IX.

EXTINGUISHMENT
Atty. Eduard Dorsey R. Caratao
Q: What are the modes of extinguishment
of an obligation?
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of debt
4. Confusion or merger
5. Compensation
6. Novation
7. Annulment
8. Rescission
9. Fulfillment of a resolutory condition
10. Prescription(Art. 1231, NCC)
• Note: The enumeration is not exclusive.
Eduard Dorsey R. Caratao
 MUTUAL DESISTANCE
Q: If the parties mutually disagree as regards
the obligation, may it be cancelled?
• A: Yes. That is in the nature of “mutual
desistance” – which is a mode of extinguishing
obligations. It is a concept that derives from
the principle that since mutual agreement can
create a contract, mutual disagreement by the
parties can cause its extinguishment. (Saura v.
Development Bank of the Phils., G.R. No. 24968, Apr. 27, 1972)

Eduard Dorsey R. Caratao

 A. PAYMENT OR PERFORMANCE
• Q: Is the term “payment,” as used in the Code,
limited to appreciable sums of money?
• A:No. Payment may consist not only in the delivery
of money but also the giving of a thing (other than
money), the doing of an act, or not doing of an act.

• Q: What is tender of payment?

• A: Tender of payment is the definitive act of
offering the creditor what is due him or her,
together with the demand that the creditor accept
the same.
 Note: PAYMENT OR PERFORMANCE

• There must be a fusion of intent,

ability and capability to make good
such offer, which must be absolute
and must cover the amount due.
(FEBTC v. Diaz Realty Inc., G.R. No. 138588,
Aug. 23, 2001)

Eduard Dorsey R. Caratao

 Q: Is the creditor bound to accept payment or
performance by a third person?
General Rule: No, the creditor is not.
• XPNs:
• When made by a third person who has
interest in the fulfillment of the obligation
• Contrary stipulation

Eduard Dorsey R. Caratao

 Q: What are the rights of a third person
who paid the debt?
1. With knowledge and consent of the debtor:
a. can recover entire amount paid
(absolute reimbursement )
b. can be subrogated to all rights of the
creditor
2. Without knowledge or against the will of the
debtor – can recover only insofar as payment has
been beneficial to the debtor (right of conditional
reimbursement )

Eduard Dorsey R. Caratao

 Note: Payment
• 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. (Art. 1238, NCC)

Eduard Dorsey R. Caratao

Q: State the requisites of a valid payment.

• A: CCPAD
Capacity of the payor
Capacity of the payee
Propriety of the time, place, manner of payment
Acceptance by the creditor
Delivery of the full amount or the full
performance of the prestation

Eduard Dorsey R. Caratao

Q: What are the characteristics of
payment?

Integrity;
Identity; and
Indivisibility.

Eduard Dorsey R. Caratao

 INTEGRITY
Q: How should performance be made?
• GR: Performance should always be in FULL.
• XPNs:
1. Substantial performance performed in good
faith
2. Creditor accepts the performance knowing its
incompleteness or irregularity without protest
or objection
3. Debt is partly liquidated and partly
unliquidated, but the liquidated part of the
debt must be paid in full
Eduard Dorsey R. Caratao
 IDENTITY
Q: What should be given as payment of an
obligation?
• GR: Thing paid must be the very thing due and
cannot be another thing even if of same
quality and value.
• XPNs:
1. Dation in payment
2. Novation of the obligation
3. Obligation is facultative

Eduard Dorsey R. Caratao

 INDIVISIBILITY
Q: Can the debtor or creditor be compelled to
perform/accept partial prestations?
• 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.
• XPNs: When:
1. partial performance has been agreed upon
2. part of the obligation is liquidated and part is
unliquidated
3. to require the debtor to perform in full is
impractical
Eduard Dorsey R. Caratao
Q: Is the acceptance by a creditor of a partial payment
an abandonment of its demand for full payment?

• A: No. When creditors receive partial payment,

they are not ipso facto deemed to have
abandoned their prior demand for full payment.
• To imply that creditors accept partial payment
as complete performance of their obligation,
their acceptance must be made under
circumstances that indicate their intention to
consider the performance complete and to
renounce their claim arising from the defect.

Eduard Dorsey R. Caratao

 Note:
• While Article 1248 of the Civil Code states that
creditors cannot be compelled to accept
partial payments, it does not prohibit them
from accepting such payments. (Selegna
Management and Development Corp. v. UCPB,
G.R. No. 165662, May 30, 2006)

Eduard Dorsey R. Caratao

Q: To whom payment should be made?

• A: 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.
(Art. 1240)

Eduard Dorsey R. Caratao

Q: Is payment to an unauthorized person a
valid payment?
• GR: Payment to an unauthorized person is not a
valid payment.
• XPNs:
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

3. Payment in good faith to the possessor of credit

Eduard Dorsey R. Caratao
 SPECIAL FORMS OF PAYMENT
Q: What are the special forms of
payment?
DATION IN PAGO
APPLICATION OF PAYMENT
PAYMENT BY CESSION
TENDER OF PAYMENT
CONSIGNATION

Eduard Dorsey R. Caratao

CONCEPT

Eduard Dorsey R. Caratao

 Dation in Payment
• Alienation by the DR of a particular property
in favor of his CR, with the latter’s consent, for
the satisfaction of the former’s money
obligation to the latter, with the effect of
extinguishing the said money obligation
• (Pineda, Obligations and Contracts, 2000 ed, p. 212)
 Application of Payment
• Designation of the particular debt being
paid by the DR who has two or more
debts or obligations of the same kind in
favor of the same CR to whom the
payment is made (Pineda, Obligations and Contracts,
2000 ed, p. 229)
Jan 3
Jan 1
Php5,000 Jan 11
Php5,000 Php3,000

