CHAPTER 4

EXTINGUISHMENT OF OBLIGATIONS

CHAPTER 4
EXTINGUISHMENT

OF OBLIGATIONS

GENERAL

PROVISIONS

1231. Obligations are extinguished:

5. by payment or performance
6. by loss of the thing due
7. by condonation or remission
8. by confusion or merger of the rights of creditor and debtor
9. by compensation
10. by novation
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a
resolutory condition, and prescription, are governed elsewhere in this Code.

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

Payment means not only delivery of money but also the performance.

1233. A debt shall not be understood to have been paid unless the thing or service in which the
oligatoin consists has been completely delivered or rendered, as the case may be.

1. When debt is considered paid :

a. Integrity of the prestation - Gen. Rule : Partial performance will not extinguish the obligation.
b. Identity of the prestation: Due prestation must be delivered.

* Burden of proving : Debtor who claims payment.

1234. 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.

1. Recovery allowed less the damages brought to creditor in case of substantial performance in good faith.
Requisites :
a. Substantial performance ( essential part )
b. Obligor must be in good faith
Assumption : Good faith is always presumed in the absence of proof to the contrary.

1235 – When the oblige accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied with
1. Recovery allowed when incomplete performance is waived
a. The creditor may reject if the fulfillment is incomplete
b. Law considers it , as a waive of creditos right if that creditor did not protest
2. Requisites:
a. The obligee knows that the performance is incomplete
b. He accepted it with no objection

1236. 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. 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
1. Gen. Rule : Creditor may refuse the payment of a third person
 2. Whom to pay :
a. Debtor
b. Person who has interest in obli.
c. 3rd person granted by the stipulation
3. Effect of payment of a THIRD PERSON:
a. W/O KNOWLEDGE OR WILL OF DR :only to the extent of what benefits the debtor. The 3rd
person cannot claim any reimbursement.
● the creditor who acted in bad faith must be liable for interest in lieu for damages
b. W/KNOWLEDGE - 3rd person is entitled for subrogation and for reimbursement

1237. 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

1. Right of the 3rd person to subrogation ( only if consented by the debtor, what he have is only
the right for reimbursement on a certain extent ).
2. Subragation - Reimbursement + personality of the creditor , no real extinction of the
obligation.
1238. Payment made by a third person who does not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor’s consent/ but the payment is in any case
valid as to the creditor who has accepted it

1. Donation is valid in the pov of the creditor w/ or w/o consent of the debtor
2. The debtor needs to reimburse the 3rd person only up to the extent, if the donation is
against the will of the debtor .

ART 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, without prejudice to the provisions of
article 1427 under the Title on “Natural Obligations”

1. Payment is invalid if it is:

a. Free disposal of the thing due - kahit anong gawin mo kase walang ibang nagmamayari kundi
ikaw.
b. Capacity to alienate - legal dapat na pumasok sa contract not mga minors…
c.
1240. 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
1. Whom the payment shall be made?
a. Creditor ( not at the time the obli. is constituted )
b. Successor in interest
c. Any person authorized to to receive it (authorized by the creditor and authorized by the law)
Rule: Payment to any other person, is not valid even if the debtor acted in good faith.

1241. Payment to a person who is incapacitated to administer his property shall be valid if he has
kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to
a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such
benefit to the creditor need not be proved in the following cases:
(1) If after the payment, the third person acquires the 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. (1163a)
1. Effect of payment to
a. an incapacitated person - if he has kept the thing delivered
b. 3rd person -redounded to the benefit of the third person
Assumption : the creditor is not benefited by the payment through a 3rd person , so one must prove the
facts or else the creditor has still the right to demand payment.
2. When benefits of the creditor need not to be proved by the debtor:
a. subrogation of the payer in the creditor’s right
b. ratification by the creditor (consented)
c. estoppel on the part of the creditor( the debtor has been led to believe that the 3rd person has
the right to receive the payment because of the creditor’s act)
1242. Payment made in good faith to any person in possession of the credit shall release the debtor.
(1164)

1. Payment to a third person in possession of credit

a. The instrument does not bear the credit,it does not release the debtor nor gives the holder the
right ( unless transferable by delivery ).ie. the note is payable to the holder
b. Debtor must act in good faith.Good faith is presumed .

