Extinguishment of obligations, Obligations Law

Obligations are extinguished:

1) By payment or performance:

2) By the loss of the thing due:

3) By the condonation or remission of the debt;

4) By the confusion or merger of the rights of creditor and debtor;

5) By compensation;

6) By novation. (Article 1231, Civil Code)

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in the Civil Code. (Paragraph 2, Article 1231, Civil Code)

1. Payment or performance

a. Concept

Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (Article 1232, Ibid.)

1) Payment of debt

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.(Article 1233, Ibid.)

2) Substantial performance

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. (Article 1234, Ibid.)

3) Acceptance of performance

When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.(Article 1235, Ibid.)

4) Payment by third person

The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. (Article 1236, Ibid.)

a) Rights of third person payor

GENERAL RULE: Whoever pays for another may demand from the debtor what he has paid… (Paragraph 2, Article 1236, Ibid.)

EXCEPTION: …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. (Paragraph 2, Article 1236, Ibid.)

No right of 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. (Article 1237, Ibid.)

Payment by third person w/o intention to be reimbursed, a donation. 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. (Article 1238, Ibid.)

5) Payment by person w/ no free disposal of thing, no capacity to alienate

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. (Article 1239, Ibid.)

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. (Article 1427, Ibid.)

b. Recipient of payment

1) Payment to proper recipient

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. (Article 1240, Ibid.)

2) Payment to incapacitated person

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. (Article 1241, Ibid.)

3) Payment to a third person

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 creditor’s rights;

2) If the creditor ratifies the payment to the third person;

3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment. (Paragraph 2, Article 1241, Ibid.)

4) Payment to any person in possession of the credit

Payment made in good faith to any person in possession of the credit shall release the debtor. (Article 1242, Ibid.)

5) Payment to creditor where debtor is judicially ordered to retain the debt

Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (Article 1243, Ibid.)

c. Manner of payment

1) No substituted payment

The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due.(Article 1244, Ibid.)

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will. (Paragraph 2, Article 1244, Ibid.)

2) Dation in payment

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. (Article 1245, Ibid.)

3) Delivery of indeterminate or generic thing

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. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (Article 1246, Ibid.)

4) No partial performance or payment, by default

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 be required to make partial payments. (Article 1248, Ibid.)

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.(Paragraph 2, Article 1248, Ibid.)

5) Monetary debts

a) In what currency

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. (Article 1249, Ibid.)

b) Mercantile documents – when payment takes effect

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. (Paragraph 2, Article 1249, Ibid.)

In the meantime, the action derived from the original obligation shall be held in the abeyance. (Paragraph 3, Article 1249, Ibid.)

c) Extraordinary inflation or deflation

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. (Article 1250, Ibid.)

6) Extrajudicial expenses

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. (Article 1247, Ibid.)

d. Place of payment

1) Place designated in obligation

Payment shall be made in the place designated in the obligation.(Article 1251, Ibid.)

2) If not stipulated

a) For delivery of determinate thing: where located at the constitution of 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. (Paragraph 2, Article 1251, Ibid.)

b) For all others: domicile of debtor

In any other case the place of payment shall be the domicile of the debtor. (Paragraph 3, Article 1251, Ibid.)

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. (Paragraph 4, Article 1251, Ibid.)

e. Application of payments

1) Debtor has right on application – with exceptions

GENERAL RULE: 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. (Article 1252, Ibid.)

EXCEPTIONS: Unless…

1) Unless the parties so stipulate; or

2) When the application of payment is made by the party for whose benefit the term has been constituted

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. (Article 1252, Ibid.)

2) Effect of receiving receipt from creditor

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.(Paragraph 2, Article 1252, Ibid.)

3) Interest payments first before principal debt

If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (Article 1253, Ibid.)

4) When most onerous debt applies

When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. (Article 1254, Ibid.)

If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (Paragraph 2, Article 1254, Ibid.)

f. Payment by cession

1) Cession or assignment of property as payment

The debtor may cede or assign his property to his creditors in payment of his debts. (Article 1255, Ibid.)

2) Release, limited to net proceeds – unless otherwise stipulated

This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. (Ibid.)

g. Tender of payment and consignation

1) Concept and nature

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. (Article 1256, Ibid.)

Consignation 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.(Paragraph 2, Article 1256, Ibid.)

2) Announcement/notice, required

In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. (Article 1257, Ibid.)

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (Paragraph 2, Article 1257, Ibid.)

3) How done

Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases.(Article 1258, Ibid.)

The consignation having been made, the interested parties shall also be notified thereof. (Paragraph 2, Article 1258, Ibid.)

4) Expenses of consignation

The expenses of consignation, when properly made, shall be charged against the creditor. (Article 1259, Ibid.)

5) Judicial order, re cancellation of obligation

Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. (Article 1260, Ibid.)

6) Debtor’s right to withdraw

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. (Paragraph 2, Article 1260, Ibid.)

7) Lose of preference by creditor-authorized withdrawal

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. (Article 1261, Ibid.)

2. Loss of determinate thing due or impossibility or difficulty of performance

a. Loss of determinate thing

1) Obligation to deliver a determinate thing

GENERAL RULE: An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. (Article 1262, Ibid.)

EXCEPTIONS:

1) By law

2) By stipulation

3) Assumption of risk

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (Paragraph 2, Article 1262, Ibid.)

2) Obligation to deliver generic thing

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (Article 1263, Ibid.)

The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation.(Article 1264, Ibid.)

3) Presumption

a) Against debtor if in possession of thing lost – unless proven otherwise

Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. (Article 1265, Ibid.)

When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. (Article 1165, Ibid.)

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor.(Paragraph 2, Article 1165, Ibid.)

