PAYMENT OR PERFORMANCE

 Mode of extinguishing an obligation which refers to the fulfillment of the prestation due.
 Consists not only in the delivery of money but also GIVING OF A THING (other than money), the
doing of an act, or not doing of an act.
 In law, payment and performance are synonymous.
 Performance= service/delivery, to do or not to do

Requisites of a valid payment

1. Payment must be in ACCORDANCE with the obligation

 There must be delivery of the thing or rendition of the service that was contemplated.
 The debtor cannot compel the creditor to accept a different one although the latter may
be of the same value as, or more valuable than that which is due.
 Substitution can be made if the creditor consents. In facultative
obligations, the debtor is given the right to render another prestation in
substitution.

Indeterminate or generic thing Determinate thing

Principle of Equity (Art 1246)

When the obligation consists in the delivery of an

indeterminate or generic thing, whose quality and
circumstances have not been stated:
Quality of
the thing Creditor cannot demand a thing of SUPERIOR quality
Debtor cannot deliver a thing of INFERIOR quality

The purpose of the obligation and other circumstances shall

be taken into consideration.

The benefit of this article may be waived by the creditor accepting a

thing of inferior quality, and by the debtor delivering a thing of superior
quality.
1. Stipulated 1. Stipulated
2. In absence, circumstances
shall be taken in to
consideration

 A debt to deliver a thing or to render service is not understood to have been paid unless
the thing or service has been COMPLETELY delivered or rendered.
 Partial or irregular performance will not produce the extinguishment of an
obligation.

Exceptions: (Partial or irregular performance will extinguish obligation)

1. Doctrine of substantial performance in good faith
 Substantial performance when the important or essential part of the
contract has been performed and only a minor part has not been carried.
 Important or essential part= remedy is rescission or cancellation
 Minor part has NOT been carried= remedy is proportionate reduction in the
amount recoverable by debtor.

REQUISITES:
1. Substantial performance
2. Good faith (which is presumed)
 Debtor must show however that he attempted in good faith to
comply with his obligation.
2. Principle of Estoppel
REQUISITES:
1. CREDITOR KNOWS that the performance is INCOMPLETE AND
IRREGULAR
 If the payment is incomplete or irregular, the creditor
may properly reject it. (Payment must be in
ACCORDANCE with the obligation)
2. Creditor ACCEPTS performance without protest or objection
 In case of acceptance, the law considers that creditor
waives his right. Therefore obligation is extinguished.
2. Debtor and Creditor must have CAPACITY to receive and pay.
  In obligations to give, payment by one who does NOT have the free disposal of
the thing due and capacity to alienate is NOT VALID. (Thing paid cannot be
recovered)

 Free disposal of the thing: the thing delivered must NOT be subject to any
claim or lien or encumbrance of a third person. (pledged, mortgaged)

 Capacity to alienate: person is not incapacitated to enter in to contract.

Minor makes payment= minor cannot recover if creditor has spent or
consumed it in good faith.

3. Made by the DEBTOR to the CREDITOR

 Creditor is not bound to accept payment or performance by a third person who has NO
INTEREST in the fulfillment of the obligation, unless there is a stipulation to the
contrary.

A. Persons FROM WHOM the creditor must accept payment:

a) DEBTOR
b) Person who HAS INTEREST IN THE FULFILLMENT OF OBLIGATION (ex:
guarantor)
c) A THIRD PERSON who has NO interest in the fulfillment of the obligation but
there is a STIPULATION THAT HE CAN MAKE PAYMENT

Effect of payment by a third person

WITH KNOWLEDGE of debtor
1. Right to reimbursement
2. Legal Subrogation
WITHOUT KNOWLEDGE or AGAINST THE
WILL of debtor
 Right to reimbursement to the
EXTENT OF BENEFIT received
by the debtor.

*Third person who pays, cannot

compel the creditor to subrogate him
in the latter’s accessory rights of
mortgage, guaranty or penalty.


SUBROGATION
 Person who pays for the debtor is
put into the shoes of the creditor.
 Acquires rights which the creditor
could have exercised pertaining
to the credit either against the
debtor or against third persons
(guarantors, possessors or
mortgages)
REIMBURSEMENT
 Right to be refunded to the extent
of benefit that redounded
 Acquires NO RIGHT to the
guarantees and securities of the
original obligation.

