EXTINGUISHMENT OF OBLIGATIONS

Friday, 6 October 2023 12:46 pm

MODES OF EXTINGUISHMENT
1. Payment or performance
2. Loss of the thing due
3. Condonation or Remission of debt
4. Confusion or Merger of rights
5. Compensation
6. Novation
7. Annulment
8. Fulfillment of a Resolutory Condition
9. Prescription

NoCOMeRePaLoPreFulAN
1. Novation
2. Compensation
3. Remission
4. Payment
5. Loss of the Thing due
6. Prescription
7. Fulfillment of a Resolutory condition
8. Annulment

PAYMENT OR PERFORMANCE
- The delivery of money and performance, in any other manner of the obligation as agreed upon
by the parties.

REQUISITES AS TO PAYMENT OR PERFORMANCE

1. Same Object or Prestation
2. Given to the Proper Party
3. Obligation is Completely Performed

REQUISITES AS TO THE OBJECT

A. With respect to Prestation itself:
a. Identity
b. Integrity or completeness
c. Indivisibility
B. With respect to parties - must be made by proper debtor/obligor to proper creditor/obligee
Payment or Performance as to Parties
a. Payor
i. Payor - the one performing/paying. He can be the debtor himself or his heirs or
assigns or his agent, or anyone interested in the fulfillment of the obligation; can
be anyone as long as it is with the creditor's consent
ii. The third person interested in the performance of the obligation - only with the
creditor's consent; if the performance is done also with debtor's consent - he
takes the place of the debtor. There is subrogation except if the Third person
intended it to be a donation.
iii. Third person not interested in the performance of the obligation pays/performs
1) The creditor is not bound to accept payment, unless there is a stipulation to
the contrary (see Art. 1236, Civil Code);
2) If Original Creditor accepted, the payor may demand what he has paid
(reimbursement), except that if he paid without the knowledge or against
the will of the debtor, in which case he can recover only insofar as the
payment has been beneficial to the debtor .
3) Payment made by a third person who does not intend to be reimbursed by

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 3) 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;
The payment, however, is in any case valid as to the creditor who has
accepted it (Art. 1238, Civil Code).
b. Payee - The one expecting payment or performance. He usually waits and demands the
said payment or performance
i. payee – original creditor or Obligee or successor in interest of transferee, or agent
authorized by the original creditor
ii. Third person - if any of the Following concur:
1) it must have redounded to the Obligee/Creditor’s benefit and only to the
extent of such benefit
2) If a Third Person acquires Creditor’s rights, Creditor ratifies payment to a
Third Person or by The Creditor’s conduct Debtor had been made to believe
that Third Person had authority to receive payment.
iii. anyone in possession of the credit - but will apply only if debt has not been
previously garnished.
iv. Payment made to an incapacitated person is valid if:
1) Incapacitated person kept the thing delivered, or;
2) Insofar as the payment has been beneficial to him
v. Payment to a third person shall be valid insofar as it has redounded to the benefit
of the creditor. Such benefit to the creditor need not be proved
1) if after the payment, the third person acquires the creditor’s rights;
2) if the original creditor ratifies the payment to a third person; or
3) if by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment (Art. 1241, Civil Code).
C. With respect to time and place of payment - must be according to the obligation. As agreed
by the parties!
a. Where payment should be made:
i. In the place designated in the obligation
ii. If there is no express stipulation and the undertaking is to deliver a specific thing –
at the place where the thing might be at the moment the obligation was
constituted
iii. In any other case – in the place of the domicile of the debtor

PAYMENT OF LEGAL TENDER

- Art. 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 abeyance.

What if Payment is made in checks?

- If the negotiable papers and other commercial documents are accepted by the creditor, it has
only a provisional effect.
- There is payment only in the following:
a. When they have been honored and cashed; or
b. When through the fault of the creditor, they have been impaired.
For example, A gave B a check as payment for a loan. B did not encash the check as a result of which,
the check became stale. There is no impairment here. B can still ask A for payment of the loan.
However, if B endorsed a check made by A to C as payment for a loan and C did not encash the check
which became stale, then C can no longer ask B to pay him again.

