CHAPTER 4

EXTINGUISHMENT OF OBLIGATIONS
Modes of extinguishment an obligation.
1. By payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger of the rights of the creditor and debtor.
5. Compensation
6. Novation
In addition
7. Annulment
8. Rescission
9. Fulfilment of the resolutory condition
10. Prescription
11. Death of a party in case the obligation is personal
12. Mutual desistance
13. Compromise
14. Impossibility of fulfilment
15. Happening of the fortuitous event
SECTION 1
PAYMENT OR PERFORMANCE

b. Acceptance by the creditor of an incomplete or irregular performance,

without any objection or protest.
Effects of payment by a third person.
a. If made without the consent or against the will of the debtor, the payor can
recover only insofar as the payment was beneficial to the debtor. The
recovery is only up to the extent or amount of debt at the time of payment.
b. If made with the consent of the debtor, the payor shall have the right of
reimbursement and subrogation, that is, to recover what he has paid and
to acquire all the rights of the creditor.
c. If made by a third person who does not intend to be reimbursed, it is
deemed to be a donation.
What is the legal effect of a payment made by a third person who does
not intend to be reimbursed by the debtor?
Such payment is deemed to be a donation which requires the debtors
consent but lack of this consent does not affect the validity of the payment
made to the creditor who has accepted the same.
Effect of payment by a person who is incapacitated.
As a rule, the payment is not valid, the creditor cannot even be compelled
to accept it. However, this rule is applicable if obligation is to give.

Concept of payment.
Payment or fulfilment consists in the delivery of sum of money or thing,
doing something, or not doing something.

Who are the persons from whom the creditor must accept payment?
a. The debtor
b. Person who has an interest in the obligation
c. Person stipulated in the contract to make the payment

How payment or performance is made.

a. If obligation is monetary, by delivery of money in full amount.
b. If it is a thing or an object, by delivery of the thing or object.
c. If to do something, by the performance of the same undertaking.
d. If not doing something, to desist or refrain doing the thing.

Who are the persons to whom payment must be made?

a. Creditor
b. Successor in interest
c. Person authorized to receive payment

Requisites of payment.
a. The thing or service must be delivered or rendered.
b. Payment should be made.

Incomplete compliance or partial performance considered payment.

a. Substantial performance in good faith, minus or less the damages
suffered by the creditor.

Payment to an incapacitated or unauthorized person

Payment to a person who is incapacitated to administer his property is not
a valid payment, except:

a. If he has kept the thing delivered.

b. Insofar as the payment is beneficial to creditor.
Payment to a third person.
Payment to a third person is not valid, except:
a. When the third person is authorized to receive it.
b. When the payment to the person has redounded to the benefit of the
creditor.
c. When the third person is in possession of the credit and payment was
made in good faith.
When proof of benefit on the part of the creditor is not required.
a. If after payment, the third person acquires the creditors right.
b. If the creditor ratifies the payment to third person.
c. If by the creditors conduct, the debtor has been led to believe that the
third person has authority to receive payment.
Requisites of payment to third person.
a. Payor paying must be in good faith.
b. Payee must be in possession of the credit.
Debtor cannot compel creditor to accept a different object.
What must be delivered is the object as stated in the contract. If the
debtor is delivering a thing less valuable that that stated in the contract,
the creditor has all right to refuse delivery. Likewise, if the object is more
valuable that that promised, the creditor can also refuse delivery.
Instances when debtor can compel creditor to accept a different object.
a. In facultative obligations.
b. In cases of dation in payment and novation.
c. Waiver by the creditor.

Dation in payment (Dation en Pago).

Dation is the mode of extinguishing an obligation whereby the debtor
alienates property in favour of the creditor for the satisfaction of a
monetary obligation.
The obligation is money, the payment is property.

Dation to be governed by contract of sales.

The creditor is really buying the property of the debtor, but the payment is
to be charged against the obligation of the debtor to the creditor, so it
must be governed by the contract of sales.
Rules if the contract does not specify the quality of the object to be
delivered.
a. Creditor cannot demand a thing of superior quality, unless of course, he
wishes to accept one and the debtor agrees to it.
b. Debtor cannot deliver a thing of inferior quality, unless he wants to deliver
one of superior quality, but creditor cannot be compelled to receive a thing
of superior quality.
Rule is only on quality not quantity.
This superior or inferior rule is applicable only on generic or indeterminate
thing as to their quality, and not to quantity. If the question is quantity, and
it cannot be determined without the need of a new contract between the
parties, the contract is void.

The extrajudicial expenses incurred during the payment must be borne by

the debtor, unless otherwise stipulated.

Payment must be complete.

A debt is considered paid only when the thing or service in which the
obligation consists has been completely delivered or rendered.
When partial payment is allowed.
a. When there is stipulation.
b. When obligation is subject to different terms or periods or conditions.
c. Payment of the share of a debtor in joint obligation.
d. When work is to be done by parts.