1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain
the debt shall not be valid. (1165)

1. When payment is invalid - The debt of the stranger is garnished towards the debtor as the creditor has
asked the court which thereof ordered retention .When he still pays even there is an order of retention,
it is considered valid and that stranger is still liable to the creditor . The payment made by the stranger
to the creditor extinguishes the liability of the debtor-creditor.
1244. 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. 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. (1166a)

1. Very prestation due must be complied with

a. Real- void if against the will of the creditor , as the case may be
b. Personal - void if against the will of the creditor ,
2. When prestation may be substituted - if the creditor consented or there is a stipulation

1245. 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. (n)
1. Special forms of payment
a. Dation in payment - sige ito na lang pambayad mo
i. Gen. rule : Kung magkano ang value ng pinagpalit unless there is a contrary based on stipulation.
ii. Governing law : Law of sales- kasi naging purchase price ang debt .
b. Application of payment -not a special form
c. Payment by cession-
d. Tender of payment and consignation.
1246. 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. (1167a)
● If there is disagreement between the debtor and the creditor as to the quality of the thing delivered, the court should decide
whether it complies with the obligation, taking into consideration the purpose and other circumstances of the obligation
● Both the creditor and the debtor may waive the benefit of this article
● Applicable to generic thing

1247. 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. (1168a)

1248. 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.
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. (1169a)

1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed, or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)
● LEGAL TENDER - means such currency which in a given jurisdiction can be used for the payment of debts, public and
private, and which cannot be refused by the creditor
- That which a debtor may compel a creditor to accept in payment of debt.
● so long as the notes were legal tender at the time they were paid or delivered, the person accepting them must suffer
the loss if thereafter they became valueless
● the provisions of the present article have been modified by RA No. 529 which states that payments of all monetary
obligations should now be made in currency which is legal tender in the Phils. A stipulation providing payment in a
 foreign currency is null and void but it does not invalidate the entire contract, and R.A. 4100.
● A check, whether a manager’s check or an ordinary check is not legal tender and an offer of the check in payment of debt
is not a valid tender of payment

1250. 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. (n)
● Applies only where a contract or agreement is involved. It does not apply where the obligation to pay arises from law,
independent of contracts
● Extraordinary inflation of deflation may be said to be that which is unusual or beyond the common fluctuations in the
value of the currency, which parties could not have reasonably foreseen or which was manifestly beyond their
contemplation at the time when the obligation was constituted

1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the
undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the
moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor.
● If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by
him. These provisions are without prejudice to venue under the Rules of Court.(1171a)
● Since the law fixes the place of payment at the domicile of the debtor, it is the duty of the creditor to go there and
receive payment; he should bear the expenses in this case because the debtor cannot be made to shoulder the expenses
which the creditor incurs in performing a duty imposed by law and which is for his benefit.
● But if the debtor changes his domicile in bad faith or after he has incurred in delay, then the additional expenses shall be
borne by him
● When the debtor has been required to remit money to the creditor, the latter bears the risks and the expenses of the
transmission. In cases however where the debtor chooses this means of payment, he bears the risk of loss.

SUBSECTION 1
APPLICATION OF PAYMENTS

1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose benefit the term has been constituted, application shall not be
made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract. (1172a)
● Requisites:
1. 1 debtor and 1 creditor only
2. 2 or more debts of the same kind
3. all debts must be due
4. amount paid by the debtor must not be sufficient to cover the total amount of all the debts
● It is necessary that the obligations must all be due. Exceptions: (1) whe there is a stipulation to the contrary; and (2) the
application of payment is made by the party for whose benefit the term or period has been constituted (relate to Art.
1196).
● It is also necessary that all the debts be for the same kind, generally of a monetary character. This includes obligations
which were not originally of a monetary character, but at the time of application of payment, had been converted into an
obligation to pay damages by reason of breach or nonperformance.
● If the debtor makes a proper application of payment but the creditor refuses to accept it because he wants to apply it to
another debt, such creditor will incur in delay
● RIGHT OF DEBTOR TO MAKE APPLICATION. If at the time of payment, the debtor does not exercise his right to apply it to
any of his debts, the application shall be understood as provided by law, unless the creditor makes the application and
his decision is accepted by the debtor. This application of payment can be made by the creditor only in the receipt issued
at the time of payment (although the application made by creditor may be contested by the debtor if the latter’s assent
to such application was vitiated by such causes as mistake, violence, intimidation, fraud, etc)
● The debtor and the creditor by agreement, can validly change the application of payment already made without prejudice
to the rights of third persons acquired before such agreement
1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered. (1173)
● Interest paid first before principal
● Applies both to compensatory interest (that stipulated as earnings of the amount due under the obligation) and to
interest due because of delay or mora on the part of the debtor
● SC held that this provision applies only in the absence of a verbal or written agreement to the contrary (merely directory,
not mandatory)

