EXTINGUISHMENT OF OBLIGATIONS (ARTICLE 1231)

1. By payment or performance
2. By the loss of 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
7. Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere in this
Code (1156a)

By payment or performance (Article 1232)

ART. 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)
- Means not only delivery of money but also the performance
- In law, payment and performance are synonymous.
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 or form thereof;
(5) the place and the time in which it must be made;
(6) the imputation of expenses occasioned by it; and
(7) the special parts which may modify the same and the effects they generally produce —
elements which are designated in Latin quis, quinam, quid, causa, quo modo, ubi, quando,
expensae, and pacta adjunta.

When debt considered paid.

A 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. (supra.)
(1) Integrity of the prestation. — This requisite means that the prestation be fulfi lled
completely. (Alonzo vs. San Juan, 451 SCRA 45 [2005].) 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. Partial
or irregular performance will not produce the extinguishment of an obligation as a
general rule.
(2) Identity of the prestation. — This second requisite means that the very prestation due
must be delivered or performed. (see Art. 1244.)

TIME OF PAYMENT
-The payment or performance must be on the date stipulated (may be made even on
Sundays or any holiday, although some, like the Negotiable Instruments Law, states that
payment in such case may be made on the next succeeding business day)
- The burden of proving that the obligation has been extinguished by payment devolves
upon the debtor who offers such a defense to the claim of the plaintiff creditor
- The issuance of receipt is a consequence of usage and good faith which must be observed
(although our Code has no provision on this) and the refusal of the creditor to issue a
receipt without cause is a ground for consignation under Art. 1256

PAYMENT TO INCAPACITATED PERSON OR THIRD PERSON

- Payment shall be considered as having benefited the incapacitated person if he made an
intelligent and reasonable use thereof, for purposes necessary or useful to him, such as
that which his legal representative would have or could have done under similar
circumstance, even if at the time of the complaint the effect of such use no longer exists
(e.g. taxes on creditor’s property, money to extinguish a mortgage on creditor’s
property)

- The debtor is not released from liability by a payment to one who is not the creditor nor
one authorized to receive the payment, even if the debtor believed in good faith that he
is the creditor, except to the extent the payment inured to the benefit of the creditor

- In addition to those mentioned above, payment to a third person releases the debtor:

o When, without notice of the assignment of credit, he pays to the original creditor
o When in good faith he pays to one in possession of the credit
- Even when the creditor receives, no benefit from the payment to a third person, he
cannot demand payment anew, if the mistake of the debtor was due to the fault of the
creditor

ART. 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)

EXAMPLE: D owes C P15,000.00. To fulfi ll the obligation, D, with the consent of C, delivers a
piano. If the piano, however, is worth less than P15,000.00, the conveyance must be
deemed to extinguish the obligation to the extent only of the value of the piano as agreed
or as may be proved, unless the parties have considered the piano by their agreement,
express or implied, as full payment in which case the obligation of D is totally extinguished.
The conveyance is, in effect, a novation of the contract. (see Art. 1291[1].)

ART. 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)

EXAMPLES: S promised to deliver to B a horse. B cannot compel S to deliver a price-winning

race horse. Neither can S require B to accept an old sickly horse.
(1) If B owns a stable of race horses and horse-racing is his main diversion in life, which fact
is known to S, and the price agreed upon is the reasonable price of a race horse, then S
must deliver a race horse.
(2) If B happens to be a “calesa” driver and B agreed to pay S for the horse an amount which
is the reasonable price of a horse for “calesa,” then that kind of horse may be delivered.
(3) If B is a veterinary doctor and his only purpose in buying a horse is to examine its organs
in connection with his work, this, and other relevant circumstances may show that the old
sickly horse was intended by the parties to be delivered.
 IF THE OBLIGATION IS A MONETARY OBLIGATION, THE PAYMENT MUST BE MADE IN
LEGAL TENDER
LEGAL TENDER- that currency with which a debtor can legally compel a creditor to accept
in payment of a debt
- The currency which has been made suitable by law for the purpose of tender of
payment of debts
MEDIUM OF PAYMENT- must be in currency which is legal tender in the Philippines.
However, parties may agree that payment be made in currency other than Philippine legal
tender at the time of the payment (RA 8183)
Section 1. All monetary obligations shall be settled in the Philippine currency which is legal
tender in the Philippines. However, the parties may agree that the obligation or transaction
shall be settled in any other currency at the time of payment.
COINS:
PISO- 1000 pesos
5 PESOS- 1000 pesos
10 PESOS- 1000 pesos

