Law on Obligations

Chapter 4 – Extinguishment of Obligation (Part 1)

(Articles 1231-1277)
Causes of extinguishment of obligations
1. Payment or performance 7. Annulment
2. Loss of the thing due 8. Rescission
3. Condonation or remission of the 9. Fulfillment of resolutory condition
debt 10. Prescription
4. Confusion or merger of rights of 11. Other causes
the creditor and debtor
5. Compensation
6. Novation
(1) PAYMENT OR PERFORMANCE
• Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation (Art. 1232).
• Thus, if the obligation is to paint a portrait, payment consists in the
performance of the service. Or if the obligation is to deliver a certain ring,
payment consists in the delivery of the thing.
How payment must be made
1. There must be delivery of the thing or rendition of the service that was
contemplated.
a. The debtor of a thing cannot compel the creditor to accept a different one although
the latter may be of the same value as, or more valuable than, that which is due
(Art. 1244).
b. 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 (Art. 1244).
c. In obligations to give a 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. 1246).
d. If the obligation is a monetary obligation, the payment must be in legal tender.
How payment must be made (cont.)
• Legal tender is the money or currency which the debtor may compel his
creditor to accept in payment of his debt, whether public or private.
• Payment of debts in money must be made in the currency which is legal
tender in the Philippines. However, the parties may stipulate that the
payment may be made in currency other than Philippine legal tender at
the time of payment (RA No. 8183).
• Under Monetary Board Resolution No. 862 dated July 6, 2006, in relation
to Section 52 of the New Central Bank Act, the following are legal tender
in the Philippines:
1. PhP1,000 for denominations of 1 piso, 5 piso, 10 piso coins.
2. PhP100 for denominations of 1 sentimo, 5 sentimo, 10 sentimo, and 25 sentimo.
3. All bills are legal tender up to any amount.
How payment must be made (cont.)
• 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 (Art. 1250).
• The delivery of promissory notes payable to order, bills of exchange, or
other mercantile documents shall produce the effect of payment only
when they have been encashed, or when through the fault of the creditor
they have been impaired (Art. 1249).
• A check is not a legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute for
money, and not money, the delivery of such an instrument does not by
itself operate as payment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized.
How payment must be made (cont.)
2. GR: The payment or performance must be complete (Art. 1233).
Exceptions:
a. 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 (Art. 1234).
b. 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 (Art. 1235).
When partial payments may be made
• GR: The creditor cannot be compelled partially to receive, and the debtor
cannot be compelled to make, partial payments.
• Exceptions:
1. When there is an agreement to that effect (Art. 1248). The payment must still be
made in full at some future time in accordance with the agreement to extinguish
the obligation.
2. When the debt is in part liquidated (i.e., the amount is fixed) 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 (Art. 1248). The
unliquidated part, once it is finally determined, must also be paid, to extinguish the
obligation.
Who must make the payment
• Payment must be made by the debtor who must possess the following:
1. Free disposal of the thing due; and
2. The capacity to alienate the thing.

• Effects if not complied with:

• 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” (Art. 1239).
• Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid (Art. 1243).
Payment by a third person
• GR: The creditor is not bound to accept payment or performance by a
third person.
• Exceptions:
• When there is a stipulation to that effect; or
• When the third person has an interest in the fulfillment of the
obligation such as a guarantor or a co-debtor (Art. 1236).
Rights of a third person who makes the payment
1. Payment with knowledge and consent of the debtor:
a. He can recover what he has paid (Art. 1236); and
b. He is entitled to be subrogated in the rights of the creditor such as
those arising from mortgage, guaranty, or penalty (Art. 1237).

