Book IV Title 1, Chapter 4

Extinguishment of Obligations
Extinguishment of Obligations
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)

Extinguishment of Obligations means the termination of the obligations where it ceases to

exist. These are accomplished by:

 Complying with the terms – Payment

 Force Majeure or Fortuitous Events – Loss of the Thing Due

 The forgiveness of the obligation –Condonation or Remission

 The merger of debtor and creditor in one person – Confusion

 Off-set of two concurring obligations – Compensation

 Replacement of old obligation with a new one - Novation

There are other modes by which obligations are extinguished but it is covered in other sections
of the Civil Code or other laws.

Requisites for payment to be valid:

a. must be paid by the right person (debtor or representative)
b. payment must be done to the right person
c. must be at the right time (reasonable hour of the day)
d. must be made at the right place
e. must be in the right currency
 Book IV Title 1, Chapter 4 (S1)
Payment
SECTION 1- Payment
ARTICLE 1232. Payment means not only the delivery of money but also the performance,
in any other manner, of an obligation.
ARTICLE 1233. A debt shall not be understood to have been paid unless the thing or service
in which the obligation consist has been completely delivered or rendered, as the case may
be.
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.
Ex. I promised to deliver 4 specific white horses to X, unfortunately due to fortuitous events,
one of the horses died. I can collect the fees from X, less the value of the 4th horse (unless
indivisible).
Requisite: There must be substantial performance, and
The obligor must be in good faith.
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.
This is similar to an implied waiver by the obligee to claim for damages
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
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.
This article tackles situations where a third party to the obligation meddles in the payment
of the obligation.
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 from
arising from a mortgage, guaranty, or penalty.
 Subrogation – The right to acquire the rights of the creditor.
- “Stepping into the shoes of the creditor”
Subrogation can only apply if the debtor consented to the payment by a third party to the
creditor. This means that the third party will acquire all the rights of the creditor in the
obligation, including the securities and penalties originally agreed upon.
If the debtor did not consent, only substitution occurs. This is when only the personality
of a party (the creditor) is transferred to another person.
ARTICLE 1238. Payment made by a third person who does not intend to 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.
Ex. Old Philippine Commercial on Integrity.
There are actually two situations being described in this particular case.
 The case of the donation by a stranger to the debtor by paying the debt which must be
accepted by the debtor to be a valid donation.
 And the case of the creditor accepting the payment from a stranger which extinguishes the
obligation, even if it is without the consent or knowledge of the debtor.
ARTICLE 1239. In obligation to give, payment made by one who does not have the free
disposal if the thing due and capacity to alienate it shall not be valid, without prejudice to
the provisions of article 1425 under the Title on “Natural Obligations.”

ARTICLE 1240. Payment shall be made to the person whose favor the obligation has been
constituted, or his successor in interest, or any person authorize to receive it.
 Who is the person in whose favor the obligation has been constituted? Is it not the
creditor? - Normally, the person in whose favor the obligation has been constituted is the
creditor/obligee because the creditor is the passive subject in the obligation. But this is not
always the case. Ex. Tutorial lessons taken by parents for children.
 Who are successors in interest? – Successors in interest are people who will acquire the
rights and interests of a person by way of any legal means. Ex. In cases of subrogation,
heirs of a decedent creditor, assignment of rights by the creditor.
ARTICLE 1241. Payment to a person who is incapacitated to administer his property shall
be valid if he kept 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 creditors conduct, the debtor has been led to believe that the third person
had authority to receive the payment.

ARTICLE 1242. Payment made in good faith to any person in possession of the credit shall
release the debtor.
A person in possession of the credit is the person who is able to prove to be in possession
of the right to collect. i.e. person in possession of a winning ticket, promissory note or
authority to collect.

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.
“Makulit!!! ” Payment after being ordered by the court not to.

ARTICLE 1244. The debtor of the 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 obligation to do or not to

do, an act or forbearance cannot be substituted by another act or forbearance against

the obligee’s will.

Substitution of the object is only valid with the consent of the obligee.

