MODULE I-WEEK 2

CHAPTER 4-EXTINGUISHMENT OF OBLIGATIONS

General Provisions
SECTION 1-Payment or Performance

Mindanao State University-Iligan Institute

of Technology
Class: HTM108

Topic: Law on Obligations and Contracts

CHAPTER 4- EXTINGUISHMENT OF OBLIGATIONS

General Provisions Article 1231
SECTION 1 Payment or Performance Articles 1232-1251
SUBSECTION 1. Application of Payments Article 1252-1254
SUBSECTION 2. Payment by Cession Article 1255
SUBSECTION 3. Tender of Payment and Consignation Article 1256-1261
SECTION 2 Loss of the Thing Due Article 1262- 1269
SECTION 3 Condonation or Remission of the Debt Article 1270-1274
SECTION 4 Confusion or Merger of Rights Article 1275-1277
SECTION 5 Compensation Article 1278-1290
SECTION 6 Novation Article 1291-1304
II.Learning Objectives
At the end of the Chapter, the student should be able to:

1. Master the different modes of extinguishing obligations, as well as the respective requisites;

2. Understand their effects and consequences on the rights of the debtor.

CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory

condition, and prescription, are governed elsewhere in this Code. (1156a)

SECTION 1. - Payment or Performance

Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of
an obligation. (n)
Payment- it should be the delivery of money and the performance in any other manner of an obligation.
Ex. RYE is indebted to EMILY P1, 000.00. Her obligation is to deliver to EMILY the amount and to perform
his obligation which is to pay EMILY the said amount.

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be. (1157)

The general rule is that, to be considered a valid payment, the thing or service contemplated must be paid and
fulfillment must be complete.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)

This is the exception to the general rule in Art. 1233, that if there is substantial performance in good faith by the
debtor, the obligation is deemed to be fulfilled.

Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with. (n)

Another exception to the general rule in Art. 1233 that when the creditor accepts the performance knowing its
incompleteness and irregularities and without expressing any protest, the obligation is deemed complete.

Ex. KARLO agreed to paint the house of JAYSON. According to their stipulation, KARLO would use a
particular brand of paint. If JAYSON accepted the performance of KARLO, knowing that the paint
used was another brand and without expressing any protest or objection, the obligation is deemed
fully complied with.

Art. 1236. The 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.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial
to the debtor. (1158a)

The general rule is that, you cannot compel the creditor to accept payment by a third person whom he may dislike
or distrust. However, if it is paid by the guarantor and mortgagors, creditor can accept it if is stipulated in their
contract.

Persons from whom creditor must accept payment:

1. Debtor
2. Any person who has an interest in the obligation (like guarantor).
3. A third person who has no interest in the obligation when there is stipulation that he can make
 payment.

Effect of payment by a third person:

1. If made without the knowledge or against the will of the debtor, the person who paid can recover only
insofar as the payment beneficial to him.

Ex. LEA is indebted to ACE P1, 000.00. RYAN, a third person paid the whole amount without the
knowledge and consent of LEA, and did not know that LEA already paid P400.00, RYAN is entitled to be
reimbursed only on the amount of P600.00 from LEA since it is the only amount LEA benefited. RYAN
can recover P400.00 from ACE who should not have accepted it. If ACE acted in bad faith, he is liable
also for interest in lieu of damages.

2. If made with the knowledge of the debtor, the third person shall have the rights of reimbursement and
subrogation that is to recover what he has paid.

Full reimbursement-full amount down to the single centavo the third person has paid.
SUBROGATION- the right to step on the shoes of the creditor.
Ex. In the above case, if the payment of RYAN was made with the knowledge or consent of LEA, RYAN
can recover from LEA the full reimbursement of P1, 000.00 and the rights of subrogation.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter
cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty,
or penalty. (1159a)

Subrogation- the act of putting somebody into the shoes of the creditor, hence, enables the former to exercise all
the rights and actions that could have been exercised by the latter.
Rights arising from:
1. A mortgage
2. A guaranty
3. A penalty or penal clause

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed
to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor
who has accepted it. (n)

Donation, in order to be valid it must be accepted. Since, no one should be compelled to accept the generosity of
another. (Report of the Code of Commission, p. 132). However, if the creditor accepts the payment, it shall be valid
as to him and the payor although the debtor did not give his consent to the donation.

Ex. JAY owes TONNY P1, 000.00. Without the intention of being reimbursed, SYPRES, a third
 person paid JAY’s obligation. JAY had previously accepted SYPRES’s generosity.

