FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
EXTINGUISHMENT OF OBLIGATIONS *For payment to properly exist, the creditor has to
Art. 1231. – Obligations are extinguished:
(1) By payment or performance;
(2) By 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.
OTHER CAUSES OF EXTINGUISHMENT OF
OBLIGATIONS:
1. Death of a party in case of personal
obligation (1311, NCC)
2. Mutual desistance or withdrawal of parties
3. Arrival of resolutory period (1193, NCC)
4. Compromise agreements (2028, NCC)
5. Impossibility of fulfillment (1266, NCC)
6. Happening of fortuitous event (1174, NCC)
Compromise agreements – are contracts whereby
the parties undertake reciprocal obligations to
resolve their differences thus avoiding litigation, or
put an end to one already commenced. It is based
on reciprocal concessions.
Section 1 – Payment or Performance
Art. 1232. – Payment means not only the delivery
of money but also the performance, in any other
manner, of an obligation.
Payment – that mode of extinguishing obligations
which consists of: (a) the delivery of money; or (b)
the performance in any other manner of an
obligation.
*A person who pays a PRE-EXISTING obligation. If
no such obligation exists, strictly speaking, there is
no payment.
E.g.
A was given the option to buy a car or not, within
one week. Here, A has no duty to buy. But if he
decides to buy, an obligation is created and he must
pay. (Asturias Central vs Pure Cane Molasses Co.,
60 Phil 259)
accept the same, expressly or implicitly. Payment,
for valid reasons, may properly be rejected.
EFFECT OF PAYMENT MADE UNDER A VOID
JUDGMENT
If the judgment upon which the aggrieved party
made payment is null and void, the payment made
thereunder is also null and void.
RECEIPT vs VOUCHER
RECEIPT – is a written and signed acknowledgement
that money has or goods have been delivered. Best
evidence of fact of payment is receipt of payment.
VOUCHER – Documentary record of a business
transaction. The references to alleged check
payments in the vouchers presented do not vest
them with the character of receipts. Voucher is not
necessarily an evidence of payment.
REQUISITES OF PAYMENT:
1. The very thing or service contemplated must
be paid
2. Fulfillment must be complete. (Ramos vs
Ledesma, 12 Phil 656)
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.
HOW PAYMENT OR PERFORMANCE IS MADE?
1. If the debt is a MONETARY OBLIGATION, by
delivery of the money. The amount paid
must be full, unless of course otherwise
stipulated in the contract.
(The term “indebtedness” has been defined
as an unconditional and legally enforceable
obligation for the payment of money. (CIR vs
Prieto, L-13912, Sept 30, 1960)
2. If the debt is the DELIVERY OF A THING, by
delivery of the thing/s.
3. If the debt is the DOING OF A PERSONAL
UNDERTAKING, by the performance of said
personal undertaking.
4. If the debt is NOT DOING of something, by
refraining from doing the action.
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
BURDEN OF PROOF
An alleged creditor has the burden of showing that a
valid debt exists. Once he does this, the debtor has
the burden of proving that he has paid the same.
(Lopez vs Tan Tioco, 8 Phil 693). Thus, if a
promissory note is still in a creditor’s possession,
the presumption is that it has not yet been paid.
(Bantug vs del Rosario, 11 Phil 511)
Question: Is a testimony sufficient to establish or
prove the fact that the whole debt had been paid?
A: No, a testimony does not constitute sufficient
proof that the entire debt has been paid. (Javier vs
Brinas (CA, 40 OG 4th Supp No. 8, p. 279)
Art. 1234. If the obligation has been substantially
performed in good faith, the obligor may recover
as though there has been strict and complete
fulfillment, less damages suffered by the obligee.
Art. 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.
General Rule: PRINCIPLE OF INTEGRITY – 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.
EXCEPTIONS:
1. 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. (1234, NCC)
E.g.
In their contract, X obliged himself to manufacture
and deliver 10 chairs for Y at P1,000 per chair.
However, due to lack of lumber because of the
recent super typhoon, X only manufactured eight (8)
chairs and delivered it to Y. In this case, X is
presumed to be in good faith; hence, he can recover
P8,000 [P10,000 (P1,000 x 10) – P2,000 (P1,000 x
2)] only.
Substantial performance doctrine – The rule that is
a good faith attempts to perform does not precisely
meet the terms of an agreement or statutory
requirements, the performance will still be
considered complete if the essential purpose is
accomplished, subject to claim for damages for the
shortfall. (Black’s Law Dictionary)
Substantial performance or compliance is, in a
sense, a performance according to the fair intent of
the contract, with an attempt in good faith to
perform. Fair dealing and equity demand a faithful
compliance of one’s contractual obligations.
(Rosete, et al. vs Perober Dev Corp, CA-GR 61032-
R, Jul 31, 1981)
2. 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. (1235, NCC)
E.g.
In their contract of sale, X obliged himself to deliver
10 tables to Y at P1,000 per table. Thereafter, X
delivered nine (9) tables and was accepted by Y with
knowledge that is incomplete. Y paid P9,000. The
obligation of X is extinguished.
E.g.
The buyer failed to pay the downpayment on time.
But the seller still accepted without objections, the
delayed payment of the buyer. The obligation of the
buyer is deemed complied with under Art 1235.
(Arra Realty Corporation, et al. vs Guarantee
Development Corporation, et al., GR No. 142310,
Sept 20, 2004)
Accept – to take as satisfactory or sufficient, or
agree to an incomplete or irregular performance.
(Constante Amor de Castro vs CA, GR No. 115838,
Jul 18, 2002)
Qualified acceptance – There is a possibility or
objection can be made. Hence, there is what is
called qualified acceptance of incomplete or
irregular payment. Mere receipt of partial payment is
not equivalent to the required acceptance of
performance as would extinguish the obligation.
Reason for Article 1235: Presence of waiver and
estoppel.
Art. 1236. – The creditor is not bound to accept
payment or performance by a third person who has
no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
Whoever pays for another may demand from the
debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the payment
has been beneficial to the debtor.
RIGHT OF CREDITOR TO REFUSE PAYMENT BY
THIRD PERSONS:
Creditor can refuse payment by a stranger (3rd
person), EXCEPT:
1. If there is a stipulation allowing this; or
2. If said third person has an interest in the
fulfillment of the obligation (like a co-debtor,
guarantor, or even a joint debtor). (Monte de
Piedad vs Rodrigo, 63 Phil 312)
Third person may pay:
1. With the knowledge and consent of the
debtor. Here, the payor is entitled to
reimbursement and subrogration to such
rights as guaranty, penalty clause, or
mortgage.
2. Without the debtor’s knowledge or against
his will. Here, the payor is NOT entitled to
subrogration; moreover, he is allowed only
BENEFICIAL REIMBURSEMENT.
E.g.
If X pays for Y’s transportation fare, without Y’s
knowledge, or against Y’s will, and later discovers
that Y was entitled to half fare, X can recover only
said half faire, even if he had paid the full fare. This
is clearly the fault of X.
In this example, can X recover Y’s half fare from the
creditor?
No. This is not solutio indebiti (for said half fare was
really due). X’s right is against Y, the debtor, for
said half fare. (Bank of P.I. vs Trinidad, 42 Phil 223)
The remaining half fare which was NOT even due
the creditor, is of course undue payment or solutio
indebiti and may properly be recovered from the
creditor.
OTHER INSTANCES WHEN RECOVERY CAN BE HAD
FROM THE CREDITOR AND NOT FROM THE
INNOCENT DEBTOR:
1. When debt had prescribed
2. When debt had been completely remitted
3. When debt has already been paid
4. When legal compensation had already taken
place.
E.g.
A owes B P1M. Later, A paid B P700k, leaving a
balance of P300k. C, a suitor of A, and intending to
impress A, paid B the sum of P1M thinking that A
still owed B that amount. He did this without
knowledge of A. How much can C recover from A?
A: C can recover only P300k from A because it is
only up to this amount that A has been benefitted. C
can recover the remaining P700k from B who
should not have accepted complete payment for a
debt already partially paid. If B incidentally is in bad
faith, B is responsible not only for the return of the
P700 but also for the interest in lieu of damages.
Q: in the preceding problem, suppose the payment
by C had been made against the will of A, would
your answer be the same?
A: Yes. Same. The law makes no distinction as to
the right of recovery in the case of payment by a
stranger was made either without the knowledge or
against the consent of the debtor. In both cases, the
paying stranger can recover only insofar as the
payment has been beneficial to the debtor. (1236,
NCC)
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.
No subrogation exists. One who pays without
knowledge of the debtor has no right to
subrogation.
Subrogation – the act of putting somebody into the
shoes of the creditor, hence, enabling the former to
exercise all the rights and actions that could have
been exercised by the latter.
The law says, “Subrogation transfers to the person
subrogated the credit with all the rights thereto
appertaining, either against the debtor or against
third persons, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional
subrogation.” (1303, NCC)
RIGHTS WHICH MAY BE EXERCISED BY THE PERSON
SUBROGATED IN THE PLACE OF THE CREDITOR:
1. Mortgage
2. Guaranty
3. Penalty or penal clause
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS

