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Mahari, Razjiun T.

BS Accountancy II
LAW 101

Extinguishment of Obligations

Modes of Extinguishment
1. by payment or performance
2. by loss of the thing due
3. by condonation or remission
4. by confusion or merger of the rights of creditor and debtor
5. by compensation
6. by novation

Other Causes of Extinguishment
Mentioned in Art. 1231
1. Annulment
2. Rescission
3. Fulfillment of a resolutory condition
4. Prescription
Not mentioned in Art. 1231
5. Death of a party in case the obligation is a personal one
6. Mutual desistance or withdrawal
7. Arrival of resolutory period
8. Compromise
9. Impossibility of fulfillment
10. Happening of a fortuitous event

I. Payment or Performance
(a) Payment
(i) It is the complete delivery of money and performance of obligation
Requisites:
1. Persons, who may pay and to whom payment may be made
2. the thing or object in which payment must consist
3. Manner, time and place of payment
(ii) When debt considered paid:
a. Integrity of the prestation prestation must be fulfilled completely
b. Identity of the prestation - the very thing or service due must be
delivered or performed
General rule: Partial or irregular performance will not produce the
extinguishment of an obligation
(iii) Recovery allowed in case of substantial performance in good faith
- there must have been an attempt in good faith to perform, without
any willful or intentional departure therefrom
(iv) Recovery allowed when incomplete or irregular performance waived
- There must be an intentional relinquishment of a known right
(v) Third party cannot compel creditor to accept payment or performance,
except when:
a. there is stipulation to the contrary
b. third person has an interest in the fulfillment of obligation
(vi) Persons from whom the creditor must accept payment:
a) The debtor
b) Any person who has an interest in the obligation (like a guarantor)
c) A third person who has no interest in the obligation when there is
stipulation that he can make payment
(vii) Effect of payment by a third person:
i. If made without the knowledge or against the will of debtor:
- The payer can recover from the debtor only in so far as the
payment has been beneficial to the latter
- The third person is not subrogated to the rights of the creditor,
such as those arising from a mortgage, guarantee, or penalty
ii. If made with the knowledge of debtor:
- The payer shall have the rights of reimbursement and
subrogation, that is, to recover what he has paid (not
necessarily the amount of the debt) and to acquire all the rights
of the creditor
(viii) To whom payment must be made:
a. To the person in whose favor obligation has been constituted
b. His Successor in interest
c. Any person authorized to receive it
d. Third person provided it has redounded to benefit of creditor
- Benefit to the creditor need not be proved in the following case:
i. If after payment, third person acquires creditors
rights
ii. If creditor ratifies payment to third party
iii. If creditors conduct let debtor to believe that the
third person had authority to receive payment
e. Possessor of the credit
(ix) Payment in Legal Tender
- Payment be made in the currency which is legal tender in
the Philippines if payment of debts in money made in the
currency stipulated is not possible
Legal Tender is that currency which a debtor can legally compel a
creditor to accept in payment of a debt in money when
tendered by the debtor in the right amount
a. In the Philippines, all coins and notes issued by the BSP constitute legal
tender for all debts, both public or private
b. Promissory notes, bills of exchange, checks produce effect of legal
tender only when encashed or impaired through the fault of creditor
c. In case of extraordinary inflation or deflation, the basis is the
value of currency at the time obligation is established
(x) Places where payment shall be paid:
1. If there is stipulation, the payment shall be made in the place
designated
2. If there is a stipulation and the thing to be delivered is specific, the
payment shall be made at the place where the thing was, at the
perfection of the contract
3. If there is no stipulation and the thing to be delivered is generic, the
place of payment shall be the domicile of the debtor
(b) Application of Payments is the designation of the debt to which should be
applied payment made by a debtor who owes
several debts in favor of the same creditor
i. Requisites:
1. One debtor and one creditor
2. Two or more debts
3. Debts must be of the same kind
4. Debts to which payment made by the debtor has been applied
must be due
5. Payment made must not be sufficient to cover all debts
ii. Rules on application of payments:
1. The debtor makes the designation
2. If not, the creditor makes it by stating in the receipt that he
issues unless there is cause for invalidating the contract.
3. If neither the debtor nor the creditor has made the application,
or if the application is not valid, then application is made by
operation of law
4. If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately
(c) Payment by Cession Abandonment of all the properties of the debtor for the
benefit of his creditors in order that the latter may sell
same and apply proceeds thereof
i. Requisites:
a. Plurality of debts
b. Partial or relative insolvency of the debtor
c. Acceptance of cession by the creditors
ii. Characteristics:
a. Cession requires more than one creditor
b. Cession requires partial insolvency
c. Cession affects all the properties of debtor
d. Cession does not transfer ownership
e. Cession is not a novation
(d) Dation in Payment (Dacion en pago)
- It is the transmission of the ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of an obligation
- It is governed by law of sales
- Characteristics:
a. Dacion usually has one creditor
b. Dacion does not require insolvency
c. Dacion does not involve all the properties of debtor
d. Dacion makes creditor owner of the property
e. Dacion is a novation
(e) Tender of Payment and Consignation
a. Tender of payment The act of the debtor of offering to the creditor the
thing or amount due
Requisites of a valid tender of payment:
1. It must comply with the rules on payment
2. It must be unconditional and for the whole amount
3. It must be actually made
b. Consignation the act of depositing the thing due with the court or judicial
authority whenever the creditor cannot accept or refuses
to accept payment
i. Requisites of a valid consignation
a. Debt Due
b. Tender of payment by debtor and refusal by creditor to
accept it without justifiable reason
- Exception to this requisite:
a. When creditor is absent or unknown or does not
appear at place of payment
b. When he is incapacitated to receive payment
c. When he refuses to give receipt, without just cause
d. When two or more persons claim same right to collect
e. When title of the obligation has been lost
f. When the debtor had previously been notified by the
creditor that the latter would not accept any payment
c. Previous notice of the consignation had been given to persons
interested in fulfillment of obligation
d. Thing or amount due has been deposited with judicial authority
e. Subsequent notice of consignation to interested parties
ii. Effects if consignation is properly made:
1. The debtor may ask the judge to order the cancellation of the
obligation
2. The running of interest is suspended
iii. Effects if, the consignation having been made, creditor authorizes the
withdrawal by debtor:
1. The obligation remains
2. The creditor loses any preference (priority) over the thing
3. The co-debtors, guarantors, and sureties are released (unless
they consented)