What is legal tender?

Currency which a debtor can compel a creditor to accept in payment of a
debt in money, when tendered by the debtor in the right amount.
All notes and coins issued by the Banko Sentral shall be guaranteed by
the government of the Republic of the Philippines for all debts, both public
and private.

A check is not a legal tender.

A creditor cannot be compelled to accept a check in payment of the debt
in his favour because a check is not a legal tender. But if the creditor
decides to accept a check in payment of the obligation in his favour, such
payment does not produce the effect of payment until the check is
cashed, or through the fault of the creditor, it could not be cashed.
Effects of payment by means of instruments of credit.
Promissory notes, checks, bills of exchange, and other commercial
documents are not legal tender and therefore the creditor cannot be
compelled to accept them. But the creditor, if he chooses, may accept
them without the acceptance producing the effect of payment.
Summary of the delivery of commercial instruments as payment.
1. A check is not a legal tender, even if it is managers check. So, the
creditor cannot be compelled to accept it.
2. Acceptance of this commercial document is equivalent to payment when:
a. The creditor is in estoppels or he had previously promise he would
accept a check.
b. When the check has lost its value because of the creditor.
c. When the check has been cashed.
Republic Act. No. 8183
An act to assure uniform value of Philippine coin and currency.
All monetary obligations shall be settled in the Philippine currency which
is the legal tender in the Philippines. However, the parties may agree that
the obligation or transaction shall be settled in any other currency at the
time of payment.
Inflation
Sharp, sudden increase in value of money or credit or both without
corresponding increase in business transaction.
Deflation
Sudden decrease of the value of money.
Inflation or deflation must be extraordinary.
If the inflation or deflation becomes extraordinary, the basis of payment is
the value of the currency at the time the obligation is constituted and not
at the time of payment.

Place where the obligation shall be paid.

a. If there is a stipulation at the place designated
b. If there is no stipulation:
1. Delivery of a specific or determinate thing payment shall be made at
the place where the thing was at the time of perfection.
2. Delivery of a generic indeterminate thing - delivery or payment must be
made at the domicile of the debtor.
SUBSECTION 2
APPLICATION OF PAYMENTS
What are the special modes of payment?
a. Application of payment or imputation of payment
b. Cession of payment or assignment
c. Dation in payment
d. Tender of payment and consignation
Concept of application of payments.
It is the designation of the debt which should be applied a payment made
by a debtor who owes several debts in favour of the same creditor. The
purpose is to know which debt out of two or more debts owing the creditor
should be extinguished.
Requisites for application of payments.
a. Two or more debts.
b. Of the same kind.
c. One debtor and one creditor.
d. All debts are due.
e. Tendered payment is not sufficient to extinguish all obligations.

When application of payment is applicable even if obligations are not

yet due.
a. When the parties stipulate so.
b. When application is made by the party whose benefit the period or term is
constituted.
Right to choose in application of payments.
The right to choose belongs to the debtor unless otherwise agreed upon.
If the application is made properly and the creditor refuses to accepts, he
will be considered in default.

How application is made.

a. The debtor makes the designation.
b. If the debtor fails to designate, the creditor will choose and this must be
stated in the receipt.
c. If no application was made by either party, application is by operation of
law.
When application must be made.
It must be made at the time payment. Once it is made, it cannot be
revoked except with the consent of both parties.
Payment must be applied to the interest before the principal.
In the payment of an obligation producing interest, when the amount
being paid is not sufficient to cover the principal and interest due, the
amount paid must apply first to the interest, the excess if owing, shall be
applied to the principal obligation.
Rules if no application of payment is made.
a. Apply it to most onerous, in case the debts are of different nature.
b. If both are of the same nature and burden, apply them proportionately.
Examples of more burdensome or more onerous debts.
a. Older debts in case of running accounts.
b. Interest bearing debts.
c. Debts with penalty.
d. Debts secured by mortgage or by pledge.
e. Exclusive debt is more onerous than that of a solidary debt.

Summary of the rules in application of payment.

a. Debtor has to choose which obligation he wishes to extinguish.
b. If debtor does not apply payment, the creditor may make the designation
by stating in the receipt of payment.
c. If letter a and b will not apply, the most onerous to the debtor among
those due must be paid.
d. If the debts due are of the same nature and burden, apply to all of them
proportionately.
SUBSECTION 2
PAYMENT BY CESSION
Cession in payment defined.

It is the process by which a debtor transfers all the properties not subject
to execution in favour of his creditors so that the latter may sell and apply
the proceeds to their credits.