2. Payment without the knowledge or against the will of the debtor:

• He can recover only insofar as the payment has been beneficial to the
debtor. He is not entitled to subrogation (Arts. 1236 and 1237).
Rights of a third person who makes the payment
3. Payment by a third person who does not want to be reimbursed
a. The payment shall be deemed to be a donation which requires the
debtor’s consent.
b. If the debtor does not consent, the payment shall nevertheless be
valid to the creditor who has accepted it (Art. 1238). In such a case,
the third person can only recover insofar as the payment has been
beneficial to the debtor; he is also not entitled to subrogation (Arts.
1236 and 1237).
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 successors in interest, such as his heirs or assigns; or
3. To any person authorized to receive payment (authorized by the creditor
or by law).
Payment to an incapacitated creditor
• The creditor must be capacitated to receive the payment. Payment to an
incapacitated creditor is not valid except in the following cases:
a. If has kept the thing delivered.
b. Insofar as the payment has been beneficial to him (Art. 1241)
Payment to an unauthorized third person
• GR: Payment to an unauthorized third person is not valid.
• Exceptions:
1. If the payment has redounded to the benefit of the creditor, which
benefit need not be proved in the following cases (Art. 1241):
a. If after the payment, the third person acquires the creditor’s rights (e.g.,
assignee of the instrument evidencing the credit);
b. If the creditor ratifies the payment to the third person; or
c. If by the creditor’s conduct, the debtor has been led to believe that the third
person had the authority to receive payment (i.e., estoppel).
2. If the payment is made in good faith to a third person in position of
the credit (Art. 1242). In this case, the third person should be both in
possession of the instrument and the credit.
Where payment must be made
• If there is a stipulation, then in the place designated.
• If there is no stipulation –
• If the obligation is to give a determinate thing, wherever the thing
might be at the time the obligation was constituted.
• If the obligation is to give a generic thing or an obligation to do, then
at the domicile of the debtor (Art. 1251).
Special forms of payment
1. Dation in payment
2. Application of payment
3. Payment by cession
4. Tender of payment and consignation
Dation in payment (dacion en pago)
• Dation in payment (dacion en pago, adjudicacion en pago or dation in
solution), is a special form of payment where the ownership of property of
the debtor is transferred to his creditor to pay a debt in money (Art.
1245). It is governed by the law of sales since it partakes in a sense the
nature of sale with the creditor in effect buying the property of the debtor.
• What actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of
sale, while the debt is considered the purchase price. In any case,
common consent is an essential prerequisite, be it sale or novation, to
have the effect of totally extinguishing the debt or obligation.
Application of payment (concepts)
• 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).
• Requisites of application of payment:
1. There must be two or more debts;
2. The debts must be of the same kind;
3. The debts are owed by the same debtor to the same creditor; and
4. All debts are due, except:
a. When the parties have stipulated that payment may be applied to
a debt not yet due, or
b. When the application is made by the party for whose benefit the
term has been constituted (Art. 1252).
Application of payment (How application is made)
1. The debtor, who is given the preferential right to apply the payment,
designates the debt to be paid.
2. If the debtor does not make the designation, the creditor makes it by
indicating the debt being paid in his receipt. If the debtor accepts the
receipt from the creditor, the debtor cannot complain unless there is a
just cause of invalidating the contract.
3. If neither the debtor nor creditor makes the designation, or application
cannot be inferred from the circumstances, payment shall be applied by
operation of law as follows:
a. Payment shall be applied to the debt, among those due, which is the most onerous
to the debtor.
b. If the debts are of the same nature and burden, payment shall be applied to all due
debts proportionately. (Arts. 1252, 1254)
Payment by cession
• Payment by cession is the abandonment or assignment by the debtor of all
his property in favor of his creditors so that the latter may sell them and
recover their claims out of the proceeds (Art. 1255).
• The cession or assignment operates only to authorize the creditors to sell
the debtor’s property, hence, ownership is not transferred to them. Unless
agreed upon, the cession releases the debtor from his responsibility only
to the extent of the net proceeds of the things assigned (Art. 1255).
Payment by cession
• Kinds of payment by cession
1. Voluntary or conventional – Agreed upon by the parties.
2. Legal – Cession by operation of law.

Requisites of payment by cession

1. There must be two or more creditors;
2. The debtor is insolvent;
3. The debtor abandons all his properties except those which are exempt
from execution; and
4. The creditors accept the abandonment.
Payment by cession v dation in payment
There must be two or more creditors Plurality of creditors is not required
The debtor is insolvent The debtor may not be insolvent.
Affects all the debtor’s properties, except Does not affect all the debtor’s properties.
those exempt from execution.
The creditors are authorized to sell only the The creditor becomes the owner of the
debtor’s properties. properties given as payment.
The debtor is not released as a rule. The debtor is released as a rule.
Tender of payment and consignation
• Tender of payment is the act of the debtor of offering to his creditor what
is due him.
• Consignation is the act of depositing the sum or thing due with the judicial
authorities whenever the creditor refuses without just cause to accept the
same or in the cases when the creditor cannot accept it.
Requisites (steps) for tender of payment and
consignation to extinguish the obligation (Arts. 1256 and
1258)
1. There must be a valid tender of payment. Thus, the payment being
tendered must be the other requisites for a valid payment.
2. The creditor refuses without just cause to receive the payment.
3. The persons interested in the fulfillment of the obligation must be
notified by the debtor of his intention to deposit the sum or thing due
with the judicial authorities.
4. The sum or thing due is deposited with judicial authorities.
5. The persons interested in the fulfillment of the obligation must again be
notified by the debtor that the consignation has been made.
Effect of consignation duly made
• If the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation. The obligation shall be
extinguished after the creditor has accepted the consignation or the judge
has declared that the consignation has been properly made (Art. 1260).
Debtor’s right to withdraw the sum or thing consigned
• Before acceptance by the creditor of the consignation or the declaration by
the judge that the consignation has been properly made: The debtor may
withdraw the sum or thing consigned as a matter of right, i.e., the
creditor’s consent is not required.
• Such withdrawal produces the following effects:
1. The obligation shall remain in force (Art. 1260); and
2. The co-debtors, guarantors, and sureties are not released (Art.
1261).
Debtor’s right to withdraw the sum or thing consigned
• After acceptance by the creditor of the consignation or the declaration by
the judge that the consignation has been properly made: The debtor may
withdraw the sum or thing consigned only with the consent of the creditor.
• Such withdrawal produces the following effects:
1. The obligation shall be revived (Art. 1260);
2. The creditor shall lose every preference which he may have over the
thing; and
3. The guarantors and sureties are released unless they consented. If
there are several debtors and their obligation is solidary, such
obligation will become a joint obligation.
When consignation, without a previous tender of
payment, will produce the same effect
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; or
5. When the title of the obligation has been lost (Art. 1256).
(2) LOSS OF THE THING DUE
• 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, par. 2).
• Loss includes the physical or legal impossibility of the service in which the
obligation consists.
Effects: Loss of a determinate thing
• GR: Loss of a determinate thing extinguishes the obligation (Art. 1262).
• Exceptions:
• When the loss is due to the fault of the debtor (Art. 1262);
• When the debtor has incurred in delay (Art. 1262);
• When so provided by law (Art. 1262) like when the debtor has promised to deliver
the same thing to two or more persons who do not have the same interest (Art.
1165);
• When it is stipulated by the parties (Art. 1262);
• When the nature of the obligation requires the assumption of risk (Art. 1262); or
• When the debt proceeds from a criminal offense, unless the person who should
receive it refuses to accept it without just cause (Art. 1268).
Effects: Loss of a generic thing
• The loss of or destruction of anything of the same kind does not
extinguish the obligation (Art. 1263) because a generic thing does not
really perish (“genus nunquam perit”)
• Exception: In the cause of a “delimited generic thing,”
• Example: “100 sacks of rice from my harvest this year” when the harvest got
completely destroyed.
Effects: Loss in personal obligations (to do)
• When the prestation becomes legally or physically impossible without the
fault of the debtor, the obligation is extinguished (Art. 1266).
• Rebus sic stantibus: When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may also
be released in whole or in part (Art. 1267).
Effect of partial loss
• The courts shall determine whether under the circumstances, the partial
loss of the object of the obligation is so important as to extinguish the
obligation (Art. 1264).