II. Loss of the thing due
(a) A thing is lost when:
(1) it perishes
(2) it goes out of commerce
(3) it disappear in such a way that its existence unknown or cannot be recovered
(4) it becomes legally or physically impossible to perform or so difficult as to be
manifestly beyond the contemplation of the parties
(b) The obligation to deliver specific thing is extinguished if:
1. the specific thing is lost without the fault of debtor, and
2. debtor is not guilty of delay
(c) No person shall be responsible for fortuitous events, except:
1. When the law so provides
2. When the stipulation so provides
3. When the nature of the obligation requires assumption of risk
4. When debtor incurs delay
5. When debtor promises to deliver same thing to two or more persons who do
not have the same interest
6. When obligation to deliver arises from criminal offense
7. When obligation is to deliver a generic thing
(e) In an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation (the genus never perishes)
Exception:
a. If the generic thing is delimited
b. If the generic thing has already been segregated or set aside, in
which case, it has become specific
(f) In case of partial loss, the court shall determine whether it is so important as
to extinguish the obligation
(g) Whenever the thing is lost in the possession of the debtor, it shall be presumed that
the loss was due to his fault
Exception:
i. there is proof to the contrary
ii. earthquake, flood, storm, or other natural calamity
(h) The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor.
i. The impossibility of performance will result in the extinguishment of the
obligation
ii. The impossibility must take place after the constitution of the obligation
iii. Kinds of Impossibility:
1. Physical takes place when, for example the obligor dies or
becomes physically incapacitated to perform the
obligation
2. Legal occurs when the obligation cannot be performed
because it is rendered impossible by provision of law,
although physically it may be possible of performance.
(i) The creditor has a right to proceed against the third person responsible for the loss

III. Condonation or Remission
(a) It is an act of liberality by virtue of which the creditor gratuitously renounces
his right, which is extinguished either in its entirety or in that part of the
same to which the renunciation refers
(b) Requisites
i. Gratuitous (without any equivalent)
ii. Must be accepted by debtor
iii. Debt must be demandable
iv. Parties must have capacity
v. Must not be inofficious
vi. Must comply with the forms of donation if made expressly
(c) Effect of Inofficious Remission:
- If a person, while making donations, give more than that which he can
give by a testamentary will, the excess will be inofficious and shall be
reduced by the court accordingly
(d) Implied remissions:
- Delivery of private document evidencing credit
- Private document in which the debt appears is found in the possession
of the debtor
- If the thing pledged is found in the possession of debtor or of a third
person who owns the thing
- Renunciation of principal debt extinguishes accessory obligation
IV. Confusion or Merger of Rights
(a) Confusion or merger is the meeting in one person of the qualities of creditor and
debtor with respect to the same obligation
(b) It erases the plurality of subjects of the obligation
(c) Requisites of a valid confusion or merger:
i. It must take place between the principal debtor and creditor
ii. It must be complete and definite
(d) Effect of merger in the person of principal debtor or creditor
i. Extinguishes the obligation
ii. The accessory obligation of guaranty is also extinguished in
accordance with the principle that the accessory follows the
principal
(e) Effect of merger in the person of guarantor
i. The extinguishment of the accessory obligation does not carry with it
that of the principal obligation
ii. Consequently, merger which takes place in the person of the guarantor,
while it extinguishes the guaranty, leaves the principal obligation in force
(f) Confusion in a joint obligation
- the confusion will extinguish only the share corresponding to the creditor or
debtor in whom the two characters concur
(g) Confusion in a solidary obligation
- Merger in the person of one of the solidary debtors shall extinguish the entire
obligation because it is also a merger in the other solidary debtors

