Extinguishment OF Obligations PDF

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EXTINGUISHMENT OF OBLIGATIONS (ART. 1231)MODES OF EXTINGUISHING OBLIGATIONS. 1 Article 1231. Obligations are extinguished by: 1) PAYMENT or PERFORMANCE; 2) LOSS of the thing due; 3) CONDONATION or REMISSION of the debt; 4) CONFUSION or MERGER of the rights of creditor and debtor; 5) COMPENSATION; an...

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EXTINGUISHMENT OF OBLIGATIONS (ART. 1231) MODES OF EXTINGUISHING OBLIGATIONS.1Article 1231. Obligations are extinguished by: 1) PAYMENT or PERFORMANCE; 2) LOSS of the thing due; 3) CONDONATION or REMISSION of the debt; 4) CONFUSION or MERGER of the rights of creditor and debtor; 5) COMPENSATION; and, 6) NOVATION. ARE THEY EXCLUSIVE? No. Other causes of extinguishment of obligations, such as ANNULMENT, RESCISSION, fulfillment of a RESOLUTORY CONDITION, and PRESCRIPTION, are governed elsewhere in this Code.2 Also, an obligation may be extinguished by DEATH (when the obligation is purely personal in character) UNILATERAL WITHDRAWAL (in some contracts such as partnership and agency), remission [RENUNCIATION OR WAIVER]3 by the creditor, COMPROMISE,4 the fulfillment of a RESOLUTORY TERM, a CHANGE IN CIVIL STATUS,5 the occurrence of a fortuitous event, rebus sic stantibus,6 IMPOSSIBILITY of performance, and MUTUAL DISSENT, WANT OF INTEREST7 AND JUDICIAL INSOLVENCY.8 1.1.

PAYMENT OR PERFORMANCE (ARTS. 1232-1251)

1.1.1. General Rules MOST PREFERRENTIAL MODE. Generally, in extinguishing obligations, payment (or performance) would be preferred. PAYMENT, DEFINED. According to ARTICLE 1232: “Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.” [TOLENTINO says that payment is the fulfillment of the prestation due, a fulfillment that extinguishes an obligation by the realization of the purposes for which it was constituted.] For legal purposes, payment does not only mean payment of a money obligation. It includes performance of an obligation not payable in money, such as delivery of property or performance of service. In an obligation not to do, payment would mean refraining from the act which has been prohibited. [DCD: TAKE NOTE that “payment” as used herein refers to a pre-existing obligation. If no obligation exists, the delivery of money will not constitute payment. Thus, in the exercise of an OPTION, the Articles 1232 to 1236 CANNOT apply.] BURDEN OF PROVING PAYMENT. The debtor has the burden of proving payment of his debt, granted that the creditor has shown that the debt exists. 1 Article 1231 2 Article 1231 ¶ 2 3 see Article 6 4 Article 2028 (“A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. ”) see CIVIL CODE, Book IV, Title XIV “Compromises and Arbitration” 5 see EXECUTIVE ORDER NO. 209 (The Family Code of the Philippines) Arts. 74, 88-104, 105133, 143-146, 147-148. 6 see Article 1267 7 [RFB]: A owns a pecking duck restaurant with a secret recipe for preparing the duck. A disclosed the secret to B, his cook. B is then prohibited in his employment contract to work in another restaurant within 5 years from leaving A’s restaurant. Two years after B left, A closes his restaurant and opens a hardware store. B can now work in a restaurant. JMBD: A similar situation can be said of “non-compete” clauses in employment contracts. 8 See Republic Act No. 10142 Financial Rehabilitation and Insolvency Act.

BEST EVIDENCE OF PAYMENT. One of which is the presentation of a RECEIPT. The debtor has a right to demand a receipt from the creditor. THREE PRINCIPLES OF PAYMENT. These are: 1) INTEGRITY;9 2) IDENTITY;10 and, 3) INDIVISIBILITY.11 1.1.1.1.