E.g. to bring actions against the debtor as mortgagee or

A borrowed P1M from B. The loan was secured by a against third persons.
mortgage of A’s land in favor of B. WITHOUT the
knowledge of A, C paid B the sum of P1M for A’s Art. 1302 of the Civil Code States that “It is
debt. A benefitted in the amount of P1M. presumed that there is legal subrogation xxx (2)
when a third person, not interested in the obligation,
Q1: May C claim reimbursement from A? pays with the express or tacit approval of the
Q2: If so, how much? debtor.”
Q3: If A cannot pay, may C foreclose the mortgage
on A’s land? SUBROGATION vs REIMBURSEMENT
Subrogation Reimbursement
A1: Yes, C can claim reimbursement from A Recourse can be had to No such recourse
inasmuch as C paid A’s debt. the mortgage or
guarantee or pledge
A2: C can recover the whole amount of P1M
inasmuch as the problem states that A benefitted up Debt is extinguished in New creditor has
to the amount of P1M. one sense, but a new different rights, so it is
creditor, with exactly if there has indeed
A3: If A cannot pay, C cannot foreclose the the same rights as the been an extinguished of
mortgage on A’s land. It is true that the original old one appears on the the obligation.
creditor B had the right to foreclose in case of non- scene
payment. But in this case, the new creditor C had
not been subrogated in the rights of B, inasmuch as There is something There is only personal
C paid without the knowledge of A. The only right of more than a personal action to recover the
C therefore is not reimbursement up to the amount action of recovery amount
A had benefited, but NOT the right of subrogration.

E.g. Art. 1238 – Payments made by a third person who

A owes B the sum of P1M. C is the guarantor of A. does not intend to be reimbursed by the debtor is
A was able to pay B the sum of P400k. Therefore, deemed to be a donation, which requires the
P600k still remains unpaid. D, thinking that A still debtor’s consent. But the payment is in any case
owed B P1M paid P1M to B, against the will of A. valid as to the creditor who has accepted it.

Q1: May D recover from A?
Q2: If so, how much?
Q3: If A cannot pay, may D proceed against the
guarantor C?
Q4: Suppose D pays B with the express or implied
consent of A, what are the rights of D?
A1: Yes, D may recover from A.
Reason why debtor has to consent – No one should
be compelled to accept the generosity of another.
E.g.
Z, a classmate of X, paid the latter’s obligation to Y
in the amount of P3,000. Z intends that the payment
will be his gift to X by virtue of the latter’s birthday
two days ago. X consented to this donation.

