Payment or Performance

Part 1

Coverage of Discussion:
•Meaning of Payment
•How must the payment be made?
•Who must make the payment?
•Payment by a third person
 Extinguishment of Obligations
 Causes of Extinguishment of
obligations:
1. Payment or performance Today

2. Loss of the thing due

3. Condonation or remission of the debt
4. Confusion or merger of rights of creditor
and debtor
5. Compensation
6. Novation
Later
7. Annulment
8. Rescission
9. Fulfillment of resolutory condition
10. Prescription
11. Other causes
 Payment or Performance
Payment – means not only the delivery of
money but also the performance, in any
other manner, of an obligation.
Thus, if the obligation is to paint a
portrait, payment consists in the
performance of the service. Or if the
obligation is to deliver a certain ring,
payment consists in the delivery of the
thing.
How must the payment be made?
There must be delivery of the thing or rendition of the
service that was contemplated.
◦ The debtor of a thing cannot compel the creditor to accept a
different one although the latter may be of the same value as, or
more valuable than that which is due,
 D is obliged to give C a Seiko wristwatch. D cannot compel C to accept
a Rolex wristwatch even if the latter is more valuable than a Seiko,
◦ In obligations to do or not to do, an act or forbearance cannot be
substituted by another act for forbearance against the obligee’s
will.
(1) D is obliged to paint C’s car. He cannot substitute it with an obligation
to paint C’s house. (2) D borrowed 10,000 from C. C gave D one year to
pay provided D must not enter a casino before he has paid the debt. D
cannot ask C that the “obligation not to enter a casino” be substituted
with “no to drink and smoke” during the term of the loan.
◦ In obligations to give a generic thing whose
quality and circumstances have not been
stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver
a thing of inferior quality. The purpose of the
obligation and other circumstances shall be
taken into consideration.
 D is obliged to give C 50 yards of textile. C cannot
compel D to deliver to C a textile that shrinks
substantially at first wash. If C happens to be
engaged in the sale of student uniforms, then D may
give C the kind of textile fit for that purpose.
◦ If the obligation is a monetary obligation, the
payment must be in legal tender
 Legal tender – is the money or currency which the debtor
may compel his creditor to accept in payment of his debt
(whether public or private)
 Medium of payment – payments of debts in money must be
made in the currency which is legal tender in the
Philippines. However, the parties may stipulate that the
payment may be made in currency other than Philippine
legal tender at the time of payment.
◦ Under Section 52 of Republic Act No. 7653 as adjusted by
Monetary Board Resolution No. 862 dated July 6, 2006,
the following are legal tender in the Philippines:
 One thousand pesos (1,000) for denominations of 1-Piso,
5-Piso and 10-Piso coins.
 One hundred pesos (100) for denominations of 1-sentimo,
5-sentimo, 10-sentimo, and 25-sentimo coins.
 All bills are legal tender up to any amount.
 Inflation and deflation, concept; value to be used when payment
is made
 Inflation- is the increase in the currency in circulation or a
marked expansion of credit, resulting in a fall in currency
value, and a sharp rise in prices. It is the opposite of deflation,
or the sharp sudden decrease of money or credit or both
without a corresponding decrease in business transactions.
 In case an extraordinary inflation or deflation of the currency
should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
◦ Example: D borrowed 1,000,000 from C payable at the end of 10
years.
 Suppose that before maturity of the loan, an extraordinary inflation supervened
causing the value of the debt to fall to 500,000 on the date of maturity, how
mush must D pay C at maturity?
 Suppose that before maturity of the loan, an extraordinary deflation supervened
causing the value of the debt to rise to 4,000,000 on the maturity date of the
loan, how much must D pay C at maturity?
 When extraordinary inflation (or deflation) exists
◦ In order that the effects of extraordinary inflation (or deflation)
are to be applied, there should an official pronouncement or
declaration by competent authorities of the existence of
extraordinary inflation (or deflation) during a given period.
 Delivery of mercantile documents
◦ 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.
 Check not legal tender
◦ A check is not legal tender and, therefore, cannot constitute a
valid tender of payment. since a negotiable instrument is only
a substitute for money, and not money, the delivery of such an
instrument does not by itself, operate as payment. The
obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized.
