DE OCAMPO, James P.

BSA31KB2

Extinguishment
Extinguishment of Obligation

Art. 1231. Obligations are extinguished:

extinguished:
\

Section I.  –  Payment or Performance

Payment – not
 – not only the delivery of money but includes the performance of an obligation in any other manner. In
law, payment and performance are synonymous.

According to the general rule partial or irregular performance will not produce the extinguishment of an
obligation.

Exception to the general rule:

If substantially performed in good faith.

 – The
 – The obligor is allowed is allowed to recover the payment less the damages suffered by the obligee.
Obligee accepts the performance, knowing its incompleteness or irregularity.
 – The
 – The obligor is not liable for damages, because the obligation is deemed fully complied.

Payment of third person

 – Payment
 – Payment or performance by any person not incapacitated is recognized. Even has no interest in the obligation

 If made without

without the knowledge
knowledge or against the will of the debtor 
debtor  –  he can recover only upto the amount the debtor has
 benefited.

 If made with

with the knowledge
knowledge of the debtor 
debtor  – he
 – he shall have the rights of reimbursement and subrogation.

Subrogation and reimbursement distinguished

Subrogation - the payor acquires all the rights which the creditor could have exercised pertaining to the credit.

 Reimbursement 
 Reimbursement  – can
 – can recover only up to amount the debtor benefited.

Validity of Payment to an Incapacitated Person

 – is
 – is not valid unless the person kept the thing paid or delivered, or was benefited by the payment.

Ex: Mary is indebted to Claire, a minor, in the amount of P200. On maturity of the debt, Mary pays Claire P200.
Claire deposits the amount to the bank; she does not spend it. The payment is valid.

Payment to a Third Person in Possession of Credit

 – if
 – if made in good faith shall release the debtor.

Ex: Mary executed a negotiable promissory note for P10,000 in favor of Claire. On maturity date, Carla, a third
 person, presented
presented the note, properly
properly indorsed,
indorsed, and demanded
demanded payment
payment of the same. The
The payment
payment released
released her,
 because she
she paid in good faith to a person
person in possession
possession of the credit whom
whom the law
law presumes
presumes to be the owner of 
the note properly indorsed.

Special Forms of Payment:

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Dation in Payment

 – Conveyance
 – Conveyance of ownership of a thing as an accepted equivalent of performance. Debtor alienates property in
 payment of
of a debt in money.

 – The
 – The creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality.

Application of Payment

 – Designation
Designation of debt when there are several debts to a creditor.

 – Principally,
Principally, it is the debtor who can make an application of payment. Failure of the debtor to make an application
automatically allows the creditor to make an application. If both parties fail to make an application, the More Burdensome
Rule will apply.

 – Payment
Payment must be applied first to the interest and whatever balance is left can be credited to the principal.

Payment by Cession

 – Debtor
Debtor abandons property in favor of the creditor so that the latter may dispose of the property in order to apply the
same to the debts,

Voluntary Cession – 
Cession – requires
requires the consent of all the creditors

Ex: Pnoy is indebted to Pablo, Diego and Juan in the amount of P10,000. He has more debts than assets.
 because Pnoy cannot
cannot pay them all in full amount,
amount, Pnoy may
may assign to Pablo, Diego, and
and Juan his
his properties
properties
valued at P6,000 so they can sell the same and the net proceeds applied in payment of his debt.

Tender of Payment and Consignation

 – T
Tender
ender of payment is an act on the part of the debtor to offer to the creditor the thing or amount due.

 – C
Consignation
onsignation is the act of depositing the thing due or placing the same under judicial authority when the creditor 
refuses to accept payment without just cause.

Ex: Billy was indebted to Vhong. On maturity of the obligation, Billy offered to pay Vhong the amount of the
debt but without justified reason refused to accept the payment. Billy then notified Vhong, thus if Vhong persist
in not accepting the payment, Billy will go to the proper court. Proved to the court that there was a valid tender of 
 payment and
and that, Vhong, the creditor, unjustly
unjustly refused
refused to accept
accept the payment
payment and
and that, there
there was previous
previous notice
notice
consignation. The clerk accepted the payment.

Section II.  –  Loss of the Thing Due

The 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. As a rule, the loss of the thing extinguishes the obligation to give. This is
equivalent to impossibility of obligations to do.

Impossibility of Performance

Physical Impossibility

Ex: Ely obliged himself to make a statue of Raimund. After the obligation was constituted, Ely’s hands were
amputated by reason of an accident. Because Ely’s obligation cannot be performed, his obligation to Raimund is
thereby extinguished.

Legal Impossibility
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Ex: Marcus agreed to construct a commercial building for Buddy. The government refused to sign a building
 permit because
because the area has been declared
declared as a residential
residential zone.
zone. The obligation
obligation therefore
therefore was extinguished
extinguished..

Loss of a Generic Thing

 – Debtor
Debtor can still be compelled to deliver a thing of a same kind.

Ex: Herbert obliges himself to deliver to Joseph a cow. The cow which Herbert intended to deliver to Joseph died
of sickness. In this case, Herbert’s obligation to deliver a cow is not extinguished because a cow is generic, he is
still obliged to deliver any of the species.

Loss of a Specific Thing

 – If
If the loss is due to fortuitous event:
event:

a. Due to the fault of the debtor  – not

 – not extinguished
 b.  Not due to the fault of
of the debtor
debtor - extinguished
extinguished

Ex: Herbert obliges himself to deliver to Joseph his dog named “Labuyo”. Before the agreed date of delivery ,
“Labuyo” dies without Herbert’s fault. In such case, the obligation is extinguished.

Section III.  –  Condonation or Remission of Debt

Gratuitous abandonment by the creditor of his right against the debtor.