In this case, JAY is not liable to SYPRES and his obligation is extinguished. But if JAY did not consent
to the donation, SYPRES may recover from JAY since there has been no donation, although
originally SYPRES did not tend to be reimbursed. Nevertheless, the obligation of JAY to TONNY is
extinguished because the payment is valid and he accepted it.

Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due
and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the
Title on "Natural Obligations." (1160a)

FREE DISPOSAL OF THE THING DUE- means that the thing to be delivered must not be subject to any claim or
lein or encumbrance of a third person.

CAPACITY TO ALIENATE- that the person is not incapacitated to enter into contracts.

General rule in obligations to give, payment by one who does not have the free disposition and capacity to alienate
is not valid.

EXCEPTION: Is provided in ART. 1427. The creditor cannot be compelled to accept payment where the person
paying it has no capacity to make it.

Ex. RYE agreed to sell to LINDA a refrigerator. If the refrigerator to be delivered to LINDA belongs
to ENZY, the same can be recovered by ENZY because the payment is not valid. RYE does not have
free disposal of the refrigerator. The same right of recovery exist although the refrigerator belongs
to RYE if she is a minor and therefore, has no capacity to alienate it.

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. (1162a)

Person to whom payment shall be made:

1. The creditor or oblige (person in whose favor obligation has been constituted).
2. His successor in interest (like an heir or assignee).
3. Any person authorized to receive it.

Ex. RYE owes ENZY P1, 000.00. RYE must pay ENZY or any person authorized by ENZY or in case of his
death, his heirs or any person authorized by law. Payment to any other person is not valid except as
provided in Art. 1241, par. 2. If RYE acted in good faith in paying to the wrong party is not an excuse.
Art. 1241. 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 has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor.
Such benefit to the creditor need not be proved in the following cases:

(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the 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. (1163a)

If the creditor is incapacitated to accept the payment, in order to be valid :

1. If the incapacitated person kept the thing delivered.
2. And if it is beneficial to the incapacitated person.
Ex. LEXXY delivers P1, 000.00 to RICKY, a minor. RICKY loses the P700.00 of the money in
gambling, or due to negligence or ignorance. In this case, the payment should be considered as
made only to the extent of P300.00. On the other hand, if RICKY kept the money paid or spent it for
purposes useful to him, the payment shall be valid; otherwise, and RICKY would unduly enrich
himself at the expense of LEXXY.
The debtor is relieved from proving benefit to the creditor in case of:
1. Subrogation of the payer in the creditor’s right.
2. Ratification by the creditor.
3. Estoppel on the part of the creditor.

Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.
(1164)
 This is another instance of a valid payment.
Requisites:
1. Payment by payor must be made in good faith (this is presumed)(but payee may be good or bad faith).
2. The payee must be in possession of the credit itself (not merely the document evidencing the credit)
Ex. JAKE is indebted to KYLE the amount of P1, 000.00 which is evidenced by a promissory note
signed by JAKE in favor of KYLE. KYLE lost the promissory note which was later found by RHEA
who demanded payment from JAKE. Payment to RHEA is not valid because RHEA is the possessor
merely of the document evidencing the credit and not of the credit itself.

Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain
the debt shall not be valid. (1165)
 When payment to creditor not valid:
In an action against the debtor who is the creditor of another, the latter (the debtor-stranger), during the
pendency of the case, may be ordered by the court (or by any competent authority though it be
administrative) to retain the debt until the right of the plaintiff, the creditor in the main litigation is
resolved.
 Ex. NICK owes RHIAN P1, 000.00. EMILY, in turn owes NICK P1, 000.00. In action by RHIAN against NICK,
EMILY, upon petition of RHIAN, may be ordered by the court not to pay NICK and to retain the debt in the
meantime. In this case, the debt of EMILY is said to be garnished or is subjected to payment to RHIAN.
GARNISHMENT- the proceeding by which a debtor’s creditor is subjected to the payment of his own debt
to another.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee's will. (1166a)

The debtor cannot compel creditor to accept a different object.

Ex. RICARDO is obliged to give to LIELA a Toyota car. Not having a Toyota car, RICARDO wants to deliver a
Honda car, more expensive. RICARDO cannot compel LIELA to receive the Honda car even though it
commands a higher price. Because, the subject matter of the contracting parties which is stipulated in their
contract, cannot be changed without the consent of Laila.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales. (n)

This is one of the special forms of payment.

DATION IN PAYMENT (DACION EN PAGO) - it is the mode of extinguishing an obligation whereby the debtor
alienates in favor of the creditor, property for the satisfaction of monetary debt.
Ex. SIMON owes IYA P50, 000.00. To fulfill his obligation, SIMON with the consent of IYA, delivers a piano.
If the piano, however, is worth less than P50, 000.00, the conveyance must be deemed to extinguish the
obligation to the extent only of the value agreed upon unless it is stipulated in their contract that the piano
is considered full payment.

