CHAPTER 4 Classification of Modes of Extinguishment

Extinguishment of Obligations 1) voluntary

a) performance
- payment
Modes of Extinguishment of Obligations
- consignation
1) primary causes
b) substitution
a) by payment of performance
- dacion en pago (dation in payment / conveyance for payment)
b) by lost of the thing due
- novation
c) by the condonation or remission of the debt
c) by release agreement
d) by the confusion or merger of the rights of creditor and debtor
- agreement subsequent to the constitution of the obligation
e) by compensation
 mutual waiver
f) by novation
 unilateral waiver
2) other causes
a) death of a party in a personal obligation  remission
b) mutual desistance or withdrawal - agreement simultaneous to the constitution of the obligation
- mutuo disenso  resolutory condition
 since mutual agreement can create a contract, mutual  extinctive period
disagreement can cause its extinguishment 2) involuntary
c) arrival of a resolutory period 1) by reason of the subject
d) compromise - confusion
e) impossibility of fulfillment - death of a party in personal obligations
f) happening of a fortuitous event 2) by reason of the object
- loss of the thing due
- impossibility of performance
3) by failure to exercise
- extinctive prescription
 SECTION 1 - real generic obligations – the purpose of the obligation and other
Payment or Performance circumstances shall be taken into consideration to determine the
quality/kind of the thing to be delivered
Meaning of Payment  rule of medium quality – the creditor cannot demand a
thing of superior quality, neither can the debtor deliver a
1) ordinary payment – refers only to the delivery of money
thing of inferior quality
2) payment or performance – consists not only the delivery of money but also the giving
2) exceptions to the general rule
of the thing, the doing or not doing of an act
a) the obligation has been substantially performed in good faith
- the debtor should be allowed to recover as if there had been a strict
Elements of Payment (under the common doctrine of payment) and complete fulfillment less damages suffered by the creditor
1) persons (quis) - requisites:
a) to who may pay  there must be a substantial performance
b) to whom the payment will be made  the debtor must be in good faith
2) thing or object which the payment must consist (quinam) b) substantial performance waived
3) the cause of the payment (quid / causa) - based on principle of estoppel
4) the mode or form of the payment (quo modo)  a restraint that prevents a person from doing/saying
5) the place (ubi) and the time (quando) in which it must be made something that would contradict some earlier
6) the imputation of expenses occasioned by it (expensae) action/statement that another has relied on
7) the special parts which may modify the payment, and the effects they generally - requisites:
produce (pacta adjunta)  the creditor knows that the performance is
incomplete/irregular
 the creditor accepts the performance without any
Burden of Proving Payment
protests/objections
- devolves upon the debtor who pleads payment / offers such a defense against the
 accept means to take as satisfactory, or to give
creditor
assent to
- it is unnecessary that the creditor must prove non-payment first
c) when partial performance is allowed
- when there is an expressed stipulation
When Debt Considered Paid - when the debt is in part liquidated and in part unliquidated
1) general rule - when the different prestations are subject to different periods
a) integrity of the prestation – prestation must be fulfilled completely - when the parties know that the obligation reasonably cannot be
- partial/irregular performance will not produce an extinguishment performed completely at one time
of obligation - when there is an abuse of right / if good faith requires acceptance
- if the payment is partial/irregular, the creditor may properly reject it
b) identity of the prestation – the very prestation must be delivered/performed
Persons Who Must Pay to the Creditor
- real specific obligation – a thing
1) the debtor
different from that due cannot be
2) any person who has an interest in the obligation (e.g. guarantor)
offered or demanded against the will
3) a third person who has an interest in the obligation where there is a stipulation that he
of the debtor
can make payment
- personal (positive/negative)
obligation – an act to be performed
or an act prohibited cannot be
substituted against the debtor’s will
Effect of Payment by a Third Person  if not possible, the debtor may relieve himself by the
1) if made without knowledge or against the will of the debtor consignation in court of the thing or sum due
- the third person can recover from the debtor only in so far as the payment has 2) exceptions to the general rule
been beneficial to the latter a) such incapacitated person kept the thing paid or delivered
2) if made with knowledge of the debtor b) such incapacitated person was benefited by the payment
- the third person shall have the rights of: - in the absence of benefit the debtor may be made to pay again by:
 reimbursement – merely the bare right to be refunded  the creditor’s guardian / legal representative
 if the third person doesn’t want reimbursement, it is  the incapacitated person itself when he acquires/recovers
considered as a donation his capacity
 this is subject to the consent of the debtor
 subrogation – the third person who pays for the debtor is put into Effect of Payment to a Third Person
the shoes of the creditor 1) general rule – payment to a third person is not valid
 it can only take place with the debtor’s consent 2) exceptions to the general rule
a) the payment has rebounded to the benefit of the creditor
