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CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS Causes of Extinguishment of Obligations 1. By payment or performance 2. By the loss of the thing due 3. By the condonation or remission of the debt (Forgive the debt) 4. By the confusion or merger of the rights of creditor and debtor 5. By C...

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CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS Causes of Extinguishment of Obligations 1. By payment or performance 2. By the loss of the thing due 3. By the condonation or remission of the debt (Forgive the debt) 4. By the confusion or merger of the rights of creditor and debtor 5. By Compensation 6. By novation (Substitution of a new contract in place of an old one) Other causes provided by Article 1231: 1. Annulment 2. Rescission 3. Fulfillment of a Resolutory Condition 4. Prescription Other causes not provided by Article 1231: 1. Death of a party in case of an obligation requiring personal service. 2. Mutual desistance or withdrawal. 3. Arrival of a reolutory period 4. Compromise 5. Impossibility of Fulfillment 6. Happening of a fortuitous event.

SECTION 1 – Payment or Performance Meaning of Payment Payment – In ordinary parlance, payment refers to delivery or money. - May consist not only in the delivery of money but also giving of a thing, doing of an act, or not doing of an act.

When debt is considered paid Debt – may refer to an obligation to deliver money, to deliver a thing, to do an act, or not to do an act. A Debt is considered paid in:

1. Integrity of prestation – A debt to deliver a thing or to render service is not understood to have been paid unless the thing or service has been completely delivered or rendered. 2. Identity of the prestation – The very prestation due must be delivered or performed.

Recovery allowed in case of substantial performance in good faith Article 1234 is the first exception in Article 1233. Code Commission said that Article 1234 is adopted from American Law. In case of partial performance, the creditor is benefited. So, the debtor should be allowed to recover as if there had been a strict and complete fulfillment.

Requisites for the Application of Article 1234 (Obligation partially fulfilled) 1. There must be substantial performance 2. The debtor must be in good faith *There is Substantial Performance when the important or essential part of the contract has been performed and only a small or minor part has not been carried out. Recovery allowed when incomplete or Irregular performance is waived Article 1235 is other exception to Article 1233. 1. If the payment is incomplete or irregular, the creditor may properly reject it. 2. In case of acceptance, the law considers that he waives his right. The whole obligation is extinguished.

Requisites for the application of Article 1235 1. The creditor knows that the performance is incomplete. 2. He accepts the performance without expressing any protest.

Persons from whom the creditor must accept payment 1. The debtor 2. Any person who has interest in the obligation (Parent or Guardian) 3. A third person who has no interest in the obligation when there is stipulation that he can make payment.

Creditor may refuse payment by a third person Under the Old Civil Code, the creditor cannot refuse payment by a third person but the commission believes the creditor should have a right to insist on the liability of the debtor.

Effect of payment by a third person 1. If made without the knowledge or against the will of the debtor – The payer can recover from the debtor only insofar as the payment has been beneficial to the debtor. 2. I made with the knowledge of the debtor – The payer shall have the rights of reimbursement and subrogation that is to recover what he has paid.

Right of third person to subrogation Whoever pays in behalf of the debtor in entitled to subrogation if they payment is with the consent of the debtor. If the payment is made without the consent of the debtor, the payer cannot compel the creditor to subrogate him.

Subrogation and Reimbursement Distinguished Subrogation Reimbursement The person who The third person is pays for the debtor entitled by the reason is put into the of payment without shoes of the the right to the creditor. The payer guarantees and acquires the rights securities of the to be reimbursed original obligation.

and the right of the creditor could have exercised pertaining to the credit.

Payment by a third person who does not intend to be reimbursed If the paying third person does not intend to be reimbursed, the payment is deemed a donation which requires the debtor’s consent to be valid.

Meaning of “Free Disposal of the Thing Due” and “Capacity to Alienate” 1. Free Disposal of the Thing Due – means that the thing to be delivered must not be subject to any claim or lien or encumbence of a third person. 2. Capacity to alienate – means that the third person is not incapacitated to enter into contracts.

Free Disposal of the Thing Due and Capacity to Alienate Required Payment by one who does not have the free disposition of the thing due and capacity to alienate is not valid. This means that the thing paid can be recovered.

Person to whom the payment shall be made Payment shall be made to: 1. The creditor 2. His successor in interest 3. Any person authorized to receive it

Meaning of “Any person authorized to receive it” It means not only a person authorized to receive by the creditor, but also a person authorized by

the law to receive the payment, such as guardian.

the debt until the right of the plaintiff, the creditor in the main litigation is resolved.

Effect of the Payment to an Incapacitated person Payment to a person incapacitated to administer his propert is not valid unless such incapacitated person has kept the thing paid or delivered.

Very Prestation Due must be Complied with 1. The first paragraph refers to real obligation to deliver a specific thing. A thing different from that due cannot be offered or demanded against the will of the creditor or debtor. 2. The second paragraph refers to Personal Obligations. The act to be performed or the act prohibited cannot be substituted against the creditor’s will.

Effect of payment of a Third Person Payment to a third person or wrong party is not valid except insofar as it has redounded to the benefit of the creditor.