1254. 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. If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately. (1174a)
● As to which of 2 debts is more onerous is fundamentally a question of fact, which courts must determine on the basis of
the circumstances of each case
● Debts are not of the same burden (1st par.)– Rules:
1. Oldest are more onerous than new ones
2. One bearing interest more onerous than one that does not
3. secured debt more onerous than unsecured one
4. principal debt more onerous than guaranty
5. solidary debtor more onerous than sole debtor
6. share in a solidary obligation more onerous to a solidary debtor
7. liquidated debt more onerous than unliquidated
● Debts are of the same burden (2nd par.)– the payment shall be applied to all of them pro rata or proportionately.
● Example: debtor owes his creditor several debts, all of them due, to wit: (1) unsecured debt, (2) a debt secured with
mortgage of the debtor's property, (3) a debt with interest, (4) a debt in which the debtor is solidarily liable with another.
Partial payment was made by the debtor, without specification as to which the payment should be applied.
The most onerous is (4), followed by (2), then (3), then (1). Consequently, payment shall be made in that order.

SUBSECTION 2
PAYMENT BY CESSION

1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there
is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall
be governed by special laws. (1175a)
● Cession is a special form of payment whereby the debtor abandons or assigns all of his property for the benefit of his
creditors so that the latter may obtain payment of their credits from the proceeds of the property.
● Requisites:
1. plurality of debts
2. partial or relative insolvency of the debtor
3. acceptance of cession by the creditors
● Kinds of Cession:
1. Contractual (Art. 1255)
2. Judicial (Insolvency Law)
● Must be initiated by debtors
● Requires two or more creditors, debtors insolvent, cession accepted by creditors
● Such assignment does not have the effect of making the creditors the owners of the property of the debtor unless there
is an agreement to that effect

● Difference between Dation and Cession

DATION CESSION
may be 1 creditor many creditors
does not require insolvency requires partial or relative insolvency
 delivery of a thing delivery of all the property
transfer of ownership of the property no transfer of ownership (only of possession and
administration)
a novation
payment extinguishes obligation (to the extent of the effect is merely to release debtor from the net proceeds
the value of the thing delivered) of the property; hence, partial extinguishment of
obligation.

SUBSECTION 3
TENDER OF PAYMENT AND CONSIGNATION

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.
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. (1176a)
● Tender of payment : manifestation made by the debtor to the creditor of his desire to comply with his obligation; The
act of the debtor of offering to the creditor the thing or amount due
● Consignation : Deposit of the object or the amount due with the proper court after refusal or inability of the creditor to
accept the tender of payment
● Tender of payment by certified check is valid; a mere check would also be valid for tender of payment if the creditor
makes no prompt objection, but this does not estop the latter from later demanding payment in cash
● When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had
accepted the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the date of such tender. But when the
tender of payment is not accompanied by the means of payment, and the debtor did not take any immediate step to
make a consignation, then the interest is not suspended from the time of such tender.

● GENERAL REQUISITES OF VALID CONSIGNATION vs SPECIAL

REQUISITES General Req : relative to payment (Arts. 1232 - 1251)
Special Req : very nature of consignation (Arts. 1256 – 1258)

● Special Requisites of consignation: [DLN-DN]

1. [D] There was a debt due
2. [L] The consignation of the obligation was made because of some legal cause provided in the present article
3. [N] That previous notice of the consignation has been given to persons interested in the performance of the obligation
4. [D] The amount or thing due was placed at the disposal of the court
5. [N] After the consignation had been made the persons interested had been notified thereof

● If the reason for consignation is the unjust refusal of the creditor to accept payment, it must be shown:
1. That there was previous tender of payment, without which the consignation is ineffective
2. That the tender of payment was of the very thing due, or in case of money obligations that legal tender currency was
offered
3. That the tender of payment was unconditional and
4. That the creditor refused to accept payment without just cause

● Exception to requirement for tender of payment: [AIR-TT]

1. [A] When creditor is absent or unknown or does not appear at place of payment
 2. [I] When he is incapacitated to receive payment
3. [R] When he refuses to give receipt, without just cause
4. [T] When two or more persons claim same right to collect
5. [T] When title of the obligation has been lost

● The 1st and 2nd Special Requisites of Consignation are embodied in Article 1256.
● As to the 2nd requisite ([L] – legal cause) the following musst be present:
(a) the tender of payment must have been made prior to the consignation
(b) that it must have been unconditional [e.g. where the debtor tendered a check for P3,250 to the creditor as payment of a
debt conditioned upon the signing by the latter of a motion to dismiss a complaint for legal separation, such tender of
payment is invalid.]
(c) that the creditor must have refused to accept the payment without just cause [it is not necessary for the court where the
thing or the amount is deposited to determine whether the refusal of the creditor to accept the same was with or without
just cause. The question will be resolved anyway in a subsequent proceeding. Hence, the mere refusal of the creditor to
accept the tender of payment will be sufficient (Manresa)]