When Payment of Debtor is not Valid - it is not presumed, so debtor must prove such benefit
1) payment made by one who does not have the free disposal of the thing and capacity to  when benefit need not be proved by debtor
alienate it  ratification by the creditor
a) free disposal of the thing – the thing to be delivered must not be subject to  subrogation of the payer in creditor’s right
any claim/lien/encumbrance of a third person  estoppel on the part of the creditor
b) capacity to alienate – the person is not incapacitated to enter into contracts b) payment to third person in possession of credit
and to make a disposition of the thing - requisites:
 the creditor cannot be compelled to accept payment where the  possession of credit, not merely the instrument evidencing
person paying has no capacity to make it the credit
 the debtor is in good faith
Persons to Whom Payment Shall be Made
1) creditor/obligee When Payment to Creditor is not Valid
- must be the creditor at the time the payment is to be made, not at the 1) garnishment (an involuntary novation) – subjecting a debtor’s credit (from a debtor-
constitution of the obligation stranger) to the payment of his debt to another
 a subrogated person a) the debtor-stranger may be ordered by the court to retain the debt until
2) the creditor’s successor in interest (like an heir or assignee) the right of the creditor is resolved
3) any person authorized to receive it - payment made subsequently by the debtor-stranger shall not be
- means not only the person assigned by the creditor, but also the person valid if the creditor wins the case
authorized by law to receive the payment  debtor-stranger cannot collect from the debtor for such
payment was made in bad faith
Effect of Payment to an Incapacitated Person
1) general rule Special Form of Payment
a) payment to a person incapacitated (lacking a legal ability) to administer or 1) dation in payment
manage his property is not valid 2) application of payments
- payment should be made to: 3) payment by cession
 the creditor’s legal representative 4) tender of payment and consignation
Dation in Payment (dacion en pago) b) there must be two or more debts
1) dacion en pago – a debt of money is satisfied, not by payment of money, but by the c) the debts must be of the same kind
transmission of ownership of a thing by the debtor to the creditor d) the debts to which payment made has been applied must be due
2) requisites of dation in payment - application as to debts not yet due
a) there must be performance of the prestation in lieu of payment (animo solvendi)  there is a stipulation that the debtor may apply so
- requires the delivery and transmission of ownership of a thing to  it is made by the debtor or creditor for whose benefit the
the creditor who accepts it as equivalent of payment of an period has been constituted
outstanding debt e) the payment made must not be sufficient to cover all the debts
b) there must be a difference between the prestation due and that which is given
in substitution (aliud pro alio) 3) rules on application of payments
c) there must be an agreement between the debtor and creditor that the a) the debtor has the first choice
obligation is immediately extinguished by reason of performance of a b) the application, once exercised, is irrevocable unless the creditor consents to
prestation different from that due the change
3) governing laws c) the creditor has the subsidiary right to make the designation
a) what actually takes place in dacion en pago is an objective novation d) if both creditor and debtor has not made an application, or if the application
b) dacion in pago is considered as a specie of sale is not valid, the debt which is most onerous to the debtor among those due,
- the amount of the monetary debt becomes the price of the thing shall be deemed satisfied
alienated e) if the debts due are of the same nature and burden, the payment shall be
- sale and dation in payment distinguished applied to all of them proportionately
4) guide to determine the more onerous debt
dation in payment sale - when debts are cannot be determined which is more onerous to the debtor,
existence there is a pre-existing there is no pre-existing apply payment to all of them proportionately
of credit credit credit
an interest-bearing debt > non-interest-bearing debt
effect to obligations are
obligations are created a debt as a sole debtor > a debt as a solidary debtor
obligation extinguished
acquisition of the object in older debts > younger debts
price paid (seller); > unsecured debts
lieu of the credit (creditor); secured debts
cause acquisition of the thing
extinguishment of the debts w/ higher interest rate > debts w/ lower interest rate
(buyer)
obligation (debtor) obligation with penal clause > obligation without penal clause
fixing of there is more freedom in fixing of the price in sale than in
price dation in payment 5) if the debt bears interest
the payment is received by the payment is received by a) general rule
time of - the payment must be applied first to the interest, and whatever
the debtor before the the seller after the
payment
perfection of contract perfection of contract balance is left, must be credited to the principal
roles debtor and creditor buyer and seller b) exceptions to the general rule
- the debtor can apply payment first in principal before interest if:
 both parties agreed
Application of Payments
 the creditor waived his right
1) application of payments – the designation of the debt to which should be applied the
payment made by a debtor who has various debts of the same kind favor of one and the
same creditor
2) requisites of application of payments
a) there must be one debtor and one creditor
Payment by Cession - a creditor-debtor relationship must exist