Extraordinary Inflation

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Extraordinary Inflation
- Art. 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.
a. existence of extraordinary inflation or deflation of the currency stipulated;
b. an obligation to pay a sum certain in money;
c. the obligation is contractual in nature; and
d. there exists no stipulation to the contrary

SPECIAL FORMS OF PAYMENT

Dacion en Pago
- Mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor
property for the satisfaction of monetary debt - extinguish up to amount of property unless
with contrary stipulation;
- A special form of payment because one element of payment is missing: IDENTITY
○ Governed by law on sales
○ Conditions for a valid dacion:
i. If creditor consents, for a sale presupposes the consent of both parties
ii. If dacion will not prejudice the other creditors
iii. If debtor is not judicially declared insolvent

APPLICATION OF PAYMENTS
- To be valid: Must be by the Debtor's choice (Arts. 1251-52)
Requisites for the Application of payment:
1. Various debts of the same kind
2. Same debtor;
3. Same creditor;
4. All debts must be due
5. Payment is not enough to extinguish all debts
How Application is made:
1. Debtor makes the designation
2. If not, creditor makes it by so stating in the receipt to that he issues to which debt it applies. –
unless there is cause for invalidating the contract
3. If neither the debtor nor creditor has made the application or if the application is not valid,
then application, is made by operation of law- apply to the most onerous.

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In case no application has been made:
1. Apply payment to the most onerous;
2. If debts are of the same nature and burden, application shall be made to all proportionately.

Remember!
• Article 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered.
• When principal has been paid without the creditor making the reservation as to the interest, it
shall be presumed that interest shall also been paid.

ASSIGNMENT / CESSION
Cession/Assignment in Favor of creditors
- the process by which debtor transfer all the properties not subject to execution in favor of
creditors. This will empower the creditors to sell them and thus, apply the proceeds to their
credits;
- Obligation is extinguished up to amount of net proceeds (unless there is a contrary stipulation)
- Kinds:
a. Legal – governed by the insolvency law
b. Voluntary – agreement of creditors

REQUISITES FOR VOLUNTARY ASSIGNMENT:

1. More than One (1) debt
2. More than One (1) creditor
3. Complete or partial insolvency of debtor
4. Abandonment of all debtor’s property not exempt from execution
5. Acceptance or consent on the part of the creditors

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EFFECTS OF ASSIGNMENT/CESSION
a. Creditors do not become the owner; they are merely assignees with authority to sell
b. Debtor is released up to the amount of the net proceeds of the sale, unless there is a
stipulation to the contrary
c. Creditors will collect credits in the order of preference agreed upon, or in default of
agreement, in the order ordinarily established by law
Compare: Cession v. Dation in Payment
a. As to ownership. In dacion en pago, there is a transfer of ownership from the debtor to the
creditor. In payment by cession, there is no transfer of ownership. The creditors simply acquire
the right to sell the properties of the debtor and apply the proceeds of the sale to the
satisfaction of their credit.
b. As to business practice and usage. Payment by cession does not generally terminate all debts
due since normally there is still a balance due. In dacion en pago, once the thing is
given/alienated, this will be already be enough for the creditor.

CONSIGNATION
- the act of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment;
- This generally requires prior tender of payment

TENDER
- the act of offering the creditor what is due him together with a demand that the creditor
accept the same
- (When creditor refuses without just cause to accept payment, he becomes in mora accipiendi
& debtor is released from responsibility if he consigns the thing or sum due)

REQUISITES OF VALID CONSIGNATION:

a. Existence of valid debt
b. Consignation was made because of some legal cause - previous valid tender was unjustly
refused or circumstances making previous tender exempt
c. Prior Notice of Consignation had been given to the person interested in performance of
obligation (1st notice)
d. actual deposit/Consignation with proper judicial authorities
e. subsequent notice of Consignation (2nd notice)

Consignation Without prior tender

allowed in:
1. Creditor absent or unknown/ does not appear at the place of payment
2. Creditor is incapacitated to receive payment at the time it is due
3. Creditor Refuses to issue receipt without just cause
4. Two (2) or more creditors claiming the same right to collect
5. Title of Obligation Has Been lost

LOST OF THE THING DUE

Loss may be partial or total and includes impossibility of performance
When is there a Loss?
1. When the object perishes (physically)
2. When it goes out of commerce
3. When it disappears in such a way that its existence is unknown or it cannot be recovered

Effect of Loss: Obligation to Deliver a Specific Thing

OBLIGATION TO DELIVER A SPECIFIC THING
General Rule: Extinguished
Exceptions:
a. Debtor is at fault

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 a. Debtor is at fault
b. Debtor is made liable for fortuitous event because of a provision of law, contractual stipulation
or the nature of the obligation requires assumption of risk on part of debtor

Effect of Loss: Obligation to Deliver a Generic Thing

OBLIGATION TO DELIVER A GENERIC THING
General Rule: Not Extinguished
Exceptions:
a. if the generic thing is delimited
b. if the generic thing has already been segregated
c. monetary obligation

In Obligations to Do….
• 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).
• The impossibility here must be supervening.