V. Compensation
(a) 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
(b) Guarantor can set up compensation of what principal debtor may owe
creditor
(c) Compensation may be:
a. Total compensation - is when the amount due are equal or of the
same amount, hence both obligations are extinguished
b. Partial compensation - is when the amount are not the same after
compensation took place, there is a balance remains
(d) Parties may agree to compensate debts not yet due
(e) When one or both debts are rescissible or voidable, they may be
compensated before they are judicially rescinded or avoided
(f) Requisites of legal compensation (by operation of law):
1. Parties are principal creditors and debtors of each other
2. Both debts consist in sum of money or consumable of same kind
and quality
3. Both debts are due and demandable
4. Two debts are liquidated (amount is certain)
5. No retention or controversy commenced by third party
(g) Effects of assignment of credit
a. Made before compensation took place:
i. with consent of debtor
- cannot set up against assignee unless debtor reserved
his right to compensation when he gave his consent
ii. with knowledge but without consent
- Debtor can set up compensation for debts before the
notification
- Debtor cannot set up compensation with respect to debts
which matured after notification
iii. without knowledge of debtor
- Debtor can set up compensation for debts maturing prior
to his knowledge
b. Made after compensation took place:
- No effect; compensation is already perfected
(h) Compensation cannot take place in the following cases:
i. Debts from Contracts of Depositum - A person receives a thing
belonging to another for safekeeping and of returning the same; not
bank deposits
ii. Commodatum - One person delivers something for him to use
and return it
iii. Support due by gratuitous title
iv. Debts from Criminal offense
v. Taxes

VI. Novation
(a) It is the extinguishment of an obligation through the creation of a new one which
substitutes it
(b) Obligations can be modified by:
1. changing the object or principal conditions
2. substituting another in place of the debtor
3. subrogating a third person in the rights of the creditor
(c) Requisites:
i. Previous valid obligation
ii. Agreement to enter new obligation
iii. Extinguishments of old
iv. Creation of new valid obligation
(d) Must be declared in unequivocal terms or incompatible on every point
Incompatibility Test: The test is whether they can stand together without
conflict, each one having its own independent existence.
If they cannot, they are incompatible, and the subsequent
obligation novates the first.
(e) Substitution when the person of the debtor is substituted
i. Expromision takes place when a third person of his own initiative and
without the knowledge or against the will of the original
debtor assumes the latters obligation with the consent of the
creditor
1. Payment by new debtor gives him right to beneficial reimbursement
2. Insolvency or non fulfillment of obligation by new debtor will not
give rise to liability of old debtor
ii. Delegacion takes place when the creditor accepts a third person to
take the place of the debtor at the instance of the latter
1. Payment by new debtor entitles him to reimbursement and
subrogation
2. Non fulfillment of obligation by new debtor will not give rise to
liability of old debtor
3. Insolvency of new debtor will revive action against old debtor if
insolvency was already existing and of public knowledge, or known
to the debtor when he delegated his debt
(f) If the new obligation is void, there is no novation, and the original obligation
generally will subsist
(g) If original obligation is void, novation is void; except when annulment may
be claimed only by debtor or when voidable acts have been ratified
(h) The conditions attached to the old obligation are also attached to the new
obligation except when there is a contrary stipulation
(i) Subrogation when a third person is subrogated in the rights of the creditor
i. Conventional requires the consent or express agreement of:
1. The debtor because he becomes liable under the new
obligation and because his old obligation ends
2. The old creditor because his credit is affected
3. The new creditor because he becomes a party to the
obligation
ii. Legal Without agreement, by operation of law
1. When creditor pays another creditor who is preferred, even
without the debtors knowledge
2. When a third person, not interested in the obligation, pays
with the express or tacit approval of debtor
3. When a third person interested in the fulfillment of
obligation pays, even without the knowledge of debtor
(j) Effect of legal subrogation
- to transfer to the new creditor the credit and all the rights and actions
that could have been exercised by the former creditor either against the
debtor or against third persons, be they guarantors or mortgagors
(k) Effect of partial subrogation
- The creditor to whom partial payment has been made by the new creditor
remains a creditor to the extent of the balance of the debt.