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EXTINGUISHMENT OF OBLIGATIONS
*Enumeration is non-exclusive
Principal modes of extinguishing relationship
between parties: PaLoCo3No
1. Payment
2. Loss of the thing due
3. Condonation or remission
4. Confusion or merger of rights of the
creditor and debtor
5. Compensation
6. Novation
Other modes:
1. Annulment of the contract
2. Rescission of the obli
3. Fulfillment of the resolutory condition
4. 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 bet.
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of the contract sought to be rescinded,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.
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PAYMENT – Not only the delivery of money
but includes the performance of an
obligation in any other manner.
Kinds of performance or payment:
1. Normal or voluntary – debtor paid
obli on his own volition, not because
he was told to pay.
2. 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 the
obli is not personal to the
debtor.
○ Equivalent – the economic
equivalent of the obli is given.
Requisites of a valid payment:
1. Parties (debtor and creditor)
2. The thing to be paid
3. Time, place, and manner of payment
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 effect
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.
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– Generally, payment must be made to the
creditor, but payments may also be made
to his heirs, successors-in-interest, or his
agent.
– There is dispute as to the requirement of
capacity of the debtor and creditor for the
validity of payment. Some say the need
for the capacity of both is absolute, while
some qualify and distinguish between obli
to give and obli to do or not to do.
○ In obli to give, where there is a
juridical transaction where ownership,
dominium or title of the thing being
given is involved, capacity becomes
necessary because incapacitated
persons cannot effectively transfer
ownership from himself to the creditor.
– It can be said that the capacity of both
the creditor and debtor is essential. The
capacity of the debtor is necessary to be
able to effectively transfer title of the
object given to the creditor. The capacity
of the creditor is also equally necessary
to be able to give a valid release from the
obli.
○ GR: Payment to incapacitated creditor
is invalid.
○ XPN: Such remains valid if:
1. The payment redounds to the
benefit of the creditor, and;
2. The creditor retains or keeps the
thing paid
– “Benefit” in XPN #1 refers to any kind of
benefit EXCEPT sensual benefit.
– Payment made by an incapacitated
person will not be valid, neither will it be
void. It is simply voidable.
– There can be recovery if what has been
paid has not been consumed. In other
words, payment is annullable. But there
can be no recovery if the payment has
been consumed in good faith, in which
case, the payment becomes valid.
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– Payment made by a 3rd person is valid
only if accepted by the creditor. Consent
of debtor is not necessary for the validity
of such payment, but it becomes
essential in determining the rights of the
3rd person against the debtor.
– Effect of payment by 3rd person: Payment
is valid if accepted by the creditor.
– Rights of the 3rd person:
*If the 3rd person made the payment
without the knowledge of the debtor,
he acquires only the right to reimburse
only up to the extent that the debtor
may have been benefited (conditional
reimbursement).
*If payment was made with the
consent of the debtor, the 3rd person
acquires the right of absolute
reimbursement and he is subrogated
into the rights of the creditor.
– 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.
– Rights of guarantor against the debtor:
absolute reimbursement and subrogation.
– 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 acquires
the creditor’s rights.
• Creditor ratifies the payment to the 3rd
person.
• By the creditor’s conduct, the debtor
has been led to believe that the 3rd
person had authority to revive the
payment.
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– If a 3 person pays without intention of
seeking reimbursement, such payment is
considered by law as a donation which
must 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.
– The debtor cannot compel the 3rd person
to accept reimbursement.
– 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 same
thing 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.
• 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 a
Sunday or holiday, the instrument must
be presented for payment on the
succeeding business day.
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• Requisites for negotiability:
○ Must be in writing and signed by
the maker or drawer
○ Contains an unconditional promise
or order to pay a sum certain in
money
○ 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 creditor
acquires the right to enforce the obli.
Place of payment
– No provision of law that dictates where
demand must be made, but the law
provides for the place of payment. (Art.
1251)
– If creditor demands payment in a place
other than the proper place, debtor can
refuse 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 in
accordance 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 in
the case of New Pacific Timber v. Sener,
the payment is valid. The SC also ruled in
Co v. PNB that payment by manager’s
check 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.
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– Under RA 8183, which repealed the
Uniform Currency Act, parties may agree
on the currency to be used in the
payment of an obli.
Characteristics of payment:
1. Integrity – GR: complete performance
is 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
Dation in Payment – debtor alienates
property in payment of a debt in money.
– Does not apply only to debts in money;
governed by the Law on Sales; Barter is
also covered by the Law on Sales.
– Eviction will not revive the orig obli.
Remedy of the creditor who is evicted is
to enforce the right of the vendee under
the Law on Sales – right to recover the
price paid plus interest thereon.
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– Deprivation in law (deprivation by virtue