Eduard Dorsey R. Caratao

 Payment by Cession
• DR cedes his property to his CRs so the latter
may sell the same and the proceeds realized
applied to the debts of the DR
 Tender of Payment
• Voluntary act of the DR whereby he offers to
the CR for acceptance the immediate
performance of the former’s obligation to the
latter
 Consignation
• Act of depositing the object of the
obligation with the court or competent
authority after the CR has unjustifiably
refused to accept the same or is not in a
position to accept it due to certain
reasons or circumstances
 1. DATION IN PAYMENT
Q: What does dation in payment or dacion en
pago entail?
• A: Dacion en pago is 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.
(Tolentino, Civil Code of the Philippines, Vol. IV,
2002 ed, p. 293)
 Note: DATION IN PAYMENT
• The consent of the creditor is essential.
• It is a special mode of payment where the debtor
offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt.
• The undertaking partakes of the nature of sale,
that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be
charged against the debtor’s debt.
 Note: DATION IN PAYMENT
• As such, the essential elements of a contract of sale,
namely, consent, object certain, and cause or
consideration must be present.
• In its modern concept, what actually takes place in dacion
en pago is an objective novation of the obligation where
the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object
of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an
essential prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or obligation.
 Note: DATION IN PAYMENT
• Q: Lopez obtained a loan in the amount of
P20,000.00 from the Prudential Bank. He
executed a surety bond in which he, as principal,
and PHILAMGEN as surety, bound themselves
jointly and severally for the payment of the sum.
He also executed a deed of assignment of 4,000
shares of the Baguio Military Institution in favor
of PHILAMGEN. Is the stock assignment made by
Lopez dation in payment or pledge?
 Note: DATION IN PAYMENT
• A: The stock assignment constitutes a pledge and not a dacion en
pago. Dation in payment is 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. Lopez’s loan has
not yet matured when he "alienated" his 4,000 shares of stock to
Philamgen. Lopez's obligation would arise only when he would
default in the payment of the principal obligation which is the
loan and Philamgen had to pay for it. Since it is contrary to the
nature and concept of dation in payment, the same could not
have been constituted when the stock assignment was executed.
In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge, the
latter being the lesser transmission of rights and interests. (Lopez
v. CA,G.R. No. L‐33157, June 29, 1982)
 Note: DATION IN PAYMENT
• Q: Cebu Asiancars Inc., with the conformity of the lessor,
used the leased premises as a collateral to secure payment
of a loan which Asiancars may obtain from any bank,
provided that the proceeds of the loan shall be used solely
for the construction of a building which, upon the
termination of the lease or the voluntary surrender of the
leased premises before the expiration of the contract, shall
automatically become the property of the lessor. Meeting
financial difficulties and incurring an outstanding balance
on the loan, Asiancars conveyed ownership of the building
on the leased premises to MBTC, by way of "dacion en
pago."Is the dacion en pago by Asiancars in favor of MBTC
valid?
 Note: DATION IN PAYMENT
• A: Yes. MBTC was a purchaser in good faith. MBTC had no
knowledge of the stipulation in the lease contract.
Although the same lease was registered and duly
annotated, MBTC was charged with constructive
knowledge only of the fact of lease of the land and not of
the specific provision stipulating transfer of ownership of
the building to the Jaymes upon termination of the lease.
While the alienation was in violation of the stipulation in
the lease contract between the Jaymes and Asiancars,
MBTC’s own rights could not be prejudiced by Asiancars’
actions unknown to MBTC. Thus, the transfer of the
building in favor of MBTC was valid and binding. (Jayme v.
CA, G.R. No. 128669, Oct. 4, 2002)
 FORM OF PAYMENT
Q: What are the rules as regards
payment in monetary obligations?

