EXTINGUISHMENT

OF OBLIGATIONS
RFBT 1 (LAWS ON OBLIGATIONS AND CONTRACTS)
 EXTINGUISHMENT OF OBLIGATIONS
ART. 1231 - Obligations are extinguished:
1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debt;
4. By the confusion or merger of the right of creditor
and debtor;
5. By compensation; and
6. By novation.
 EXTINGUISHMENT OF OBLIGATIONS
ART. 1231 - Other mode of extinguishment of
Obligations:
1. Annulment;
2. Rescission;
3. Fulfillment of Resolutory Condition; and
4. Prescription.
 EXTINGUISHMENT OF OBLIGATIONS
Other causes of extinguishment of obligations:
1. Death of a party in case the obligation is a
personal one;
2. Mutual desistance or withdrawal;
3. Arrival of the resolutory period;
4. Compromise;
5. Impossibility of Fulfillment; and
6. Happening of a fortuitous event.
 PAYMENT OR PERFORMANCE
ART. 1232 – Payment means not only the
delivery of money but also the performance, in
any other manner, of an obligation.

Note: It covers not only the delivery of money but

also the giving of a thing, the doing of an act, or
not doing of an act.
 PAYMENT OR PERFORMANCE
Characteristics of Payment:
1. Integrity – The payment of the obligation
must be completely made.
2. Identity – The payment of the obligation
must consist in the performance of the very
thing due.
3. Indivisibility – The payment of the
obligation must be in its entirety.
 PAYMENT OR PERFORMANCE
INTEGRITY:
GR: Payment or performance must be complete.
Exception:
1. Substantial performance performed in good
faith;
2. When the oblige accepts the performance, knowing
its incompleteness or irregularity and without
expressing any protest or objection. (Estoppel)
3. Debt is partly liquidated and partly unliquidated,
but the liquidated part of the debt must be paid in
full.
 PAYMENT OR PERFORMANCE
INTEGRITY:
Substantial Performance Doctrine:
It provides the rule that if a good faith
attempt 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.
 PAYMENT OR PERFORMANCE
IDENTITY:
GR: The thing paid must be the very thing due
and cannot be another thing even if of the same
or more quality and value.
Exception:
1. Dation in payment;
2. Novation of the obligation; and
3. Obligation is facultative.
 PAYMENT OR PERFORMANCE
IDENTITY:

NOTE: In an obligation to do or not to do, an act

or forbearance cannot be substituted by another
act or forbearance against the obligee’s will.
 PAYMENT OR PERFORMANCE
INDIVISIBILITY:
GR: Debtor cannot be compelled by the creditor to
perform obligation in parts and neither can the debtor
compel the creditor to accept obligation in parts.
Exception:
1. When partial performance has been agreed upon;
2. Part of the obligation is liquidated and part is
unliquidated; or
3. To require the debtor to perform in full is
impractical.
 PAYMENT OR PERFORMANCE
INDIVISIBILITY:

NOTE: Acceptance by a creditor of a partial

payment NOT an abandonment of its demand
for full payment.
 PAYMENT OR PERFORMANCE
REQUISITES OF A VALID PAYMENT:
1. The person who pays the debt must be the
debtor;
2. The person to whom the payment is made must
be the creditor;
3. The thing to be paid or to be delivered must be
the precise thing or the thing required to be
delivered by the creditor;
4. The manner (if expressly agreed upon), time,
and place of payment, etc.; and
5. Acceptance by the creditor.
 PAYMENT OR PERFORMANCE
Person who pays:
1. Debtor himself;
2. His/her heirs and assigns;
3. His agents and representatives; or
4. Third persons who have a material interest
in the fulfillment of the obligation.
 PAYMENT OR PERFORMANCE
PAYMENT MADE BY THIRD PERSONS:
GR: The creditor is not bound to accept
payment or performance by a third person.
Exception:
1. When made by a third person who has
interest in the fulfillment of the obligation;
and
2. Contrary stipulation.
 PAYMENT OR PERFORMANCE
Rights of a third person who made payment:
1. If the payment was made with knowledge and
consent of debtor:
a. Can recover the entire amount paid
(absolute reimbursement); or
b. Can be subrogated to all the rights of the
creditor.
2. If the payment was made without the knowledge
or against the will of the debtor – Can recover only
insofar as payment has been beneficial to the
debtor (right of conditional reimbursement).
 PAYMENT OR PERFORMANCE
Rights of a third person who made payment:

Note: Payment made by a third person who

does not intend to be reimbursed by the debtor
is deemed to be a donation, which requires the
debtor’s consent. But the payment is in any
case valid as to the creditor who has accepted
it.
 PAYMENT OR PERFORMANCE
Person to whom payment is made:
Persons entitled to receive the payment:
1. The person in whose favor the obligation
has been constituted;
2. His successor in interest; or
3. Any person authorized to receive it.
 PAYMENT OR PERFORMANCE
Payment to an unauthorized person
GR: Payment to an unauthorized person is not a
valid payment.
Exceptions:
1. Payment to an incapacitated person if:
a. He kept the thing delivered; or
b. It has been beneficial to him.
2. Payment to a third person insofar as it
redounded to the benefit of the creditor; and
 PAYMENT OR PERFORMANCE
Payment to an unauthorized person
Exceptions:
Benefit to the creditor need not be proved:
a. If after the payment, the third person acquires
the creditor’s Rights;
b. If the creditor ratifies the payment to the third
person; or
c. If the creditor’s conduct, the debtor has been led
to believe that the third person had authority to
receive the payment.
3. Payment in good faith to the possessor of credit.
 PAYMENT OR PERFORMANCE
FORM OF PAYMENT:
1. Payment in cash – All monetary obligations shall be
settled in Philippine Currency. However, the parties
may agree that the obligation be settled in another
currency at the time of payment.
2. Payment in check or other negotiable instrument –
not considered payment, they are not considered
legal tender and may be refused by the creditor
except when:
a. the document has been encashed; or
b. It has been empaired through the fault of the
creditor.
 PAYMENT OR PERFORMANCE
CONCEPT OF LEGAL TENDER:
Legal Tender- means such currency which in a
given jurisdiction can be used for the payment
of debts, public and private, and which cannot
be refused by the creditor. (Notes and Coins
issued by the BSP)
 PAYMENT OR PERFORMANCE
LEGAL TENDER AS TO COINS:
 PAYMENT OR PERFORMANCE
CONCEPT OF EXTRAORDINARY INFLATION
OR DEFLATION:
Extraordinary inflation exists when there is
a decrease or increase in the purchasing power
of the Philippine currency which is unusual or
beyond common fluctuation in the value of said
currency, and such decrease or increase could
not have been reasonably foreseen or was
manifestly beyond contemplation of the parties
at the time of establishment of the obligation.
 PAYMENT OR PERFORMANCE
CONCEPT OF EXTRAORDINARY INFLATION
OR DEFLATION:
GR: The value of the currency at the time of the
establishment of the obligation shall be the
basis of payment.
Exception:
1. Agreement to the contrary. (Revaluation of
the credit)
 PAYMENT OR PERFORMANCE
Requisites for Revaluation:
1. That there was an official declaration of
extra-ordinary inflation or deflation from
the BSP;
2. That the obligation was contractual in
nature; and
3. That the parties expressly agreed to
consider the effects of the extraordinary
inflation or deflation.
 PAYMENT OR PERFORMANCE
Place of Payment:
GR: Payment must be made in the place designated
in the obligation.
Exception: If there is no express designation or
stipulation in the obligation:
1. At the place where the thing might be at the
time the obligation was constituted – If the
obligation is to deliver a determinate thing;
2. At the domicile of the debtor – In any other
case.
 PAYMENT OR PERFORMANCE
Special Forms of Payment
1. Dation in Payment;
2. Application of Payment;
3. Payment by Cession;
4. Tender of Payment;
5. Consignation.
 PAYMENT OR PERFORMANCE
1. Dation in Payment (dacion en pago)
The delivery and transmission of
ownership of a thing by the debtor to the
creditor as an accepted equivalent of the
performance of the obligation. The property
given may consist not only of a thing but also of
a real right.
NOTE: The undertaking partakes of the nature of
sale.
 PAYMENT OR PERFORMANCE
Requisites for Dacion en Pago:
1. There must be a performance of the prestation in
lieu of payment, which may consist in the delivery
of a corporeal thing or a real right or a credit
against the third person;
2. There must be some difference between the
prestation due and that which is given in
substitution; and
3. There must be an agreement between the creditor
and debtor that the obligation is immediately
extinguished by reason of the performance of a
prestation, different from that due.
 PAYMENT OR PERFORMANCE
2. APPLICATION OF PAYMENT
It is the 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.
 PAYMENT OR PERFORMANCE
REQUISITES OF APPLICATION OF PAYMENT:
1. There is only one debtor and creditor;
2. The debtor owes the creditor two or more debts;
3. Debts are of the same kind or identical nature;
4. All debts are due and demandable, Except:
a. When there is mutual agreement between the
parties.
b. The application is made by the party for
whose benefit the term has been constituted.
5. The payment made is not sufficient to cover all
obligations.
 PAYMENT OR PERFORMANCE
Right of the Debtor in the Application of
Payments:
GR: The law grants the debtor a preferential
right to choose the debt to which his payment
is to be applied. But the right of the debtor is
not absolute; he cannot impair the rights
granted by law to the creditor.
 PAYMENT OR PERFORMANCE
Right of the Debtor in the Application of
Payments:
Exception: Debtor’s failure to ascertain which
debt his payment is to be applied – The right of
the debtor to choose to which debt his payment
will be applied against may be transferred to
the creditor.
 PAYMENT OR PERFORMANCE
Limitation upon right to apply payment.
If the debt produces interest, payment of
the principal shall not be deemed to have been
made until the interest has been covered.