The payment or performance must be complete. The
following are the exceptions:
◦ If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been strict and
complete fulfillment, less damages suffered by the obligee.
 S agreed to deliver 20 fire extinguishers to B. After S has delivered 18
fire extinguishers to B, there are no more fire extinguishers available.
He wants to complete the delivery but there is no more stock available.
S can recover the cost of 20 fire extinguishers less damages suffered by
B. (Note: The damages suffered by B includes the cost of the two fire
extinguishers not delivered.
◦ 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.
 D agreed to repair the car of C and to paint it red. D repaired the car but
painted it maroon. C accepted the car without any objection. D’s
obligation is fully complied with notwithstanding the irregularity of the
performance.
When partial payments may be made
The creditor cannot be complied to receive, and the
debtor cannot be compelled to make, partial
payments except:
◦ When there is an agreement to that effect.
 However, the payment must still be made in full at some future
time in accordance with the agreement, to extinguish the
obligation.
◦ When the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting for
the liquidation of the latter.
 The unliquidated part, once it is finally determined, must also be
paid, to extinguish the obligation.
 Who must make the payment?
The free disposal of the thing due.
Debtor
◦ Free disposal of the thing due means that the property delivered should not be subject to any claim
by, or encumbrances in favor of, third persons.
The capacity to alienate the thing
◦ Effect on payment in obligations to give if debtor does not have free disposal and
capacity to alienate
 The payment shall not be valid except in cases provided by law. If the payment is
made, the guardian of the incapacitated person, or the incapacitated person himself
when he regains or attains his capacity, may seek the annulment of the payment. In
case the debtor does not have the free disposal of the thing due, the injured party may
seek to recover the payment.
◦ Payment made by the debtor after court has ordered him to retain debt
 Payment made to the creditor by the debtor after the debtor has been judicially ordered
to retain the debt shall not be valid. The court order is known as garnishment.
 D owes C 50,000. On due date, C demands payment but D cannot pay. C, however,
learns that D has a receivable from X so he files a court action against D and asks the
court order X not to make any payment to D. The court issues the order. If X pays D,
the payment will not be valid because there is an order of retention from the court.
Should the court favor C in its judgment in the case filed by C against D, X can be
required to pay again, this time to C.
Payment by third person
Creditor not bound to accept payment by a
third person
◦ The creditor is not bound to accept payment or
performance by a third person except in the
following cases:
 When there is a stipulation to that effect
 When the third person has an interest in the fulfillment
of the obligation such as guarantor or co-debtor
 D borrowed 20,000 from C with G as a guarantor. G, as a
person who has an interest in the fulfillment of the obligation,
may compel C to accept the payment from him.
Rights of a third person who makes the payment
◦ Payment with knowledge and consent of the debtor
 He can recover what he has paid
 He is entitled to be subrogated in the rights of the creditor such as
those arising from mortgage, guaranty or penalty.
 D owes C 10,000. The obligation is secured by a mortgage of D’s lot.
T, a third person, pays C the amount of 10,000 with the consent of D.
T can recover the amount of 10,000 from D. If D cannot pay, T, having
been subrogated in the rights of C, can foreclose the mortgage.
◦ Payment without the knowledge or against the will of the
debtor
 He can recover only insofar as the payment has been beneficial to
the debtor. He is not entitled to subrogation.
 D borrowed 20,000 from C with G as guarantor. D pays C 2,000. T, a
third person, pays C 20,000 believing that D still owed C 20,000. The
payment is without the consent of D. In this case, T can only recover
18,000 from D, the amount that was beneficial to D. If D cannot pay, T
cannot go after G because he is not entitled to be subrogated in the
rights of C.
Payment by a third person who does not
want to be reimbursed
◦ The payment shall be deemed to be a donation
which requires the debtor’s consent.
◦ If the debtor does not consent, the payment
shall nevertheless be valid to the creditor who
has accepted it. In such a case, the third person
can only recover insofar as the payment has
been beneficial to the debtor; he is also not
entitled to subrogation.