1257. 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.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
payment. (1177)
● The lack of notice does not invalidate the consignation but simply makes the debtor liable for the expenses
● The tender of payment and the notice of consignation sent to the creditor may be made in the same act. In case of
absent or unknown creditors, the notice may be made by publication

● 1st paragraph of this article – pertains to the 3rd Special Requisite of Consignation ([N] Previous Notice)
- Tender of Payment vs Previous Notice : the former is a friendly and private act manifested only to the creditor; the latter is
manifested also to other persons interested in the fulfillment of the obligation.
● 2nd paragraph of this article – pertains to the General Requisites of Consignation (Arts. 1232-1251), which must be
complied with

1258. 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.
The consignation having been made, the interested parties shall also be notified thereof. (1178)
● 1st paragraph hereof - 4th Special Requisite of Consignation ([D] Disposal of the Court)
- this is complied with if the debtor depostis the thing or amount with the Clerk of Court
● 2nd paragraph hereof - 5th Special Requisite of Consignation ([N] Subsequent Notice)
- this is to enable the creditor to withdraw the goods or money deposited.

1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1179)
● The consignation is properly made when:
1.) after the thing has been deposited in court, the creditor accepts the consignation without objection and without any reservation
of his right to contest it because of failure to comply with any of the requisites for consignation; and
2.) when the creditor objects to the consignation but the court, after proper hearing, declares that the consignation has been
validly made

*in these cases, the creditor bears the expenses of the consignation

1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the
obligation. 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. (1180)
● Consignation has a retroactive effect and the payment is deemed to have been made at the time of the deposit of the
thing in court or when it was placed at the disposal of the judicial authority
 ● The effects of consignation are: 1.) the debtor is released in the same manner as if he had performed the obligation at
the time of the consignation because this produces the same effect as a valid payment, 2.) the accrual of interest on the
obligation is suspended from the moment of consignation, 3.) the deteriorations or loss of the thing or amount consigned
occurring without fault of the debtor must be borne by the creditor, because the risks of the thing are transferred to the
creditor from the moment of deposit 4.) any increment or increase in value of the thing after the consignation inures to
the benefit of the creditor.
● When the amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the
balance. If no reservations are made, the acceptance by the creditor of the amount consigned may be regarded as a
waiver of further claims under the contract

1261. 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. (1181a)
● When the consignation has already been made and the creditor has accepted it or it has been judicially declared as
proper, the debtor cannot withdraw the thing or amount deposited unless the creditor consents thereto. If the creditor
authorizes the debtor to withdraw the same, there is a revival of the obligation, which has already been extinguished by
the consignation, and the relationship of debtor and creditor is restored to the condition in which it was before the
consignation. But third persons, solidary co-debtors, guarantors and sureties who are benefited by the consignation are
not prejudiced by the revival of the obligation between the debtor and the creditor

SECTION 2
LOSS OF THE THING DUE

1262. 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.
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.

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

1264. 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. (n)

1265. 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. This presumption
does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a)

● 3rd paragraph of Art. 1165: whe 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 liable for any fortuitious event until he has effected the delivery
● Hence, in cases where Art. 1165, par. 3 is applicable, even if the debtor can prove that the loss of the thing in his
possession was not through his fault or that it was through a fortuitous event, he shall still be liable to the creditor for
damages.

1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor. (1184a)

LEGAL IMPOSSIBILITY : may either be -

1. direct (when the law prohibits the performance or execution of the work agreed upon, i.e. when it is immoral or
dangerous)
2. indirect (the law imposes duties of a superior character upon the obligor which are incompatible with the work agreed
upon, although the latter may be perfectly licit, as where the obligor is drafted for military service or for a civil function)

PHYSICAL IMPOSSIBILTY : examples – death of the debtor; when there is an accident...

1267. 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. (n)
DOCTRINE OF UNFORESEEN EVENT / DOCTRINE OF RELATIVE IMPOSSIBILITY
(rebus sic stantibus)
It refers to obligation "to do" (personal obligation)
Parties are presumed to have the risk
It does not apply to aleatory contracts (insurance contract)
Excludes highly speculative business (stock exchange)
Monatory obligations are also excluded (governed by 1357)

Requisites:
1. event or change in the circumstances could have been foreseen of the time of the execution contract
2. it makes the performance of the contract extremely difficult but not impossible
3. the event must not be due to the act of any of the parties
4. the contract is for a future prestation. If the contract is of immediate fulfillment, the gross inequality of the reciprocal
prestations may be involve desion or want of cause.