A2: D can recover only P600k because this is the
only amount which benefitted A. Remember that
previously, P400k had been paid, leaving a balance
of P600k only.
A3: If A cannot pay D, D cannot ordinarily proceed
against the guarantor C because D, having paid
against the will of A, is not entitled to subrogation.
A4: D would be entitled not merely to full
reimbursement but also to subrogation, or the right
Q1: Is the obligation of X extinguished?
Q2: If X did not consent, but Z still paid the
obligation of X without an intention to be
reimbursed, may Z still recover from X?
A1: Yes, the obligation of X is extinguished.
Payment is valid. There is also no right to reimburse
Z because there is lack of intention to be
reimbursed. (Art 1238)

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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
A2: Yes, Z may still recover from X because there is
no consent on the part of X. Under Art. 1238, even
if the stranger does not intend to be reimbursed,
debtor’s consent is required for the payment by a
stranger to be deemed as a donation; thus, not
giving rise to a right to be reimbursed. Absent
consent, the obligation to reimburse stranger is not
disposed of. All that can be recovered by Z is the
extent that X has benefitted. With regard to the
payment by Z to Y is concerned, the same is valid.
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.”
PAYMENT BY INCAPACITATED PERSON
GR: If person paying has no capacity to give:
a. Payment is not valid – if accepted
b. Creditor cannot even be compelled to accept
it
c. Remedy of consignation would not be proper
EXCEPTION:
Art 1427 – When a minor xxx who has entered into
a contract without the consent of the parents or
guardian voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the
same from the obligee who has spent or consumed
it IN GOOD FAITH.
EXCEPTION TO THE EXCEPTION: (Paras)
Art. 1241 (by analogy)
E.g.
A, a minor, entered into a contract without the
consent of his parents. In said contract, A was
supposed to pay B the sum of P1M. B did not know
of A’s minority, and when A voluntarily paid him the
money, B accepted the sum. Out of this amount, B
spent P800k. Later, the parents of A learned of the
transaction, and brought an action in court to
recover the P1M paid to B. How much can the
parents recover from B?
ANS: The parents can recover only P200k since
P800k had already been spent in good faith.
NOTE: Art. 1239 refers to payment by an
incapacitated person, Art. 1241 refers to payment to
an incapacitated person.
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.
TO WHOM PAYMENT MUST BE MADE
1. To the person in whose favor the obligation
has been constituted (the creditor)
- This refers to the creditors at the time of
payment, not the original creditor at the
time the obligation was constituted.
2. To the successor-in-interest (like heirs)
3. To any person authorized to receive it.
- Authorization may be by agreement or by
law
- If the recipient was not authorized, the
payment generally is NOT valid, without
prejudice to Art. 1241. (Keeler Electric
Co vs Rodriguez, 44 Phil 19)
Harry E. Keeler Electric Co. vs Rodriguez
44 Phil 19
FACTS: Rodriguez owed the company a certain
amount of money. A certain Montelibano
approached Rodriguez and claimed that he
(Montelibano) was duly authorized to receive
payment for the company. Without making any
verification, Rodriguez paid Montelibano. Later, the
company sued Rodriguez for payment of debt.
Rodriguez presented the defense that he had
already paid his debt to Montelibano who was not
authorized to receive payment.
ISSUE: Should Rodriguez still pay his debt to the
company?
HELD: Yes. Rodriguez’s payment to Montelibano
was not valid because Montelibano was not duly
authorized to receive such payment. Payment to an
unauthorized agent is at risk of the payor. Rodriguez
should have made a proper verification.
*Payment made by the debtor to a wrong party does
not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed
to the latter. Even when the debtor acted in utmost
good faith and by mistake as to the person of his
creditor, or through error induced by the fraud of a
third person, the payment to one who is not in fact
his creditor, or authorized to receive such payment
is void, except as provided in Article 1241. Such
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
payment does not prejudice the creditor, and
accrual of interest is not suspended by it. (Allied
Banking Corp vs Lim Sio Wan, et al., GR No.
133179, Mar 27, 2008)
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 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 creditor’s conduct, the debtor has
been led to believe that the third person
had authority to receive the payment.
*First paragraph deals with payment to an
INCAPACITATED person. Second paragraph deals
with payment to an UNAUTHORIZED third person.
Generally, payment to an incapacitated person is not
valid. However, payment to a third 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 beneficial to him.
FIRST PARAGRAPH
Q1: Is payment to a third person incapacitated to
manage or administer his property valid?
A1: Generally, not valid, EXCEPT:
a. If the incapacitated person has kept the thing
delivered, or
b. Insofar as the payment has been beneficial
to him.
Q2: A owes B P1M. When A paid B, the latter was
already insane. However, the money was never
spent, and is still in the possession of B. Is A’s
obligation extinguished?
A2: Yes, A’s obligation is already extinguished by
virtue of A’s payment to B. True, B was
incapacitated to administer his own property, yet B
has kept the thing delivered. Hence, A’s payment is
valid.
Q3: In Q2, suppose that the swindler had asked B
for P1M in exchange for a ring worth P600k, does
A’s payment to B remain valid?
A3: A’s payment to B remains valid only up to the
extent of P400k because this is the only amount
which B really benefitted from A’s payment to him.
A’s payment is thus valid only insofar as the
payment has benefitted the incapacitated payee.
Q4: Who has the burden of proving that the
payment has benefitted the incapacitated payee?
A4: The one who made the payment has the burden
of proving that it benefitted the incapacitated payee.
(Panganiban vs Cuevas, 7 Phil 477). The benefit
may be financial, moral or intellectual but it must be
proved.
Q5: In proving that the incapacitated payee really
benefitted from the payment, is it necessary for the
payor to prove that the payee invested the thing or
money delivered in some profitable enterprise?
A5: No, proof of investment is not necessary. All
that is needed is proof that payment to the
incapacitated payee has in some way or another
redounded to the benefit of the payee. Example is
when the money was used for proper hospital or
psychiatric expenses.
Q6: If indeed there has been no benefit, what is the
remedy?
A6: The payment is not valid; therefore, the legal
representative of the incapacitated person can
demand a new payment on behalf of his war. The
ward himself, should he regain capacity, is allowed
to claim a new payment.
SECOND PARAGRAPH
Payment is valid BUT only to the extent of benefit
(financial, moral or intellectual) to the creditor. The
payment must be proved, and is therefore, not
presumed except in the three instances provided for
in the second paragraph of Art. 1241.
Benefit to the creditor is presumed in the following
cases:
1. SUBROGATION – If after payment, the third
person acquires the creditor’s rights
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
E.g.
An impostor-agent after payment to him becomes
the owners of the company-creditor.
2. RATIFICATION – If the creditor ratifies the
payment to third person
E.g.
If the MERALCO, a few days after its unauthorized
collector had collected from you, tells you that the
payment to him is alright, Here, the defect is cured.
3. ESTOPPEL – If by the creditor’s conduct, the
debtor has been led to make the payment.
E.g. When the impostor-agent had been given by the
MERALCO the usual uniform for collectors.
Art. 1242. – Payment made in good faith to any
person in possession of the credit shall release the
debtor.
Article 1242 is another exception to the general rule
that payment to an unauthorize person is not valid.
REQUISITES:
1. Payment by payor must be made in good
faith (which is presumed)
