Extinguishment of Obligation

1. Novation
2. Compensation
3. Confusion or Merger
4. Rescission
5. Payment or Performance
6. Loss of the thing due
7. Prescription
8. Remission or Condonation
9. Fulfillment of a resolutory condition
10. Annulment
 Other Forms of Extinguishment
(FC-MAID)
1.  Fortuitous Event
2.  Compromise
3. Mutual desistance or withdrawal
4. Arrival of resolutory condition
5. Impossibility of condition
6. Death
 Payment or Performance (1232)
Concept – payment is the fulfillment of the
prestation due, a fulfillment that extinguishes the
obligation by the realization of the purpose for
which it was constituted.
Not only the delivery of money but also the
performance, in any manner, of an obligation.
(Civil Code, Art. 1232)
Burden of Proving Payment
Devolves upon the debtor who pleads payment
rather than on the creditor to prove non-payment.
 Requisites of Payment
1.  Payor or the person who pays
2.  Payee or the person to whom payment is made
3. Thing to be paid
4. Manner, time, and place of payment
 Kinds of Payment
1.  Normal – when the debtor voluntarily performs
the prestation as agreed upon;
2. Abnormal – when the debtor is forced by means
of a judicial proceeding either to comply with
the prestation or pay indemnity
Characteristics of a Valid Payment (1233)

1. Identity- only the prestation agreed upon and no

other must be complied with
2. Completeness – the thing or service must be
completely delivered or rendered
 Principle of Integrity (1233)
General Rule: 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.
Excpn:
1. When the obligation has been substantially performed in
good faith, the obligor may recover as though there had been
a strict & complete fulfillment less damage suffered by the
obligee. (1234)
2. When the obligee accepts performance knowing its
incompleteness or irregularity & without expressing any
protest (ESTOPPEL) (1235)
 Who Must Pay
In General
1. Debtor
2. Anyone acting on the debtor's behalf
(a)  Duly authorized agent or legal representative
(b)  Successors-in interest and assignees
Third Person who is an Interested Party
One who has an interest in the extinguishment of
the obligation such as:
1. Co-debtors
2. Sureties
3. Guarantors
4. Owners of mortgaged property of pledge

Note: The creditor cannot refuse the valid tender

of payment from the aforementioned individuals.
 Effects of Payment
1.  The obligation is extinguished
2.  The debtor is to fully reimburse the 3rd person
who is an interested party
3. The 3rd person is subrogated to the rights of the
creditor.
 Third person who is NOT an interested
party but with Debtor's Consent
General Rule: The creditor is not bound to
accept payment or performance by a 3rd person
who has no interest in the fulfillment of the
obligation. (1236 (1))
Excpn: Unless there is a stipulation to the
contrary.
Effects of Payment
1. Third person is entitled to full reimbursement
2. There is legal subrogation
Third person who is NOT an interested party & w/out
knowledge or Against the Will of the Debtor

The 3rd person can only recover insofar as the

payment has been beneficial to the debtor.
Payment Made by a 3rd Person who Does
Not Intend to be Reimbursed
Effects of Payment
1.  Presumed to be a donation. (1238)
2. Once the consent of the debtor is secured,
rules on ordinary donation will apply
3. If the consent is not secured, Art 1236 and
1237 will apply.
 To Whom Payment Must be Made (1240)