B. Person TO WHOM payment shall be made:

General rule: Payment to any other person is not valid.
(Debtor making the payment to the wrong party even in good faith is
not excused)
a) Creditor or obligee
 Creditor at the time payment is made, not creditor at the
constitution of the obligation.
 If there is subrogation, payment must be made to new creditor
b) Successor in interest
c) Any person AUTHORIZED to receive payment
 Guardian
 Executor/administrator of estate
 Assignee or liquidator

 As a general rule, payment TO a third person is NOT VALID. However, the

following are exceptional instances wherein payment by a debtor to a
third person is valid.
1. When in good faith, the debtor pays to one in possession of the
credit.
 Payment in good faith to the person in possession of
the credit is valid although such person may not be
authorized to receive payment.
  Possession of credit itself Is not merely the document
or instrument evidencing the credit. (Negotiable
instruments Law)
2. WITHOUT NOTICE of the assignment of the credit, the debtor pays
to the original debtor.
3. Payment to a third person has REDOUNDED TO THE BENEFIT of
the creditor.
 GENERAL RULE: Benefit is NOT presumed.
 Proof of such benefit is incumbent to the debtor who paid.
 In the absence of benefit, debtor may be made to pay again
by the creditor’s guardian or by the incapacitated person
himself.
D pays 1000 to C (minor).
 If C loses the 700 in gambling, negligence, or
ignorance, D must pay again the 700
 If C kept the money or spent it in purposes USEFUL
to him, payment of whole 1000 is valid.

EXCEPTIONS:
1. If after the payment, the third person acquires the
creditor’s rights
2. If the creditor ratifies the payment to a third
person.
3. If by the creditor’s conduct, the debtor has been
led to believe that the third person had authority to
receive the payment. (estoppel)

 Payment to a person who is incapacitated to administer his property shall

be valid if he has kept the thing delivered, or insofar as the payment is
beneficial to him.

4. Made at the RIGHT TIME and PLACE

Debtor
Cost Extrajudicial expenses (if
silent)

Other payment concepts:

1. Payment made to the creditor by the debtor after the debtor is judicially ordered to retain the debt
shall not be valid.
 During the pendency of the case, debtor may be ordered by the court to retain the debt
until the right of the plaintiff (creditor) in the main litigation is resolved.
D owes C 1000
E owes D 1000
 In an action by C against D, E upon petition was ordered by the court not to pay D
and to retain the debt in the meantime. In this case, the debt of E is said to be
“garnished” or is subjected to payment to C.
 Any payment made by E to D, is in violation of judicial order, and payment is
considered invalid.
 C may still hold E liable for debt. D has a quasi-contractual obligation (solution
indebiti) to return the amount to C.
 Payment of E to C will extinguish the obligation of D and C
2. In obligations to do or not to do, an act of forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
3.

Special forms of payment

1. Dation in payment
2. Application of payments (not really a special form of payment)
3. Payment by cession
4. Tender of payment and Consignation

Dation in payment Payment by cession

(adjudication or dacion en pago)
 Conveyance of ownership of a thing as
an accepted equivalent of performance.
 An existing debt in money is satisfied, not
by payment of money, but by alienation of
property.
 Special specie of sale
 Assignment or abandonment of all the
properties of the debtor for the benefit of
his creditors, in order that the creditors
may sell the property and apply the
proceeds of the sale to the satisfaction
of their credits.
  Assignment does not make the creditors
the owner to the property, and debtor is
released up to the extent of net proceed
of the sale.

REQUISITES
1. 2 or more creditors
2. Debtor must be partially insolvent
3. Must involve all properties of debtor
4. Cession must be accepted by the
creditors

1 creditor 2 or more creditors

Does not presuppose the insolvency of the Debtor is insolvent at the time of
debtor assignment
Does not involve all of the property of the Extends to all property of the debtor subject
debtor to execution sale
Creditor becomes the owner of the thing given Creditors only acquire the right to sell the
by the debtor thing and apply the proceeds to their credits
proportionately
Act of novation Not an act of novation