2. Payee must be in possession of the credit
itself, not merely the document evidencing
credit
When one possesses the credit, there is
colorable title to it.
Examples of a person in possession of credit:
1. X found a negotiable promissory note
payable to bearer. If the maker thereof pays
in good faith to X, the debt is extinguished
even if X was not entitled to it.
Q: What if the promissory note was payable to a
specific person, Y, is the payment to X valid?
A: Not valid. X would just be the possessor of
the document, not the credit itself.
2. X, a presumed heir, entered upon an
inheritance, collected the credits of the
estate, but was later declared by the court to
be incapacitated to inherit. Here, payment of
the credit to X extinguished the obligation.
Art. 1243. – Payment made to the creditor by the
debtor after the latter has been judicially ordered
to retain the debt shall not be valid.
EXAMPLES OF JUDICIAL ORDER:
1. Preliminary attachment of final attachment
2. Preliminary injunction or final injunction
3. Garnishment
*In case of violation of the abovestated orders,
payment is VOID.
Preliminary attachment – provisional remedy issued
upon order of the court where an order is pending
to levy upon the property of the defendant, the
same to be held thereafter by the sheriff as security
for the satisfaction of whatever judgment might be
secured in said action by the attaching creditor
against the defendant.
Preliminary injunction – Order granted at any stage
of an action or proceeding prior to the judgment or
final order, requiring a party or a court, agency or a
person to refrain from a particular act.
Garnishment – A species of attachment in which
plaintiff seeks to subject his claims on properties of
the debtor in the hands of a stranger.
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.
*Creditor cannot compel creditor to accept a
different object.
E.g.
A is obliged to give B a Jaguar car. Not having any
Jaguar car, A wants B to accept a Rolls Royce, a
more expensive car, but B refuses to accept. Is B
justified legally in refusing to accept?
A: Yes. Even if the Rolls Royce is more valuable than
the Jaguar, if B does not want the Rolls Royce, he
cannot be compelled by A to accept it. The terms of
the contract form the law between the parties and
the subject matter cannot be changed without the
consent of the parties.
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
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 on sales.
Dation in payment – a special mode of extinguishing
an obligation whereby the debtor alienates in favor
of the creditor, property for the satisfaction of
monetary debt.
- Can be considered an objective novation of the
obligation with the common consent of the
parties; thus, extinguishing the obligation.
- In a sense, the understanding really partakes a
nature of sale, i.e., the creditor is really buying
the thing or property of the debtor, payment for
which is to be charged against the debtor’s
debt. As such, elements of a contract of sale
must be present, namely: (1) consent; (2)
object certain; (3) cause or consideration.
- Also called, “dation in solutum” or “adjudicacion
en pago.”
REQUISITES:
1. Agreement between creditor and debtor that
the obligation is immediately extinguished by
reason of the performance of a prestation
different from that due;
Debtor offers another thing to the creditor
who accepts it as equivalent payment.
Creditor must consent.
2. Performance of the prestation in lieu of
payment (animo solvendi) which may consist
in the delivery of a corporeal thing or a real
right or a credit against the third person;
3. Some difference between the prestation due
and that which is given in substitution (aliud
pro alio)
Example 1: To pay my debt of P1M in favor of Bella,
I gave her with her consent, a diamond ring instead
worth P1M.
Example 2: To pay off his debt, an heir assigned his
inheritance in an estate to his creditor. (Ignacio vs
Martinez, 33 Phil 576)
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.
OBLIGATION TO GIVE GENERIC THINGS
Reason for the Article: This Article gives a principle
of equity in that it applies justice in a case where
there is lack of precise declaration in the obligation.
It is always hard to find one thing that is exactly
similar to another. But in this kind of obligation,
there is the question of a relative appreciation in that
one party appreciates the same thing as the other
party does. If there is disagreement between them,
then the court steps in and declares whether the
contract has been complied with or not, according
to the circumstances.
E.g.
X obliged himself to deliver to Y a second hand car,
a 2010 model. In this case, X must not deliver a
2005 model. Also, Y cannot demand a 2014 model.
Art. 1247. – Unless it is otherwise stipulated, the
extrajudicial expenses required by the payment
shall be for the account of the debtor. With regard
to judicial costs, the Rules of Court shall govern.
GENERAL RULE:
Debtor has to pay for the extrajudicial expenses
incurred during the payment.
EXCEPTION:
When there is stipulation to the contrary.
JUDICIAL COSTS
Judicial costs are governed principally by Rule 142
of the Rules of Court. They are awarded to the
winning litigant, but the court may also adjudge that
either party shall pay the costs of an action or that
the same be divided as may be equitable.
Art. 1248. – Unless there is an express stipulation
to that effect, the creditor cannot be compelled
partially to receive the prestations in which the
obligations consist. Neither may the debtor be
required to make partial payments.
However, when the debt is in part liquidated 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.
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
GENERAL RULE: Performance should be complete.
Under 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. Hence,
partial performance is not allowed generally under
Art. 1248.
EXCEPTIONS (Partial performance, allowed):
1. When there is stipulation to this effect;
2. Debt is partly liquidated and partly
unliquidated, in which case, performance of
the liquidated part may be insisted upon
either by the debtor or the creditor;
E.g.
D owes C P3M plus damages. Even if the
amount of damages has not yet been
ascertained, the P3M is already known or
liquidated. This is already demandable and
payable.
3. When the different prestations are subject to
different conditions or different terms;
E.g.
A debt payable in installments
4. When a joint debtor pays his share or the
creditor demands the same. This is a
complete payment of his share, but it is still
a partial fulfillment of the whole obligation.
5. When a solidary debtor pays only the part
demandable because the rest are not yet
demandable on account of their being
subject to different terms and conditions.
6. In case of compensation, when one debt is
larger than the other, it follows that a
balance is left. (1290, NCC)
7. When the work is to be done by parts.
(1720, NCC)
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 obligations shall be held in abeyance.
Legal tender – money (bills and coins) approved in
a country for the payment of debts, the purchase of
goods, and other exchanges for value. (Black’s Law
Dictionary)
- That which a debtor may compel a creditor to
accept in payment of the debt
LEGAL TENDER IN THE PHILIPPINES
Pre-martial law – all notes and coins issued by
Central Bank without maximum limit
Nov 29, 1972 to 2006 under Sec. 231 of PD 72:
- 1 centavo & 5 centavo coins – valid legal
tender up to P20.00
- Other coins (P1, P5, P10) up to P50
- All bills – valid for any amount
2006 to present under Sec. 52, RA 7653 & BSP
Circular No. 537, S-2006:
- 1, 5, 10, 25 centavo coins – valid legal
tender up to P100.00
- P1, P5, P10 coins – up to P1,000
- All bills – valid for any amount
A check is not legal tender and, therefore, the
creditor cannot be compelled to accept payment
thru this means. (Belisario vs Natividad, 67 Phil 648)
It must be emphasized, however, that this dictum
does not prevent a creditor from accepting a check
as payment. In other words, the creditor has the
option and the discretion of refusing or accepting it.
(Far East Bank and Trust Co. vs Diaz Realty, Inc., GR
No. 138588, Aug 23, 2001)
Are the following legal tender?
1. US dollar – YES, if agreed upon