1. Payment in cash
2. Payment in check or other
negotiable instrument
 Rules: Payment in Cash
1. Payment in cash– all monetary obligations
shall be settled in the Philippine currency which
is legal tender in the Philippines. However, the
parties may agree that the obligations or
transactions shall be settled in any other
currency at the time of payment. (Sec. 1, R.A.
8183)
– Note: R.A. 8183 amended the first paragraph of Art.
1249 of the Civil Code, but the rest of the article
remain subsisting. (Pineda, Obligations and Contracts,
2000 ed, p. 221)
 Rules: Payment in Checks/N.I.
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 cashed; or
• b. it had been impaired through the fault
of the creditor.
 PAYMENT IN CASH
• Q: Northwest Airlines, through its Japan Branch, entered
into an International Passenger Sales Agency Agreement
with CF Sharp, authorizing the latter to sell its air
transport tickets. CF Sharp failed to remit the proceeds of
the ticket sales, thus, Northwest Airlines filed a collection
suit before the Tokyo District Court which rendered
judgment ordering CF Sharp to pay 83,158,195 Yen and
damages for the delay at the rate of 6% per annum.
Unable to execute the decision in Japan, Northwest
Airlines filed a case to enforce said foreign judgment with
the RTC of Manila. What is the rate of exchange that
should be applied for the payment of the amount?
 PAYMENT IN CASH
• A: The repeal of R.A. 529 by R.A. 8183 has the effect of removing
the prohibition on the stipulation of currency other than
Philippine currency, such that obligations or transactions may
now be paid in the currency agreed upon by the parties. Just like
R.A. 529, however, the new law does not provide for the
applicable rate of exchange for the conversion of foreign
currency‐incurred obligations in their peso equivalent. It follows,
therefore, that the jurisprudence established in R.A. 529
regarding the rate of conversion remains applicable. Thus, in
Asia World Recruitment, Inc. v. National Labor Relations
Commission, the SC, applying R.A. 8183, sustained the ruling of
the NLRC that obligations in foreign currency may be discharged
in Philippine currency based on the prevailing rate at the time of
payment. It is just and fair to preserve the real value of the
 If the rate of interest is not stipulated,
what should be the rate of interest that
should apply? When should the interest
begin to run?
• A: In Eastern Shipping Lines, Inc. v. CA, it was
held that absent any stipulation, the legal rate of
interest in obligations which consists in the
payment of a sum of money is 12% per annum to
be reckoned from the time of filing of the
complaint therein until the said foreign judgment
is fully satisfied.
• (C.F. Sharp & Co., Inc. v. Northwest Airlines, Inc.,
PAYMENT BY NEGOTIABLE INSTRUMENT
• Q: Diaz & Company obtained a loan from Pacific Banking Corp which was
secured by a real estate mortgage over two parcels of land owned by the
plaintiff Diaz Realty. ABC rented an office space in the building
constructed on the properties covered by the mortgage contract. The
parties then agreed that the monthly rentals shall be paid directly to the
mortgagee for the lessor's account, either to partly or fully pay off the
aforesaid mortgage indebtedness. Thereafter, FEBTC purchased the
credit of Diaz & Company in favor of PaBC, but it was only after 2 years
that Diaz was informed about it. Diaz asked the FEBTC to make an
accounting of the monthly rental payments made by Allied Bank. Diaz
tendered to FEBTC the amount of P1,450,000.00 through an Interbank
check, in order to prevent the imposition of additional interests,
penalties and surcharges on its loan but FEBTC did not accept it as
payment, instead, Diaz was asked to deposit the amount with the
FEBTC’s Davao City Branch Office. Was there a valid tender of payment?
PAYMENT BY NEGOTIABLE INSTRUMENT

• A: Yes. True, jurisprudence holds that, in

general, a check does not constitute legal
tender, and that a creditor may validly refuse
it. It must be emphasized, however, that this
dictum does not prevent a creditor from
accepting a check as payment. In other words,
the creditor has the option and the discretion
of refusing or accepting it. (FEBTC v. Diaz
Realty Inc., G.R. No. 138588, Aug. 23, 2001)
 Q: Who has the burden of proving
payment in an action for sum of money?
• A: The party who pleads payment as
a defense has the burden of proving
that such payment has, in fact, been
made.
Q: Are receipts the only evidence that can
be presented to prove payment?
• A: No. Receipts of payment, although
not exclusive, are deemed the best
evidence of the fact of payment. (Dela
Peña and Villareal v. CA and Rural Bank of
Bolinao, Inc., G.R. No. 177828, Feb. 13, 2009)
 EXTRAORDINARY INFALTION OR
DEFLATION
Q: What is the rule in payment in case of an
extraordinary inflation or deflation?
• A: In case an extraordinary inflation or
deflation of the currency stipulated 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. (Art. 1250, NCC)
 Q: Does the exchange rate at the time of
the establishment of the obligation apply
in all cases?
• A: No. The rule that the value of the
currency at the time of the establishment
of the obligation shall be the basis of
payment finds application only when
there is an official pronouncement or
declaration of the existence of an
extraordinary inflation or deflation.
 2. APPLICATION OF PAYMENTS
Q: What does the concept of application
of payments mean?
• A: 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.
Q: What are the requisites of application of
payments?
a) One debtor and one creditor
b) Two or more debts of the same kind
c) Amount paid by the debtor must not be
sufficient to cover all debts
d) Debts are all due
e) Parties have not agreed previously on
the application
 Q: What is the governing rule in case
the debtor fails to ascertain which
debt his payment is to be applied?
• A: The choice may be transferred to the
creditor as when the debtor makes payment
and does not make application and debtor
accepts a receipt in which the application is
made. In such a case, the debtor cannot
complain of the application the creditor has
made unless there be a cause for invalidating
the contract.
 Q: If both the creditor and the debtor fail
to apply payments, what rule governs?
• A: Legal application of payment governs wherein the law makes the application.
• 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 older
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.
5) With respect to indemnity for damages, the debt which is subject to the general
rules 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. (Tolentino, Civil Code of the Philippines, Vol. IV, 2002 ed, p. 314‐315)
 Note: Application of Payments

• If the debts happen to be of same

nature and burden, the payment
shall be applied proportionately.
 3.PAYMENT BY CESSION
Q: What are the circumstances
evidencing payment by cession?
• A: Debtor abandons all of his
property for the benefit of his
creditors in order that from the
proceeds thereof, the latter may
obtain payment of credits.
 Note: PAYMENT BY CESSION
• It presupposes insolvency of the
debtor. All the debtor’s creditors
must be involved and the consent of
the latter must be obtained.
 DATION IN PAYMENT PAYMENT IN CESSION
Maybe one creditor Plurality of creditors
Not necessarily in state of financial Debtor must be partially or relatively
difficulty insolvent

Thing delivered is considered as Universality or property of debtor is

equivalent of performance what is ceded

Payment extinguishes obligation to Merely releases debtor for net

the 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 is transferred to CR upon Ownership is not transferred
delivery