1268. 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. (1185)

1269. 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. (1186)

1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made
expressly or impliedly.
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. (1187)

1271. 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.
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. (1188)

1272. 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. (1189)

1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force. (1190)

1274. 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. (1191a)

* Aticles 1271 – 1274: examples of implied remission

SECTION 4
CONFUSION OR MERGER OF RIGHTS

1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same
person. (1192a)
Merger or confusion is the meeting in one person of the qualities of creator and debtor with respect to the same
obligation. It erases the plurality of subjects of the obligation. Further, the purposes for which the obligation may have
been created are considered as fully realized by the merger of the qualities of debtor and creditor in the same person.
Requisites of merger or confusion are:
(1) It must take place between the creditor and the principal debtor,
(2) the very same obligation must be involved, for if the debtor acquires rights from the creditor, but not the
particular obligation in question in question there will be no merger,
(3) the confusion must be total or as regards the entire obligation.
The effect of merger is to extinguish the obligation.
1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion
which takes place in the person of any of the latter does not extinguish the obligation. (1193)
The extinguishment of the principal obligation through confusion releases the guarantor’s because the obligation of the
latter is merely accessory. When the merger takes place in the person of a guarantor, the obligation is not extinguished.

1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or
debtor in whom the two characters concur. (1194)

SECTION 5
COMPENSATION

1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
(1195)
● Compensation is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own
right are reciprocally debtors and creditors of each other. It is the offsetting of two obligations which are reciprocally
extinguished if they are of equal value. Or extinguished to the concurrent amount if of different values.
Kinds of Compensation:
● As to their effects
● compensation may be total (when the two obligations are of the same amount); or
● partial (when the amounts are not equal).
● As to origin
1. it may be legal;
2. facultative;
3. conventional;
4. or judicial.
■ It is legal when it takes place by operation of law because all requisites are present.
■ It is facultative when it can be claimed by one of the parties, who, however, has the right to object to it, such as
when one of the obligations has a period for the benefit of one party alone and who renounces that period so as
to make the obligation due.
■ It is conventional when the parties agree to compensate their mutual obligations even if some requisite is
lacking.
■ It is judicial when decreed by the court in a case where there is a counterclaim.

Compensation vs. Payment: In compensation, there can be partial extinguishment of the obligation; in payment, the
performance must be completer, unless waived by the creditor. Payment involves delivery of action, while compensation (legal
compensation) takes place by operation of law without simultaneous delivery.
Compensation vs. Merger: In compensation, there are at least two persons who stand as principal creditors and debtor of each
other, in merger, there is only one person involved in whom the characters of creditor and debtor are merged. In merger, there is
only one obligation, while in compensation, there are two obligations involved.

1279. 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. (1196)
● For compensation to take place, the parties must be mutually debtors and creditors (1) in their own right, and (2) as
principals. Where there is no relationship of mutual creditors and debtors, there can be no compensation. Because the 1st
requirement that the parties be mutually debtors and creditors in their own right, there can be no compensation when
one party is occupying a representative capacity, such as a guardian or an administrator. The 2nd requirement is that the
parties should be mutually debtors and creditors as principals. This means that there can be no compensation when one
party is a principal creditor in one obligation but is only a surety or guarantor in the other.
 ● The things due in both obligations must be fungible, or things which can be substituted for each other.
● Both debts must be due to permit compensation.
● Demandable means that the debts are enforceable in court, there being no apparent defenses inherent in them. The
obligations must be civil obligations, including those that are purely natural. An obligation is not demandable, therefore,
and not subject to compensation, in the following cases: (1) when there is a period which has not yet arrived, including
the cases when one party is in a state of suspension of payments; (2) when there is a suspensive condition that has not
yet happened; (3) when the obligation cannot be sued upon, as in natural obligation.
● A debt is liquidated when its existence and amount is determined. Compensation can only take place between certain and
liquidated debts.