2. British pound – YES, if agreed upon
3. Philippine Peso – YES
4. Gold bars – No
5. Check – No, unless encashed
6. Manager’s check – No, unless encashed
7. Post-dated check – No
8. Promissory note – No
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
INSTANCES WHEN CHECK SHOULD BE ACCEPTED
AS PAYMENT:
1. When agreed upon
2. Creditor is in estoppel as when he had
previously promised he would accept a
check
3. Check has lost its value because of the fault
of creditor (1249, par2) as when he has
unreasonably delayed in presenting check
for payment (PNB vs Seeto, L-4338, Aug 13,
1952), or when, in the case of a foreign bill
of exchange, the creditor neglects to make a
protest (Quiros vs Tan Guinlay, 5 Phil 675)
4. When payment occurs not because of a debt
but because of the exercise of a right of
conventional redemption, since this is a right
and not a duty, particularly when the check
is in fact deposited by the clerk of court with
the bank, and the vendee a retro has
petitioned the court that he be allowed to
withdraw the amount of the deposit.
(Cordero vs Siosoco, 41 OG 4644)
Art. 1250 – In case of an extraordinary inflation or
deflation of the currency stipulated should
supervene, the value of the currency at the time of
the establishment of the obligation shall be the
basis of payment, unless there is an agreement to
the contrary.
Inflation – sharp sudden increase of money or credit
or both without a corresponding increase in
business transaction. There is inflation when there is
an increase in the volume of money and credit
relative to available goods, resulting in a substantial
and continuing rise in the general price level.
(Equitable PCI Bank, et al. vs Ng Sheung Ngor, et
al., GR No. 171545, Dec 19, 2007)
Extraordinary inflation – unusual decrease in the
purchasing power of currency (i.e., beyond the
common fluctuation in the value of the currency)
and such decrease could not be reasonably
foreseen or was manifestly beyond the
contemplation of the parties at the time of the
obligation.
Extraordinary deflation – opposite of extraordinary
inflation
REQUISITES OF EXTRAORDINARY INFLATION/
DEFLATION:
1. An official declaration of extraordinary
inflation or deflation by the BSP;
2. Obligation was contractual in nature; and
3. Parties expressly agreed to consider the
effects of the extraordinary inflation or
deflation. (EPCIB, et al. vs Ng Sheung Ngor,
et al., GR No. 171545, Dec 19, 2007)
Filipino Pipe and Foundry Corp vs
National Water Works and Sewerage Authority
GR No. 434446, May 3, 1988
FACTS:
On June 12, 1961, NAWASA contracted FPFC for the
latter to supply it with cast iron pressure pipes for
the former’s Masbate and Samar projects at a total
cost of P270,187.50. NAWASA paid in installments
on various dates a total of P134,680, leaving a
balance of P135,507.50. Having completed delivery,
FPFC demanded payment of the balance price with
interest. NAWASA failed to pay the balance.
FPFC filed a lawsuit where the court ordered
NAWASA to pay the unpaid balance of P135,507.60
in NAWASA negotiable bonds, redeemable for 10
years from issuance with interest of 6% per annum,
P40,944.73 as interest up to May 15, 1966 and the
interest accruing thereafter to the issuance of the
bonds at 6% PA. NAWASA still failed to satisfy the
decision. On Feb 18, 1971, FPFC filed another case
seeking an adjustment of the unpaid balance in
accordance with the value of the Philippine peso
when the case was decided on Nov 23, 1967.
ISSUE: Whether or not, FPFC can validly ask for
adjustment of judgment award based on inflation.
HELD:
No, adjustment cannot be granted.
Art. 1250, NCC provides that “in case of 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 xxx.”
Extraordinary inflation exists "when there is a
decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the
common fluctuation in the value said currency, and
such decrease or increase could not have
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
reasonably foreseen or was manifestly beyond
contemplation the parties at the time of the
establishment of the obligation.
An example of extraordinary inflation is the following
description of what happened to the Deutschmark in
1920:
More recently, in the 1920's, Germany experienced
a case of hyperinflation. In early 1921, the value of
the German mark was 4.2 to the U.S. dollar. By May
of the same year, it had stumbled to 62 to the U.S.
dollar. And as prices went up rapidly, so that by
October 1923, it had reached 4.2 trillion to the U.S.
dollar!
While FPFC’s evidence proved that there has been a
decline in the purchasing power of the Philippine
peso, this downward fall of the currency cannot be
considered "extraordinary." It is simply a universal
trend that has not spared our country.
Art. 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
the 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 by him.
These provisions are without prejudice to venue
under the Rules of Court.
PLACE OF PAYMENT OF OBLIGATION
1. Place stipulated by the parties;
2. If no stipulation and obligation is deliver a
determinate thing, place where the thing
might be (usually or habitually) at the time
the obligation was constituted;
3. In any other case (as when it is to deliver a
generic thing, to give money, or in case of
personal obligation), domicile of debtor.
Example 1
Ordinarily, a tenant of a house has the right to wait
for the landlord in the house since this is an
obligation to pay money, a generic thing. (Mañalac
vs Garcia, 76 Phil 216)
Example 2
A judgment creditor has to pay only at his domicile,
in the absence of a specification in the court decree.
(Eastboard Navigation vs Ysmael, L-9090, Sep10,
1957)
Example 3
Payment not at the designated place but only to the
mere depository of the creditor’s funds is not
considered as valid. So if Iloilo was designated, but
tender is made in Manila, the payment is not
generally to be made in Manila. (Gonzaga &
Hernandez vs Rehabilitation Finance Corp, L-8947,
Feb 10, 1957)
Subsection 1
APPLICATION OF PAYMENTS
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 benefit 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.
SPECIAL FORMS OF PAYMENT
1. Application (or imputation) of payment (Art.
1252)
2. Dation in payment (adjudicacion en pago)
(Art 1245)
3. Assignment in favor of creditors or cession
(Art. 1255)
4. Tender of payment and consignation (Art.
1256-1261)
Application of payment – designation of the debt to
which should be applied a payment made by a
debtor who owes several debts in favor of the same
creditor. It is the phrase applied to show which debt,
out of two or more debts owing the same creditor,
is being paid.
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
IMPORTANCE OF APPLICATION OF PAYMENT
Otherwise, we may not know which one, of two or
more debts has been extinguished.
E.g.
A owes B P1M payable on April 1, 2020. A also
owes B P1M payable on April 5, 2020. On April 10,
A pays B P1M.
Here, we will not know which debt has been
extinguished unless we know the rules on
application of payments.
REQUISITES
1. There must be two or more debts
2. Debts must be of the same kind
3. Debts are owed by the same debtor in favor
of the same creditor
4. All debts must be due*
5. Payment is not enough to extinguish all
debts
*EXCEPTIONS TO REQUISITE 4
Despite the fact that not all debts are yet due,
application of payment under Art. 1252 still applies:
1. If the parties so stipulate; and
2. When the application of payment is made by
the party for whose benefit the term has
been constituted.
PREFERENTIAL RIGHT OF DEBTOR
It is the debtor who is given by law the right to
select which of his debts he is paying. This right is
NOT absolute, however such as when:
1. There was a valid prior but contrary
agreement, the debtor cannot choose;
2. Debtor cannot choose to pay part of the
principal ahead of the interest. (Art. 1253)
RULES ON APPLICATION OF PAYMENT
1. Debtor makes the designation (Art 1252,
par1)
2. If not, the creditor makes it, by so stating in
the receipt that he issues; not valid if without
consent of debtor.
EXCEPT: There is cause for invalidating the
contract. (Art. 1252, par2)
Note: If the obligation itself is void, the
application and payment are also void. If the
debtor’s consent in accepting the receipt
was vitiated – as by fraud, error or violence –
the application is not valid, i.e. voidable.