An act of novation Not an act of novation

Does not presuppose insolvency Presupposes insolvency

 4. TENDER OF PAYMENT
Q: What constitutes a valid tender of payment?
• A: Voluntary act of the debtor whereby he
offers to the creditor for acceptance the
immediate performance of the former’s
obligation to the latter. (Pineda, Obligations and
Contracts, 2000 ed, p. 241)
• Tender of payment is the manifestation by
debtors of their desire to comply with or to pay
their obligation. (Sps. Benosv.Sps.Lawilao, G.R.
No. 172259, Dec. 5, 2006)
 Note: TENDER OF PAYMENT
• If the creditor refuses the tender of
payment without just cause, the
debtors are discharged from the
obligation by the consignation of the
sum due. (Sps. Benosv.Sps.Lawilao, G.R. No.
172259, Dec. 5, 2006)
 5. CONSIGNATION
Q: What is consignation?
• A: Act of depositing the object of the
obligation with the court or competent
authority after the CR has unjustifiably
refused to accept the same or is not in a
position to accept it due to certain
reasons or circumstances. (Pineda,
Obligations and Contracts, 2000 ed, p. 241)
Q: When and where is consignation made?

• A: Consignation is made by
depositing the proper amount to the
judicial authority, before whom the
tender of payment and the
announcement of the consignation
shall be proved. (Sps. Benosv.Sps.Lawilao,
G.R. No. 172259, Dec. 5, 2006)
 Note: CONSIGNATION
• Once the consignation has been duly
made, the debtor may ask the judge
to order the cancellation of the
obligation.
Q: When will consignation produce effects
of payment?
• GR: Consignation shall produce effects of payment
only if there is a valid tender of payment.
• XPNs: When: ARTIT
1. Creditor is Absent or unknown, or doesn’t appear at
place of payment
2. Creditor Refuses to issue a receipt without just cause
3. Title of the obligation has been lost
4. Creditor is Incapacitated to receive payment at the
time it is due
5. Two or more persons claim the right to collect
 Note: CONSIGNATION
• The expenses of consignation, when
properly made, shall be charged
against the creditor.
Q: What are the requisites of consignation?

• A: VP‐CPAS
a) Valid existing debt which is already due;
b) Prior valid tender except when prior tender of
payment is dispensable;
c) Creditor unjustly refuses the tender of payment;
d) Prior notice of consignation given to persons
interested in the fulfillment of the obligation;
e) Amount or thing is deposited at the disposal of
judicial authority; and
f) Subsequent notice of the fact of consignation to
persons interested in the fulfillment of the obligation.
 Q: Can the debtor withdraw the thing
deposited?
• A: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. (Art. 1260, NCC)
 Note: CONSIGNATION
• 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. (Art. 1261, NCC)
 TENDER OF PAYMENT CONSIGNATION
Nature
Antecedent of consignation or Principal or consummating act
preliminary act to for the extinguishment of the
consignation obligation
Effect
It does not by itself extinguish It extinguishes the obligation
the obligation when declared valid

Character
Extrajudicial Judicial for it requires the
filing of a complaint in court
(Pineda, Obligations and
Contracts, 2000 ed, p. 242)
 IX. EXTINGUISHMENT
• Q: In an ejectment case, X refused to vacate
the land alleging that Y had sold to him the
additional area, the payment of which would
be effected five years after the execution of a
formal deed of sale. However, the parties
failed to execute a deed of sale. During the
pendency of the action, X deposited the
payment for the addition to the lot with the
court. Is there a valid consignation?
 IX. EXTINGUISHMENT
• A: No. Under Art. 1257 of this Civil Code, consignation
is proper only in cases where an existing obligation is
due. In this case, the contracting parties agreed that
full payment of purchase price shall be due and
payable within 5 years from the execution of a formal
deed of sale. At the time Rodriguez deposited the
amount in court, no formal deed of sale had yet been
executed by the parties, and, therefore, the 5‐year
period during which the purchase price should be
paid had not commenced. In short, the purchase
price was not yet due and payable. (Heirs of San
Andresv.Rodriguez, G.R. No. 135634, May 31, 2000)
 IX. EXTINGUISHMENT
• Q: Under a pacto de retro sale, X sold to Y his lot and
the building erected thereon. They agreed that half
of the consideration shall be paid to the bank to pay
off the loan of X. After paying the first installment, Y,
instead of paying the loan to the bank, restructured
it twice. Eventually, the loan became due and
demandable. Thus, X paid the bank. On the same
day, Y also went to the bank and offered to pay the
loan, but the bank refused to accept the payment.
• Y then filed an action for consignation without
notifying X. Is there a valid consignation by Y of the
balance of the contract price?
 IX. EXTINGUISHMENT
• A: No. Y filed the petition for consignation
against the bank without notifying the X,
resulting to the former’s failure to prove the
payment of the balance of the purchase price
and consignation. In fact, even before the
filing of the consignation case, Y never notified
the X of their offer to pay.(Sps. Benosv.
Sps.Lawilao, G.R. No. 172259, Dec. 5, 2006)
 IX. EXTINGUISHMENT
• Q: Because of Ligaya’s refusal to accept several tenders
of payment and notices of consignation given by OSSA in
its desire to comply with its obligation to pay on
installments, OSSA brought a complaint for consignation
against Ligaya before the RTC. The RTC allowed OSSA,
among others, to deposit with it,by way of consignation,
all future quarterly installments without need of formal
tenders of payment and service of notices of
consignation.
• Ligaya assails the validity of the consignation on the
ground that there was no notice to her regarding OSSA's
consignation of the amounts corresponding to certain
installments. Is Ligaya correct?
 IX. EXTINGUISHMENT
• A: No. The motion and the subsequent court
order served on Ligaya in the consignation
proceedings sufficiently served as notice to
Ligaya of OSSA's willingness to pay the
quarterly installments and the consignation of
such payments with the court. For reasons of
equity, the procedural requirements of
consignation are deemed substantially
complied with in the present case (De Mesa v.
CA, G.R. Nos. 106467‐68, Oct. 19, 1999).
 B. LOSS OF THE THING DUE
Q: When is a thing considered lost?
• A: When: DOPE
1. It Disappears in such a way that its
existence is unknown;
2. It goes Out of commerce;
3. It Perishes; or
4. Its Existence is unknown or if known, it
cannot be recovered.
Q: What is the effect of loss of the
thing which is the object of the
obligation?
• Determine first the nature of the
PRESTATION
Determinate obligation to give
Generic obligation to give
An obligation to do
 Determinate obligation to give:
GenRule:The obligation is extinguished when the object of
the obligation is lost.
Exceptions: LAS‐CD‐PCG
a. Law provides otherwise
b. Nature of the obligation requires the Assumption of risk
c. Stipulation to the contrary
d. Debtor Contributed to the loss
e. Loss the of the thing occurs after the debtor incurred in
Delay
f. When debtor Promised to deliver the same thing to two
or more persons who do not have the same interest
g. When the debt of a certain and determinate thing
proceeds from a Criminal offense
h. When the obligation is Generic
 Generic obligation to give:

GenRule:
The obligation is not extinguished
because a generic thing never perishes.
XPN:
In case of generic obligations whose
object is a particular class or group
with specific or determinate qualities
(limited generic obligation)
 An obligation to do
the obligation is extinguished when
the prestation becomes legally or
physically impossible.
 Q: Differentiate legal from physical
impossibility to perform an obligation to do.

• Legal impossibility – act stipulated to

be performed is subsequently
prohibited by law.
• Physical impossibility – act stipulated
could not be physically performed by
the obligor due to reasons subsequent
to the execution of the contract. (Pineda,
Obligations and Contracts, 2000 ed, p. 261)
 Q: What is the effect of
PARTIAL LOSS?
1. Due to the fault or negligence of the debtor
– Creditor has the right to demand the
rescission of the obligation or to demand
specific performance, plus damages, in either
case.
2. Due to fortuitous event:
• a. Substantial loss – obligation is extinguished.
• b. Unsubstantial loss – the CR shall deliver the
thing promised in its impaired condition.
 Q: What is the effect when the thing is
lost in the possession of the debtor?
• GR: It is presumed that loss is due to DR’s fault.
• XPN: Presumption shall not apply in case loss is
due to earthquake, flood, storm or other
natural calamity.
• XPN to the XPN: Debtor still liable even if loss is
due to fortuitous event when:
– Debtor incurred in delay; or
– Debtor promised to deliver the thing to two or more
persons with different interests (par. 3, Art. 1165,
NCC)
Q: What does rebus sic stantibus mean?

• A: A principle in international law

which means that an agreement is
valid only if the same conditions
prevailing at time of contracting
continue to exist at the time of
performance. It is the basis of the
principle of unforeseen difficulty of
service.
 Note: rebus sic stantibus
• Note: However, this principle cannot
be applied absolutely in contractual
relations since parties are presumed
to have assumed the risk of
unfavorable developments. (Pineda,
Obligations and Contracts, 2000 ed,
p. 264)
 Q: What are the requisites in order to
relieve the debtor from his obligation, in
whole or in part, based on unforeseen
difficulty of service?
• Event or change in circumstance could not have
been foreseen at the time of the execution of the
contract;
• Such event makes the performance extremely
difficult but not impossible;
• The event must not be due to the act of any of the
parties; and
• The contract is for a future prestation. (Tolentino,
Civil Code of the Philippines, Vol. IV, 2002 ed, p. 347)
 C. CONDONATION
What is condonation?
• A: It is an act of liberality by virtue of which
the creditor, 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 the
condonation or remission refers. (Pineda,
Obligations and Contracts, 2000 ed, p. 267)
 EXPRESS CONDONATION
Q: What are the requisites of condonation?
• A: GAIDE
a) Must be Gratuitous;
b) Acceptance by the debtor;
c) Must not be Inofficious;
d) Formalities provided by law on Donations
must be complied with if condonation is
express; and
e) An Existing demandable debt.
 IMPLIED CONDONATION
• Q: What is the effect of the delivery of a private
document evidencing a credit?
• A:The delivery of a private document evidencing a
credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the
former had against the latter.
• If in order to nullify this waiver it should be claimed to
be inofficious, the debtor and his heirs may uphold it
by proving that the delivery of the document was
made in virtue of payment of the debt. (Art. 1271,
NCC)
 Note: IMPLIED CONDONATION
• Whenever the private document in which the
debt appears is found in the possession of the
debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary is
proved. (Art. 1272, NCC)
• It is presumed that the accessory obligation of
pledge has been remitted when the thing
pledged, after its delivery to the creditor, is found
in the possession of the debtor, or of a third
person who owns the thing. (Art. 1274, NCC)
 Q: What is the effect of inofficious
condonation?
• A: It may be totally revoked or
reduced depending on whether or
not it is totally or only partly
inofficious. (Pineda, Obligations and
Contracts, 2000 ed, p. 268)
Q: Can there be a unilateral condonation?