1. The person in whose favor the obligation has

been constituted
2.  His successors in interest
3.  Any person authorized to receive it
Effect of payment to unauthorized person
It shall not be valid even though made in good
faith
Excpn:
1. Provided it has redounded to the benefit of the creditor
Benefit to the Creditor is presumed in the ff:
a)  The creditor ratifies the payment (Ratification)
b)  If by the creditor's conduct, the debtor has been
led to believe that the 3rd person had authority to
receive the payment (Estoppel)
c)  If after the payment, the 3rd person acquires the
creditor's rights (Subrogation)
2.  Payment to the possessor of the credit made in good
faith (1242)
3.  In obligations to give, payment to an incapacitated
person is valid when:
a)  The incapacitated person has kept the amount or
thing delivered or paid
b)  Payment has been beneficial to the incapacitated
person (1241 (1))
Payment made to the creditor by the debtor after
the latter has been judicially ordered to retain the
debt shall not be valid (1243) unless otherwise
stipulated, extrajudicial expenses required by the
payment shall be for the account of the debtor.
(1247)
 Thing to be Paid
Rule in Monetary Obligations (1249)
1.  Must be paid in the currency stipulated, if it is not
possible to deliver such currency then in the
currency which is legal tender in the Philippines
2. Delivery of PN payable to order or bills of
exchange or other mercantile documents shall not
produce the effect of payment EXCEPT:
a)  They have been encashed
b)  When through the fault of the creditor they have
been impaired.
Legal Tender:
Such currency which may be used for the
payment of all debts, whether private or public.
The debtor may compel the creditor to accept it in
payment of a debt.
1. P1, P5, P10 coins: in amounts not exceeding
P1,000.00
2. P0.25 coin or less, in amounts not exceeding
P100.00
 EXTRAORDINARY
INFALTION OR DEFLATION (1250)
1.  There must be a decrease or increase in the
purchasing power of the currency which is
unusual or beyond the common fluctuation in
value of the currency;
2. Such decrease or increase could not have been
reasonably forseen or which was manifestly
beyond the contemplation of the parties at the
time the obligation was established.
There must be a declaration of such extraordinary
inflation or deflation by the BSP. Without such
declaration, the creditors cannot demand an
increase and the debtors a decrease of what is
due to or from them. (Ramos vs CA, G.R. No.
119872, July 7, 1997)
Rule when the Obligation Consists in the Delivery of
a Determinate Thing
Debtor cannot fulfill his obligation by delivering a
thing which is a different one, although the latter
maybe of the same value as, or more valuable
than which is due. (1244 (1))
Rule when the Obligation is to do or not to do & the
act is specific
Obligor cannot fulfill the obligation by substituting another
act or forbearance against the obligee's will. (1244 (2))
Rule when the Obligation Consists in the Delivery of
Indeterminate or Generic Things

