EXTINGUISHING AN

OBLIGATION, PAYMENTS
AND COMPENSATIONS
GROUP 1
ACUNIN, ALEXIS C.
DELOS SANTOS, EDBERT
MANALAC, RICHARD R.
NADERA, KC-LYN D.
TOLENTINO, CHRISTIAN KESTER
What is an Obligation?

An obligation is a legal bond (vinculum iuris) by which one or more

parties (obligants) are bound to act or refrain from acting. An obligation
thus imposes on the obligor a duty to perform, and simultaneously
creates a corresponding right to demand performance by the obligee to
whom performance is to be tendered. Obligations may be civil, which are
enforceable by action in a court of law, or natural, which imply moral
duties but are unenforceable unless the obligor consents.
Extinguishing of Obligations

Principal modes of extinguishing relationship between parties:

Payment
Loss of the thing due
Condonation or remission
Confusion or merger of rights of the creditor and debtor
Compensation
Novation
Other modes:

Annulment of the contract

Rescission of the obli
Fulfillment of the resolutory condition
Prescription
 Death (not absolute) refers to the death of the debtor; may be applied only
if the obligation is personal to the obligor. Under the Law on Succession,the
estate of the deceased includes all the rights, and oblis of that person which
are not extinguished by death.

Mutual dissent - an agreement between the parties to mutually withdraw

from the contract. This should not be confused with rescission. Rescission
requires the existence of either of the two grounds: lesion or fraud, while
mutual dissent requires none because its basis is the agreement of both
parties to withdraw. Rescission always results in abrogation and, usually, in
mutual restitution, except in cases where the law does not allow such, while
in mutual dissent, the only effect produced is abrogation; restitution
depends upon the agreement of the parties. Rescission may be available to
3rd persons who suffer injury because of the contract sought to
be rescinded, while mutual dissent is not available to 3rd persons.
What is Payment?
A payment is the trade of value from one party (such as a person or company) to
another for goods, or services, or to fulfill a legal obligation.
Payment can take a variety of forms. Barter, the exchange of one good or service for
another, is a form of payment. The most common means of payment involve use of
money, cheque, or debit, credit or bank transfers. Payments may also take
complicated forms, such as stock issues or the transfer of anything of value or
benefit to the parties. In US law, the payer is the party making a payment while the
payee is the party receiving the payment. In trade, payments are frequently
preceded by an invoice or bill.
Not only the delivery of money but includes the performance of an obligation in any
other manner
Or simply, payment is the act of paying
Kinds of performance or payment:
Normal or voluntary debtor paid obli on his own volition, not
because he was told to pay.
Abnormal or involuntary obligor is ordered to pay.
Classification:
Specific obligor is compelled to perform a specific act; applies to
only to give.
Substitute the debtor is substituted by a 3rd person, at the expense
of the debtor, if obligation is not personal to the debtor.
Equivalent the economic equivalent of the obli is given.
Requisites of a valid payment:

Parties (debtor and creditor)

The thing to be paid
Time, place, and manner of payment
Parties
Here are some of the condition for considering a party / parties;

There must be at least two parties.

What is required is the plurality of parties, not of persons, such that a person who
represents at least two parties may affect a valid payment by himself.
Anyone can make payment (even a 3rd person).
Only those who have an interest in the fulfillment of the obli can compel the creditor to
accept payment. These are the debtor, his heirs, successors-in-interest,assignee, or
anyone authorized by him to make payment. His co-debtors, guarantor and surety are
also included. The persons enumerated have as much right or interest as the debtor in
fulfilling the obli because once the obli is extinguished,they are relieved from their obli.
Generally, payment must be made to the creditor, but payments may also be madeto his
heirs, successors-in-interest, or his agent.
Kinds of subrogation:
Conventional never presumed; agreement of the parties
Legal GR: cannot be presumed. XPN:
(a) when a creditor pays another creditor who is preferred;
(b) 3rd person who is not interested in the fulfillment of the obli pays with the consent of the
debtor;
(c) 3rd person who has an interest in the fulfillment pays even without the consent of the
debtor.
o Rights of guarantor against the debtor:absolute reimbursement and subrogation.
o Payment made to a 3rd person is invalid, except if such payment redounded to the
benefit of the creditor. Debtor must prove such benefit, except if:
After payment, the 3rd person acquiresthe creditors rights.
Creditor ratifies the payment to the 3rd person.
 By the creditors conduct, the debtor has been led to believe that the 3rd person had
authority to revive the payment.