Requisites of cession in payment.

a. More than one debt.
b. More than one creditor.
c. Complete or partial insolvency of the debtor.
d. Abandonment of all the debtors properties not exempt from execution.
Dation in payment Defined.
It is that mode of extinguishing an obligation whereby the debtor alienates
his property in favour of the creditor for the satisfaction of a monetary
debt.
Kinds or classes of cession or assignment.
a. Legal governed by Insolvency Law. Majority of the creditors must
consent.
b. Voluntary all credistors must agree.
Effects of cession or assignment.
a. The creditors do not become the owners, they are considered assignees
with power to sell the property.
b. The debtor is released from his obligation to the extent of the net
proceeds of the sale.
c. Creditors will collect credits in the order of preference as agreed upon, or
else in the order established by law.
SUBSECTION 3
TENDER OF PAYMENT AND CONSIGNATION
Tender of payment defined.
It is the act, on the part of the debtor, of offering to the creditor the thing
due or amount due. The debtor must show that he has in his possession
the thing or money to be delivered at the same time of the offer.
Consignation defined.
It is the act of depositing the thing or amount due with the proper court
when the credit does not desire or cannot receive it after complying with
the formalities required by law.
Requisites of a valid tender.

a.
b.
c.
d.

It must be made in legal tender or lawful currency.

It must include whatever interest is due.
It must be unconditional.
The obligation must already be due.

Requisites of valid consignation.

a. Existence of a valid debt which is due.
b. Tender of payment by the debtor and refusal without justifiable cause by
the creditor accept it.
c. Previous notice of consignation to persons interested in the fulfilment of
the obligation.
d. Consignation of the thing or sum due.
e. Subsequent notice of consignation made to the interested parties.
Effect of tender without consignation.
Tender of payment without consignation shall not extinguish the
obligation. In short, there must be an offer to pay. If refused without
reason, consign or deposit the object in court before the obligation is
extinguished. It is also required that notice of consignation must be sent to
all persons interested in the fulfilment of the obligation, such as the
creditor, co-debtors, sureties or guarantors.

In the following cases, consignation alone without tender of payment

will extinguish the obligation.
a. When the creditor is absent or unknown, or does not appear at the
place of payment.
b. When the creditor is incapacitated to receive payment at the time it is
due.
c. When, without just cause, the creditor refuses to give a receipt.
d. When two or more persons claim the same right to collect.
e. When the title of the obligation has been lost.
Expenses of consignation.
The expenses of consignation if properly made shall be charge against
the creditor, otherwise chargeable against the debtor.
Effects of consignation if properly made.
a. The debtor may ask the judge to order the cancellation of the obligation.
b. The running of the interest is suspended.

c.

Before the creditor accepts, or before the judge declares that consignation
is properly made, the obligation remains to subsist.

Effect of improper consignation.

a. The obligation remains, because the consignation is not effected as
payment.
b. If the debt is already due at the time of consignation and consignation is
improperly made, the debtor is considered in default.
When the debtor can withdraw the thing consigned in court.
a. As a right.
1. Before the acceptance of the creditor,
2. Before judicial declaration.
Effects:
1. Obligation remains.
2. Co-debtors, guarantors and sureties cannot object.
b. As a privilege.
1. After the acceptance of the creditor,
2. After judicial declaration.
Effects:
1. Obligation remains.
2. Co-debtors, guarantors and sureties are released.
Effects of withdrawal after consignation has been made.
a. Obligation remains.
b. Co-debtors, guarantors and sureties are released.
c. The creditor loses preference over the thing.
Release of co-debtors, guarantors and sureties.
If the thing deposited is withdrawn as a matter of privilege the solidary codebtors are released from the solidary ties, not from their share because
they are considered principal debtors. Be it noted that the liabilities off
joint debtors are separate and distinct.
SECTION 2
LOSS OF THE THING DUE
Concept of LOSS.
There is loss when:
a. When the determinate thing perishes.
b. Goes out of commerce.

c.

When it disappears in such a way that its existence is unknown or cannot

be recovered.

Kinds of Impossibility of performance.

a. Physical impossibility.
b. Legal impossibility.
c. Moral impossibility.
Effects of loss.
a. If specific or determinate, the obligation is extinguished, except.
1. If the deter is at fault.
2. When the debtor is liable, by provision of law, by contractual
stipulation, or when the nature of the obligation requires the
assumption of risk.
b. If generic or indeterminate, the obligation is not extinguished under
the principle of genus never perishes.
Delivery of delimited generic things.
When there is a limitation of the generic object to a particular existing
mass or a particular mass or group or limited quantity from which the
prestation has to be taken.
Effect of fortuitous events.
The happening of a fortuitous event itself does not necessarily extinguish
an obligation to deliver a determinate thing. The delivery of determinate
thing shall only be extinguished when the said object is lost or destroyed
without the fault of the debtor and before he is in default.
Meaning of Obligation is Extinguished.
If the thing is specific and it is lost due to a fortuitous event, the obligation
is extinguished. By this, we mean the obligation to deliver the same thing
is no longer possible because there is no more thing to deliver. Hence, if
there is default on the part of the debtor, the debtors obligation to deliver
the same thing is extinguished but the same is converted into a monetary
consideration for damages. The same holds true if the debtor is at fault the obligation is converted into monetary value.
When partial loss considered as total loss.
The partial loss of the thing is considered as a total loss, when the loss is
so material and the remaining portion of the object is insignificant or
immaterial.