If the contract does not specify the quality &

circumstances -
1.Creditor cannot demand a thing of superior
quality
2. Debtor cannot deliver a thing of inferior quality
but if he so desires he may deliver one of superior
quality provided it is not of a different kind. (1246)
RULE (1248 (1))
The creditor cannot be compelled partially to
receive the prestations in which obligation
consists. Neither may the debtor be required to
make partial payments.
EXCPN: (1248 (2))
1. When the obligation expressly stipulates the contrary;
2. When the different prestations which constitute the
objects of the obligation are subject to different terms &
conditions;
3. When the debt is in part liquidated and in part
unliquidated.
 Place of Payment (1251)
1.  Place agreed upon by the parties
2. I f there is no stipulation – delivery of
determinate thing – place where the thing might
be located at the time the obligation was
constituted.
3. In any other case – at the domicile of the
debtor.
SPECIAL FORMS OF PAYMENT
1.  Application of payments
2. Payment by cession
3. Tender of payment and consignation
Application of Payment (1252)
Designation of the debt to which the payment
must be applied when the debtor has several
obligations of the same kind in favor of the same
creditor.
APPLICATION OF PAYMENTS
Application of payment is the designation of the
debt which is being paid by the debtor who has
several obligations of the same kind in favor of the
creditor to whom payment is made.
General Rule
The right to designate the debt to which the payment
shall be made belongs to to the debtor. This right is
available to the debtor at the time the payment is made.
Excpn:
If the debtor does not apply, the creditor may designate
which debt is paid by specifying it in the receipt.
Note:
If the debt produces interest, payment of the principal
shall not be deemed to have been made until the interest
have been paid.
Legal Application (1254)
The debt more onerous to the debtor, among
those due, shall be deemed to have been
satisfied.
 Example
1.  Oldest debts vs. recent ones
2.  Interest bearing debts
3. Between interest bearing debts, the debt with a
higher interest rate
4.  A secured debt
5.  A debt in which the debtor is a solidary debtor
Nature and Burden (1254 (2))
Where the debts are if the same nature and
burden, there must always be a pro rata
application of the payment, even if the sum paid is
exactly the same amount of one of the obligations.
 Payment by Cession (1255)
A special form of payment whereby the debtor
assigns or abandons all of his property for the
benefit of the creditors in order that from the
proceeds thereof, the latter may obtain payment
of their credits.
1. Plurality of debts
2. Partial or relative insolvency of the debtor
3. Acceptance of the cession by the creditor
 Kinds of Payment by Cession
1.  Contractual (Art. 1255)
2.  Judicial (governed by Insolvency Law)
a. Voluntary
b. Involuntary
TENDER OF PAYMENT
and
CONSIGNATION
 Tender of Payment
Consists in the manifestation made by the debtor
to the creditor of his decision to comply
immediately with his obligation with the offer of
immediate performance.
Tender of payment, even if valid, does not by itself
produce legal payment unless it is completed by
consignation.
 CONSIGNATION
Is the deposit of the object of the obligation in a
competent court in accordance with the rules
prescribed by law, after the tender of payment has
been refused or because of circumstances which
render direct payment to the creditor impossible or
inadvisable.
 Effect on Interest
1.  When the tender of payment is made in such a form
that the creditor could have immediately realized
payment if he had accepted the tender, followed by a
prompt attempt of the debtor to deposit the means of
payment in court by way of consignation, the accrual
of interest on the obligation will be suspended from the
date of tender.
2. When the tender of payment is not accompanied by
the means of payment, and the debtor did not take any
immediate step to make a consignation, then interest
is not suspended from the time of tender.
Consignation
A form of payment, presupposes that there must be a
debt that must be paid. Tender of payment alone would
not be sufficient.
1. Existence of a valid debt.
2. Consignation was made because of the legal causes
provided for under Art.1256.
3. Previous notice of the consignation has been given to
the creditor.
4. That the amount was placed at the disposal of the
court.
5. After the consignation had been made, the creditor
was notified.
 1256
1. When the creditor is absent or unknown, or does not
appear at the place of payment;
2. When he is incapacitated to receive payment at the
time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the right to collect;
5. When the title of the obligation has been lost.
 Effect of Consignation
1. If the creditor accepts the thing or amount
consigned without contesting the validity or
efficacy of the consignation, the obligation is
extinguished. (1261)
2. If the creditor contests the validity of the
consignation or if he is absent, the result is
litigation.
 Effects of Withdrawal of the Object/
Amount Deposited
1.  Before the creditor has accepted -
a. Withdrawal by the debtor is a mater of right because
he is still the owner of the thing/amount
1.  With consent of the creditor -
a. Creditor losses every preference which he may have over
the thing;
b. Solidary co-debtor, guarantors and sureties are released
c. Solidary debtors are released only from their solidary
liability but not from their shares in the obligation
d. the obligation is revived.
LOSS OF THE THING DUE
To give determinate thing (1262)
Obligation is extinguished
1. Thing lost is determinate
2. There was no fault on the part of the debtor
3. The thing is lost before the debtor incurred in
delay.
Generic Things (1263)
Does not extinguish the obligation
Genus never persihes
Effect of Partial loss (1264)
General Rule: Does not extinguish the obligation
EXCPN: when the partial loss or destruction of the
thing is of such importance that would be
tantamount to a complete loss.
If the thing is in the debtor's possession (1265)
It shall be presumed that the loss was due to his fault
unless there is proof to the contrary.
EXCPN: No such presumption in case of earthquake,
flood,storm, or other natural calamity.
Effect of Impossibility of Performance of Obligation to Do
Obligor is released from the performance of the obligation.
(1266)

Doctrine of Unforseen Events – When the service has

become so difficult as to be manifestly beyond the
contemplation of the parties, the court should authorize to
release the obligor in whole or in part.
 Rule if Obligation Arises from a
Criminal Offense (1268)