o If a 3rd person pays without intention of seeking reimbursement, such payment

isconsidered by law as a donation whichmust be accepted by the debtor. If debtor
does not give his consent, there is no donation, and the 3rd person acquires the
right to reimbursement and subrogation. If debtor opposes, there will be no
donation, and the 3rd person acquires the right to reimburse to the extent which the
debtor was benefited.
o The debtor cannot compel the 3rd person to accept reimbursement.
o Payment made in good faith to a person in possession of the credit shall extinguish
obli.
Thing to be paid

This refers to the object of the prestation, not the obli. The object to be paid cannot
be another object that is merely similar to that contemplated by the parties.
If the object is specific, the very samething promised should be paid. If the object is
generic, the thing paid must belong to the class of the thing agreed upon in the
contract.
The debtor cannot compel the creditor to accept something of inferior quality. In the
same manner, the creditor cannot compel the debtor to deliver something of
superior quality.
o XPN: Dation in payment
Time of payment
GR: Payment must be made on the day the obli falls due, even if it be a Sunday or
holiday. XPN: When the instrument presented for payment is covered by the Negotiable
Instruments Law which provides that when an obli falls due on aSunday or holiday, the
instrument must be presented for payment on the succeeding business day.
Requisites for negotiability:
Must be in writing and signed bythe maker or drawer
Contains an unconditional promiseor order to pay a sum certain inmoney
Payable on demand or at a fixed,future time
Payable to order or to bearer
Instrument is addressed to a drawee who must be named or otherwise indicated
therein with reasonable certainty.
An obli falls due when it becomes demandable, such that the credit or acquires the right
to enforce the obli.
Place of payment

No provision of law that dictates where demand must be made, but the lawprovides
for the place of payment. (Art.1251)
If creditor demands payment in a place other than the proper place, debtor
canrefuse to pay w/o incurring delay. Likewise, if debtor offers to pay in a place
other than the proper place, creditor can refuse w/o incurring delay.
Manner of payment
Manner of payment must be inaccordance with the tenor of the obli.
Checks do not produce payment until encashed because checks are not legal
tender. They are mere representations of money. The validity of payments made with
checks depends on the kind. If the check used is certified, as the SC held inthe case
of New Pacific Timber v. Sener, the payment is valid. The SC also ruled in Co v. PNB
that payment by managerscheck is valid.
Legal tender is that currency which when offered as payment for a debt, whether
public of private, the creditor cannot refuse to accept.
Under RA 8183, which repealed theUniform Currency Act, parties may agree on the
currency to be used in the payment of an obli.
Characteristics of payment:
1. Integrity GR: complete performanceis necessary to extinguish obli.
XPN:
(a) Substantial performance. There must be attempt in good faith to comply and the deviation
is not substantial. Creditor does not lose the right to recover damages.
(b) Waiver/estoppel on the part of the creditor. There is full compliance but not in accordance
with the obli, and the creditor, being aware of such irregularity, accepts it and does not protest it.
2. Identity GR: Obli is fulfilled or performed only by giving that which has been agreed upon.
XPN: Dation in payment.
3. Indivisibility GR: Debtor cannot compel the creditor to accept partial payment, neither may the
creditor compel the debtor to render partial performance.
XPN:
a) Parties have agreed on partial performance
b) Obli is partly liquidated and partly unliquidated
Application of Payment
Designation of debt when there are several debts to a creditor.
Principally, it is the debtor who can make an application of payment. Failure of the debtor to make
application automatically allows the creditor to make application.
If both parties fail to make application, the More Burdensome Rule will apply.
Limitations on the right to apply:
Debtor cant make application of payment in a manner as to compel the creditor to accept
partial payment.
If there is a stipulation on how to apply payment, such must be followed.
If obli is interest-earning, payment shall not be applied to the principal without first applying
it on the interest.
GR: Application on payment cantbe made on debts that are not due.
XPN: (a) parties so stipulate; (b) when the application is made by the party for whose benefit
the term has been constituted.
Cession

Debtor abandons property in favor of thecreditor so that the latter may dispose
of the property in order to apply the same tothe debts.
If one creditor objects to the payment by cession, the remedy for the debtor is
voluntary insolvency to attain the same objective.
Condonation or remission of the debt

It is an act of liberality; it is in the nature of a donation.

Not the same as renunciation because renunciation or waiver is a unilateral act
while condonation or remission requires bilateral act because the law requires
acceptance of the condonation.
Condonation may be done impliedly (in any form), or expressly (must satisfy
therequisites prescribed by law with respect to form under the law on donation).
Effects of condonation:

If the obli condoned entirely was a joint orsolidary obli, there is total extinguishment
of the obli. If only a part of the obli has been condoned, it will give rise to partial
extinguishment only.
If what was condoned was merely the solidary tie, then the effect is
extinguishment of that solidary tie, and result in the conversion of the solidary obli to
joint.
Confusion or merger of rights
- The characters of debtor and creditor meet in
one and the same person.
Effects of confusion that occurs in the person of the debtor:
If there is only one debtor and one creditor, the obli is automatically extinguished.
If there is plurality of debtors, and the confusion occurs in the person of a debtor,
depends on the nature of the obli:
Joint obli what is extinguished is onlythe share of that debtor in the obli.
Solidary obli obli is extinguished
If confusion takes place in the person of the guarantor, this shall extinguish only
the contract of guaranty, but not the principal obli.
What is Compensation?