• A: No. Since it is a donation of an

existing credit, considered a property
right, in favor of the debtor, it is
required that the DR gives his consent
thereto by making an acceptance. If
there is no acceptance, there is no
condonation. (Pineda, Obligations and
Contracts, 2000 ed, p. 267)
 D. CONFUSION OR MERGER
Q: When is there a confusion or
merger of rights?
• A: The meeting in one person of the
qualities of a creditor and debtor of
the same obligation.
 D. CONFUSION OR MERGER
Q: What are the requisites of confusion of
rights?
a) Merger in the same person of the
characters of both a creditor and d debtor;
b) Must take place in the persons of a
principal creditor and a principal debtor;
and
c) Merger is definite and complete.
 Q: What is the effect of confusion or
merger of rights?
• A: The creditor and debtor becomes
the same person involving the same
obligation. Hence, the obligation is
extinguished. (Art. 1275, NCC)
Q: Can there be partial confusion?
• A: Yes. It will be definite and
complete up to the extent of the
concurrent amount or value, but the
remaining obligation subsists.
(Pineda, Obligations and Contracts,
2000 ed, p. 278)
 Q: What is the effect when confusion or
merger is revoked?
• A: If the act which created the confusion is
revoked for some causes such as rescission of
contracts, or nullity of the will or contract, the
confusion or merger is also revoked. The
subject obligation is revived in the same
condition as it was before the confusion.
• Note: During such interregnum, the running of
the period of prescription of the obligation is
suspended. (Pineda, Obligations and
Contracts, 2000 ed, p. 279)
 Q: What is the effect of confusion or
merger in relation to the guarantors?
• Merger which takes place in the person
of the principal debtor or principal
creditor benefits the guarantors. The
contract of guaranty is extinguished.
• Confusion which takes place in the
person of any of the guarantors does
not extinguish the obligation. (Art. 1276,
NCC)
Q: In a joint obligation, what is the effect
of confusion or merger in one debtor or
creditor?
• GR: Joint obligation is not extinguished since
confusion is not definite and complete with
regard to the entire obligation. A part of the
obligation still remains outstanding.
• XPN: Obligation is extinguished with respect
only to the share corresponding to the DR or
CR concerned. In effect, there is only partial
extinguishment of the entire obligation.
(Pineda, Obligations and Contracts, 2000 ed, p. 281)
 E. COMPENSATION
Q: What is compensation?
A: It is a mode of extinguishing to the
concurrent amount, the obligations of those
persons who in their own right are reciprocally
debtors and creditors of each other (Art. 1232,
NCC). It involves the simultaneous balancing of
two obligations in order to extinguish them to
the extent in which the amount of one is
covered by that of the other.
 Q: What are the requisites of
compensation?
a) Both parties must be mutually creditors and
debtors in their own right and as principals;
b) Both debts must consist in sum of money or if
consumable, of the same kind or quality;
c) Both debts are due;
d) Both debts are liquidated and demandable;
e) Neither debt must be retained in a controversy
commenced by third person and communicated
with debtor (neither debt is garnished); and
f) Compensation must not be prohibited by law.
 Note: Compensation
• When all the requisites mentioned in
Art. 1279 of the Civil Code are
present, compensation takes effect
by operation of law, even without
the consent or knowledge of the
creditors and debtors.
 1. KINDS OF COMPENSATION
Q: What are the kinds of compensation?
• Legal compensation – by operation of law
• Conventional – by agreement of the parties
• Judicial – by judgment of the court when
there is a counterclaim duly pleaded, and the
compensation decreed
 LEGAL COMPENSATION
Q: What are the debts not subject to
compensation?
• Debts arising from contracts of deposit
• Debts arising from contracts of commodatum
• Claims for support due by gratuitous title
• Obligations arising from criminal offenses
• Certain obligations in favor of government
(e.g. taxes, fees, duties, and others of a similar
nature)
 Note: LEGAL COMPENSATION
• If a person should have against him
several debts which are susceptible
of compensation, the rules on the
application of payments shall apply
to the order of the compensation.
(Art. 1289, NCC)
 IX. EXTINGUISHMENT
• Q: De Leon sold and delivered to Silahis
various merchandise. Due to Silahis' default,
De Leon filed a complaint for the collection of
said accounts. Silahis asserts, as affirmative
defense, a debit memo as unrealized profit
for a supposed commission that Silahis
should have received from De Leon. Was
there legal compensation?
 IX. EXTINGUISHMENT
• A: Silahis admits the validity of its
outstanding accounts with De Leon. But
whether De Leon is liable to pay Silahis a
commission on the subject sale to Dole is
disputed. This circumstance prevents
legal compensation from taking place.
(Silahis Marketing Corp. v. IAC, G. R. No.
L‐74027, Dec. 7, 1989)
 Note: LEGAL COMPENSATION
• Note: Compensation is not proper where
the claim of the person asserting the set‐
off against the other is not clear nor
liquidated; compensation cannot extend
to unliquidated, disputed claim existing
from breach of contract. (Silahis
Marketing Corp. v. IAC, G. R. No. L‐74027,
Dec. 7, 1989)
 CONVENTIONAL
Q: What is conventional
compensation?
• A: It is one that takes place by
agreement of the parties.
 JUDICIAL COMPENSATION
Q: What is judicial compensation?
• A: One made by order of a court
based on a permissive counterclaim.
Pleading and proof of the
counterclaim must be made.
 FACULTATIVE COMPENSATION
Q: What is facultative compensation?
• A: One of the parties has a choice of
claiming or opposing the
compensation.
 Q: What are the obligations subject to
facultative compensation?
• A: When one of the debts arises from:
• Depositum
• Obligations of a depositary
• Obligations in commudatum
• Claim of support due to gratuitous title
– XPN: Future support.
• Civil liability from a crime
 COMPENSATION PAYMENT
A mode of extinguishing to the Payment means not only delivery of
concurrent amount, the obligations of money but also performance of an
those persons who in their own right are obligation
reciprocally debtors and creditors of each
other