When benefit to Creditor need not be proved by the Debtor The debtor is relieved from proving benefit to the creditor incase of: 1. Subrogation of the payer in the creditor’s rights. 2. Ratification by the creditor (Consent Given) 3. Estoppel on the part of the Creditor Estoppel – an admission or representation is rendered conclusive upon the third person making it and cannot be denied or disproved as against the person relying thereon.

Payment to Third person in Possession of the Credit It must be observed that the possession referred is possession of the credit itself and not merely of the document or instrument evidencing the credit

When payment to Creditor is not Valid In an action against the debtor who is a creditor of another, the latter, during the pendency of the case, may be ordered by the court to retain

When Prestation may be Substituted Substitution can be made if the creditor consents. In facultative obligations, the debtor is given the right to render another prestation in substitution.

Special Forms of Payments 1. Dation in Payment 2. Application of payments 3. Payment by cession 4. Tender of payment and consignation

Meaning of Dation in Payment Dation in payment – the conveyance of ownership of a thing as an accepted equivalent of performance.

Governing Law The law of sales governs because dation in payment may be considered a specie of sale in which the amount of money debt becomes the price of the thing alienated.

Rule of medium quality

Article 1246 is a principle of equity in that it supplies justice in case where there is lack of precise declaration in the obligation. If the obligation consists in the delivery of a specific thing, very thing due must be delivered. If the obligation is to deliver a generic thing, the purpose of the obligation and other circumstances shall be taken into consideration.

Debtor Pays for Extrajudicial Expenses The extrajudicial expenses of payment are for the account of the debtor. If the parties have made a stipulation as to who will bear the expenses, then the stipulation will be followed.

Losing party Generally pays Judicial Costs Judicial Costs – statutory amounts allowed to a party to an action for his expenses incurred in the action.

Performance of Obligation should be complete In order that payment may extinguish an obligation, it is necessary that there, be complete performance of the prestation. The creditor may accept but he cannot be compelled to accept partial performance. The debtor has the duty to comply with the whole obligation but he cannot be required to make partial payments.

When Partial Payments are Allowed 1. When there is an express stipulation to that effect. 2. When the debt is in part liquidated and in part unliquidated. 3. When the different prestations in which the obligation consists are subject to different terms or conditions when affect some of them.

Meaning of Legal Tender Legal Tender – is that currency which is offered by the debtor in the right amount, the creditor must accept in payment of a debt in money.

Legal Tender in the Philippines Debts in money shall be paid in the currency stipulated. If it is not possible to deliver such currency or in the absence of any stipulation to make payment in foreign currency, then the payment shall be made in the currency which is legal tender in the Philippines.

Payment by means of Instruments of Credits 1. Right of creditor to refuse or accept – Promissory notes, checks, bills of exchange and other commercial documents are not legal tender and, therefore, the creditor cannot be compelled to accept them. a. The creditor, however, if he chooses, may accept them, without the acceptance producing the effect of payment. In the meantime, the demandability of the original obligation is suspended. b. The creditor must cash the instrument, and it is only when it is dishonored that he can bring an action for non-payment of the debt. 2. Effect on obligation – Payment by means of mercantile documents does not extinguish the obligation: a. Until they have been cashed. b. Unless they have been impaired through the fault of the creditor.

Meaning of Inflation and Deflation 1. Inflation – sharp sudden increase of money or credit or both without a corresponding increase in business

transactions. Inflation causes a drop in the value of money, resulting in the rise of the general price level. 2. Deflation – the reduction in the volume and circulation of the availability money or credit, resulting in a decline of the general price level.

Basis of Payment in case of Extraordinary Inflation or Deflation Under the Article 1250, the purchasing value of the currency at the time of the establishment of the obligation shall be the basis of payment, in case of increase or decrease in the purchasing power of the currency which the parties could not have reasonably foreseen.

Place where Obligation shall be Paid 1. If there is stipulation, the payment shall be paid in the place designated. 2. If there is a stipulation, and the thing to be delivered is specific, the payment shall be made at the place where the thing was, at the perfection of the contract. 3. If there is no stipulation and the thing to be delivered is generic, the place of payment shall be domicile of the debtor.

SUBSECTION 1 – Application of Payments Meaning of Application of Payments Application of Payments – the designation of the debt to which should be applied the payment made by a debtor who has various debts of the same kind in favor of one and the same creditor.

Requisites of Application of Payments 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. 5. The payment made must not be sufficient to cover all debts.

Application as to Debts not yet Due The application of payments as to debts not yet due cannot be made unless: 1. There is a stipulation that the debtor may so apply. 2. It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted.

Rules on Application of Payments As to which debt is paid, the rules are as follows: 1. The debtor has the first choice; he must indicate at the time of making payment, and not afterwards, which particular debt is being paid. 2. The right to make the application once exercised is irrevocable unless the creditor consents to the change. 3. If the debtor does not apply payment, the creditor may make the designation by specifying in the receipt which debt is being paid. 4. If the creditor has not also made the application, or if the application is not valid, the debt, which is most onerous to the debtor among those, shall be deemed to have been satisfied. 5. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.