* The five requisites of a legal compensation are enumerated in the Article. All requisites must be present before
compensation can be effectual.
1. That each of the obligators be bound principally and that he be at the same time a principal creditor of the other. The
parties must be mutual creditor and debtor of each other and their relationship is a principal one, that is, they are
principal debtor and creditor of each other.
2. That both debts consist in such 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. >>When the debts consist of money, there is not much of a
problem when it comes to compensation to the concurrent amount. It is a matter of mathematical computation.
When the debt consist of things, it is necessary that the things are consumable which must be understood as
‘fungible’ and therefore susceptible of substitution. More than that they must be of the same kind. If the quality has
been states, the things must be of the same quality.
3. That the two debts are due. >> A debt is ‘due’ when its period of performance has arrived. If it is a subject to a
condition, the condition must have already been fulfilled. However, in voluntary compensation, the parties may agree
upon the compensation of debts which are not yet due.
4. That they be liquidated and demandable. >> A debt is considered ‘liquidated’ when its amount is clearly fixed. Of if it
is not yet specially fixed, a simple mathematical computation will determine its amount or value. It is ‘unliquidated’
when the amount is not fixed because it is still subject to a dispute or to certain condition. It is not enough that the
debts be liquidated. It is also essential that the same be demandable. A debt is demandable if it is not yet barred by
prescription and it is not illegal or invalid.
5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor. >> A debt of a thing cannot be a subject of compensation if the same had been subject of a
garnishment of which the debtor was timely notified. When a credit or property had been properly garnished of
attached, it cannot be disposed of without the approval of the court.

1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards
what the creditor may owe the principal debtor. (1197)
● The liability of the guarantor is only subsidiary; it is accessory to the principal obligation of the debtor. If the principal
debtor has a credit against the creditor, which can be compensated, it would mean the extinguishment of the guaranteed
debt, either totally or partially. This extinguishment benefits the guarantor, for he can be held liable only to the same
extent as the debtor.

Exception to the Rule On Compensation: Right of Guarantor to Invoke Compensation Against Creditor. The general rule is that
for compensation to operate, the parties must be related reciprocally as principal creditors and debtors of each other. Under the
present Article, the guarantor is allowed to set up compensation against the creditor.

1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total
compensation. (n)
Total Compensation—debts are of the same amount.
Partial Compensation—Debts are not of the same amount; operative only up to the concurrent amount.

1282. The parties may agree upon the compensation of debts which are not yet due. (n)
Voluntary compensation is not limited to obligations which are not yet due. The parties may compensate by agreement
any obligations, in which the objective requisites provided for legal compensation are not present. It is necessary,
however, that the parties should have the capacity to dispose of the credits which they compensate, because the
extinguishment of the obligations in this case arises from their wills and not from law.
1283. 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. (n)
Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before
they are judicially rescinded or avoided. (n)
Although a rescissible or voidable debt can be compensated before it is rescinded or annulled, the moment it is rescinded
or annulled, the decree of rescission or annulment is retroactive, and the compensation must be considered as cancelled.
Recission of annulment requires mutual restitution; the party whose obligation is annulled or rescinded can thus recover
to the extent that his credit was extinguished by the compensation, because to that extent he is deemed to have made a
payment.

1285. 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, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.
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.
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. (1198a)
Assignment after Compensation:
When compensation has already taken place before the assignment, inasmuch as it takes place ipso jure, there has
already been an extinguishment of one of the other of the obligations. A subsequent assignment of an extinguished
obligation cannot produce any effect against the debtor. The only exception to this rule is when the debtor consents to
the assignment of the credit; his consent constitutes a waiver of the compensation, unless at the time he gives consent,
he informs the assignor that he reserved his right to the compensation.
Assignment before compensation.
The assignment may be made before compensation has taken place, either because at the time of assignment one of the
debts is not yet due or liquidated, or because of some other cause which impedes the compensation. As far as the debtor
is concerned, the assignment does not take effect except from the time he is notified thereof. If the notice of assignment
is simultaneous to the transfer, he can set up compensation of debts prior to the assignment. If notice was given to him
before the assignment, this takes effect at the time of the assignment; therefore the same rule applies. If he consents to
the assignment, he waives compensation even of debts already due, unless he makes a reservation.
But if the debtor was notified of the assignment, but he did not consent, and the credit assigned to a third person
matures after that which pertains to the debtor, the latter may set up compensation when the assignee attempts to
enforce the assigned credit, provided that the credit of the debtor became due before the assignment. But it f the
assigned credit matures earlier than that of the debtor, the assignee may immediately enforce it, and the debtor cannot
set up compensation, because the credit is not yet due.
If the debtor did not have knowledge of the assignment, he may set up by way of compensation all credits maturing
before he is notified thereof. Hence, if the assignment is concealed, and the assignor still contracts new obligation in
favor of the debtor, such obligation maturing before the latter learns of the assignment will still be allowable by way of
compensation. The assignee in such case would have a personal action against the assignor.

1286. 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. (1199a)
● This article applies to legal compensation and not to voluntary compensation.