Capacity of parties not necessary Debtor must have capacity to dispose of

Reason: Compensation operates by law, the thing paid;
not by the act of the parties creditor must have capacity to receive
payment

There can be partial extinguishment of The performance must be complete

the obligation unless waived by the creditor

Legal compensation takes place by Involves delivery or action

operation of law without simultaneous
delivery

Parties must be mutually debtors and It is not necessary that the parties be
creditors of each other mutually debtors and creditors of each
other
 COMPENSATION CONFUSION
(Arts. 1278‐1279) (Arts. 1275‐1277)

Two persons who are One person where

mutual debtors and qualities of debtor and
creditors of each other creditor are merged

At least two One obligation

obligations
 IX. EXTINGUISHMENT
• Q: Atty. Laquihon, in behalf of Pacweld, filed a
pleading addressed to MPCC titled “motion to
direct payment of attorney's fee”, invoking a
decision wherein MPCC was adjudged to pay
Pacweld the sum of P10,000.00 as attorney's fees.
MPCC filed an opposition stating that the said
amount is set‐off by a like sum of P10,000.00,
collectible in its favor from Pacweld also by way
of attorney's fees which MPCC recovered from
the same CFI of Manila in another civil case. Was
there legal compensation?
 IX. EXTINGUISHMENT
• A: MPCC and Pacweld were creditors and debtors of
each other, their debts to each other consisting in final
and executory judgments of the CFI in two separate
cases. The two obligations, therefore, respectively offset
each other, compensation having taken effect by
operation of law and extinguished both debts to the
concurrent amount of P10,000.00, pursuant to the
provisions of Arts. 1278, 1279 and 1290 of the Civil Code,
since all the requisites provided in Art. 1279 of the said
Code for automatic compensation "even though the
creditors and debtors are not aware of the
compensation" were present. (Mindanao Portland
Cement Corp. v. CA,G.R. No. L‐62169, Feb. 28, 1983)
 IX. EXTINGUISHMENT
• Q: X, who has a savings deposit with Y Bank in the sum
of PI,000,000.00, incurs a loan obligation with the said
bank in the sum of P800,000.00 which has become due.
When X tries to withdraw his deposit, Y Bank allows
only P200,000.00 to be withdrawn, less service charges,
claiming that compensation has extinguished its
obligation under the savings account to the concurrent
amount of X's debt. X contends that compensation is
improper when one of the debts, as here, arises from a
contract of deposit. Assuming that the promissory note
signed by X to evidence the loan does not provide for
compensation between said loan and his savings
deposit, who is correct?
 IX. EXTINGUISHMENT
• A: Y bank is correct. All the requisites of Art. 1279,
Civil Code are present. Compensation shall take place
when two persons are reciprocally creditor and
debtor of each other. In this connection, it has been
held that the relation existing between a depositor
and a bank is that of creditor and debtor. As a
general rule, a bank has a right of set off of the
deposits in its hands for the payment of any
indebtedness to it on the part of a depositor" (Gullas
v. PNB, GR No. L‐43191, November 13, 1935). Hence,
compensation took place between the mutual
obligations of X and Y bank. (1998 Bar Question)
 IX. EXTINGUISHMENT
• Q: Eduardo was granted a loan by XYZ Bank for the purpose of improving a
building which XYZ leased from him. Eduardo executed the promissory note in
favor of the bank, with his friend Ricardo as cosignatory. In the PN, they both
acknowledged that they are “individually and collectively” liable and waived
the need for prior demand. To secure the PN, Ricardo executed a real estate
mortgage on his own property. When Eduardo defaulted on the PN, XYZ
stopped payment of rentals on the building on the ground that legal
compensation had set in. Since there was still a balance due on the PN after
applying the rentals, XYZ foreclosed the real estate mortgage over Ricardo’s
property. Ricardo opposed the foreclosure on the ground that he is only a co‐
signatory; that no demand was made upon him for payment, and assuming he
is liable, his liability should not go beyond half of the balance of the loan.
Further, Ricardo said that when the bank invoked compensation between the
rentals and the amount of the loan, it amounted to a new contract or novation,
and had the effect of extinguishing the security since he did not give his
consent (as owner of the property under the real estate mortgage) thereto.
• Can XYZ Bank validly assert legal compensation?
 IX. EXTINGUISHMENT
• A: XYZ Bank may validly assert the partial compensation of both
debts, but is should be facultative compensation because not all of
the five requisites of legal compensation are present (Art. 1279,
NCC). The payment of the rentals by XYZ Bank is not yet due, but
the principal obligation of loan where both Eduardo and Ricardo
are bound solidarily and therefore any of them is bound principally
to pay the entire loan, is due and demandable without need of
demand. XYZ Bank may declare its obligation to pay rentals as
already due and demand payment from any of the two debtors.
• Alternative Answer: Legal compensation can be validly asserted
between the bank, Eduardo and Ricardo. This is a case of
facultative obligation, thus, the bank can assert partial
compensation. Banks have an inherent right to set off where both
obligations are due and demandable (Art. 1279, NCC).
 IX. EXTINGUISHMENT
• Can Ricardo’s property be foreclosed to pay the full balance of the
loan?
• A: No, because there was no prior demand on Ricardo, depriving him of
the right to reasonably block the foreclosure by payment. The waiver of
prior demand in the PN is against public policy and violates the right to
due process. Without demand, there is no default and the foreclosure is
null and void. Since the mortgage, insofar as Ricardo is concerned is not
violated, a requirement under Act 3135 for a valid foreclosure of real
estate mortgage is absent.
• In the case of DBP v. Licuanan, it was held that: “the issue of whether
demand was made before the foreclosure was effected is essential. If
demand was made and duly received by the respondents and the latter
still did not pay, then they were already in default and foreclosure was
proper. However, if demand was not made, then the loans had not yet
become due and demandable. This meant that the respondents had not
defaulted in their payment and the foreclosure was premature.”
 IX. EXTINGUISHMENT
• Alternative Answer 1:No. Although the principal
obligation of loan is due and demandable
without need of further demand the foreclosure
of the accessory contract of real estate
mortgage, there is a need of notice and demand.
• Alternative Answer 2: Yes. Ricardo’s property
can be foreclosed to pay the full balance of the
loan. He is admittedly “individually and
collectively” liable. His liability is solidary. He and
Eduardo have waived notice for a prior demand
as provided in the promissory note.
 IX. EXTINGUISHMENT
• Does Ricardo have basis under the Civil Code for
claiming that the original contract was novated?
• A: None of the three kinds of novation is applicable. There
is no objective novation, whether express or implied,
because there is no change in the object or principal
conditions of the obligation. There is no substitution of
debtors, either. Compensation is considered as
abbreviated or simplified payment and since Ricardo
bound himself solidarily with Eduardo, any facultative
compensation which occurs does not result in partial legal
subrogation. Neither Eduardo nor Ricardo is a third
person interested in the obligation under Art. 1302, NCC.
(2008 Bar Question)
 F. NOVATION
Q: What is novation?
• A: It is the change of an obligation by
another, resulting in its extinguishment or
modification, either by changing the
object or principal conditions, or by
substituting another in the place of the
debtor or by subrogating a third person to
the rights of the creditor. (Pineda, Obligations
and Contracts, 2000 ed, p. 298)
Q: What are the requisites of novation?