It 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
(Art. 1232, NCC). It involves the simultaneous balancing of two obligations in order
to extinguish them to the extent in which the amount of one is covered by that of the
other.
 The compensation is a mode of extinguishment of obligation wherein there is
simultaneous balancing or weighting of two obligations of two persons who are
reciprocally debtors and creditors of each other. It extinguishes to the extent in
which the amount of one is covered by that of the other.
The compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount, even without the consent of the parties.
Characteristics of Compensation

A compensation of obligations is considered as a simplified payment that aims to:

facilitate payment in a more convenient and less expensive way.
guarantee the effectiveness/enforcement of credit against fraud, insolvency, etc.
prevent unnecessary suits and payments thru the mutual extinction by operation of
law of concurring debts.
A compensation as distinguished from
a payment:
a compensation take effect by operation of law, while a payment takes effect by act
of the parties.
a compensation can bee partial extinguishment, while a payment must be complete
and indivisible.
A compensation as distinguished from
a confusion:
a compensation requires two persons to be mutually debtor and creditor each other,
while a confusionrequires only one person to be both the debtor and creditor.
a compensation covers two obligations, while a confusion covers only one
obligation.
Requisites of Compensation
A legal compensation requires:
that both parties must be mutually creditors and debtors to each other and be bound
principally.
that both debts must consist in sum of money or if consumable, of the same kind or
quality.
that both debts be due at the same time.
that both debts be liquidated and demandable.
that neither debt is held by any retention or controversy commenced by third persons,
and communicated in due time to the debtor.
that the debts are allowed by law.
A compensation shall take effect by operation of law when all the aforementioned requisites
are present, even though the creditors and debtors are not aware.
Kinds of Compensation

according to its effect or extent:

complete/total - covers the two obligations of the same amount; extinguishes both debts entirely, hence
no balance remaining.
semi-complete - covers the two obligations of different amounts to the extent in which the amount of one
is covered by that of the other; extinguishes the smaller debt entirely and the larger debt partly.
partial - covers only a part of the two obligations of different amounts; extinguishes both debts partly.
according to its origin or cause:
legal - by operation of law with all the requisites are present.
voluntary - by mutual agreement and consent of the parties even if the debts are not yet due.
judicial - by an order from a court as pleaded by one party.
facultative - by unilateral choice of one party to claim or oppose compensation; no mutual agreement
needed.
Compensation of Rescissible or Voidable
Obligations
A compensation is applicable to rescinable and voidable debts before they are
juridically rescinded or declared null and void.
However, the nullification of such debts have retroactive effect, which deemed the
compensation to have never took effect. There is also still a liability on the one who
caused the breach of obligation.
Compensation at Different Places

A legal compensation can still take effect even if the debts are payable at different
places. This is possible if the party who raises his right to the compensation shall pay
indemnity:
for expenses of monetary exchange in case of payment of money.
for expenses of transportation in case of delivery of thing.
Compensation in case of Several Debts

The rules on the application of payments shall apply if the debtor has various debts
which are susceptible of compensation.
The debtor must inform the creditor which of among those debts shall be the object
of compensation. His failure to inform would allow the creditor to apply the
compensation to the most burdensome debt (onerous obligation).
Compensation against the Government

A compensation may not take effect on taxes, which are obligations to the
government. One cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected.
A compensation may take effect on debts due to the government in its corporate
capacity.
Prohibited Compensations
A compensation is not allowed by the law:
if one of the debts arises from a depositum or deposit, wherein one receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. (not to be confused with
a 'deposit in a bank')
if one of the debts arises from a bailee (agent) in commodatum, wherein one gratuitously delivers
something to the other to be used for a certain time and then return.
if one of the debts arises from a claim for support due to gratuitous title, which are deemed vital
to the life of the recipient". This only applies to support in arrears (behind schedule), but not to
future support.
if one of the debts consists in civil liability arising from a criminal/penal offense; the fulfillment of
such obligation is imperative or necessary.This only applies to the accused, but not to the victim of
a crime.
Such prohibitions only applies to the party that has such debts. This is in order to prevent breach of
trust and confidence.
Although one party cannot use compensation, the other party has the option to claim or not to claim
compensation. This is a facultative compensation.