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. (1172a)
Meaning of application of payments.

Application of payments

 is the designation of the debt to which should

be applied the payment made by a debtor
who has various debts of the same kind in
favor of one and the same creditor.
Requisites of application of payments:

(1) There must be one debtor and one creditor;

(2) There must be two or more debts;
(3) The debts must be of the same kind;
(4) The debts to which payment made by the
debtor has been applied must be due; and
(5) The payment made must not be sufficient to
cover all the debts.
Application as to debts not yet due.

The application of payments as to debts not yet

due cannot be made unless:

(1) There is a stipulation that the debtor may so

apply; or

(2) It is made by the debtor or creditor, as the

case may be, for whose benefit the period has
been constituted.
Rules on application of payments:
 The rules in Articles 1252 to 1254 apply to a person
owing several debts of the same kind to a single
creditor.

(1) Debtor has the first choice; he must indicate at

the time of making payment, and not afterwards,
which particular debt is being paid;

(2) The right to make the application once exercised

is irrevocable unless the creditor consents to the
change;
(3) The word use is “may” rather than “shall” – the
debtor’s right to apply payment is not mandatory but
merely directory;

(4) If the creditor has not also made the application,

or if the application is not valid, the debt, which is
most onerous to the debtor among those due, shall be
deemed to have been satisfied;
(5) If the debts due are of the same nature and
burden, the payment shall be applied to all of them
proportionately; and

(6) If neither party has exercised its option and there is

disagreement as to debts to which payment must be
applied, the court will apply the payment according
to the justice and equity of the case.
D owes C as follows:

(a) P1,500 payable on September 5;

(b) P1,200 payable on September 20;
(c) A specific table worth P2,000 to be delivered
on September 20; and
(d) P1,000 payable on October 15.

(1) On September 20, D paid C P1,500. D may

apply the P1,500 to debt (a), or to debt (b) and (if
C does not object) to a portion of debt (a).
 If D paid only P1,000, he cannot choose to apply
his payment to the P1,500 debt because C cannot
be compelled to receive partial payment;

 D cannot properly apply his payment to debt (c)

because it is not of the same kind. He must deliver
the thing agreed upon;
 Neither can he apply it to debt (d) which is not yet
due unless there is a stipulation to the contrary or
he has the benefit of the period.

An application of payment made by debtor without

objection from the creditor is binding upon the latter.
(2) If D does not make a choice, C can make the
designation in the receipt with the consent of D. D
may change the application made by C.

(3) If C does not make the application in the receipt

or no receipt was issued by him, then the legal rules
in Article 1254 will govern.

 apply to the debt which is most onerous:

 if the debts due are of the same nature and burden,
payment shall be applied to all 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. (1173)
Interest earned paid ahead of principal.
 This rule is mandatory;
 Debtor cannot choose to credit his payment
to the principal before the interest is paid;
 Payment must be applied first to interest and
whatever balance is left, must be credited to
the principal.

But this rule is subject to any agreement between

the parties, or to waiver by the creditor. Here, Art.
1253 is merely directory.
 In a contract involving installment payments with
interest chargeable against the remaining
balance of the obligation, it is the duty of creditor
to inform the debtor of the amount of interest that
falls due and that he is applying the installment
payments to cover said interest;

 Otherwise, creditor cannot apply the payments to

the interest and then hold the debtor in default
for non-payment of installments on the principal.
 ART. 1254. When the 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. (1174a)
Application of payment to more
onerous debts.

In case no application of payment has been

made by the debtor and the creditor, then the
payment shall be applied to the most onerous
debt, and if the debts are of the same nature and
burden, to all of them proportionately.
A debt is more onerous than another when
it is more burdensome to the debtor.

Examples:

(1) An interest-bearing debt is more onerous

than a non-interest bearing debt even if the
latter is an older one;

(2) All things being equal, older debts are

more onerous;
(3) Debts secured by a mortgage or by pledge
are more onerous than unsecured debts;

(4) Of two interest-bearing debts, the one with a

higher rate is more onerous;

(5) An obligation with a penalty clause is more

burdensome than one without penalty clause.
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. (1175a)
Meaning of payment by cession.

Payment by cession
 is another special form of payment;

 it is the assignment or abandonment of all

the properties of the debtor for the benefit of
his creditors in order that the latter may sell
the same and apply the proceeds thereof to
the satisfaction of their credits. (8 Manresa 321)
Requisites of payment by cession.

(1) There must be two or more creditors;

(2) The debtor must be (partially) insolvent;

(3) The assignment must involve all the properties

of the debtor; and

(4) Cession must be accepted by the creditors.

Effect of payment by cession.
 Unless there is a stipulation to the contrary,
the assignment does not make the creditors
the owners of the property of the debtor
and debtor is released from his obligation
only up to the net proceeds of the sale of
the property assigned.