Special Forms of Payment

 Dacion en Pago (Dation in Payment) [Art. 1245]

 Application of Payment [Art. 1252]

 Payment by Cession [Art.1255]

  Tender of Payment and Consignation [Art. 1256-1261]

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.

Dacion en Pago – a special form of payment where the ownership of a thing is conveyed by
the debtor to the creditor in payment of a monetary obligation.

ARTICLE 1246. When the obligation consist in the delivery of an indeterminate or generic
thing, whose quality and circumstance have not been stated, the creditor cannot demand a
thing of superior quality. The purpose of the obligation and other circumstances shall be
taken in consideration.

“Medium Quality only” unless contested in which case the purpose of the obligation and
other circumstances shall be taken in consideration.

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 the judicial cost, the Rules
of Court shall govern.

Debtor takes on the burden of payment unless otherwise agreed upon.

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
mat demand and the debtor may effect the payment of the former without waiting for the
liquidation of the latter.

ARTICLE 1249. The payment of debt 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 to
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
abeyance.

Legal Tender - is that 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

 Note that the law requiring payment of debts using only Philippine Currency is no
longer in effect and foreign currency are now allowed for payment so long as the
currency is accepted in the Philippines.

 Payments of debt using coins follow the rules below:

 Using coins below 5 Peso until 25 centavos are valid only if the debt
amounts to 50 pesos.

 Using coins below 25 centavos are valid only if the debt amounts to 20
pesos

 All other coins and bills are legal tender up to any amount

 The above rules will not apply if the parties agree otherwise or the debtor
does not complain

Payment by means of Letters of Credits/Negotiable Instruments are allowed only with

the consent of the obligee until then the right to demand is suspended until the
LC/Negotiable Instrument is dishonored.

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.

Inflation - is a sharp sudden increase of money or credit or both without a corresponding

increase in business transaction.

Deflation - is the reduction in volume and circulation of the available money or credit,
resulting in the decline of the general price level
This article shall apply only in cases of extraordinary inflation or deflation of the currency and
not to ordinary inflation or deflation.

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 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 on him.

These provisions are without prejudice to venue under the Rules of Law.

Book IV Title 1, Chapter 4 (S1,s1)

Application of Payment
SECTION 1 (S1)- Application of Payment
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 may 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
debt which are not yet due.

If the debtor accepts from he 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.

Application of Payment relates to how payment of a debtor to concurrent debts are applied
when the payment is not sufficient to cover the entirety of the debts.
 Requisites for Application of Payment

• There must be one debtor and one creditor

• There must be two or more debts

• The payment must be of the same kind

• The debt to which the payment has been applied

must be due; and

• the payment made must not be sufficient to cover all

the debts

ARTICLE 1253. If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interest have been covered.

Interests must be paid first before the principal, unless otherwise stipulated

ARTICLE 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application cannot 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.

Guides to which debt is more onerous [burdensome]

 Interest bearing debts are more onerous than non-interest bearing debts

 Between 2 interest bearing debts, the one with the higher interest is more onerous
  Debt of a sole debtor is more onerous than that of solidary debtors

 All other things equal, the older debt is more onerous

 Debts with security/collateral is more onerous than unsecured debts

 Obligations with a penalty clause is more onerous than ones without a penalty clause

 In case of rentals, the rent of the place being occupied by the debtor is more onerous
than the rent of the place not being occupied by the debtor.