0.05- 100 pesos

0.10-100 pesos
0.25- 100 pesos
ALL BILLS are legal tender up to any amount
Checks and mercantile documents not legal tender (Art. 1249)
ART. 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 abeyance. (1170)
INTEREST RATES
1. The payment of interest and penalties
 2. The BSP may prescribe interest rates
3. Legal interest: 6% per annum
4. Interest rates may be invalidated or equitably reduced when unconscionable,
iniquitous and exorbitant
The imposition of an unconscionable rate of interest on money debt, even if
knowingly and voluntarily assumed, is immoral and unjust
Parties to payment
A. Payment by an incapacitated person is generally not a valid payment (Art. 1239)

ART. 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)

B. Payment maybe made by a third person, but the creditor is not bound to accept if the
third person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary (Art. 1236)

ART. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfi llment 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 benefi cial to the
debtor. (1158a)

ART. 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)
ART. 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)

C. 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
(Art.1240)

ART. 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)
 ART. 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 benefi
cial to him. Payment made to a third person shall also be valid insofar as it has
redounded to the benefi t of the creditor. Such benefi t 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 ratifi es 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)

D. Payment made in good faith to any person in possession of the credit shall release the
debtor (Art.1242)

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

Payment to incapacitated person or third person

To whom shall payment be made

1. To the creditor (the person in whose favor the obligation has been constituted)
2. To the creditor’s successor in interest such as his heirs or assigns
3. To any person authorized to receive payment
SPECIAL FORMS OF PAYMENT
A.) DACION EN PAGO (dation in payment) (Art.1245): the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. The property given may consist not only of a thing but
also of a real right (such as usufruct)

ART. 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)

B.) CESSION (Art. 1255): the assignment by the debtor of all his property in favor of his
creditors. Contemplates the existence of two or more creditors and involves the
assignment of all the debtor’s property

ART. 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)
 C.) TENDER AND CONSIGNATION

Tender of Payment: the antecedent of consignation, that is, an act preparatory to the
consignation which is the principal and from which are derived the immediate
consequence which the debtor desires or seeks to obtain. Tender, may be extrajudicial
while consignation is necessarily judicial
THE EFFECTS OF CONSIGNATION
1. The debtor is released in the same manner as if he had performed the obligation at the
time of the consignation because this produces the same effect as a valid payment
2. The accrual of interest on the obligation is suspended from the moment of consignation
3. The deteriorations or loss of the thing or amount consigned occurring without fault of
the debtor must be borne by the creditor, because the risks of the thing are transferred
to the creditor from the moment of deposit
4. Any increment or increase in value of the thing after the consignation inures to the
benefit of the creditor

When the amount consigned does not cover the entire obligation, the creditor may
accept it, reserving his right to the balance. If no reservations are made, the acceptance
by the creditor of the amount consigned may be regarded as a waive or further claims
under the contract
SPECIAL REQUISITES OF CONSIGNATION
1. There was a debt due
2. The consignation of the obligation was made because of some legal cause provided in
the present article
3. That previous notice of the consignation has been given to persons interested in the
performance of the obligation
4. The amount or thing due was placed at the disposal of the court
5. After the consignation had been made the persons interested had been notified thereof

When tender alone is sufficient

Tender is sufficient if it is done in the exercise or enforcement of a right (such as a right of
repurchase), not settlement of debt

APPLICATION OF PAYMENT
It is the designation of the debt to which payment shall be applied when the debtor owes
several debts in favor of the same creditor (Art. 1252)
ART. 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 benefi t 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)
Requisites:
1. 1 debtor and 1 creditor only
2. 2 or more debts of the same kind
3. All debts must be due
4. Amount paid by the debtor must not be sufficient to cover the total amount of all the
debts
It is necessary that the obligations must all be due. Exceptions:
1. When there is a stipulation to the contrary; and
2. The application of payment is made by the party for whose benefit the term or period
has been constituted (Relate to Art. 1196)