Interest Earned Paid Ahead of Principal

The rule laid down in the article is mandatory. Hence, the debtor cannot choose to credit his payment to the principal before the interest is paid.

which debt is more onerous to the debtor, the payment should be applied to all of them proportionately.

SUBSECTION 2 – Payment by Cession Application of Payment to the Most Onerous Debt In case no application of payment has been made by the debtor and the creditor, then the payment shall be applied to the most onerous debt, and if the debts are of the same nature and burden, to all of them proportionately.

When a debt more onerous than another A debt is more onerous than another when it is more burdensome to the debtor. No fixed rule can be laid down in determining which debt is more onerous to the debtor since the condition of being more burdensome is a matter dependent upon circumstances. The Supreme Court gave some rules which can be followed to determine whether one debt is more burdensome than another: 1. An interest bearing debt is more onerous than a non interest bearing debt even if the non interest bearing debt is an older one. 2. A debt as a sole debtor is more onerous than a solidary debtor. 3. Debts secured by a mortgage or by pledge are more onerous than unsecured debts. 4. Of two interest bearing notes, the one with a higher rate is more onerous. 5. An obligation with a penalty clause is more burdensome than one without penalty clause.

Where debts subject to Different Burdens Suppose the debts are subject to different burdens that it cannot be definitely determined

Meaning of Payment by Cession Payment by Cession is another special form of payment where it is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to the satisfaction of their credits.

Requisites of Payment by Cession 1. There must be two or more creditors 2. The debtor must be partially insolvent. 3. The assignment must involve all the properties of the debtor. 4. The cession must be accepted by the creditors.

Effect of Payment by Cession Unless there are stipulation, the assignment does not make the creditors the owners of the property of the debtor and the debtor is released from his obligation only up to the net proceeds of the sale of the property assigned.

Dation in Payment and Cession Distinguished. Dation Cession There is usually There are several one creditor creditors Does not The debtor is insolvent presuppose the in the time of insolvency of the assignment debtor Does not involve all Extends to all the the property of the property of the debtor subject to execution debtor The creditor The creditors acquire becomes the the right to sell the owner of the thing thing and apply the

given by the debtor

proceeds to their credits proportionately.

SUBSECTION 3 – Tender of Payment and Consignation Meaning of “Tender of Payment” and “Consignation” 1. Tender of Payment – act, on the part of the debtor, of offering to the creditor the thing or amount due. 2. Consignation – act of depositing the thing or amount due with the proper court when the creditor does not desire or cannot receive it, after complying with the formalities required by law.

Requisites of a Valid Consignation 1. Existence of a valid debt which is due 2. Tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it. 3. Previous notice of consignation to person interested in the fulfillment of the obligation. 4. Consignation of the thing or sum due 5. Subsequent notice of consignation made to the interest parties.

Requisites for Valid Tender of Payment 1. Tender of payment must comply with the rules on payment or with the terms required by the contract in making such tender. 2. It must be conditional and for the whole amount due and in legal tender. 3. It must be actually made.

Prior Notice to Persons Interested Required

*In the absence of notice to the persons interested in the fulfillment of the obligation, the consignation, as payment shall be void.

Consignation must comply with Provisions on Payment Consignation, to amount to a valid payment, must also comply with the previous provisions, which regulate payment. Article 1233 – A debt should not be understood as paid unless completely delivered or rendered. Article 1239 – 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. Article 1244 – The debtor of a thing cannot force the creditor to receive a different one. Article 1246 – When the obligation consists in the delivery of a generic thing whose quality have not been stated, the creditor cannot demand a superior or inferior quality. Article 1248 – Unless there is stipulation, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Article 1249 – The payment of debts in money shall be made in the currency stipulated. Article 1253 – If the debt produces interest, the payment of the principal shall not be deemed to be made until interests are covered

Consignation must be with Proper Judicial Authority *Consignation, by depositing, the thing or sum due with the proper judicial authority, is necessary to effect payment.

Creditors bear Expenses of Consignation *The consignation is made necessary because of the fault or unjust refusal of the creditor to accept payment. That being the case, it is just

that the expenses should be charged against him.

When Consignation deemed properly made 1. Acceptance of the thing or sum deposited 2. Declared by the court 3. Obligation cancelled by the court.

Withdrawal by Debtor of Thing deposited or Sum Deposited The debtor, may withdraw the thing or sum deposited: 1. Before the acceptance of Consignation 2. Before a Judicial Declaration that the consignation has been properly made.

Effect of Withdrawal with Authority of Creditor *The creditor shall lose every preference which he may have over the thing, and the co-debtors, guarantors, and sureties shall be released from the obligation.

SECTION 2 – Loss of the Thing Due When a Thing is Considered Lost *It is understood that a thing is lost when it perishes, or goes out of commerce or disappears in such a way that it cannot be recovered. Loss of a determinate thing is equivalent to impossibility of performance in obligation.

When Loss of Thing will extinguish an Obligation to Give Requisites in order for an obligation be extinguished by the loss of the thing: 1. The obligation to deliver is a specific thing. 2. The loss of the...