1) payment by cession – the assignment/abandonment of all the properties of the debtor b) tender of payment by the debtor, and refusal of the creditor to accept it
for the benefit of his creditors in order that the latter may sell the same and apply the without justifiable reasons
proceeds thereof to the satisfaction of their credits - requisites for a valid tender of payment
2) effects of payment by cession  must comply with the rules of payment
- the assignment does not make the creditors the owners of the  must be unconditional and for the whole amount
property of the debtor  must be actually made
- the debtor is only released from his obligation only up to the net - when tender of payment not required
proceeds of the sale of the properties assigned  the creditor, without legal justification, waives payment
 the debtor is still liable if there is a balance on the date the payment will be due
3) requisites of payment by cession c) previous notice of consignation to the persons interested
a) there must be two or more creditors - to give the creditor a chance to:
b) the debtor must be (partially) insolvent  reflect on his previous refusal
c) the assignment must involve all the properties of the debtor  know that the expenses of consignation shall be charged
d) the cession must be accepted by the creditors against him if the consignation is properly made
4) dation in payment and payment by cession distinguished
 when consignation is properly made
dation in payment payment by cession  when the creditor accepts the thing or
no. of creditors usually, there is only one there are several sum deposited, without objection, as
does not presuppose the the debtor is insolvent at the payment of the obligation
presuming
insolvency insolvency of the debtor time of assignment  when the creditor questions the
extends to all the property of the validity of the consignation, and the
does not involve all the property debtor subject to court declares that it has been properly
extent
of the debtor execution/confiscation made
creditor only acquires the right  when the creditor neither accepts or
creditor becomes the owner of
rights acquired to sell the thing and apply the questions the validity of the
the thing given by the debtor
proceeds to their credits consignation, and the court orders the
kind an act of novation not an act of novation cancellation of the obligation
 know that in case of loss of the thing consigned, he shall
Tender of Payment and Consignation bear the risk thereof
- tender of payment and notice of consignation may be done in the
1) tender of payment – is the act of offering to the creditor the thing or amount due.
same act
2) consignation – an act of depositing the thing or amount due with the proper court
d) consignation of the thing
when the creditor does not show desire or refuses to accept payment, or cannot receive
- consignation must comply with the provisions on payment
it, after complying with the formalities required by law
- consignation must be with proper judicial authority
3) nature and rationale for consignation
a) a facultative remedy – consignation is a facultative remedy which the debtor  tender of payment must be accompanied/followed by
may or may not avail consignation
b) avoidance of greater liability – to avoid the performance of an obligation  failure to make a consignation after a valid tender of
more onerous to the debtor by reason of causes not imputable to him payment, the court may allow him time to pay the
4) requisites of a valid consignation obligation without cancelling the contract
a) existence of a valid debt  the consignation has retroactive effect
- there is a valid debt that is due
 e) subsequent notice of consignation to the persons interested
- to enable the creditor to withdraw the thing/sum deposited or to
take possession in case he accepts the consignation
5) necessity of making tender of payment and consignation
a) all the requisites must be complied with in
b) consignation and tender of payment must not be burdened by
conditions
c) there is an obligation to pay
- consignation is not necessary in care where privileges or
rights exist
6) withdrawal by the debtor
a) the debtor may withdraw the thing/sum consigned
- before the creditor has accepted the consignation
- before a judicial declaration that the consignation has been properly
made
the loss must be suffered by the debtor
b) withdrawal with authority of the creditor
- when he may withdraw
 after he has accepted the consignation
 after the court has issued an order of cancelling the
obligation
3) effect on obligation – payment by commercial documents does not extinguish
obligations until:
a) they have been cashed
b) they have been impaired though fault of the debtor
- debtor is liable here
When There is an Extraordinary Inflation or Deflation
1) inflation – a sharp sudden increase of money and/or credit which causes a drop in the
value of money
2) deflation – the reduction in volume and circulation of the available money/credit
3) extraordinary inflation or deflation – there is an unimaginable increase or decrease in
the purchasing power of currency which could not have been reasonably foreseen
beyond contemplation of the parties at the time of perfection of contract
4) general rule – in case of extraordinary deflation or inflation of the currency stipulated
should supervene, the value of the currency at the time of perfection of contract shall
be the basis of payment, unless there is an agreement to the contrary
5) depreciation vs. devaluation
a) depreciation – downward change in the value of one currency in terms of
other currencies
b) devaluation – official reduction in the value of one currency from an official
fixed level