Loss: Obligation to Do
WHEN THING IS LOST IN THE POSSESSION OF THE DEBTOR
Presumption: Loss due to debtor’s fault ( disputable )
Exception: natural calamity, earthquake, flood, storm

CONDONATION / REMISSION OF DEBT

- This is the gratuitous abandonment of debt.
- It is essentially gratuitous and the rules of donation applies
- It can be express or implied.

REQUISITES OF CONDONATION:
a. There must be an agreement
b. There must be a subject matter (object of the remission, otherwise there would be nothing to
condone)
c. Cause of consideration must be liberality (Essentially gratuitous, an act of liberality )
d. Parties must be capacitated and must consent; requires acceptance by obligor/debtor; this is
implied in donation mortis causa and expressed donation inter vivos
e. Formalities of a donation are required in the case of an express remission
f. Revocable – subject to rule on inofficious donation ( excessive, legitime is impaired ) &
ingratitude & condition not followed
g. Obligation remitted must have been demandable at the time of remission
h. Waivers or remission are not to be presumed generally

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 Forms Extent Effect
a. Express - formalities of donation Total Principal - accessory also condoned
b. Implied - conduct is sufficient Partial Accessory - principal still outstanding

REQUISITES OF IMPLIED CONDONATION

1. voluntary delivery – presumption; when evidence of indebtedness is with debtor – presumed
voluntarily delivery by creditor; presumption is rebuttable
2. effect of delivery of evidence of indebtedness is conclusion that debt is condoned – already
conclusion;

Implied Condonation in Joint and Solidary Obligation

What if the instrument is:
a. in hands of joint debtor – only his share is condoned
b. in hands of solidary debtor - whole debt is condoned

CONFUSION OR MERGER OF RIGHTS

The character of debtor and creditor is merged in same person with respect to same obligation

REQUISITES OF CONFUSION OR MERGER OF RIGHTS

a. It must take place between principal debtor & principal creditor only
b. Merger must be clear and definite
c. The obligation involved must be same & identical – one obligation only
d. Revocable, if reason for confusion ceases, the obligation is revived

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COMPENSATION
Set off; it is a mode of extinguishment to the concurrent amount the obligation of persons who are in
their own right reciprocally debtors or creditors

REQUISITES OF COMPENATION
a. Both parties must be mutually creditors and debtors - in their own right and as principals
b. Both debts must consist in sum of money or if consumable , of the same kind or quality
c. Both debts are due
d. Both debts are liquidated & demandable (determined)
e. Neither debt must be retained in a controversy commenced by third persons and is not
communicated with the debtor

KINDS OF COMPENSATION
a. Legal compensation – by operation of law; as long as all five requisites concur.
- Article 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.

b. Facultative compensation takes place when compensation is claimable by only one of the
parties but not of the other.
- Compensation shall not be proper when one of the debts:
a. arises from a depositum or from the obligation of a depositary;
b. arises from the obligation of a bailee in commodatum;
c. is a claim for support due by gratuitous title, except those in arrears (see Art. 301,
Civil Code); and
d. consists in civil liability arising from a penal clause (Arts. 1287 and 1288, Civil
Code).

c. Conventional or Contractual (Article 1282)

- Contractual or conventional compensation takes place when parties agree to set-off
even if the requisites of legal compensation are not present.

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 even if the requisites of legal compensation are not present.
- The parties may agree upon the compensation of debts 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.

d. Judicial Compensation
- Judicial compensation is compensation decreed by the court in a case where there is a
counterclaim.
- 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.

Effect of Rescissible and Voidable Debts in Compensation

- Article 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided.
- Rescissible and voidable debts are valid until they are judicially rescinded or voided. Prior to
rescission or annulment the debts may be compensated against each other.

Assignment of Rights in Compensation

- Article 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

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 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.

