1
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because of the contract sought to be rescinded,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.
----
PAYMENT – Not only the delivery of money but includes
the performance of an obligation in any other manner.
BadNotes
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:
o Specific – obligor is compelled to
perform a specific act; applies to only to
give.
o Substitute – the debtor is substituted by
a 3rd person, at the expense of the
debtor, if the obli is not personal to the
debtor.
o 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.
- 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.
 2
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.
o 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.
o GR: Payment to incapacitated creditor is invalid.
o 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.
- 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
BadNotes
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:
o Conventional – never presumed; agreement of
the parties
o 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.
- If a 3rd 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.
 3
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.
 Requisites for negotiability:
o Must be in writing and signed by the maker
or drawer
o Contains an unconditional promise or order
to pay a sum certain in money
o Payable on demand or at a fixed, future
time
o Payable to order or to bearer
o 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
BadNotes
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.
- 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.
 4
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.
- 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.
BadNotes
- 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 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
 5
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.
- 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.
BadNotes
- 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.
Loss of the thing due
- Effect depends:
o 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.
o 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).
 6
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 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:
o Joint obli – what is extinguished is only
the share of that debtor in the obli.
o 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.
BadNotes
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 other but
the one who can oppose is not precluded from
invoking compensation.
Requisites of Compensation
- Parties must be bound principally in their own
rights (XPN: Guarantor who is allowed by law to
claim compensation with respect to what the
creditor owes the principal debtor)
- Both debts must consist of a sum of money or if
fungible goods, although the law uses
“consumable”, they must be the same kind and
quality (Not necessary that they be of the same
amount for compensation may be partial or
total. If one of the debts is in money and the
other is in goods, there can be no compensation,
only dation)
- Both debts must be due
- They be liquidated and demandable
- Over neither of them there be any retention or
controversy, commenced by 3rd persons and
communicated in due time to the debtor
*In legal compensation, it is necessary that all
requisites must concur in order for compensation to
take place. But in conventional compensation, no,
because the law allows compensation even if one
debt is not due or liquidated as long as both parties
agree.
Facultative compensation – Kinds of oblis that come
under it: Obli arising from:
- Deposits
- Commodatum
- Support
- Civil liability arising from crime
 7

Novation Requisites of a valid novation:

- Not an absolute mode of extinguishment, it is - Old valid obli

only relative because it plays a dual role. While
it extinguishes an obli, it creates a new one to
take the place of the extinguished one.
- Also includes the simple case of modification.
Novation may either be:
- 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.

- Extinctive – old obli is extinguished and a new

one is created
- Modificatory – no extinguishment of obli. It
simply modified the obli.

3 ways by which novation may take place:

- Changing the object or any other principal

conditions of the obli – principal, not accessory
condition. This is called real or objective
novation, which refers to a change in the (a)
cause of the obli; (b) object of the obli; (c) any
of the principal conditions of the obli

- Subsititution of the person of the debtor:

o Expromision – initiative for the change

of debtor comes from the 3rd person.
Consent of creditor is necessary.
o Delegacion – initiative comes from the
debtor himself. Consent of all parties is
necessary.

*Effect of insolvency of substitute:

*In expromision, the old obli will not be revived.

*In delegacion, GR is the old obli 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.

- Subrogating a 3rd person into the rights of the

creditor

BadNotes