 Hence, the debtor is still liable if there is a

balance.
Article 1255 refers to contractual
assignment.

 The assignment of property under Article

1255 refers to voluntary or contractual
assignment which requires the consent of all
the creditors as distinguished from legal or
judicial assignment which is governed by the
Insolvency Law.
Dation in payment and cession
distinguished.
Dation in payment or dacion en pago

 is a special form of payment whereby another

thing is alienated by the debtor to the creditor
who accepts it as equivalent of payment of an
existing debt in money.

 There is no dation if the transfer of property is

by way of security only, and not by way of
satisfying the debt.
(1) In dation, there is usually only one creditor, while
in cession, there are several creditors;

(2) Dation does not presuppose the insolvency of the

debtor or a situation of financial difficulties, while in
cession, debtor is insolvent at the time of assignment;

(3) Dation does not involve all the property of the

debtor, while cession extends to all the property of
the debtor subject to execution;
(4) In dation, the creditor becomes the owner of
the thing given by the debtor, while in cession, the
creditors only acquire the right to sell the thing and
apply the proceeds to their credits pro rata; and

(5) Dation is an act of novation, while cession is not

an act of novation.
SUBSECTION 3. —
Tender of Payment
and Consignation
 ART. 1256. If the creditor to whom
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;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)

(Tender of payment is NOT necessary before the debtor can consign the thing
due with the court.)
Meaning of tender of payment
and consignation.
Tender of payment
 is a debtor’s act of offering to the creditor the thing or
amount due.
 Debtor must show that he has in his possession the
thing or money to be delivered at the time of the offer.
 It is an act preparatory to consignation;

Consignation
 is the act of depositing the thing or amount due with
the proper court when the creditor does not desire, or
refuses to accept payment, or cannot receive it;
 it generally requires a prior tender of payment;
Nature of and rationale for consignation.

 For failure to consign the thing or amount due,

the debtor may become liable for damages
and/or interest. (Eternal Gardens Memorial Park Corp.
vs. Court of Appeals, 282 SCRA 553 [1997])
Requisites of a valid consignation:

(1) existence of a valid debt which is due;

(2) tender of payment by the debtor and refusal without
justifiable reason by the creditor to accept it;
(3) previous notice of consignation to persons interested in
the fulfillment of the obligation;
(4) consignation of the thing or sum due; and
(5) subsequent notice of consignation to interested parties.

 All requisites must be complied (mandatory), otherwise,

consignation ineffective;
 Consignation applies to both real and personal property.
Existence of valid debt.
Consignation is proper only where there is a valid
debt which is due.
 Creditor-debtor relationship must exist between
the parties, otherwise the legal effects thereof
cannot be availed of.

 Ejectment – where possession of property by a

person (who wanted to pay) is by mere
tolerance or permission of the owner) and no
contract of lease, the owner has no obligation
to receive any payment from that person.
Necessity of making tender of payment
and consignation.
 Both tender of payment and consignation must
be validly done to effect the extinguishment of
an obligation;

 Substantial compliance is not enough;

 The words used are “shall” and “must”;

 All essential requisites must be complied with for

consignation to be valid and effectual.
EXAMPLES:

(1) D owes C a sum of money. On the due date of

the obligation, D offers to pay the obligation but C
refuses to accept the payment without any justifiable
reason.

In this case, D’s obligation will not be extinguished

until he has made a valid consignation.
(2) D entered into a contract with C. D is given the right to
cancel the contract upon payment of P1,000 to C.

Here, D has no existing debt to C. The amount of P1,000 is

not owed by D, but only a consideration for the exercise
of his right to cancel the contract.

Hence, consignation of the P1,000 is not necessary.

(3) For failure to pay rents for 3 months, R (lessor) demanded
that E (lessee) pay the back rentals and vacate the premises.
Subsequently, R filed a complaint for unlawful detainer. E
contends that R refused to accept the rents.

The failure of R to collect or his refusal to accept the rentals is

not a valid defense.

To be released from responsibility, the debtor should consign

the thing or sum due. The belated payment of back rentals
by E does not automatically restore the contract of lease
without R’s consent. (Cetus Dev’t. Inc. vs. CA, 176 SCRA 72)
Requirements for valid tender
of payment:

(1) Tender of payment must comply with “rules on

payment”;

 A check, whether a manager’s check or ordinary check,

is not legal tender;

 An offer of a check in payment of a debt is not a valid

tender and may be refused by the creditor. (Abalos vs.
Macatangay, Jr., 439 SCRA 649 [2004])

 But a debtor who offered checks backed by sufficient

deposit or ready to pay cash if the creditor chose that
means of payment – cannot be considered delinquent.
(2) It must be unconditional and for the whole amount;

 Tender of payment of only a portion of an obligation

when the contract gives to the creditor the right to
require payment of the whole amount due and still
unpaid upon default of an installment, may be validly
refused by the creditor. (PCSO vs. Olmos, 83 SCRA 188 [1978])
(3) It must be actually made.