Integrity

INTEGRITY, DEFINED. INTEGRITY OF PAYMENT means the complete and full performance of payment of the obligation. The principle [as well as indivisibility,] is embodied in Art. 1233, which states: “A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.” Thus: 1) if it is an obligation “to do” it must be performed completely; and, 2) if on the other hand, it is an obligation to give, it must be completely delivered and always in accordance with the terms and conditions agreed upon by the parties. EXCEPTIONS TO COMPLETE PERFORMANCE OF PAYMENT. These are: 1) substantial compliance in good faith on the part of the debtor; and, 2) waiver on the part of the creditor. SUBSTANTIAL COMPLIANCE, REQUISITES. The pertinent provision is ARTICLE 1234 which says: “If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.” The REQUISITES are: 1) the debtor must have COMPLIED IN GOOD FAITH. Good faith means that there must be a reasonable attempt to comply with the obligation and the failure to perform the obligation completely is not due to the fault or negligence of the debtor, but because of some other factor; and, 2) there must ONLY BE A SLIGHT OR CASUAL BREACH. What is slight or material will have to depend on the circumstances and fact of the case, as well as the nature of the obligation. Slight and casual breach means the performance must approximate the full and complete performance of the obligation. Thus, if a breach is material, the rule on substantial compliance cannot be applied. ARTICLE 1234, RATIONALE. [DCD: According to the Code Commission, in case of substantial performance, the obligee is benefitted. So the obligor should be allowed to recover as if there has been a strict and complete performance, less damages suffered by the obligee. This last condition affords a just compensation for the RELATIVE breach committed by the obligor.] “RECOVER” OR “RECOVERY” UNDER ARTICLE 1234. RECOVERY here does not mean that the obligor will recover what he has already paid. The term means in this instance that, if there is substantial compliance in good faith, the debtor is entitled to enforce the obligation as if it has already been completed the agreement. The recovery here is in relation to the enforcement, not the rescission, of the obligation. APPLICABILITY OF “RECOVERY” IN UNILATERAL OBLIGATIONS. Strictly speaking, there is no recovery, but merely an extension of time for the obligor. This is 9 See Arts. 1233-1235 and 1254 ¶2 10 see Arts. 1244, 1246, 1249 contra Arts. 1245, 1250 11 see Arts. 1248 contra Arts. 1248, 1225, 1208, 1211, 1290, 1720, 2065

because he cannot ask the creditor to perform his part of the obligation as only the obligor is required to do, to give or not to do. SUBSTANTIAL COMPLIANCE DEEMED FULL COMPLIANCE. Technically, there is full performance. The creditor may still sue for damages, but cannot seek relief in actions that flow from breach, such as specific performance or rescission - such rights are suspended. After seeking damages, the court will give the debtor time to pay for the remaining part of the obligation so that there may be full compliance. [DCD: This period is given as an “additional lease on life” to give the debtor time to fulfill his obligation in full. But the said period does not give the debtor all the time in the world to comply. After this period, the creditor becomes entitled to remedies for breach, if the debtor has not yet fully complied with the obligation. During this period, it is as if there has been no breach by the debtor.] WAIVER, DEFINED. ARTICLE 1235 states that “[w]hen the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.” HOWEVER, there must be an intentional relinquishment of a known right. A waiver will not result from a mere failure to assert a claim for defective performance when the thing or work is received, or from mere payment in accordance with the terms of the contract. There must have been acceptance of the defective performance with actual knowledge of the incompleteness or the defect, under circumstances that would indicate an intention to consider the performance as complete and renounce any claim arising from the defect. The word “ACCEPT” as used in the provision means to take as satisfactory or sufficient, or agree to an incompatible or irregular performance. [DCD: The essential condition of a waiver is that a person making the waiver knows what he is waiving.] RECEIPT IS NOT A WAIVER. The mere receipt of partial payment is not equivalent to the required acceptance of performance as would extinguish the whole obligation. CREDITOR CANNOT OBJECT TO A DEFECTIVE PERFORMANCE AFTER A VALID WAIVER. The creditor is ESTOPPED. The failure to protest beforehand precludes the obligee from questioning the performance of the obligation under the contract. Also, where a party makes particular objections to the sufficiency of the performance, he is ESTOPPED from later setting up other objections. WAIVER