Creditor’s right if the loss is caused by a third person

• If the obligation has been extinguished by the loss of the thing, the
creditor shall have all the rights of action which the debtor may have
against third persons by reason of loss (Art. 1269).
(3) CONDONATION OR REMISSION
• Condonation or remission is the gratuitous abandonment by the creditor of
his right.
• In plain language, this refers to the forgiveness of an indebtedness. To
extinguish the obligation, it requires the debtor’s consent (Art. 1270).
Requisites of condonation or remission
1. It must be gratuitous;
2. It must be accepted by the obligor;
3. The parties must have capacity;
4. It must not be inofficious; and
5. If made expressly, it must comply with the forms of donation.
Kinds of condonation or remission
• As to amount or extent
1. Total – When the total obligation (both principal and accessory obligations) is
remitted.
2. Partial – When only a part of the obligation, or only the accessory obligation is
remitted.
 Kinds of condonation or remission
• As to form
1. Express – One made orally or in writing. It must, to be valid, comply with the formalities
of donation as follows:
• When the remission involves an immovable property, to be valid, the remission and the
acceptance must be in a public instrument. The public document must specify the
property remitted and the value of the charges that the debtor (donee) must satisfy
(Art. 749).
• When the remission involves a movable/ personal property –
• If the value of the property exceeds P5,000.00, the remission and the acceptance must be
in writing (public or private), otherwise, the donation is void.
• If the value of the property is P5,000.00 or less, the remission and the acceptance may be
in any form, i.e., oral or in writing (public or private). However, the remission, if made orally,
requires the simultaneous delivery of the thing or the document representing the right
remitted (Art. 748).
2. Implied - One inferred from the conduct of the parties.
Implied remission
• The delivery of a private document evidencing a credit, made voluntarily
by the creditor to the debtor, implies the renunciation of the action which
the former had against the latter. If in order to nullify this waiver it should
be claimed to be inofficious, the debtor and his heirs may uphold it by
proving that the delivery of the document was made in virtue of payment
of the debt (Art. 1271). Hence, there is no such presumption if the
document is a public document which is easily available being a public
record.
• Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved (Art. 1272).
Implied remission
• The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force (Art.
1273).
• It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing (Art.
1274).
(4) CONFUSION OR MERGER
• Confusion or merger is the meeting in one person of the qualities or the
characters of creditor and debtor (Art. 1275).
• Requisites:
1. It must take place between the principal debtor and creditor; and
2. It must be complete.
Effect of merger
• Merger which takes place in the principal debtor or creditor benefits the
guarantors (Art. 1276). Here, both the principal obligation and the
guaranty are extinguished.
• Merger which takes place in the person of the guarantor does not
extinguish the obligation (Art 1276). Here, only the guaranty is
extinguished.
Merger in a joint obligation.
• Merger extinguishes only the share of the joint debtor or creditor in whom
the characters of debtor and creditor concur (Art. 1277).

Merger in a solidary obligation.

• Merger in one of the solidary debtors or solidary creditors extinguishes the
whole obligation (Art. 1215).
• The solidary debtor in whom the characters of debtor and creditor concur
can demand reimbursement from his co-debtors (Art. 1217).
• In the case of the solidary creditor, he shall be liable to his co-creditors for
the share corresponding to each of them (1215).
Thank you!