1287. 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.
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. (1200a)
A. The prohibition of compensation when one of the debts arises from a depositum (a contract by virtue of which a person
[depositary] receives personal property belonging to another [depositor], with the obligation of safely keeping it and
returning the same) or commodatum (a gratuitous contract by virtue of which one of the parties delivers to the other a
non-consumable personal property so that the latter may use it for a certain time and return it) is based on justice. A
deposit of commodatum is given on the basis of confidence in the depositary of the borrower. It is therefore, a matter of
morality, the depositary or borrower performs his obligation.
With respect to future support, to allow its extinguishment by compensation would defeat its exemption from attachment
and execution. , and may expose the recipient to misery and starvation. Common humanity and public policy forbid this
 consequence. Support under this provision should be understood, not only referring to legal support, to include all rights
which have for their purpose the subsistence of the debtor, such as pensions and gratuities.

1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.
(n)
● If one of the debts consists in civil liability arising from a penal offense, compensation would be improper and inadvisable
because the satisfaction of such obligation is imperative.
The person who has the civil liability arising from crime is the only party who cannot set up the compensation; but the
offended party entitled to the indemnity can set up his claim in compensation of his debt.
Art. 1289. 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. (1201)
It can happen that a debtor may have several debts to a creditor. And vice versa. Under these circumstances, Articles
1252 to 1254 shall apply.

1290. 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.
Legal compensation takes place from the moment that the requisites of the articles 1278 and 1270 co-exist; its effects
arise on the very day which all its requisites concur.
Voluntary of conventional compensation takes effect upon the agreement of the parties.
Facultative compensation takes place when the creditor declares his option to set it up.
Judicial compensation takes place upon final judgment.
Effects of Compensation:
(1) Both debts are extinguished to the concurrent amount;
(2) interests stop accruing on the extinguished obligation of the part extinguished;
(3) the period of prescription stops with respect to the obligation or part extinguished;
(4) all accessory obligations of the principal obligation which has been extinguished are also extinguished.
● Renunciation of Compensation. Compensation can be renounces, either at the time an obligation is contracted or
afterwards. Compensation rests upon a potestative right, and a unilateral decision of the debtor would be sufficient
renunciation. Compensation can be renounced expressly of impliedly.
● No Compensation. Even when all the requisites for compensation occur, the compensation may not take place in the
following cases: (1) When there is renunciation of the effects of compensation by a party; and (2) when the law prohibits
compensation.
(Unless otherwise indicated, commentaries are sourced from the Civil Code book IV by Tolentino).

SECTION 6
NOVATION
HOW OBLIGATIONS ARE MODIFIED

1291. Obligations may be modified by:

(1) Changing their object or principal condition
(2) Substituting the person of the debtor
(3) Subrogating a third person in the rights of a creditor
● Novation is the extinguishment of an obligation by a substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first either by:
1. changing the object or principal conditions
2. by substituting the person of the debtor
3. subrogating a third person in the rights of the creditor
● Novation is a juridical act of dual function. At the time it extinguishes an obligation it creates a new one in lieu of the old
● Classification of Novation
● as to nature
1. Subjective or personal – either passive or active. Passive if there is substitution of the debtor. Active if
a third person is subrogated in the rights of the creditor.
2. Objective or real – substitution of the object with another or changing the principal conditions
 3. Mixed – Combination of subjective and objective
● as to form
● Express – parties declare that the old obligation is substituted by the new
● Implied – an incompatibility exists between the old and the new obligation that cannot stand together
● as to effect
1. Partial – when there is only a modification or change in some principal conditions of the obligation
2. Total – when the old obligation is completely extinguished
● Requisites of Novation:
1. A previous valid obligation
2. Agreement of all parties
3. Extinguishment of the old contract – may be express of implied
4. Validity of the new one

Who must make payment?