AND

SUBSTANTIAL PERFORMANCE, DISTINCTION. SUBSTANTIAL PERFORMANCE does not per se extinguish the obligation. It only “ STOPS THE CLOCK” insofar as payment is concerned, whatever is lacking would still have to be delivered or performed. On the other hand, in a WAIVER, the creditor decides to forego the balance. PAYMENT, BY WHOM MADE. The following can do so: 1) the debtor at the time of payment, and includes his heirs, successors in interest and assigns; 2) an interested third person who is not a debtor, heir or successor in interest or assign; and, 3) a third person who has no intention of being reimbursed. CREDITOR REFUSES TO ACCEPT DEBTOR’S PAYMENT, CONSEQUENCE. This would amount to Mora Accipiendi. INCAPACITATED DEBTOR AT THE TIME OF PAYMENT, CONSEQUENCE. His legal

representatives shall have the right to annul the payment made by the incapacitated debtor. The obligation, aside from the payment, is likewise voidable in this case. [DCD: This envisions a situation wherein the incapacity did not exist at the time of the constitution of the obligation. If it had existed then, the obligation will be deemed void.] [DCD: TAKE NOTE that there is an EXCEPTION: “Article 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.”12 In this case, the legal representatives may annul the payment.] THIRD PERSONS MAKING PAYMENT, PRESENCE OF INTERESTED IN THE OBLIGATION. They may or may not be interested in the obligation. However, if they are INTERESTED, their interest must be in such a way that they may be held liable in the contract the debtor fails to pay. PAYMENT FROM THIRD PERSONS, CREDITOR COMPELLED TO ACCEPT. It depends: 1) if payment was made by a third person INTERESTED in the obligation, then the creditor is still compelled to accept payment. Otherwise, he will be in Mora Accipiendi; but, 2) if payment was made by a third person NOT INTERESTED in the obligation, the creditor’s consent is necessary. In other words, the creditor cannot be compelled to accept payment. [DCD: The reason is that, whenever a third person pays, there is a modification of the prestation that is due. If the creditor does not accept and payment is not made in due time, the debtor will be considered in default.] CREDITOR’S RIGHT TO REFUSE PAYMENT FROM AN UNINTERESTED THIRD PERSON, RATIONALE. [DCD: According to the Code Commission, “the creditor should not be compelled to accept payment from a third person who he dislikes or distrusts. The creditor may not, for personal reasons, desire to have any business dealings with a third person; or the creditor may not have confidence in the honesty of the third person who might deliver a defective thing or pay with a check which may not be honored.”] CREDITOR ACCEPTS PAYMENT FROM A THIRD PERSON NOT INTERESTED IN AN OBLIGATION, CONSEQUENCE. The payment is considered VALID. Actually, in a relationship between a third person-payor and the creditor, what is crucial is the creditor’s consent to the former’s payment. This must be distinguished from the created relationship between the third person-payor and the debtor. [DCD: Though payment by a third person is valid once accepted by the creditor, “this is not the end of the story.” In fact, as far as the third person and the debtor are concerned, it is only the beginning. Now, it is in this aspect that the debtor’s knowledge or consent is determinative.] DEBTOR’S CONSENT OR KNOWLEDGE TO PAYMENT BY A THIRD PERSON, IMPORTANCE. The consent or non-consent of the debtor is ONLY essential for purposes of reimbursement and NOT for purposes of validity of payment. As long as the creditor accepts payment, such is valid.13 [CONSENT may be express, implied or tacit.] 12 JMBD: This seems to be of doubtful application already due to the amendments introduced to the Family Code of the Philippines, which set the age of majority at eighteen (18) years. 13 see Articles 1236-1237, 1302 et seq.

DEBTOR CONSENTS TO PAYMENT BY A THIRD PERSON, CONSEQUENCE. There is FULL REIMBURSEMENT AND SUBROGATION. Full reimbursement simply means that a person is entitled to recover what he has paid. Subrogation means, taking the place of the creditor. This will entitle the third person to enforce all other rights which the creditor may exercise against the debtor.