Place Where Obligation Shall be Paid

Expenses Incurred Upon Payment
1) rules
1) extrajudicial expenses
a) if there is a stipulation, the payment shall be made in the place designated
- debtor pays for extrajudicial costs, unless otherwise stipulated
b) if there is no stipulation and the thing due is specific, the payment shall be
2) judicial expenses
made at the place where the thing was, at the perfection of the contract
- the losing party generally pays judicial costs
c) if there is no stipulation and the thing due is generic, the place of payment
- the court may adjudge that:
shall be the domicile of the debtor
 either party shall pay for the costs - the creditor bares the expenses in going to the debtor’s domicile
 the costs shall be divided equitably 2) domicile vs. residence
a) domicile – place of a person’s habitual residence
Legal Tender – currency or unit of exchange that the creditor cannot refuse to accept or the b) residence – simply requires the presence as an inhabitant in a given place
debtor can compel the creditor to accept
1) right of creditor to accept or refuse – the creditor may accept/refuse if the thing
delivered is not of legal tender
a) commercial documents are not valid as payments
- promissory notes
- checks
- bills of exchange
2) payment for purpose of redemption
 SECTION 2 Impossibility of Performance
Loss of the Thing Due 1) kinds of impossibility
a) physical impossibility – when the personal qualifications of the debtor are
Kinds of Loss involved
- the debtor dies
1) legal loss
- the debtor becomes incapacitated to perform the obligation
2) physical loss
b) legal impossibility – when obligation cannot be performed because it is
3) civil loss
rendered impossible by provision of law
a) existence is unknown
2) effects of impossibility of performance
b) existence is known but cannot be recovered
a) without fault of the debtor
- the obligation is extinguished
When Loss of a Thing Extinguish an Obligation - debtor is not liable
1) the obligation is to deliver a specific/determinate thing b) debtor is at fault
a) partial loss of a specific thing - the obligation is not extinguished
- real obligation - the debtor is liable
 only a portion of a thing is destroyed/lost 3) natural impossibility vs. impossibility in fact
 when it suffers depreciation/deterioration a) natural impossibility – impossibility happened before perfection of the
- positive personal obligation contract
 difficulty of performance - the obligation is extinguished
2) the loss of the thing occurs without the fault of the debtor b) impossibility in fact – impossibility happened after perfection of the
3) the debtor is not guilty of delay contract
- the obligation is not extinguished
- debtor is liable
When Loss of a Thing will not Extinguish Liability (even in the absence of fault and delay)
1) when the law so provides
2) when the stipulation so provides Where Obligation Proceeds from a Criminal Offense
3) when the nature of obligation requires assumption of risk - the obligation is not extinguished (except when the creditor exercised mora accipiendi)
4) when the obligation to deliver a specific thing arises from a crime - debtor is liable for damages