3. If the creditor did not apply or if application
is void, the debt which is most onerous to
the debtor, among those due, shall be
deemed to have been satisfied. (Art 1254)
4. If the debt due are of the same nature and
burden, the payment shall be applied to all of
them proportionately. (Art 1254)
Example 1
X owes Y the following obligation:
1. P5,000 due on Jan 15, 2018
2. P10,000 due on Feb 14, 2018
3. P20,000 due on Apr 1, 2018
4. Two (2) sacks of NFA rice on Apr 15, 2018
5. P50,000 due on Jul 1, 2018
For example, today is May 1, 2018 and X has
P5,000 which he intends to pay his obligation. There
is no application of payment on the 4th obligation
because it will only be extinguished later on by
delivering rice of the same kind, quality and
quantity. There is also no application of payment on
the 5th obligation as it is not yet due.
What if X wants to apply the P5,000 to the obligation
which will mature on Jan 15, 2018 but Y wants that
it will be deducted on the P20,000 obligation. This is
the kind of situation which will be resolved by the
rules on application of payment.
Applying rules on application of payment, X has
preferential right to apply. Thus, the P5,000 will be
deducted from the first obligation so as to totally
extinguish the obligation.
If X does not want to make use of such preferential
right, then Y will designate which debt is to be paid.
So that if Y chooses the third obligation then the
P5,000 will be deducted from the P20,000 leaving a
balance of P15,000.
If X and Y did not make use of the application of
payment, then the third rule maybe used and that is,
it will be applied to the debt which is most onerous
to the debtor because there is no factual
circumstance to indicate that the obligation is
burdensome like guaranty, surety, pledge, real
estate mortgage, chattel mortgage or interest.
Hence, if the 1st obligation is secured by a pledge
involving a cellphone, the 2nd obligation is secured
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
by a guaranty and the third obligation contains a
stipulation as to interest then it should be mentioned
in the facts of the case on what is the most onerous
obligation to the debtor. Like if the debtor wants to
have the cellphone which is in possession of Y
being a real contract (perfected by delivery of the
object to the pledgee). If he wants to lessen his
interest, then he might apply his payment to the
third obligation.
If there is no debt which is most onerous to the
debtor, then last rule may apply, that is the payment
of P5,000 shall be applied to all of the debts
proportionately.
Art. 1253. – If the debt produces interest, payment
of the principal shall not be deemed to have been
made until the interests have been covered.
Interest must be paid first. The debtor cannot insist
that his payment be credited to the principal instead
of the interest.
WHY? Reduction in the principal would result in the
decrease of the total collectible.
What interest is supposed to be paid?
1. Interest by way of compensation; and
2. Interest by way of damages due to default
The law does not make a distinction.
Art. 1254. – When 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.
Rules in case no application of payment has been
voluntarily made
1. Apply it to the most onerous in case the due
and demandable debts are of different nature
2. If the debts are of the same nature and
burden, application shall be made to all
proportionately.
SAMPLES OF MORE BURDENSOME (MORE
ONEROUS) DEBTS
1. Older ones in case of running accounts (PNB
vs Veraguth, 50 Phil 253)
2. Interest-bearing debts even if the non-
interest bearing debt is older. (Menzi & Co.
vs Quing Chuan, 69 Phil 46)
3. Of two interest-bearing debts, that which
charges the higher interest is more
burdensome
4. Debts secured by mortgage or pledge
(Mission de San Vicente vs Reyes, 19 Phil
525)
5. Debts with a penalty clause
6. Advances for subsistence are more onerous
than cash advances (Montinola vs Gatila, 97
Phil 999)
7. Debt where the debtor is in mora is more
onerous than the one where he is not
8. An exclusive debt (not solidary) is more
onerous than a solidary debt
(Commonwealth vs Far Eastern Surety, 83
Phil 305)
NOTE: If a principal debtor is guaranteed by a surety
but the guaranty is for a smaller amount, any partial
payment made by the debtor shall be applied to the
portion which is not secured, since this exclusive
debt is considered more onerous to him. (HSBC vs
Alanese, 48 Phil 990)
Q: If one debt is for P1M, and another is for P2M,
and only P1M is paid, how will the payment be
applied?
A: If the debtor makes the application, the payment
should be credited to the first debt. The debtor
cannot insist that the creditor accept it for the
second debt for insofar as the second debt is
concerned, it is only a partial payment. And under
the law, a credit cannot generally be compelled to
receive partial payment.
If no application has been made, the law steps in,
and application will be made, not equally but
proportionately. (Art 1248)
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
NOTE: Sometimes it is hard to determine which
obligation is most onerous. The reason is that the
burden may be relative. It follows, therefore, that no
hard and fast rules can be put up. This becomes
more evident when not one circumstance alone is
considered but a combination of different
circumstances.
E.g.
Obligation A – is secured by a mortgage, non-
interest bearing and recent.
Obligation B – is unsecured, but maximum interest
bearing and old.
In such cases, the particular circumstances which
have significant bearing on the case at hand should
be observed and the balancing must be done.
However, as a last resort, when it cannot definitely
be determined whether one debt is more
burdensome than the other, the author believes that
both will be considered equally burdensome, and
hence, payment must be applied to both pro rata.
Q: If one debt is P1.2M and the other is P600k, and
the debtor without making any application of
payment gives P300k, how should said payment be
applied, presuming that both are of the same nature
and burden?
A: Payment will be applied proportionately. Hence,
200k will be deducted from the first and P100k will
be deducted from the second. The ratio of the first
debt to the second debt is thus preserved, namely:
2 is to 1.
Subsection 2
PAYMENT BY CESSION
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.
Cession or Assignment – Process by which a debtor
transfers all the properties not subject of execution
in favor of his creditors so that the latter may sell
them, and thus apply the proceeds to their credits.
- Special form of payment whereby the debtor
abandons all of his property for the benefit of
his creditors in order that from the proceeds
thereof, the latter may obtain payment of their
credits.
KINDS OR CLASSES OF ASSIGNMENT
1. Legal – Majority of creditors must agree;
governed by the Insolvency Law (Sec 8, Act
1956)
2. Voluntary – All creditors must agree;
governed by Art. 1255, NCC
REQUISITES FOR VOLUNTARY ASSIGNMENT
1. More than one debt
2. More than one creditor
3. Complete or partial insolvency of debtor
4. Abandonment of all debtor’s property not
exempt from execution, unless exemption is
validly waived by debtor in favor of creditors
5. Acceptance or consent on the part of the
creditors, for assignment cannot be imposed
on an unwilling creditor.
EFFECT OF PAYMENT BY CESSION
1. Creditors do not become the owners. They
are merely assignees with authority to sell. If
ownership is transferred, this becomes a
dation en pago.
2. Debtor is released up to the amount of the
net proceeds of the sale, unless there is a
stipulation to the contrary (Art. 1255, 2nd
sentence)
3. Creditors will collect credits in the order of
preference agreed upon, or in default of
agreement, in the order ordinarily
established by law.
NOTE: Some properties should not be
assigned such as:
a. Family home (w/ exceptions, Art 223,
226)
b. Amount needed by the debtor to support
himself and those he is required by law
to support. (Art 750) If such amount is
not reserved, the cession is not void but
merely reducible to the extent that the
support is impaired. The party prejudiced
can ask the court for the reduction.
(Agapito vs De Joya, CA, 40 OG No.
3526)
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS

Dacion en Pago Cession (4) When two or more persons claim the same
Does not affect all In general, affects all right to collect;
properties; only that properties of the debtor (5) When the title of the obligation has been
equivalent of the debt lost.

Does not require Requires more than Tender of payment – Act of offering the creditor
plurality of creditors one creditor what is due him together with a demand that the
creditor accept the same. (Far East Bank & Trust Co
Only the specific or Requires consent of all vs Diaz Realty, GR No. 138588, Aug 23, 2001); may
concerned creditor’s creditors be extrajudicial.
consent is required
Consignation – act of depositing the thing due with
May take place during Requires full or partial the court or judicial authorities whenever the
the solvency of the insolvency creditor cannot accept or refuses to accept
debtor payment. (Limkako vs Teodoro, 74 Phil 31); must
always be judicial.
Transfers ownership Does not transfer
upon delivery ownership NOTE: General Rule: Tender of payment must be
accompanied by consignation in order that the
Really an act of Not an act of novation effects of payment may be produced. Tender of
novation payment is the antecedent of consignation.
Consignation without tender of payment and vice
Extinguishes the Releases the debtor for versa produces no effect of payment.
obligation to the extent the net proceeds of the
of the value of the thing things ceded or EXCEPTIONS: Art. 1256, par 2 (1) to (5); same
delivered either as assigned, unless there effect as payment even without tender of payment.
agreed upon or as may is a contrary intention
be proved, unless Q: When a debtor owes money lent him with
silence of parties interest, is it sufficient to just tender the principal
signifies that they without the interest?
consider the delivery of
the thing as the A: No. Tender of the principal must be accompanied
equivalent of the with the tender of the interest which has accrued.
performance of the Otherwise, tender is not valid. (Fiege & Brown vs
obligation Smith, Bell & Co. and Cowper, 43 Phil 113)

