EXTINGUISHMENT OF OBLIGATIONS

1231. Obligations are extinguished: 1. By payment or performance; 2. By loss of the thing due; 3. By condonation or remission of debt 4. By confusion or merger of rights of creditor and debtor; 5. By compensation; 6. By novation Other causes: 1. Annulment 2. Rescission 3. Fulfillment of resolutory condition 4. Prescription Additional causes 1. Death of a party 2. Mutual desistance or withdrawal 3. Arrival of resolutory condition 4. Compromise 5. Impossibility of fulfilment 6. Happening of fortuitous event Mode of extinguishment 1. Voluntary 2. Involuntary

1235.

When the obligee accepts performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. Requisites: 1. The oblige knows that the performance is incomplete or irregular; and 2. He accepts the performance without expressing any protest or objection. The mere receipt of partial payment is not equivalent to acceptance of performance as would extinguish the whole obligation. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfilment of the obligation, unless there is stipulation to the contrary. 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. Persons from whom the creditor must accept payment. 1. Debtor; 2. Any person who has an interest in the obligation (guarantor); or 3. A third person who has no interest in the obligation when there is stipulation that he can make payment. Effect of payment by a third person 1. If made without the knowledge or against the will of debtor. The payer can recover from the debtor, only to the amount that debtor has been benefited or only up to the extent or amount of debt at the time of payment. 2. If made without the knowledge of the debtor. The payer shall have the rights of reimbursement and subrogation. 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. Subrogation The payer acquires all other rights which the creditor could have exercised pertaining to the credit. Reimbursement The third person has merely the bare right to be refunded to the extent provided in 1236 without the right to the guarantees and securities of the original obligation. There is no real extinction of the obligation but only a change of creditor.

1236.

SECTION 1: Payment or performance 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. Elements of payment 1. Persons (who and whom) 2. Thing or object 3. Cause 4. Mode or form 5. Place and time 6. Imputation of expenses 7. Special parts The debtor has the burden of showing that the obligation has been discharged by payment. 1233. A debt shall not to 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. Requisites: 1. Integrity of the prestation The prestation be fulfilled completely. 2. Identity of the prestation The very prestation due must be delivered or performed. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfilment, less damages suffered by the obligee. Requisites: 1. There must be substantial performance. 2. The obligor must be in good faith.

1237.

1234.

1238.

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 debtors consent. But the payment is in any case valid as to the creditor who has accepted it. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the title on Natural Obligations. Free disposal of the thing due The thing to be delivered must not be subject to any claim or lien or encumbrance of a third person. (Not subject to mortgage). Capacity to alienate The person is not incapacitated to enter into contracts. 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. Person to whom payment shall be made 1. Creditor or oblige 2. His successor in interest 3. Any person authorized to receive it. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: 1. If after the payment, the third person acquires the creditors rights; 2. If the creditor ratifies the payment to the third person; 3. If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive payment. When benefit to the creditor need not be proved by the debtor. 1. Subrogation of the payer in the creditors right; 2. Ratification by the creditor; or 3. Estoppel on the part of the creditor. Payment made in good faith to any person in possession of the credit shall release the debtor. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. Garnishment The proceeding for the purpose of subjecting a debtors credit to the payment of debt to another.

1244.

1239.

The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of same value, or as more valuable than that of which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligees will. 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 Special forms of payment 1. Dation in payment; 2. Application of payments; 3. Payment by cession; 4. Tender of payment and consignation Dation in payment (adjudication or dacion en pago) The conveyance of ownership of a thing by the debtor to creditor as an accepted equivalent of performance of a monetary obligation. Requisites of dation in payment: 1. There must be performance of the prestation. 2. There must be some difference between the prestation due and that which is given in substitution. 3. There must be an agreement between the creditor and debtor. Sale No created Seller: Price paid Buyer: Acquisition of the thing sold Dation in payment Yes extinguished Debtor: extinguishment of debt Creditor: Acquisition of the object The payment is received before the contract is perfected Debtor and creditor

1245.

1240.

1241.

Pre-existing credit Obligation Cause

Fixing Price Payment

More freedom The buyer has still to pay the price

Parties

Seller and buyer

1246.

1242.

1243.

1247.

When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. The purpose of the obligation and other circumstances shall be taken into consideration. Principle of equity Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern.

Judicial costs The statutory amounts allowed to a party to an action for his expenses incurred in action. No costs are allowed against the Government, unless otherwise provided by law. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor required to make partial payments. However, 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. When partial performance of obligation allowed 1. When there is an express stipulation; 2. When the debt is in part liquidated; 3. When different prestations in which the obligation consists are subject to different terms or conditions which affect some of them. 4. When the parties know that the obligation reasonably cannot be expected to be performed completely at one time; and 5. When there is abuse of right or if good faith requires acceptance. 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. 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. In the meantime, the action derived from the original obligation shall be held in abeyance. Legal tender The currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount. 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. Inflation Sharp sudden increase of money or credit or both without a corresponding increase in business transactions Deflation The reduction in volume and circulation of the available money or credit, resulting in decline of the general price level.

1248.

Requisites: 1. There is an official declaration of extraordinary inflation or deflation from the BSP. 2. The obligation is contractual in nature; and 3. The parties expressly agreed to consider its effects. Extraordinary inflation or deflation When there is unimaginable increase or decrease in the purchasing power of the Philippine currency, or fluctuation in the value of pesos which could not have been foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Devaluation An official reduction in the value of one currency from an officially fixed level imposed by monetary authorities. Depreciation The downward change in the value of one currency in terms of the currencies of other nations which occurs as a result of market forces in the foreign exchange market. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. Payment where obligation shall be paid 1. Stipulation; 2. No stipulation: Specific thing, the payment shall be made at the place where the thing was, at the perfection of the contract. 3. No stipulation: Generic thing, the place of payment shall be the domicile of the debtor. Domicile The place of a persons habitual residence Residence Only an element of domicile.

1251.

1249.

1250.

SUBSECTION 1. Application of payments 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. Application of payments The designation of debt to which should be applied the payment made by the debtor who has various debts of the same kind in favor or one and the same creditor. Requisites; 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 debts. Application as to the debts not yet due. 1. Stipulation 2. Made by the debtor and creditor Rules