Loss of a Generic Thing

- genus nunquam perit (genus never perishes)

Loss of Thing in Possession of Debtor

1) general rule
- whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault
 the debtor who has the custody and care of the things can easily
explain the circumstances of the loss
 the debtor must prove that he was not in fault, rather that the
creditor to show that the debtor was at fault
2) exceptions to the general rule – when the debtor proved the contrary
 SECTION 3 Presumptions about Document of Indebtedness
Condonation or Remission of the Debt 1) when voluntarily delivered to the debtor
a) presumption of implied remission
Condonation or Remission - unless there is a contrary evidence
b) presumption only applicable in private documents
- the gratuitous renunciation by the creditor of his right against the
c) extent of remission (presumptions)
debtor resulting in the extinguishment of the latter’s obligation in
- joint obligation
its entirely or part of the same which the renunciation refers
- a form of donation  the remission pertains only to the share of the debtor who
- it is not presumed is in possession of the document
- solidary obligation
 the remission pertains to the whole obligation
Kinds of Condonation or Remission
2) when found in possession of creditor
1) as to extent - he is in favor of legal presumption that his credit is as yet
a) complete – when it covers the entire obligation uncollected, unless the debtor proves the contrary
b) partial – when is does not cover the entire obligation 3) when found in possession of debtor
2) as to form - the presumption s that the creditor delivered it voluntarily
a) express – when it is made either verbally or in writing - this gives rise to the presumption of remission
b) implied – when it can only be inferred from conduct  only when it is known that there is no payment made
3) as to date of effectivity
a) intervivos – when it will take effect during the lifetime of the donor
b) mortis causa – when it will become effective upon death of the donor Presumption about the Thing Pledged
1) general rule
- it is necessary that the thing pledged be placed in the possession of
Requisites of Condonation/Remission
the creditor, or of a third person by common agreement
1) it must be gratuitous 2) if found in possession of debtor
a) there is no equivalent received for the benefit given - only the accessory obligation of pledge is remitted, not the
- the moment that an equivalent exists, it becomes: obligation itself
 dation in payment  the debtor shall continue to be indebted, but he does not have to
 cession return the thing
 novation
 compromise
2) it must be accepted by the obligor
a) condonation/remission is a bilateral act, so it requires the acceptance of the
debtor
b) the creditor may still renounce his credit even against the will of the debtor
3) the parties must have capacity
4) it must not be inofficious (it must not be contrary to one’s moral/natural obligation)
a) no one can give more than what he can give by will, otherwise, the excess
shall be inofficious and shall reduced by the court accordingly
b) if proven to be inofficious, there shall be a payment made by the debtor
5) if made expressly, it must comply with the forms of donation
 SECTION 4 SECTION 5
Confusion or Merger of Rights Compensation

Confusion or Merger Compensation

- is the meeting in one person of the qualities of debtor and creditor with respect to the - the extinguishment to the concurrent amount of debts of two persons who, in their
same obligation own rights, are reciprocally principal debtors and creditors of each other