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (Paragraph 3, Article 1165, Ibid.)

Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (Article 1170, Ibid.)

b) Non-applicability if due to natural calamity

b. Impossibility of performance

1) Legal or physical impossibility

The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (Article 1266, Ibid.)

2) Beyond the contemplation of the parties

When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (Article 1267, Ibid.)

3) Proceeds from a criminal offense

When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (Article 1268, Ibid.)

4) Creditor’s right of subrogation

The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (Article 1269, Ibid.)

3. Condonation or remission of debt

a. Concept

1) Gratuitous

Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. (Article 1270, Ibid.)

2) Acceptance by obligor, required

Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. (Ibid.)

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (Paragraph 2, Article 1270, Ibid.)

b. Delivery of credit document

1) Implies waiver/renunciation of debt

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.(Article 1271, Ibid.)

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. (Paragraph 2, Article 1271, Ibid.)

2) Presumption favors voluntary delivery

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.(Article 1272, Ibid.)

c. Renunciation of principal debt

The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (Article 1273, Ibid.)

d. Delivery of thing pledged in possession of debtor or third person owner

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. (Article 1274, Ibid.)

4. Confusion

a. Concept

1) Extinguishes obligation

The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (Article 1275, Ibid.)

2) As between principal or creditor

Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.(Article 1276, Ibid.)

3) As against guarantors

Confusion which takes place in the person of any of the [guarantors] does not extinguish the obligation. (Ibid.)

4) Joint obligation

Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (Article 1277, Ibid.)

5. Compensation

a. Concept

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.(Article 1278, Ibid.)

1) Requisites

GENERAL RULE: In order that compensation may be proper, it is necessary:

1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

2) 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;

3) That the two debts be due;

4) That they be liquidated and demandable;

5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Article 1279, Ibid.)

EXCEPTIONS:

1) The guarantor may set up compensation as regards what the creditor may owe the principal debtor. (Article 1280, Ibid.)

2) The parties may agree upon the compensation of debts which are not yet due. (Article 1282, Ibid.)

2) Scope of compensation

Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (Article 1281, Ibid.)

3) By operation of law

a) Even if debts are payable at different places

Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (Article 1286, Ibid.)

b) Even if creditors and debtors are unaware

When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (Article 1290, Ibid.)

4) Rescissible or voidable debts

When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (Article 1284, Ibid.)

5) Lawsuit: Off-setting damages

If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (Article 1283, Ibid.)

6) Rules on application of payments

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. (Article 1289, Ibid.)

b. Assignment by creditor

1) Debtor who consents

GENERAL RULE: The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor… (Article 1285, Ibid.)

EXCEPTION: …unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. (Article 1285, Ibid.)

2) Debtor who did not consent

a) Right to compensation for debts previous to cession/assignment

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.(Paragraph 2, Article 1285, Ibid.)

3) Debtor who had no knowledge

a) Right to compensation for all credits until his knowledge of assignment

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Paragraph 3, Article 1285, Ibid.)

c. No compensation

1) Depositum / depositary, commodatum

Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. (Article 1287, Ibid.)

2) Claim for support

Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (Paragraph 2, Article 1287, Ibid.)

The right to receive support cannot be renounced; nor can it be transmitted to a third person. Neither can it be compensated with what the recipient owes the obligor. (Article 301, Ibid.)

However, support in arrears may be compensated and renounced, and the right to demand the same may be transmitted by onerous or gratuitous title.(Paragraph 2, Article 301, Ibid.)

3) Civil liability from a penal offense

Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (Article 1288, Ibid.)

6. Novation

a. Concept

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. (Article 1293, Ibid.)

1) Kinds of novation

Obligations may be modified by:

1) Changing their object or principal conditions;

2) Substituting the person of the debtor;

3) Subrogating a third person in the rights of the creditor. (Article 1291, Ibid.)

2) Manner of novation

In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, Ibid.)

3) Extinguishment of principal obligation

When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (Article 1296, Ibid.)

4) If new obligation is void

If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (Article 1297, Ibid.)

5) If original obligation is void

GENERAL RULE: The novation is void if the original obligation was void. (Article 1298, Ibid.)

EXCEPTION: …except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (Ibid.)

If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (Article 1299, Ibid.)

b. Creditor

1) Rights of creditor

a) To obtain creditor’s consent

b) To refuse subrogation, if payment is without knowledge or against will of original debtor

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. (Article 1237, Ibid.)

c. New debtor

1) Rights of new debtor

Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1239, Ibid.)

a) To pay for the original debtor, if stipulated on the debt

b) To be reimbursed by original debtor, subject to conditions

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.(Paragraph 2, Article 1293, Ibid.)

d. Original debtor

1) No liability for new debtor’s insolvency or non-fulfillment of obligations

a) If substitution without knowledge or against will of original debtor

If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (Article 1294, Ibid.)

b) If new debtor’s insolvency was not existing nor of public knowledge, or known to the original debtor, when debt was delegated

The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt.(Article 1295, Ibid.)

2) When liable for new debtor’s insolvency

a) If new debtor’s insolvency was existing or of public knowledge, or known to the original debtor, when debt was delegated

e. Subrogation

1) Concept

Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (Article 1303, Ibid.)

2) Preference to creditor who received partial payment

A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit.(Article 1304, Ibid.)

3) Kinds of subrogation

Subrogation of a third person in the rights of the creditor is either legal or conventional. (Article 1300, Ibid.)

a) Legal subrogation

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. (Article 1302, Ibid.)

The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (Article 1300, Ibid.)

b) Conventional subrogation

Conventional subrogation of a third person requires the consent of the original parties and of the third person. (Article 1301, Ibid.)

References

⦁ Book IV, Republic Act No. 386, Civil Code

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