Supplemental Notes

Law on Obligations and Contracts

Extinguishment of Obligations

1. Obligations are extinguished:

a. By payment or performance;
b. By the loss of the thing due;
c. By the condonation or remission of the debt;
d. By the confusion or merger of the rights of creditor and debtor;
e. By compensation;
f. 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

2. Payment - does not only mean delivery of money but also the performance, in any
other manner, of an obligation.

3. As a 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.

Exceptions:
a. 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.
b. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. As a general rule: Payment to a third person is not valid.

Exceptions: When the payment to a third person redounded to the benefit of the
creditor.

9. 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.

Legal Tender in Philippine – refers to the currency which the creditor cannot refuse
to accept as payment.

Atty Kid Page 1 of 5

 a. 1 centavo, 5 centavos, 10 centavos, 25 centavos – Up to P100 only.
b. P1, P5, P10 – Up to P1,000 only.
c. P20, P50, P100, P200, P500, P1,000 – Unlimited legal tender power.

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.

10. Place of payment of obligation

a. Place designated in the obligation.
b. In the absence of agreement, delivery shall be made wherever the thing might
be at the moment the obligation was constituted or perfected in case of
obligation to deliver a determinate thing.
c. In the absence of agreement, delivery shall be made at the domicile of debtor
in case of obligation to deliver a generic thing.

11. Special Forms of Payment

a. Dation in payment - whereby property is alienated to the creditor in satisfaction

of a debt in money, shall be governed by the law of sales

b. Application of payment (Not really a special form of payment) - designation of

the payment made by the debtor who has several obligations of the same kind
in favor of the creditor to whom payment is made. The right of application of
payment belongs to the debtor.

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.

When the payment cannot be applied in accordance with the preceding rules,
or if application can not 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

If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered.

c. Payment by cession - 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

d. Tender of payment and consignation -

a. Tender of payment - manifestation made by the debtor to the creditor of his

willingness to comply with his obligation.

b. Consignation – deposit of the thing or money due to the proper judicial

authorities.

Essential requisites of valid consignation as a special mode of payment:

a. The debt must be due.

b. The consignation was made because of some legal cause provided by law.

Atty Kid Page 2 of 5

 c. Previous notice of the consignation has been given to the persons interested
in the performance of the obligation. (1st notice of the intent to consign)
d. The amount or thing was placed at the disposal of the court.
e. After the consignation, the persons interested were notified thereof. (2nd
notice of actual consignation)

12. Dation in payment vs. payment by cession

a. Dation in payment transfers the ownership over the thing alienated to the
creditor, while in payment by cession, transfers only the right to sell the
properties.
b. Dation in payment totally extinguish the obligation, while in payment by
cession only extinguishes the credits to the extent of the amount realized from
the properties assigned.

c. Dation in payment involves only some specific thing, payment by cession

involves all the properties of the debtor.

d. Dation in payment, involves one creditor, while in payment by cession, there

are various creditors.

13. Ifthe thing to be delivered is a determinate thing and the same is lost through a
fortuitous event – the obligation is extinguished.

If the thing to be delivered is an indeterminate thing and the same is lost through
a fortuitous event – the obligation is not extinguished.

14. Condonation or remission of the debt – mode of extinguishing obligation by which

the creditor renounces the enforcement of the obligation. It is essentially
gratuitous and requires acceptance by the debtor.

The renunciation of the principal debt shall extinguish the accessory obligations.

The renunciation of the accessory obligation shall not extinguish the principal
debt.

15. Confusion or merger is a mode of extinguishing obligation which takes place when
there is meeting in one person of the qualities of creditor and debtor with respect
to the same obligation.

Requisites:

a. It must take place between the creditor and the principal debtor.
b. The very same obligation must be involved
c. The confusion or merger must be total or as regards the entire obligation.

Merger which takes place in the person of the principal debtor or creditor benefits
the guarantor.

Merger which takes place in the person of the guarantor does not extinguish the
principal obligation.

16. Compensation - takes place when two persons, in their own right, are creditors
and debtors of each other.

Kinds of Compensation

a. Legal compensation is a compensation which takes place by operation of law

because the requisites provided by law are present.
Atty Kid Page 3 of 5
 b. Facultative compensation is a compensation which can be claimed by one of
the parties who, however, has the right to object to it

c. Conventional compensation is a compensation wherein the parties agree to

compensate their mutual obligations even if some requisite is lacking.

d. Judicial compensation is a compensation decreed by the court in a case where

there is a counterclaim.

Requisites of legal compensation or compensation by operation of law

a. Each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other.

b. Both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and of the same quality if the latter has been stated.

c. Both debts must be due, liquidated, and demandable.

d. That over neither of them there be any retention or controversy, commenced

by third persons and communicated in due time to the debtor.

17. Novation - substitution or change of the obligation by a subsequent one which

extinguishes or modifies the first obligation.

Kinds of Novation of Obligation

a. Changing their object or principal conditions (real novation)

b. Substituting the persons of the debtor (personal novation)
c. Subrogating a third person in the rights of the creditor (Legal Subrogation or
Conventional Subrogation)

Requisites of Novation of Obligation

a. There must be a previous valid obligation.

b. There must be agreement of all parties to the new contract.
c. There must be extinguishment of the old contract.
d. The new obligation must be valid.

18. Inorder that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms.

There is implied novation if the old and new obligations are on every point
incompatible with each other.

When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third person
who did not give their consent.

If the new obligation is void, the original obligation was not extinguished, unless
the parties intended that the former should not subsist in any event.

The novation is void if the original obligation was void, except when annulment
may be claimed only by the debtor, or when ratification validates acts which are
voidable.

Atty Kid Page 4 of 5

 If the original obligation was subject to a suspensive condition or resolutory
condition, the new obligation shall be under the same condition, unless it is
otherwise stipulated
19. Substitution of person of Debtor

a. Expromission, the initiative for the change does not emanate from the original
debtor and may be made even without his knowledge, since it consists in a
third person assuming the obligation and it logically requires the consent of
the third person (new debtor) and the creditor.

b. Delegacion, the original debtor (delegante) offers and the creditor (delegatario)
accepts a third person (delegado) (new debtor) who consents to the
substitution, so that the consent of the three parties is necessary.

If the substitution is without the knowledge or against the will of the debtor, the
new debtor's insolvency or non-fulfillment of the obligations shall not give rise to
any liability on the part of the original debtor.

The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the
original obligor, except when said insolvency was already existing and of public
knowledge, or known to the debtor, when he delegated his debt.

Substitution of Creditor

a. Conventional subrogation refers to substitution of creditor by agreement of

original parties and the new creditor.
b. Legal subrogation is the substitution of new creditor in exceptional cases
provided by law.

It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge;
(2) When a third 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.

Atty Kid Page 5 of 5