EXERCISE OF CREDITOR’S RIGHTS IN SUBROGATION OF A THIRD PERSON, NECESSITY OF CREDITOR’S CONSENT. This is no longer necessary. ARTICLE 1302 states that: “It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share.” Therefore, what is being spoken of here is that legal subrogation takes place by operation of law. The law provides for an automatic subrogation of rights as soon as the third person, with the consent of the debtor, pays the obligation. ASSIGNMENT OF RIGHT OF THE CREDITOR, NOT NECESSARY. Technically, it is no longer necessary because subrogation is automatic. HOWEVER, for practical purposes, there is no harm to move for an assignment of right by the creditor to the third person. [DCD: But, it is noteworthy to state that a creditor may assign his rights14 to a third person. But in this case, the resulting rights and obligations of the creditor and the third person would be DIFFERENT from those arising from payment.] PAYMENT’S BENEFITTED THE DEBTOR, MATERIALITY. It is immaterial. The debtor gave his consent, so it is presumed that he will accept the consequences that may arise from the third person’s payment. DEBTOR DOES NOT CONSENT TO THE PAYMENT MADE BY THE THIRD PERSON, CONSEQUENCE. There is only BENEFICIAL reimbursement. This means that the debtor shall only pay the third person to the EXTENT THAT HE HAS BENEFITTED. THIRD PERSON PAID AGAINST THE WILL OF THE DEBTOR, CONSEQUENCE. There is also BENEFICIAL reimbursement - debtor shall only pay the third person to the EXTENT THAT HE HAS BENEFITTED. THIRD PERSON PAYS WITHOUT THE INTENTION OF BEING REIMBURSED, CONSEQUENCE. ARTICLE 1238 states that: “[p]ayment 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.” [This is actually a DONATION from the third person and the debtor.] CONSENT OF THE DEBTOR, NECESSITY. The rules on donation require consent, because the debtor or any person receiving a donation may not be compelled to accept such a donation. Consent therefore is NECESSARY, so that the donation may be perfected. [DCD: No one should be compelled to accept the generosity of another.] 14 CIVIL CODE, Art. 1628 et seq.

DEBTOR’S CONSENT TO DONATION, CONSEQUENCE. It will be considered both a valid payment and a donation. The creditor who accepted it as payment deems the obligation as between him and the debtor extinguished. As for the debtor and the third person, this being a perfected donation, does not require that the former reimburse the latter. [DCD: However, if the third person should want to collect, he is entitled to collect on the basis of beneficial reimbursement.] DEBTOR OBJECTS TO PAYMENT ITSELF, CONSEQUENCE. The effect would be as if the obligation was paid by a third person without the knowledge and consent of the debtor in which case the third person is only entitled to beneficial reimbursement. DEBTOR OBJECTS TO DONATION, CONSEQUENCE. If, for instance, a debtor says “Go ahead and pay, but I do not want this to be a donation,” the effect is that this is payment with the knowledge and consent of the debtor in which case the third person is entitled to full reimbursement and subrogation. PAYMENT, TO WHOM MADE. Payment may be made to the following: 1) the creditor at the time of the payment, which includes his heirs and successors in interest; 2) a third person authorized by law or by agreement of the parties; or, 3) a third person who is not authorized by law or by agreement. CREDITOR INCAPACITATED AT TIME OF PAYMENT. The relevant provision is ARTICLE 1241 which states: “[p]ayment 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.”[DCD: If payment is made to a creditor who is incapacitated, it shall be valid only insofar as it accrued to his benefit. In the absence of this benefit, the debtor may be made to pay again by the incapacitated himself when he regains capacity, or by his legal representatives. Payment shall be considered as having benefitted the incapacitated person if he made intelligent and reasonable use thereof, for purposes necessary or useful to him. If there is NO LEGAL REPRESENTATIVE, the remedy is ARTICLE 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, thus: “[c]onsignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost.] PAYMENT TO THE CREDITOR, CONSEQUENCE. It extinguishes the obligation. WHEN MAY PAYMENT TO A CREDITOR DOES NOT EXTINGUISH THE OBLIGATION, INSTANCE. This is found in ARTICLE 1243 which states “[p]ayment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.” THIRD PERSON AUTHORIZED BY LAW TO ACCEPT PAYMENT, EXAMPLES. It could be a legal guardian or representative of an incapacitated creditor. [DCD: NOTE THAT in making payment, always ask for the authority of the person to receive payment.] PAYMENT TO THIRD PERSONS AUTHORIZED BY LAW OR BY THE PARTIES,

CONSEQUENCE. The obligation is extinguished. PAYMENT TO A THIRD PERSON NOT AUTHORIZED BY LAW NOR BY THE PARTIES, CONSEQUENCE. The GENERAL RULE is that the obligation will be extinguished only insofar as it benefitted he creditor. BENEFIT REDOUNDED TO THE CREDITOR, BURDEN OF PROOF. It is the debtor. NO PROOF OF BENEFIT, CONSEQUENCE. It will be considered as though no benefit had been delivered by the creditor. Thus, the debtor may be made to pay again. PROOF OF BENEFIT, NOT REQUIRED. GENERALLY the situation is governed by ARTICLE 1241 which states “[p]ayment 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.” The EXCEPTIONS are also found in the same provisions of law, thus “[s]uch benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's c...