NOTE: This applies only in the absence of a

verbal or written agreement to the contrary.
 PAYMENT OR PERFORMANCE
Legal Application of Payment:

If both the creditor and debtor failed to

exercise the right of application of payment, the
legal application of payment will now govern.
 PAYMENT OR PERFORMANCE
Rules on legal application of payment:
The payment should be applied to the more onerous debts.
1. When a person is bound as principal in one obligation
and as surety in another, the former is more onerous.
2. When there are various debts, the oldest ones are more
burdensome.
3. Where one bears interest and the other does not, even if
the latter is the oldest obligation, the former is
considered more onerous.
4. Where there is an encumbrance, the debt with a
guaranty is more onerous than that without security.
 PAYMENT OR PERFORMANCE
Rules on legal application of payment:
The payment should be applied to the more onerous debts.
5. With respect to indemnity for damages, the debt which
is subject to the general rule on damages is less
burdensome than that in which there is a penal clause.
6. The liquidated debt is more burdensome than the
unliquidated one.
7. An obligation in which the debtor is in default is more
onerous than one in which he is not.

NOTE: The payment shall be applied proportionately if it

happens that the debt is of the same nature and burden.
 PAYMENT OR PERFORMANCE
EFFECT IF CREDITOR REFUSES THE
APPLICATION OF PAYMENT:
If the debtor makes a proper application
of payment, but the creditor refuses to accept
it because he wants to apply it to another
debt, such creditor will in cure in delay.
 PAYMENT OR PERFORMANCE
3. PAYMENT BY CESSION
Assignment or Cession is the
abandonment of the universality of the
property of the debtor for the benefit of his
creditors in order that such property may be
applied to the payment of the credits.
 PAYMENT OR PERFORMANCE
REQUISITES FOR PAYMENT BY CESSION
1. Plurality of debts (two or more creditors);
2. Partial or relative insolvency of the debtor;
and
3. Acceptance of the cession by the creditors.
 PAYMENT OR PERFORMANCE
DATION IN PAYMENT VS. PAYMENT BY CESSION
DATION IN PAYMENT PAYMENT BY CESSION
Number of Creditors
Maybe one creditor. Plurality of creditors.
Financial Condition of the Debtor
Not necessarily in state of financial Debtor must be partially or relatively
difficulty. insolvent.
Object
Thing delivered is considered as the Universality of property of debtor is
equivalent of performance. what is ceded.
 PAYMENT OR PERFORMANCE
DATION IN PAYMENT VS. PAYMENT BY CESSION
DATION IN PAYMENT PAYMENT BY CESSION
Extent of Extinguishment
Payment extinguishes obligation to the Merely releases debtor for net
extent of the value of the thing proceeds of things ceded or assigned,
delivered as agreed upon, proved, or unless there is contrary intention.
implied from the conduct of the
creditor.
Ownership
Ownership is transferred to Creditor Ownership is not transferred.
upon delivery.
 PAYMENT OR PERFORMANCE
DATION IN PAYMENT VS. PAYMENT BY CESSION
DATION IN PAYMENT PAYMENT BY CESSION
Novation
An act of novation. Not an act of novation.
Presumption of Insolvency
Does not presuppose insolvency. Presupposes insolvency.