Book IV Title 1, Chapter 4 (S1,s2)

Payment by Cession
SECTION 1 (S2)- 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
special laws.
Payment by Cession is another special form of payment. It is the assigned or abandonment
of all the properties of the debtor for the benefit of his creditor in order that the latter may
sell the same and apply the proceeds thereof to the satisfaction of their credits
Requisites for Payment by Cession:
 There must be two or more creditors
 The debtor must be insolvent (even partially so)
 The assignment must involve all the property of the debtor
 The cession must be accepted by the creditors
Payment by Cession is not to be confused with Insolvency or Bankruptcy proceedings
which is covered by the insolvency law, nor foreclosure proceedings. Payment by Cession
is a contractual agreement made by the debtors to his creditors.
Difference between Cession and Dacion:
 In Dacion there is only one creditor. In Cession there are multiple creditors
 In Dacion there is no presumption of insolvency but in Cession there is.
  In Dacion only a specific property is involved. In Cession all the property of the
debtor is involved.
 In Dacion, the creditor becomes the owner of the property of the debtor. In Cession,
the creditor(s) does not necessarily become the owner of the property of the debtor.
[creditors only acquire the right to sell the same]
 In Dacion novation occurs but in Cession no novation occurs.

Book IV Title 1, Chapter 4 (S1,s3)

Tender of Payment or Consignation
SECTION 1 (S3)- 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 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 rights to collect;
(5) When the title of the obligation has been lost.
This article covers instance when a debtor wishes to pay but cannot do so
Tender of Payment is the act of offering to the creditor the amount due.
Consignation is the act of depositing the prestation of the obligation with the proper court in
order to ask the court, after due process, to extinguish the obligation.
Requisites for a valid Consignation
 Existence of a valid debt that is due and demandable
 Tender of payment by the debtor which is refused by the creditor without justifiable reason
or the creditor is incapable of accepting the payment
 Previous notice of consignation to the parties interested in the fulfillment of the obligation
 Actual consignation/delivery of the prestation to the proper court
 Subsequent notice of consignation made to interested parties
 Judgment by court approving consignation.
ARTICLE 1257. In order that the consignation of the thing due may release the obligor, it
must first be announced to the person interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulates payment.

The purpose for the notice is to allow the creditor to reconsider his refusal to accept the
tender of payment and hence avoid judicial and additional costs

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.

ARTICLE 1259. The expense of consignation, when properly made, shall be charged against
the creditor.
The cost is charged to the creditor because the judicial action was prompted by circumstance
caused by or related to the creditor.
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 has been
properly made, the debtor may withdraw the thing or the sum deposited allowing the
obligation to remain in force.
Order of the judge to cancel the obligation terminates the obligation. But the action may be
cancelled by the debtor before that time and before the creditor accepts the consignation.