ART. 1196. Whenever in an obligation a period is designated, it is presumed to have

been established for the benefi t of both the creditor and the debtor, unless from the
tenor of the same or other circumstances it should appear that the period has been
established in favor of one or of the other. (1127)

It is also necessary that all the debts be for the same kind, generally of a monetary character.
This includes obligations which were not originally of a monetary character, but at the time of
application of payment, had been converted into an obligation to pay damages by reason of
breach or nonperformance
If the debtor makes a proper application of payment but the creditor refuses to accept it
because he wants to apply it to another debt, such creditor will incur in delay

LOSS OF THING DUE2

A thing is considered lost when it perishes, or goes out of commerce, or disappears in such a
way that its existence is unknown or it cannot be recovered (Art.1189)
Loss includes the physical or legal impossibility of the service in which the obligation consists.

LOSS OF A DETERMINATE THING

As a rule, the loss of determination thing extinguishes the obligation (Art.1262)
ART. 1262
. An obligation which consists in the delivery of a determinate thing shall be extinguished if it
should be lost or destroyed without the fault of the debtor, and before he has incurred in
delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
the thing does not extinguish the obligation, and he shall be responsible for damages. The
same rule applies when the nature of the obligation requires the assumption of risk. (1182a)
Exceptions:
a. When the loss is due to the fault of the debtor (Art.1262)
b. When the debtor incurs in delay
c. When so provided by law (Art. 1262) as when the debtor promised to deliver the same
thing to two or more persons who do not have the same interest (Art.1165)
d. When it is stipulated by the parties (Art.1262)
e. When the nature of the obligation requires the assumption of risk (Art.1262)
f. When the debt proceeds from criminal offense (unless the person who should receive it
refuses to accept it without just cause) (Art.1268)

LOSS OF A GENERIC THING

- The loss or destruction of anything of the same kind does not extinguish the obligation
(Art.1263) because a generic thing does not perish (GENUS NUNQUAM PERIT)
ART. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation. (n)
- Exception: In case of a “DELIMITED GENERIC THING” such as “100 bags of cement from
warehouse No.1 when such warehouse was completely burned.”
CONDONATION OR REMISSION3
- An act of liberality of the creditor whereby he waives his right to collect the debt. It is
the creditor’s gratuitous release of the debtor from his obligation to him. It refers to the
forgiveness of an indebtedness.
RIGHT OF DEBTOR TO MAKE APPLICATION
 - If at the time of payment, the debtor does not exercise his right to apply it to any of his
debts, the application shall be understood as provided by law, unless the creditor makes
the application and his decision is accepted by the debtor. This application of payment
can be made by the creditor only in the receipt issued at the time of payment (although
the application made by creditor may be contested by the debtor if the latter’s assent to
such application was vitiated by such causes as mistake, violence, intimidation, fraud,
etc.)
- The debtor and the creditor by agreement, can validly change the application of
payment already made without prejudice to the rights of third persons acquired before
such agreement
CONFUSION OR MERGER OF RIGHTS
- The meeting in one person of the qualities of creditor and debtor with respect to the
same obligation. It erases the plurality of subjects of the obligation. Further, the
purposes for which the obligation may have been created are considered as fully
realized by the merger of the qualities of the debtor and creditor in the same person.
- Requisites of merger or confusion are:
1. It must take place between the creditor and the principal debtor
2. The very same obligation must be involved, for if the debtor acquires rights
from the creditor, but not the particular obligation in question there will be
no merger
3. The confusion must be total or as regards the entire obligation
- The effect of merger is to extinguish the obligation
COMPENSATION
- Shall take place when two persons, in their own right, are creditors and debtors of each
other
- Compensation is a mode of extinguishing to the concurrent amount, the obligations of
those persons who in their own right are reciprocally debtors and creditors of each
other. It is the offsetting of two obligations which are reciprocally extinguished if they
are of equal value. Or extinguished to the concurrent amount if of different values.
KINDS OF COMPENSATION
- As to their effects, compensation may be:
Total (when the two obligations are of the same amount); or
Partial (when the amounts are not equal)
As to origin:
1. It may be legal
2. Facultative
3. Conventional
 4. Judicial
- It is legal when it takes place by operation of law because all requisites are present
- It is facultative when it can be claimed by one of the parties, who, however, has the
right to object to it, such as when one of the obligations has a period for the benefit of
one party alone and who renounces that period so as to make the obligation due.
- It is conventional when the parties agree to compensate their mutual obligations even if
some requisite s lacking
- It is judicial when decreed by the court in a case where there is a counterclaim
LEGAL COMPENSATION (ART.1279)
In order that compensation may be proper, it is necessary:
1. That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
2. That both debts consist in a sum of money, or if the things due are consumable, they ne
of the same kind, and also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