a) Previous valid obligation;

b) An agreement by the parties to
create a new one or a modified
version;
c) Extinguishment or modification of
the old obligation; and
d) Valid new obligation.
 Q: Is novation presumed?
• A: No. Novation is never presumed, it
must be proven as a fact either by:
• Explicit declaration – if it be so declared
in unequivocal terms; or
• Material incompatibility – that the old
and the new obligations be on every
point incompatible with each other. (Art.
1293, NCC)
 IX. EXTINGUISHMENT
• Q: SDIC issued to Danilo a Diners Card (credit card) with
Jeannete as his surety. Danilo used this card and initially paid
his obligations to SDIC. Thereafter, Danilo wrote SDIC a letter
requesting it to upgrade his Regular Diners Club Card to a
Diamond (Edition) one. As a requirement of SDIC, Danilo
secured from Jeanette her approval and the latter obliged.
Danilo's request was granted and he was issued a Diamond
(Edition) Diners Club Card. Danilo had incurred credit charged
plus appropriate interest and service charge. However, he
defaulted in the payment of this obligation. Was the upgrading
a novation of the original agreement governing the use of
Danilo Alto's first credit card, as to extinguish that obligation?
 IX. EXTINGUISHMENT
• A: Yes. Novation, as a mode of extinguishing obligations, may be
done in two ways: by explicit declaration, or by material
incompatibility.
• There is no doubt that the upgrading was a novation of the
original agreement covering the first credit card issued to Danilo
Alto, basically since it was committed with the intent of
cancelling and replacing the said card. However, the novation
did not serve to release Jeanette from her surety obligations
because in the surety undertaking she expressly waived
discharge in case of change or novation in the agreement
governing the use of the first credit card.(Molino v. Security
Diners International Corp.,G.R. No. 136780, Aug. 16, 2001)
 Q: What are the effects of novation?
1. Extinguishment of principal also extinguishes
the accessory, except:
• a. Mortgagor, pledgor, surety or guarantor
agrees to be bound by the new obligation
(Tolentino, Civil Code of the Philippines, Vol. IV,
1999 ed, p. 395)
• b. Stipulation made in favor of a third person
such as stipulation pour atrui(Art. 1311, NCC),
unless beneficiary consents to the novation.
 Q: What are the effects of novation?
2. If the new obligation is:
• a. Void – old obligation shall subsist since there is nothing to
novate, except when the parties intended that the old obligation
be extinguished in any event.
• b. Voidable – novation can take place, exceptwhen such new
obligation is annulled. In such case, old obligation shall subsist.
• c. Pure obligation – conditions of old obligation deemed attached
to the new, unless otherwise stipulated (Tolentino, Civil Code of
the Philippines, Vol. IV, 1999 ed, p. 399)
• d. Conditional obligation:
if resolutory– valid until the happening of the condition
if suspensive and did not materialize– no novation, old
 Q: What are the effects of novation?
3. If old obligation is conditional and the new
obligation is pure:
• a. if resolutory and it occurred – old obligation
already extinguished; no new obligation since
nothing to novate
• b. if suspensive and it did not occur – it is as if
there is no obligation; thus, there is nothing to
novate
Did the assignment amount to payment by
cession?
• A:No.There was only one creditor,
the DBP. Article 1255 contemplates
the existence of two or more
creditors and involves the
assignment of all the debtor's
property.
 Did the assignment constitute dation in
payment:
• A: No. The assignment, being in its
essence a mortgage, was but a
security and not a satisfaction of
indebtedness. (DBP v. CA, G.R. No.
118342, Jan. 5, 1998)