Kinds of remission

Complete Remission

Ex: Habagat was indebted to Maring in the of P1,000. On the due date of the obligation, Habagat, offered to
 pay his debt to Maring
Maring but the latter told
told Habagat
Habagat that he was renouncing
renouncing his right to
to collect
collect the debt
debt as
he won in the sweepstakes.

Partial Remission

Ex: In the same example above, suppose Habagat offered to pay the whole amount of P1,000 to Maring but
latter accepted on P500 and renounced the balance.

Inofficious remission

-No one can give more than that which he can give by will, otherwise, the excess shall be inofficious.

Ex: A, a widower, died survived by his only heir, B, his son. In his last will and testament, A renounced a debt
due him from X, in the amount of P50,000. The debt constituted his only estate. Since A could only dispose
of one-half of his estate as the other half belong to his heir, B, as his legitimate child, the renunciation was
inofficious and should be reduced.

Case Document found in Possession

P ossession of Debtor

-Ordinarily, the document evidencing the debt is in the possession of the creditor. If later the document is found in the
hand of the debtor , the presumption is that it was voluntarily delivered
delivered by the creditor .

Ex: Habagat owes Maring P2,000 evidenced by promissory note. Later on, the promissory note was found in
 possession of
of Habagat. The presumption
presumption of law
law is that
that the obligation
obligation has been remitted
remitted by Maring.
Maring.

Section IV.  –  Confusion or Merger of Rights

The characters of debtor and creditor meet in one and the same person with respect to the same obligation.
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Confusion in a joint obligation

 – What
What is extinguished is only the share of that debtor in the obligation.

Ex: Gomez and Burgos are jointly indebted to Zamora in the amount of P1000. If merger of confusion takes place
 between Gomez
Gomez and
and Zamora, the Gomez’s
Gomez’s obligation
obligation of P500 will
will be extinguished. However, the indebtedness of 
Burgos to Zamora will remain.

Confusion in a solidary obligation

 – The
The obligation is extinguished

Ex: In the same example above, if the obligation of Gomez and Burgos is solidary, the indorsement to Gomez
extinguishes the entire obligation of P1000. Gomez can demand reimbursement from Burgos.

Section V. - Compensation
Two persons or two parties are debtors and creditors of each other.

Kinds of Compensation

Legal – 
Legal – by
by operation of law

Conventional – 
Conventional  – by
by agreement of the parties

Facultative – 
Facultative  – only
only one party can claim compensation

Judicial – 
Judicial  – declared
declared by court

Compensation in General

Ex: Mario is indebted to Luigi in the amount of P100. On the other hand, Luigi is also indebted to Mario in the
amount of P100. Both debts are due. Compensation will take place.

Requisites of Compensation:

Obligors must be bound principally

Ex: Mario is indebted to Luigi in the amount of P100. In another obligation, Mario is the creditor of Princess in
the amount of P100 with Luigi as guarantor. Compensation will not take place because Mario and Luigi are not
 bound principally
principally to each
each other.
other.

 Debt consist
consist in a sum of money

Ex: Mario owes Luigi the amount of P100. Luigi is under obligation to Mario to render his professional services.
 No compensation
compensation can
can take place
place because
because the second debt
debt does not
not consist in a sum of money.

Two debts be due

Ex: Mario owed Luigi P100 payable on Sept. 1 2013. On the other hand, Luigi owed Mario also P100 due Sept.
15 2013. If on Sept 16 2013, both debts are still unpaid, then compensation can take place.

 No retention
retention or controversy
controversy commenced
commenced by third person

Ex: Mario is indebted to Luigi. Luigi is also indebted to Mario. Before both debts fall due, Princess secures an
order from court notifying Mario not to pay Luigi as she (Princess) claims right to the said amount.

Exception to the General Rule

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The guarantor may set up by way of compensation what the creditor owes his principal debtor 

Total Compensation

Ex: A owed B P1000 due on Sept 1 2013. But B also owed A P1000 due on the same date

Partial Compensation

Ex: A owed B P1000. But B only owes A P500, then partial payment took place, A is still liable to pay B P500

Meaning of Depositum

 – Is
Is a contract where one person receives a thing belonging to another, with the obligation of safe keeping it and of 
returning the same.

Meaning of Commodatum

 – IIss a gratuitous contract where one of the parties to another, something not consumable so that the latter may use the
same for a certain time and return it.

Section VI.  –  Novation

 Not an absolute
absolute mode
mode of extinguishment,
extinguishment, it is only relative because
because it
it plays a dual role.
role. While it extinguishes
extinguishes an
obligation, it also creates a new one.

Novation may either be:

Extinctive – 
Extinctive  – old
old obligation is extinguished and new one is created

Modification – 
Modification – no
no extinguishment of obligation. It simply modified the obligation

Three ways by which novation may take place:

Changing the object or any other principal conditions of the obligation

Ex: S agreed to deliver B a television set. Later, they enter into another contract whereby, instead of delivering a
television set, he will deliver
deliver air conditioner.
conditioner. The obligation to deliver a television
television set is extinguished,

Substitution of the person of the debtor 

Expromision – 
Expromision – when
when a third person of his own accord and even without the knowledge of the original
debtor assumes the obligation, with the consent of the creditor 

Delegacion – 
Delegacion  – when
when the debtor asks the creditor to accept a third person to take his place as obligor 

Subrogating a third person into the right of the creditor 

Conventional – 
Conventional  – when
when it takes place by express agreement of the original parties and the third person

Legal – 
Legal – when
when it takes place without agreement but by operation of law

Insolvency of the substitute

Expromision – 
Expromision – the
the old obligation will not be revived

Delegacion – 
Delegacion  – if
if at the time of substitution, the new debtor is already insolvent.