COMPENSATION VS PAYMENT
In compensation, there can be partial extinguishment of the obligation; in payment, the
performance must be completer, unless waived by the creditor. Payment involves delivery of
action, while compensation (legal compensation) takes place by operation of law without
simultaneous delivery.

COMPENSATION VS MERGER
In compensation, there are at least two persons who stand as principal creditors and debtor of
each other, in merger, there is only one person involved in whom the characters of creditor and
debtor are merged. In merger, there is only one obligation, while in compensation, there ae
two obligations involved.

LEGAL AND PHYSICAL IMPOSSIBILITY

LEGAL IMPOSSIBILITY: may either be-
1. Direct (when the law prohibits the performance or execution of the work agreed upon,
i.e. when it is immoral or dangerous)
 2. Indirect (the law imposes duties of a superior character upon the obligor which are
incompatible with the work agreed upon, although the latter may be perfectly licit, as
where the obligor is drafted for military service or for a civil function)
PHYSICAL IMPOSSIBILITY: examples- death of debtor; when there is an accident…

SUBSTITUTION: CHANGE OF DEBTORS (ALWAYS WITH CONSENT OF CREDITOR)

EXPROMISION: A third person initiates the substitution and assumes the obligation even
without the knowledge or against the will of the debtor

New debtor is entitled to beneficial reimbursement; no subrogation.

The new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any
liability on the part of the original debtor (Art.1294)
ART. 1294. If the substitution is without the knowledge or against the will of the debtor, the
new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability
on the part of the original debtor. (n)

DELEGACION: The debtor initiates the substitution, which requires consent of all parties
(original debtor, creditor, new debtor)

New debtor is entitled to full reimbursement and subrogation

If new debtor is insolvent, right to proceed against original debtor is not revived except: when
the insolvency was already existing and of public knowledge, or known to the debtor when
he delegated his debt. (Art. 1295)
ART. 1295. The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original
obligor, except when said insolvency was already existing and of public knowledge, or known to
the debtor, when he delegated his debt. (1206a)

NOVATION
- The extinguishment of an obligation by a substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first either by:
1. Changing the object or principal conditions
 2. By substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
- Novation- is a juridical act of dual function. At the time it extinguishes an obligation it
creates a new one in lieu of the old
CLASSIFICATION OF NOVATION
AS TO NATURE:
1. SUBJECT OR PERSONAL- either passive or active. Passive if there is substitution of the
debtor. Active if a third person is subrogated in the rights of the creditor

2. OBJECTIVE OR REAL- substitution of the object with another or changing the principal
conditions

3. MIXED- Combination of subjective and objective

AS TO FORM:
1. EXPRESS- parties declare that the old obligation is substituted by the new
2. IMPLIED- an incompatibility exists between the old and the new obligation that cannot
stand together
AS TO EFFECT:
1. PARTIAL- when there is only a modification or change in some principal condition of the
obligation
2. TOTAL-when the old obligation is completely extinguished
REQUISITES OF NOVATION
1. A previous valid obligations
2. Agreement of all parties
3. Extinguishment of the old contracy- may be express or implied
4. Validity of the new one
SUBROGATION: THE CHANGE OF CREDITORS
- It transfers to the person subrogated, the credit and all rights appertaining to the ld
creditor, either against (1) the debtor or (2) third persons, who may be guarantors,
mortgagors, subject to the stipulation in conventional subrogation ( Art.1291).
Subrogation is the transfer of all rights of the creditor to a third person, who substitutes
him in all his rights. It may either be legal or conventional.
CONVENTIONAL SUBROGATION (Art.1300)- takes place by agreement of the parties;
hence; consent of old and new creditors and debtor is necessary (Art. 1303)

LEGAL SUBROGATION-takes place without agreement of the parties, but by operation

of law