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality
and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can
the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be
taken into consideration. (1167a)

It is a principle of equity in that it supplies justice in cases where there is lack of precise declaration in the
obligation. It is always hard to find one thing that is exactly similar to another. If there is disagreement between the
parties, the law steps in and determines whether the contract has been complied with or not according to the
circumstances. (8 Manresa 280-281).

The benefit is that it may be waived by the creditor or by accepting a thing of inferior quality, and by the debtor by
delivering a thing of superior quality.
 Ex. If TOFFER promised to deliver to LANDER a horse. LANDER cannot compel TOFFER to deliver
a price-winning race horse. Neither can TOFFER require LANDER to accept an old sickly horse.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for
the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)

General rules the debtor has to pay for the extrajudicial expenses incurred during the payment.
Exception: When there is a stipulation to the contrary.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestations in which the obligation consists. Neither may the debtor be required to make partial
payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may affect the payment of the former without waiting for the liquidation of the latter. (1169a)

General rule: the performance should be generally complete, delivered or rendered, as the case may be.

Exceptions:
1. When there is an express stipulation to that effect.
2. When the debt is in part liquidated (definitely and determined or computed) and in part unliquidated.
3. When the different prestations in which the obligation consists are subject to different terms or conditions
which affect some of them.
4. When a joint debtor pays his share or the creditor demands the same.
5. When a solidary debtor pays only the part demandable because the rest are not yet demandable on account
of their being subject to different terms and conditions.
6. In case of compensation, when one debt is larger than the other, it follows that a balance is left.
7. When work is to be done by parts.

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

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. (Black Law Dictionary)

In the Philippines, all coins and notes issued by the Bangko Sentral Ng Pilipinas (BSP) constitute legal tender for all
debts, both public and private.
Unless otherwise fixed by Monetary Board of the BSP, coins are legal tender for amounts not exceeding P50.00 for
denomination of P0.25 and above, and those of amounts not exceeding P20.00 for denominations of P0.10 or less.

All coins and bills above P1.00 are, therefore, valid, legal tenders for any amount.

Ex. RICARDO owes LIELA P1, 000.00 which is due today. LIELA can refuse to accept check from
RICARDO. If LIELA accepts, there is no payment yet until the check has been cashed or when
through his fault, it has been impaired as when he has delayed in presenting the check for payment
for an unreasonable length of time and the check has lost its value by reason of the insolvency of the
bank.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless
there is an agreement to the contrary. (n)

INFLATION- it is a sharp sudden increase of money or credit or both without a corresponding increase in business
transactions. (Webster’s Dictionary). It causes a drop in the value of money, resulting in the rise of the general price
level.

DEFLATION- is the reduction in volume and circulation of the available money or credit, resulting in a decline of
the general price level; it is the opposite of inflation.
Ex. RHIAN borrowed from EMILY P5, 000.00 payable after five years. On the maturity of the
obligation, the value of P5, 000.00 dropped to P2, 500.00 because of inflation (or increased to P10,
000.00 because of deflation).
In this case (assuming there is extraordinary inflation or deflation), the basis of payment shall be
equivalent value of the currency today to that five years ago. Hence, RHIAN is liable to pay EMILY
P5, 000.00 (or P2, 500.00) unless there is an agreement to the contrary.
Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment
shall be made wherever the thing might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses
shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court. (1171a)

Places where obligation shall be paid:

1. If there is stipulation, the payment shall be made in the place designated. (par. 1, Art 1306)
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. (par. 2)
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.
VENUE- is the place where a court suit or action must be filed or instituted. (Secs. 1-4, Rule 4, rules of Court)

DOMICILE- is the place of a person’s habitual residence (Art. 50), the place where he has his true fixed permanent
home and to which place he, whenever he is absent, has the intention of returning. (17 Am. Jur. 588).
RESIDENCE- is only an element of domicile. It simply requires bodily presence as an inhabitant in a given place.

Ex. GABBI is obliged himself to deliver to KHALIL a specific car. It was agreed that the car should be
delivered at KHALIL’s house. The house of KHALIL shall be the place of delivery.

1. Cabulay, D. and Carpio, C. (2014). Philippine Tourism Laws, (2nd ed.). Philippines. Rex Bookstore, Inc
2. Javier, Nancy Joan M.,(2012).Tourism Laws, 3rd ed.Philippines. Central Bookstore
3. Soriano, Fidelito R.(2011).Obligations and Contracts.GIC Enterprises
4. www.lawphil.net
5. www.supremecourt.gov.ph