of a final judgment) will fall under the Law
on Sales and gives rise to the
enforcement of warranty against eviction.
– There can be no dation in payment
without the consent of the creditor
because it involves a substitution or
change in the object of the obli.
*Art. 1250 speaks of extraordinary inflation
or deflation. The value of the currency at the
time of the establishment of the obli shall be
the basis of determining the payment
EXCEPT when the parties agreed otherwise.
*The SC held in Spouses Suapangco v.
Manotoc Realty Corp. that Art. 1250 does not
apply when the obli is payable in Phil. legal
tender, bec. the article refers to “currency”,
which means that the law is not referring to
Phil. peso but a foreign currency.
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 can’t 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 can’t
be made on debts that are not due.
XPN: (a) parties so stipulate; (b)
when the application is made by
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the party for whose benefit the
term has been constituted.
Cession
– Debtor abandons property in favor of the
creditor so that the latter may dispose of
the property in order to apply the same to
the debts.
– If one creditor objects to the payment by
cession, the remedy for the debtor is
voluntary insolvency to attain the same
objective.
Tender of Payment and Consignation
– Tender of payment is the offer to pay.
– Consignation is the act of depositing the
thing due or placing the same under
judicial authority/disposal when the
creditor refuses to accept payment
without just cause.
– Requisites: (a) valid tender of payment
(satisfies the requisites of payment); (b)
depositing the thing due to judicial
disposal.
– There may be consignation without valid
tender of payment (Art. 1256):
• Creditor is absent, unknown, or
does not appear at the place of
payment. (He must have had no
legal representative)
• Creditor is incapacitated at the
time the obli falls due, or at the
time payment, or offer of payment,
is made. (Also, there must have
been no legal representative)
• Creditor, without just cause,
refuses to give a receipt.
• 2 or more persons claim the right
to collect.
• Title of the obli has been lost.
– Obli is extinguished when (a) creditor
claims the thing consigned, or (b) the
court declares that the consignation was
properly made.
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– 2-notice rule: 1st notice: notice of the
intent to consign. 2nd notice: notification
informing the creditor of the consignation
of the thing. Absence of one of these
notices will constitute a valid defect and
will invalidate the consignation.
– Consignation may be made judicially or
extra-judicially. Extra-judicial
consignation, is governed by BP 25, which
refers to rentals in arrears. Extra-j is done
through opening an account in a bank in
the name of the creditor or lessor to
enable such person to withdraw/claim
what has been deposited. In extra-j, the
debtor can’t withdraw the thing. Judicial
consignation is obviously done with the
court.
– If deposit is made in a place that is not
the proper place of payment, the court
held in the case of Chua Kay v. Lim Chang
that in case of loss of the thing, even if
due to fortuitous event, such will not
extinguish the obli.
– The debtor may withdraw what has been
deposited during the pendency of the
case because he still owns the thing.
However, the obli will subsist. He may
also withdraw even after the consignation
is declared proper, provided that the
creditor consents to the withdrawal. In
this case, the obli will remain but the
creditor will lose his preference over the
object and the parties interested in the
fulfillment of the obli will have to be
released from the obli.
– The creditor may prevent the debtor
from withdrawing by claiming what has
been deposited.
– If the creditor claims the thing w/o
reservation, it will extinguish obli. If he
claims it w/ certain reservations, then his
withdrawal will only partially extinguish
the obli.
– Consignation is not proper if what is
involved is the right of option or the right
of redemption because there is no debt
due.
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Loss of the thing due
– Effect depends:
○ Specific – (a) due to the fault of
debtor – not extinguished; (b) not due
to the fault of debtor – extinguished
XPN: Exceptions to loss due to
fortuitous event.
○ Generic – not extinguished.
– Loss of obli to do occurs when there is
impossibility of performance or difficulty
of performance.
– Impossibility of performance happens
when such performance is impossible
because it is against laws (legal
impossibility) or the laws of nature
(physical impossibility).
– There is difficulty of performance when
the obli requires extraordinary effort that
goes beyond the contemplation of the
parties.
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 the
requisites prescribed by law with respect
to form under the law on donation).
Effect of condonation:
– If the obli condoned entirely was a joint or
solidary 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
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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.
Effect 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 only
the 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.
Compensation
– Two persons or two parties are debtors
and creditors of each other. (Not
necessarily reciprocal, but it is bilateral)
– Not the same as confusion. In confusion,
there is only one obli involved, while in
compensation, there are at least two oblis
involved. In confusion, there is only one
party involved because the characters of
debtor and creditor meet in one and the
same person. Whereas in compensation,
there are two parties involved.
Kinds of Compensation
– Legal – takes place by operation of law
– Conventional – takes place by agreement
of the parties
– Judicial – decreed by the court
– Facultative – a party is entitled to oppose
it when compensation is invoked by the
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other but the one who can oppose is not creates a new one to take the place of the
precluded from invoking compensation. extinguished one.