A.Debtor who possess:
1. The free disposal of the thing due
2. The capacity to alienate the thing
Effect on payment if the debtor don’t possess,
1. Invalid, otherwise stipulated by law (1239)
2. When it has been paid , the payment can be annuled by the guardian of incapacitated
during incapacity or if the incapacitated regains capacity
3. Does not have free disposal, the debtor can recover payment (1397)
Garnishment - Courts’s order to the debtor to retain the debt.
*If the debtor has still paid the creditor after the order the debtor’s payment will be invalid
(1243). He will be still liable to pay the other one for example.
B. Payment by 3rd person
Creditor not bound to accept payment unless;
a. Stipulation
b. 3rd person is interested such as guarantor and a co-debtor(1236)
i. His rights:With debtor’s consent
1. Recover what he has been paid (1236)
2. Subrogated to the rights of creditor mortgage (1237)
Without consent/against will/without the knowledge:
1. Recovery only up to what is beneficial to the creditor
2. Not entitled to subrogation
2. Donation ( 3rd person doesn’t want to be reimbursed )
a. Donation requires consent
b. Dr doesnt give consent , payment still valid to the creditor who received it(1238)
i. 3rd person : recovery is as far as how it benefits the debtor and not subrogated to
the rights of creditor(1236, 1237)
To whom shall payment be made
1. To the creditor
Rule: Payment too incapacitated creditor is INVALID,unless:
a. He has kept the thing
b. Insofar has benefited the cr 1241
2. Cr’s successors in interest
3. 3rd person: INVALID unless,
 a. Payment has transferred the benefit to the creditor. Dr doesn’t need to prove this
when:(1241)
i. 3rd person acquires creditor’s right .assigning the credit.
ii. Cr aproves the payment
iii. By cr’s conduct , making the dr believe that paying to the 3rd person is
valid.
b. Payment in good faith (1242)
*Possession = when only one has benefited. Doesn’t mean a holder of a the
credit.

Where payment must be made

1.Stipulation, if none,
2. Give a SPECIFIC thing = wherever the thing was in the moment the obligation is contracted
3. Give a GENERIC thing , obli TO DO = at the place of Debtor (1251)

SPECIAL FORMS OF PAYMENT

1. DATION IN PAYMENT (1245) dacion en pago, adjudicacion en pago or datio in solutum
- ownership of property (object of contract of sale) is transferred to the creditor in
payment of debt (purchase price). Governed by contract of sale . A form of novation.
REQUISITE: CONSENT in sale or novation to extinguish .
2. APPLICATION OF PAYMENT- what particular debt among the other debts should the
payment be applied?
REQUISITES:
a. 2 or more debts
b. debts must be of same kind
c. debts are owed by the same debtor to the same creditor
d. all debts are due, unless
d.1 the stipulation that says it can be applied to the debt not yet due
d.2 made by party to who must benefit the term (1252)
HOW:
1. Dr’s preference
2. If dr doesn’t make application, cr will choose by indicating which debt is being
paid in the receipt. After it , the dr cannot complain unless there is a just cause
invalidating the contract.
3. If neither of them, the law will choose.
a. Which debt burdens the debtor the most. debt who has the pledge.?
b. If onerousity and nature is unidentifiable, the payment must be in
proportionate.
ex. D owes C
7k ………………………..May 1 No,it is incomplete unless consented by C
Sacks of rice worth 7k... May 5 No, different kind
5k………………………...May 8 Yes
All the debts are due ,and D has only 5k
 3. PAYMENT BY CESSION (1255)- Authorizing the creditor to sell all his properties to
cover his debt and he will be released only up to the extent.
KINDS OF PAYMENT OF CESSION
a. Voluntary/Conventional - agreed upon by the parties
b. Legal - operation of law
REQUISITES:
a. 2/more creditors
b. debtor is insolvent
c. dr abandons all his properties except those that are forbidden to be executed
d. creditor accept the abandonment

4. TENDER OF PAYMENT (what the dr gives that is due to cr) AND CONSIGNATION (
depositing the money to the authority/court when cr refuses to accept the payment )
REQUISITES:
1. Valid tender of payment .the thing contemplated and what is due (1256)
2. Cr refuses to accept unjustifyingly
3. Persons w/ interest must be notified of consignation=MANDATORY, or else void.
*to reconsider litigation* Cr= consignation expenses
4. What is due is deposited at the judicial authority
5. Subsequent notice that consig. was made = MANDATORY, or else void.
(1260) EFFECT: Dr can ask the extinguishment of obli to the jury. When? Creditor has received
consignation or the judge has declared that it was made
1. Dr’s right to withdraw what is being consigned
a. BEFORE cr has received consignation or the judge has declared that it was made:
a1. Dr may withdraw WITHOUT CONSENT OF CR
- obli remain in force (1260)
- guarantors ,sureties not released (1261)
b. AFTER cr has received consignation or the judge has declared that it was made:
b1. Dr may withdraw WITH CONSENT OF CR
- obli shall be revived (1260)
- cr will lose preference
- guarantors : released, solidary dr : joint dr thus cr can no longer proceed
against guarantors if the dr cannot pay him
WHEN CONSIGNATION , WITHOUT A PREVIOUS TENDER OF PAYMENT
1. Cr doesn’t appear on place of payment
2. Incapacitated when payment is due
3. refuses to accept unjustifyingly
4. 2 or more person claim the same right
5. title of obli is lost (1256)