STUDY GUIDE
MODIFIED TRUE OR FALSE
1. In case the obligation is silent, payment shall be made at the domicile of the creditor.
2. While the creditor can refuse partial payment, debtor may be required to make partial
payments.
3. In Dacion en Pago, the creditor may not sell the property he receives in payment of his
receivable.
4. In Application of Payment, a debt of 10,000 with 2% interest per month is more onerous
than a debt of 5,000 with a 4% interest per month.
5. A debtor who pays a third person is valid if he believed that the third person was authorized
to receive the payment for the creditor.
6. A third party may not pay an obligation without the consent of the creditor.
7. Costs of paying is bourn by the creditor.
8. If A third party who pays an obligation with no intention to be paid back extinguishes the
obligation by condonation.
9. In Cession, the creditor may keep the property delivered to him in payment of his
receivable.
10. Payment can be validly made by the debtor wherever he may find the creditor.
11. Refusal to receive payment by the creditor always gives the debtor the right to pay by
consignation.
12. Payment in another currency is valid if the debtor agrees to it.
13. A creditor who accepts partial payment from the debtor without protest, cannot use the
partial payment as grounds to claim for damages.
14. Substitution allows the third party who paid the obligation to acquire all the rights of the
former creditor.
15. Payment made by a third person who has no intention to be reimbursed will extinguish the
obligation if accepted by the creditor.
16. A party who pays with another person’s property cannot extinguish his obligation.
17. Valid payment requires that the payment must be made to the creditor.
18. Payment to an incapacitated person will be valid if the said person kept the money that was
paid.
19. Payment in good faith to a person who has the debtor’s evidence of indebtedness does not
necessarily extinguish the obligation of the debtor.
20. When the court orders the debtor not to make payment, debtor may still opt to pay the
creditor, although such payment will not be deemed valid.
21. In an obligation to give a thing, the quality of the thing to be delivered shall depend on the
sole discretion of the debtor.
22. A creditor who is unable to pay what has been agreed upon may make payment nonetheless
by delivering another object in substitution.
23. Payment by the debtor who issued a check extinguishes the obligation.
 24. Inflation or deflation of currency cannot not affect the payment of an obligation.
25. Application of payment happens when several creditors have debts which are due and the
debtor does not have sufficient cash to pay all debts.
26. A debtor who is confused as to who is entitled to get paid from 2 or more seemingly valid
claimants, may opt to pay via consignation.
27. Payment to a minor creditor can only be made via consignation.
28. Consignation is a judicial action.
29. Once delivery of the payment to court is made, it cannot be withdrawn
30. Dacion en pago is nothing more than novation of the obligation
ENUMERATIONS/DEFINITIONS
1. Under the laws of obligations, how are obligations extinguished?
2. What are the requisites of a valid payment?
3. Payment presupposes the delivery of money in an obligation?
4. When does subrogation occur?
5. When does substitution occur?
6. When does payment to a third person be deemed to have benefited the creditor?
7. What are the special forms of payment?
8. What is Dacion en pago?
9. What is Cession?
10. What is legal tender?
11. What is application of payment?
12. What are the requisites for application of payment?
13. What are the requisites for cession en pago?
14. What is consignation?
15. When can debtor opt to avail of consignation?
16. What is the requisites for a valid consignation?
PROBLEM SOLVING
Problem 1. – Trish promised to give Philip an old textbook she used in college on Saturday when
they meet for the wedding of their common friend. At the wedding, because of all the things
happening at the wedding, Trish forgot to bring the book and told Philip that she would just give
Philip P1,500 so that Philip can buy a new book instead of her old one. Philip refused to accept
the money from Trish because that was not payment for the obligation. Can Philip refuse the
money on grounds that it was not a valid payment? Justify.

Problem 2. – Alan owed Kit P50,000 due on Monday. On due date Kit made a demand on Alan
to pay up, but Alan could not because he has not been able to get the money he had expected to
get from a customer. Alan then said that he will pay his obligation with Dacion en Pago, and
offered to deliver to Kit his prized collectible Luke Skywalker lightsaber prop signed by Mark
Hamill. Can Kit refuse the offer of payment by Alan? Justify.

Problem 3. – Because of the outstanding service rendered by Philip, Tony promised to give Philip
a cellphone that Philip can use as a phone and also to check on his messenger messages. On due
date Philip went to Tony to ask for the Samsung Note 10+ that he was excited to have. But Tony
was surprised by the demand of Philip and delivered instead the analog China phone that he bought
in Divisoria. Philip protested saying that he was entitled to at least a Note 10+ but Tony insisted
that because he was the one giving the phone, the choice of phone belongs to him and not Philip.
 Can Philip demand for a Samsung Note 10+ from Tony? Justify.
 Is Tony correct in delivering the phone he chose for Philip? Justify.
 If you were the judge before whom this case was brought, how would you decide? Justify.

Problem 4. – Joe owed Jenny 3 separate obligations. (1) 15 sacks of rice worth P15,000; (2) 5
sacks of sugar worth P5,000 with 10% interest and (3) P10,000 with 5% interest. Joe, not having
sufficient resources to pay all the obligations gave Jenny P8,000 as partial payment which Jenny
accepted without protest since partial payment is better than no payment. Jenny, using the rules
of application of payment applied the 8,000 to the first obligation. Later, Joe came to deliver 10
sacks of rice but Jenny said that the only remaining balance for the rice was 7 sacks (15,000 less
the applied payment of 8,000). Joe was surprised because he said he had no intention of paying
cash for the rice but Jenny countered that Joe did not give any specific instruction on which debt
needs to be paid and thus used application of payment to decide which debt is paid for.
 Did Jenny properly use application for payment? Justify.
 Which debt should have been paid by Joe? Justify.