Subsection 3 WHEN CONSIGNATION IS NOT REQUIRED

TENDER OF PAYMENT AND CONSIGNATION
Art. 1256. – If the creditor to whom the tender of
payment has been made refuses without just cause
to accept it, the debtor shall be released from
responsibility by the 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;
When there is really no debt, no obligation and
payment is purely voluntary, i.e., the person offering
at his option, could have refused to offer, such as:
1. Options
2. Pacto de retro sales
3. Legal redemption
Here, only a right, not a duty exists. As any other
right, these may also be waived. If one is granted an
option to buy, he may or may not buy at his choice.
If one is granted the right to redeem, he may or may
not redeem at his own choice.
Thus, if tender of redemption money is refused,
there is no need to consign it in court. (Co vs PNB,
L-61787, Jun 29, 1982)
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS
REQUISITES OF TENDER OF PAYMENT:
1. Made in legal tender
2. Includes whatever interest is due
3. Generally, unconditional
EXCEPT when it has conditions accepted by
creditor without protest
4. Obligation must already be due.
Art. 1257. – In order that the consignation of the
thing due may release the obligor, it must first be
announced to the persons interested in the
fulfillment of the obligation.
The consignation shall be ineffectual if it is not
made strictly in consonance with the provisions
which regulate payment.
REQUISITES OF CONSIGATION:
1. Existence of a valid debt / debt is due;
2. Valid prior tender, unless tender is excused
Creditor to whom tender of payment was
made refused to accept it; or was absent or
incapacitated; or because of several persons
claimed to be entitled to receive the amount
due; or because title to the obligation had
been lost
3. Prior notice of consignation (before deposit)
Previous notice of consignation had been
given to the person interested in the
performance of the obligation.
4. Actual consignation (deposit)
Amount due was placed at the disposal of
the court.
5. Subsequent notice of consignation
After consignation was made, person
interested was notified of the action.
Art. 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.
The consignation having been made, the
interested parties shall also be notified thereof.
HOW CONSIGNATION IS ACTUALLY MADE
Thing due must be deposited with the proper judicial
authorities (while ordinarily, the cashier or the cash
officer should be the person to issue the receipt for
the money consigned, a temporary receipt issued by
the clerk of court for said deposit would suffice.
(Yap vs Tingin, L-18943, May 31, 1963)
There must be proof that: (1) tender had previously
been made (general rule); or (2) that the creditor
had previously notified the debtor that consignation
will be made (in case tender is not required).
Art. 1259. – The expenses of consignation, when
properly made, shall be charged against the
creditor.
CREDITOR GENERALLY BEARS EXPENSES OF
CONSIGNATION
Consignation is due to creditor’s fault. Had he
accepted, there would not have been any need for
consignation. If not properly made, consignation
expenses are chargeable to debtor.
Expenses include those for the preservation or
warehousing of the goods pending litigation.
Art. 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 declaration that the
consignation has been properly made, the debtor
may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
EFFECTS IF CONSIGNATION HAS BEEN DULY MADE
If the consignation is duly (properly) made:
1. Debtor may ask the judge to order the
cancellation of the obligation.
2. Running interest is suspended.
3. However, it should be observed that before
the creditor ACCEPTS, or before the judge
declares that consignation has been
PROPERLY MADE, the obligation REMAINS.
(Padua vs Rizal Surety, 47 OC Supp No. 12,
p. 308)
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 FINALS REVIEW NOTES ON OBLIGATIONS & CONTRACTS

RISK OF LOSS Art. 1261. – If, the consignation having been

Creditor bears the loss if: made, the creditor should authorize the debtor to
1. Consignation is judicially approved; or withdraw the same, he shall lose every preference
2. All the requisites are present which he may have over the thing. The co-debtors,
3. If the creditor has signified his acceptance guarantors and sureties shall be released.

Otherwise, debtor bears the burden. (Sia vs CA, 92 *Withdrawal by debtor after consignation has been
Phil 335) made is only a matter of privilege.

EFFECTS OF IMPROPER CONSIGNATION EFFECTS:

1. If consignation was improperly made, the
obligation remains, because the consignation
is NOT EFFECTIVE as payment (Bravo vs
Barreras, 92 Phil 679)
2. If at the time of consignation, the debt was
already due, and the requisites for
consignation are absent, the debtor is in
DEFAULT.
WHEN DEBTOR MAY WITHDRAW THE THING OR
SUM CONSIGNED
As a matter of right:
1. Before the creditor has accepted the
consignation (Gamboa vs Tan, L-17076, Jan
29, 1962)
1. Obligation remains
2. Creditor loses any preference or priority over
the thing
3. Co-debtors (solidary debtors only, not joint
debtors), guarantors and sureties are
released unless they consented
Solidary debtors are only released from
solidarity, not from their own individual
shares because solidary co-debtors are
principal debtors unlike guarantors or
sureties.

2. Before there is a judicial declaration that the

consignation has been properly made. Here,
the obligation and the accessory stipulation
remain.

The right is given the debtor because he still

owns the thing; however, he bears the
expenses. The co-debtors, guarantors and
sureties cannot object.

As a matter of privilege:
When after the consignation had been
properly made (the creditor having accepted
or the court having declared it proper), the
creditor authorizes the debtor to withdraw
the thing. (Art 1261)

Q: How can the creditor prevent the debtor from

exercising the right to withdraw the thing
consumed?

A: By immediately accepting the consignation with

or without reservations. If he accepts without
reserving his right to further claims such as
damages, this would be a case of waiver. (Sing Juco
vs Cuayong, 46 Phil 81)

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