Reason or Basis for Confusion/Merger Kinds of Compensation

1) if the debtor in his own creditor, the enforcement of the obligation becomes absurd 1) as to extent/effect
since a person cannot claim payment from himself a) total compensation – when both obligations are of the same amount and are
2) when there is a confusion of rights, the purposes for which the obligation may have entirely extinguished
been created are deemed realized b) partial compensation – when two obligations are of different amounts and a
balance remains
Requisites of Confusion/Merger - the extinctive effect of compensation will be partial only as to
regards of the larger debt
1) it must take place between the principal debtor and creditor
2) as to cause/origin
2) it must be complete and definite
a) legal compensation – when it takes place by operation of law even without
the knowledge of the parties
Effect of Confusion/Merger b) conventional compensation – when it takes place by agreement of the
1) extinction of real rights parties
- real rights may be extinguished when any of such rights is merged with c) judicial compensation – when it takes place by order of the court
ownership (which is the most comprehensive real right) d) facultative compensation – when it can be set up only by one of the parties
 this results in consolidation of ownership
2) principal debtor and creditor Purpose and Importance of Compensation
- extinguishes the obligation (and the accessory obligation, if any)
1) it is a kind of abbreviated payment
3) guarantor (there is an accessory obligation)
a) advantages:
- extinguishes the accessory obligation only
- facility of payment – it avoids the employment of enumeration
- the principal obligation is still in force
- guaranty for the effectiveness of credit – it avoids being a victim
4) joint obligation
of fraud or of insolvency
- the confusion/merger shall extinguish only the share corresponding to the
2) simplified payment – supposes more convenient and less expensive
creditor/debtor the two character concur
3) simplifying accounting – the economic utility of compensation:
5) solidary obligation
- saving the use of money in transactions
- the confusion/merger shall extinguish the entire obligation
4) a guaranty against fraud – due to the guaranty for the effectiveness of the credit
- he who makes payment or who possessed the two characters, may claim
reimbursement
Requisites of Legal Compensation b) assignment with the knowledge but without the consent of the debtor
1) the parties are principal creditors and principal debtors of each other c) assignment without the knowledge of the debtor
- the guarantor has the right to compensate although he is not
principally bound to the obligation Compensation vs. Confusion
2) both debts consist of money, or of consumable things of the same kind and quality
a) if there are different prestations, compensation cannot exist, unless there is a compensation confusion
facultative compensation there are two persons, whom is there is only one person, but he is
- if there is a right of choice in one of the two parties persons involved the debtor and creditor of the a creditor and debtor of himself
other
3) the two debts are due or demandable
no. of obligations two obligations one obligation
a) if the debts are subject to different periods, compensation cannot exist,
there is an impossibility of
unless the debtor upon arrival of the period did not comply types of payment there is an indirect payment payment
- once the period of the creditor’s debt arises, there can a
compensation, if the previous debtor has still not complied
b) when there is a voluntary/conventional compensation, even if all the Compensation vs. Payment
requisites for legal compensation are not present
compensation payment
- requisites for conventional compensation
source takes effect by operation of law takes effect by act of parties
 each of the parties has the right to dispose of the credit he
it is not required that the parties it is required that the parties
seeks to compensate capacity to
have the capacity to alienate and have the capacity to alienate and
 they agree to the mutual extinguishment of their credits perform
free disposal of the thing due free disposal of the thing due
4) the two debts are liquidated the law permits partial
5) no retention or controversy has been commenced by a third person partial it is necessary that the payment
performance, thus partial
performance be complete and indivisible
a) retention – when the credit of one of the parties is subject to the satisfaction extinguishment
of the claim of a third person
b) controversy – when a third person claims that he is the creditor of one of the
parties
Compensation vs. Counterclaim

When Compensation is Against the Government compensation counterclaim

1) taxes extinguishes the two debts as
reason it must be pleaded to be effective
2) contractual obligations soon as they exist simultaneously
it is required that the thing due
it is not required to have the
prestation are consumable, and they be of
Compensation of Rescissible or Voidable Debts same prestations
the same kind and quality
- rescissible or voidable obligations are valid until they are juridically rescinded or requires that the two debts must
liquidity there is no such requirement
avoided be liquidated

Compensation when a Person is Assigned

1) where compensation has taken place before assignment
a) the debtor can raise defense of compensation
2) where no compensation has taken place before assignment
a) the debtor cannot raise defense of compensation
3) where compensation has taken place after assignment
a) assignment with the consent of debtor