 The manifestation of a desire or intention to pay is not

enough. (Belisario vs. IAC, 165 SCRA 101 [1988])

 Thus, tender of payment cannot be presumed by a

mere inference from surrounding circumstances, such
as sufficiency of available funds in the hands of the
debtor.

 “A proof that an act could have been done is no proof

it was actually done.”
Proof of tender of payment.

 Since tender of payment must precede

consignation, the tender must be proved by
the debtor in the proper case;

 Thus, when tender is not required, only prior

notice to interested persons of the consignation
need be proved.
 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. (1177)
Prior notice to persons interested
required.
 Without prior notice to the persons interested in
the fulfillment of the obligation (ex. guarantors,
mortgagees, solidary debtors, solidary creditors),
the consignation, as payment, shall be void.
(Valdellon vs. Tengco, 141 SCRA 321 [1986])

The purpose of the notice:

 To give creditor chance to reflect on his previous
refusal to accept payment – since the expenses
of consignation shall be charged against him;
Tender of payment and notice of consignation
may be done in the same act (sending a letter
that, should the creditor fail to accept the
payment tendered, the debtor would consign
the amount in court. (Ramos vs. Sarao, 451 SCRA 103
[2005])
Consignation must comply with provisions on
payment:
 Payment should be made in legal tender;

 The general rule:

 An offer of a bank check for the amount due

is not a good tender and this is true even
though the check is certified or is a manager’s
check, except where no objection is made on
that ground;
 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.
(1178)
Consignation must be with proper
judicial authority.

 Consignation – by depositing the thing or sum due with

the proper judicial authority (court);

 It cannot be elsewhere (like bank) unless otherwise

prescribed by special law (Pres. Decree No. 25, on
rental);

 Consignation has a retroactive effect.

 The payment is deemed to have been made at the
time of the deposit of the thing in court or when it was
placed at the disposal of the judicial authority.
 (Ramos vs. Sarao, 451 SCRA 103 [2005].)
Notice to be given to interested parties of
consignation made.
 After consignation has been made, interested
parties must also be notified thereof;

 This requirement was held fulfilled by the service

of summons upon the defendants together with a
copy of the complaint. (Limkako vs. Limkako, 74 Phil. 313
[1944])

 The purpose of the second notice is to enable

the creditor to withdraw the thing or sum
deposited or take possession in case he accepts
the consignation.
 ART. 1259. The expenses of consignation,
when properly made, shall be charged
against the creditor. (1179)
When consignation deemed properly made:

(1) When creditor accepts the thing or sum deposited,

without objection, as payment of the obligation;

(2) When creditor questions the validity of consignation,

and the court, after hearing, declares that it has
been properly made; and

(3) When creditor neither accepts nor questions the

validity of consignation, and the court, after
hearing, orders the cancellation of the obligation.
 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. (1180)
Withdrawal by debtor of thing or sum
deposited.

While it is incumbent upon the court to allow

withdrawal before acceptance by the
creditor or judicial approval of the
consignation, the depositor cannot recover
the thing or sum without an express order of
restitution.
Risk of loss of thing or sum consigned.
 Where all the requisites for a valid consignation
have been complied with, the loss of the thing or
amount consigned occurring without fault of the
debtor before the acceptance of the consignation
by the creditor or its approval by the court is for the
account of the creditor.

 The risk of loss before acceptance by the creditor or

approval by the court is mutual, because if it be
determined that there was no valid consignation,
the loss must be suffered by the debtor. (Sia vs. CA,
et. al., 92 Phil. 355 [1952])
 ART. 1261. If, the consignation having
been made, the creditor should authorize the
debtor to withdraw the same, he shall lose
every preference which he may have over
the thing. The co-debtors, guarantors and
sureties shall be released. (1181a)
Effect of withdrawal with authority
of creditor.

 Since consignation is for the benefit of the creditor,

he may authorize the debtor to withdraw the
deposit after he has accepted the same or after the
court has issued an order cancelling the obligation;

 As far as debtor and creditor are concerned, their

relations will remain as they were before the
acceptance or cancellation.
D is indebted to C in the sum of P10,000 with G as the
guarantor. On the due date of the obligation, D
offered payment but C refused to accept the same.
So, D made a consignation. Subsequently, D withdrew
the deposit after securing the consent of C.

Under Article 1261, C shall lose whatever preference

he may have over the amount and G, the guarantor,
shall be released.