Requisites of Compensation – Also includes the simple case of

modification.
– Parties must be bound principally in their
own rights (XPN: Guarantor who is Novation may either be:
allowed by law to claim compensation
with respect to what the creditor owes – Extinctive – old obli is extinguished and
the principal debtor) a new one is created
– Both debts must consist of a sum of – Modificatory – no extinguishment of
money or if fungible goods, although the obli. It simply modified the obli.
law uses “consumable”, they must be the
same kind and quality (Not necessary 3 ways by which novation may take
that they be of the same amount for place:
compensation may be partial or total. If
– Changing the object or any other
one of the debts is in money and the
principal conditions of the obli –
other is in goods, there can be no
principal, not accessory condition. This is
compensation, only dation)
called real or objective novation, which
– Both debts must be due
refers to a change in the (a) cause of the
– They be liquidated and demandable
obli; (b) object of the obli; (c) any of the
– Over neither of them there be any
principal conditions of the obli
retention or controversy, commenced by
3rd persons and communicated in due
– Subsititution of the person of the debtor:
time to the debtor

*In legal compensation, it is necessary ○ Expromision – initiative for the

that all requisites must concur in order for change of debtor comes from the 3rd
compensation to take place. But in person. Consent of creditor is
conventional compensation, no, because necessary.
the law allows compensation even if one ○ Delegacion – initiative comes from
debt is not due or liquidated as long as the debtor himself. Consent of all
both parties agree. parties is necessary.

Facultative compensation – Kinds of oblis *Effect of insolvency of substitute:

that come under it: Obli arising from:
*In expromision, the old obli will
– Deposits not be revived.
– Commodatum
– Support *In delegacion, GR is the old obli
– Civil liability arising from crime will also not be revived, XPNs are: (1) if at
the time of substitution, the new debtor is
already insolvent and such is of public
knowledge; and (2) if at the time of the
substitution, insolvency of the new debtor
was already existing, although such is not
publicly known, yet it is known to the
debtor.
Novation

– Not an absolute mode of extinguishment,

– Subrogating a 3rd person into the rights of
it is only relative because it plays a dual
the creditor
role. While it extinguishes an obli, it

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Requisites of a valid novation:

– Old valid obli

– New valid obli
– Substantial difference between the two
– Parties to both oblis must be capacitated.
Capacity must be possessed at the time
of the constitution of the old obli and at
the time of the establishment of the new
one.

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