General Rule: Debtor shall not be exempted

from the payment of the price whatever may be
the cause for the loss.
EXPN: When the thing having been offered by the
debtor to the person who should receive it, the
latter refused without justification.
CONDONATION OR REMISSION
OF DEBT
 Condonation or Remission

An act of liberality by virtue of which the obligee,

without receiving any price or equivalent,
renounces the enforcement of the obligation, as a
result of which it is extinguished in its entirety or in
that part or aspect of the same to which remission
refers.
1.  It must be gratuitous
2.  It must be accepted by the obligor
3. The obligation must be demandable
4.  Parties have the capacity
5. Not inofficious
6. Must comply with the forms of donation should
it be express.
 Kinds of Remission
1.  As to Form
a. Express – made in accordance with the
formalities prescribed by law for donations
b. Implied – can be deduced from the acts of the
obligee.
1. As to Extent
a. Total – entire obligation is extinguished
b. Partial – only an aspect of the obligation is
extinguished.
3.  As to Constitution
a. Inter Vivos – by agreement of the obligee
and obligor
b. Mortis Causa – when it is constituted by last
will and testament
IMPLIED REMISSION- If the creditor voluntarily
delivers the private document evidencing the credit to
the debtor. (1271)
PRESUMPTION OF REUNUNCIATION -When such
private document is found in the possession of the
debtor, it is presumed that the creditor voluntarily
delivered the same. (1272)
If the obligation is joint, the presumption of remission
pertains only to the share of the debtor who is in
possession of the document.
If solidary – total obligation
 Confusion or Merger of Rights
Confusion – it is the merger of the characters of
the creditor and the debtor in one and the same
person with respect to the same obligation, by
virtue of which the obligation is extinguished.
(1275)
 Requisites
1.  It must take place between the creditor and the
debtor.
2.  The very same obligation must be involved.
3. The confusion must be total.
 Effects of Confusion/Merger (1276-1277)

1. If confusion takes place in the person of either the principal

creditor or principal debtor – entire obligation is
extinguished.
2. If confusion takes place in the person of either the
subsidiary creditor or subsidiary debtor – no
extinguishment of principal obligation, only substitution.
(1276)
3. If confusion takes place in 1 of the joint debtors – principal
obligation extinguished up to the share w/c corresponds to
him. (1277)
4. If confusion takes place in 1 of the solidary debtors – entire
obligation is extinguished.
 Compensation
Mode of extinguishing in the concurrent amount of
the obligation of those persons who are
reciprocally debtors and creditors of each other.
It extinguishes both debts to the extent of the
amount covered by the amount of the other.
 Kinds of Compensation
1.  As to cause
a. Legal – takes effect by operation of law
b. Voluntary -
c. Judicial
d. Facultative
1.  As to Effect
a. Total
b. Partial
 Requisites
1.  The parties are principal creditors and debtors
of each other
2. Both debts consist in a sum of money or of
consumable of the same kind & quality
3. The 2 debts are due or demandable
4. The 2 debts are liquidated
5. No retention or controversy commenced by a
third person
 Effects of Assignment of Rights