NOVATION
extinguishment of obligation by creating/ substituting a new one in its place.
It is done by:
a. changing object or principal conditions
b. substituting person of debtor
c. subrogating 3rd person in rights of creditor

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 c. subrogating 3rd person in rights of creditor

REQUISITES OF NOVATION
a. valid old obligation
b. intent to extinguish old obligation – expressed or implied: completely/substantially in that old
and new obligation is INCOMPATIBLE on every point
c. capacity and consent of parties to the new obligation
d. To create valid new obligation

KINDS OF NOVATION
According to its form and constitution
a. Express
b. Implied- when the two obligations are incompatible with each other
According to its Extent or Effect
a. Extinctive- when the original obligation is completely extinguished. There is no novation when
the new contract is not between the same parties as in the old contract.
b. Modificatory- when the original obligation is not totally extinguished but merely modified.
According to its Purpose/Objects or Subjects
a. REAL/OBJECTIVE – change object, cause/consideration or any of principal conditions
b. PERSONAL/SUBJECTIVE
1. substituting person of debtor ( passive )
2. Substituting the person of the creditor.
c. MIXED

TYPES OF PASSIVE SUBJECTIVE NOVATION

Change of Passive Subject – Debtor
1. EXPROMISSION- In expromission the changing of the debtor is not upon the old debtor's
initiative. It could be upon the initiative of the creditor or of the new debtor.
a. This requires the consent of the creditor since the changing of the debtor may prejudice
him and requires the consent of the new debtor since he is the one who will pay.
b. The consent of the old debtor is not required.
c. The intent of the parties must be to release the old debtor. The release of the old debtor
is absolute even if it turns out that the new debtor is insolvent.

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 d.

2. DELEGACION - when the debtor offers and the creditor accepts a third person to take the
place of the old debtor for the satisfaction of the original debtors obligation.
- In this type of novation they are called as a
a. Delegante(old debtor)
b. Delegatario(creditor) and
c. delegado(third person-new debtor).

TYPES OF PASSIVE NOVATION

1. IN DELEGACION - The intent of the parties must be to release the old debtor. However,
release of the old debtor is not absolute.
- He may be held liable still
a. If the new debtor was already insolvent at the time of the delegacion; and
b. Such insolvency was either known to the old debtor or of public knowledge

TYPES OF ACTIVE SUBJECTIVE NOVATION

Active Subjective Novation – change of creditors
- Also known as Subrogation
a. conventional- agreement & consent of all parties; clearly established.
b. legal- takes place by operation of law; no need for consent; not presumed except as
provided for in law:

LEGAL SUBROGATION - REQUISITES

It is presumed that there is legal subrogation
a. When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
b. When a third person, not interested in the obligation, pays with the express or tacit approval
of the debtor ;
c. 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;

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EFFECT OF NOVATION
a. extinguishment of principal carries accessory, except:
- stipulation to contrary
- stipulation pour autri unless beneficiary consents
- modificatory novation only; obliged to which is less onerous
- old obligation is void
b. old obligation subsists if:
- new obligation is void or voidable but annulled already.
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 (Art. 1297, Civil Code; see Ong vs. Court of Appeals, 124
SCRA 578). The novation is void if the original obligation was void, except when annulment may be
claimed only by the debtor or when ratification validates acts which are voidable
c. If the original obligation is subject to a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it is otherwise stipulated (Art. 1299,
Civil Code).
a. Example:
a. Original Obligation X should pass law course and Y will him a car.
New Obligation: Y will give him a house instead without statement on the
condition
Rule: Condition deemed integrated!

Illustration of Conditions in Novation

1. If old obligation has condition
- if Resolutory and it occurred –old obligation already extinguished; no new obligation
since nothing to novate
- if suspensive and it never occurred –as if no obligation; also nothing to novate
2. If old obligation has condition, must be compatible with the new obligation; condition is
deemed attached to new obligation
3. If new obligation has condition
- if resolutory: valid
- if suspensive & did not materialize: old obligation is enforced

KINDS OF NOVATION
Difference from payment by 3rd person Change of debtor
1. Debtor is not necessarily released from debt Debtor is released
2. Can be done without consent of creditor Needs consent of creditor - express or implied
3. One obligation Two obligations; One is extinguished & new one
created
4. Third person has no obligation to pay if New debtor is obliged to pay
insolvent

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Other Mode of Extinguishment
1. Annulment- An invalidation of legal contract. To cancel entirely.
2. Rescission - is a remedy granted by law to contracting parties and to
third persons in order to secure reparation of damages caused them by a contract, even if the
contract be valid, by means of the restoration of things to their condition prior to the
celebration of said contract.
3. Fulfillment of a Resolutory Condition - Happening of the Condition extinguishes your
obligation
4. Compromise - a contract whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.
5. Prescription - Acquisition or loss of rights by lapse of time
6. Death in Certain Instances - For example, death extinguishes obligations which are purely
personal (i.e. obligations in marriage, obligation to support, obligations in a partnership, etc.)

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