Presumption of loss.
The law presumes that the debtor is at fault, except in cases of natural
calamities.
Beyond Contemplation rule and its requisites.
The impracticability of performance or the performance is impossible due
to change of condition after the obligation was constituted and this was
not contemplated by the parties.
Requisites:
a. The service must become so difficult and that it was manifestly beyond
the contemplation of the parties.
b. One of the parties must ask for relief.
c. It must refer to future service with unusual change in the condition of
performance.
Effect of loss in criminal offense.
If the thing proceeds from a criminal offense, the loss of such thing shall
not extinguish the obligation unless the creditor is in default.

Right of subrogation.
If the thing which the debtor promised to deliver got lost, and such loss is
imputable to a third person, the right of the debtor against such person
are transferred to the creditor under the rule on subrogation.
SECTION 3
CONDONATION OR REMISSION OF DEBT
Remission or condonation defined.
It is the gratuitous abandonment by the creditor of his right.
Essential requisites of remission.
a. There must be an agreement.
b. The parties must be capacitated,
c. There must be a subject matter.
d. The cause or consideration in generosity.
e. Obligation is demandable at the time of remission.
f. Remission must not be inofficious.
Classes of remission.

a. As to effect or extent
1. Total
2. Partial
b. Date of effectivity
1. Inter vivos lifetime
2. Mortis causa after death
c. As to form
1. Implied or tacit
2. Express or formal
Effects of delivery to the debtor of private instrument evidencing the
credit.
a. There was voluntary delivery.
b. Purpose is to extinguish the obligation.
Presumption is rebuttable.
The presumption of voluntary delivery and renunciation of the obligation is
disputable, such that if the creditor can introduce or present evidence to
the contrary, the presumption will be defeated.

Contract of pledge is extinguished but the not principal obligation.

Debtor is still indebted but there is no more security.

SECTION 4
CONFUSION OR MERGER OF THE RIGHTS
Confusion or merger defined.
It is the meeting in one person of the qualities of creditor and debtor with
respect to the same obligation.
Requisites for a valid merger.
a. It must take place between the principal debtor and creditor.
b. The merger must be clear and definite.
c. Obligations are the same or identical.

Plurality of subjects.
a. If the obligation is joint and the private instrument is found in the
possession of one of the debtors,, only the share of the debtor who is
in possession is deemed impliedly renounced or remitted or
condoned.
b. If the obligation is solidary, the whole obligation is deemed impliedly
remitted or condoned.

Effect of merger and confusion.

a. Obligation is extinguished.
b. If there is a guarantor and the merger is in the principal debtor, the
obligation is extinguished, the guarantor is released.
c. If there is a guarantor and the merger is not on the principal debtor but
only on the guarantor, the principal obligation is not extinguished but the
accessory is extinguished.

Rule on express remission on movable properties.

Express remission whether written or oral must be accepted by the debtor
to be effective. However, in case of movable things, when remission is
oral, there is no need to deliver the thing, because it would then be
already in the possession of the party in whose favour the remission is
made.

Confusion in joint and solidary obligations.

a. If the obligation is joint, only the share corresponding to the creditor
or debtor in whom the two characters concur is extinguished.
b. If the obligation is solidary, the obligation is totally extinguished.

Effect of the renunciation of the principal and/or accessory obligation.

If the principal obligation is remitted or renounced, the accessory will
follow, but if it is the accessory which is remitted or renounce, the principal
shall subsist.
Effect of delivery of the thing pledged to the debtor by the creditor.

SECTION 5
COMPENSATION
Compensation defined.
It is the extinguishment to the concurrent amount of the debts of two
persons who, in their own rights are debtors and creditors of each other.
A sort of balancing two obligations simultaneously or to extinguish them to
the extent in which the amount of one is covered by the other.

Kinds of compensation.
a. As to their effects:
1. Total same amount
2. Partial not equal
b. As to origin:
1. Legal by operation of law.
2. Facultative one party can claim compensation the other cannot.
3. Conventional by agreement of the parties.
4. Judicial decreed by the court, in case where there is counterclaim.
Concept of facultative compensation.
This is a compensation which can be set up only at the option of a credit,
when legal compensation cannot take place because one or some
elements are missing. While this creditor can oppose compensation, he
renounces it, but he himself can compensate.

Requisites of legal compensation.

a. That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
b. That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
c. That the two debts be due;
d. That they be liquidated and demandable;
e. That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.