and circulation of the available money or credit, resulting in
the decline of the general price level.

Art. 1251

Place where obligation shall be paid:

1. If stipulated, in the designated place

2. If not stipulated and the thing to be delivered is specific, payment shall be made at the
place where the thing was, at the perfection of the contract
3. If not stipulated and the thing to be delivered is generic, the payment shall be at the
domicile of the debtor.

This is without prejudice to venue under the rules of court.

The order is successive and exclusive.

APPLICATION OF PAYMENT

Art. 1252

Rules on application of payment

1. the debtor has the first choice; he must indicate at the time of the payment not
afterwards. He cannot later claim that it should be applied to another debt.
2. the right to make application once exercised is irrevocable unless the creditor consents
to the change
3. if the debtor does not apply payment, the creditor may make the designation by
specifying in the receipt which debt is being paid
 4. if the creditor has also not made the application or if the application is not valid, the
debt which is the most onerous to the debtor among those due, shall be deemed to
have been satisfied (Art. 1254).
5. if the debt due are all the same nature and burden, the payment shall be applied to all
of them proportionately (Art. 1254).

Art. 1253

If the debt produces interest, payment on the principal shall not be deemed to have been made
until the interests have been covered.

Payment shall be applied to the interest first. This provision is merely directory.

PAYMENT BY CESSION

Art. 1255

Payment by Cession is the assignment or abandonment of all the properties of the debtor for
the benefit of his creditors in order that the latter may sell the same and apply the proceeds
thereof to the satisfaction of their credits.

Requisites:

1. there must be 2 or more creditors

2. the debtor must be partially insolvent
3. the assignment must involve all the properties of the debtor
4. the cession must be accepted by the creditors.

Effect of cession: the creditors does not make them owners of the properties AND the debtor is
only released from his obligation only up to the net proceeds of the sale of his property
assigned. The debtor is still liable for the balance.

Dation en Pago Cession

There is usually one creditor
Does not presupposes insolvency
Does not involve all the property
Creditor becomes the owner of the
thing given
It is an act of novation
There are several creditors
The debtor is insolvent at the time
of the assignment
Extends to all properties of the
debtor
Creditors only acquire the right to
sell the thing and apply the
proceeds to their credits
proportionately
Not an act of novation
 TENDER OF PAYMENT AND CONSIGNATION

Art. 1256

Consignation is made if the creditor refuses without just cause to accept the payment.
Consignation is made for the debtor to be released from responsibility.

Consignation ALONE (no tender of payment is necessary) 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 receipt
4. when two or more persons claim the same right to collect
5. when the title of the obligation has been lost

Requisites of a valid consignation

1. existence of a valid debt which is due (1256 par 1)

2. tender of payment and refusal without justifiable cause by the creditor to accept it
(ibid)
3. previous notice of consignation to persons interested in the fulfillment of the obligation
(1257 par 1)
4. consignation of the thing or sum due (1258 par. 1)
5. subsequent notice of consignation made to the interested parties (ibid par 2)

Tender of payment is not completed unless it is completed by consignment.

It must be unconditional and for the whole amount.

It must be actually made.

Art. 1259

The expenses of consignation, when properly made, shall be charged against the creditor.

Art. 1260

Once consignation is made, the debtor may ask the judge to cancel the obligation. The debtor
may, before creditor accepts consignation or before judicial declaration that consignation is
properly made, the debtor may withdraw the thing or sum deposited.

Art. 1261

Effect of withdrawal with authority of the creditor

AS FAR AS THE CREDITOR AND DEBTOR ARE CONCERNED, their relations will remain as they
were before acceptance or cancellation. HOWEVER, the creditor shall loose every preference
which he may have over the thing, and the co-debtors (solidary), guarantors and sureties shall
be released.