1.  With the consent of the debtor- debtor cannot set

compensation unless he reserved his right to
compensation
2. With knowledge but w/out consent of debtor –
debtor may set-up compensation prior to the
assignment but not to subsequent ones
3. If w/out knowledge of the debtor – may set up
compensation of all credits which he may have
against the assignor and which may have become
demandable before he was informed of the
assignment.
Debts w/c cannot be Compromised
1.  Arising from depositum
2. Arising from commodatum
3. Claims for support
4. Obligations arising from criminal offenses
5. Certain obligations in favor of the government
 Facultative Compensation
Compensation which can be set up only at the
option of the creditor when legal compensation
cannot take place because of want of some legal
requisites.
 Novation
It is the substitution or change of an obligation by
another, resulting in its extinguishment or
modification, either by changing its object or
principal conditions, or by substituting another in
place of the debtor, or by subrogating a third
person in the rights of the creditor. (1291)
Old obligation is extinguished
New one is created
 Requisites
1.  Previous valid & existing obligation
2.  Capacity of the contracting parties
3.  Animus novandi
4. Substantial difference between the old and the
new obligation
5. Validity of the new obligation
 Kinds of Novation
1. As to its Essence 3. Extent/Effect
a.Objective/Real a. Total
b. Subjective/Personal b. partial
c.Mixed
1. Form
a. Express
b. Implied
 Test of Incompatibility
Whether or not the old and new obligation can
stand together, each having its own independent
existence. If they can stand together, there is no
incompatibility hence, no novation. If they cannot
stand together, there is incompatibility,
consequently, there is novation.
Novation is never presumed.
 Objective Novation
1. Changing the cause of the obligation
2. Changing the object of the obligation
3. Changing the principal pr essential conditions of
the obligation
REQUISITES:
1. New obligation expressly declares that the old
is extinguished or
2. New obligation is on every point incompatible
with the old one (Ajax Marketing vs. CA 118585,
September 14, 1995)
Novation by Substitution of Debtors:
A subjective/personal novation consists in the
substitution of a new debtor in place of the
original debtor.
1.  EXPROMISION – effected with the consent of
the creditor at the instance of the new debtor
even without the consent of the old debtor.
REQUISITES
l  Initiative for substitution must come from the
new debtor
l  Consent of the creditor to the substitution
l  Old debtor must be released from the obligation
 Kinds of Substitution by Expromision

1. Substitution with the knowledge and consent of

the old debtor
2. Substitution without the knowledge or against
the will of the old debtor
DELAGACION – effected with the consent of the
creditor at the instance of the old debtor
(delegante) with the concurrence of the new
debtor (delegado)
1. Initiative must come from the old debtor
2. consent of the new debtor
3. Acceptance by the creditor (delegatorio)
4. Old debtor must be released from his obligation
TAKE NOTE!
In either of the two modes of substitution, the
consent of the creditor is an indispensable
requirement.
 Rights of the New Debtor
1. EXPROMISION
a)  With knowledge of the original debtor –
reimbursement & subrogation
b)  Without knowledge of the original debtor –
reimbursement only
2. DELAGACION
l  Reimbursement and subrogation
 Effect of Insolvency or
Non-Fulfillment by New Debtor

1. EXPROMISION -
a) With knowledge & consent of the original
debtor- it shall revive the original debtor's liability
to the creditor.
b)  Without the knowledge & against the will of
the original debtor- the new debtor's insolvency
or nonfullfillment shall not revive the original
debtor's liability to the creditor.
2. DELEGACION – the right of the creditor can no
longer be revived except in the ff cases:
a) I nsolvency already existing & of public
knowledge at the time when the original debtor
delegated his debt
b) Insolvency was already existing and known to
the original debtor when he delegated his debt.
 Effects of Novation upon
Accessory Obligations

GENERAL RULE: when the principal obligation is

extinguished in consequence of a novation,
accessory obligation may subsist only insofar as
they may benefit third persons who did not give
their consent.
 Effects of Condition in Novation

If the original obligation was subject to suspensive

condition, the new obligation shall be under the
same condition, unless otherwise stipulated
(1299)
 Novation by Subrogation
A personal novation effected by subrogating a
third person in the rights of the creditor.
1. Legal
2. Conventional
Conventional subrogation – the consent of all
the parties is essential.
Legal subrogation
General Rule : not presumed
EXCPN: 1. when a creditor pays another creditor
who is not preferred without debtor's knowledge;
2. when a 3rd person, not interested in the
obligation pays with the express or tacit approval
of the debtor; 3. when, even without the
knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the
latter's share.
 Effects of Subrogation

1.  Total – transfers to the person subrogated the

credit with all the rights the original creditor has
against the debtor or third persons.
2.  Partial – a creditor to whom partial payment
has been made may exercise his right for the
remainder and he shall be preferred to the
person who has been subrogated in his place.
 COMPROMISE
A contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an
end to one already commenced.
Cannot be compromised:
1. Civil status of persons
2. Validity of marriage
3. Legal separation
4. Future support