PAYMENT or

PERFORMANCE
Edison Jett A. Hipolito
Rayce F. Seguerra
Bachelor Science of Accountancy 2-A
*Pictures directly taken from Google Photos.
 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, are governed elsewhere in this Code.”
CHAPTER I
ART. 1232 to ART. 1239
Image from: New York Post, Google Photos
ART. 1232.
“ Payment means not only the delivery of money, but also the
performance, in any other manner, of an obligation.”
MEANING OF PAYMENT.
(1) In ordinary parlance, payment refers only to the delivery of money.
(2) As a legal mode of extinguishing an obligation, it has a much wider
meaning. Payment may consist of not only in the delivery of money
but also the giving of a thing (other than money), the doing of an
act, or not doing of an act.

When a debtor pays damages or penalty in lieu of the fulfillment of an

obligation, there is also payment in the sense used in Article 1232.

In law, payment and performance are synonymous.

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.”
WHAT IS DEBT?
A debt may refer to an obligation to deliver money, to deliver a thing
(other than money), to do an act, or not to do an act.
WHAT ARE THE REQUISITES?
(1) Identity of the prestation – This requisite means that the very
prestation due must be delivered and released or performed.
(2) Integrity of the prestation – The prestation must be fulfilled and
completed.
GENERAL RULE TO INTEGRITY OF THE PRESTATION.
In case of integrity, it demands that the prestation be fulfilled
completely. However, as general rule, partial or irregular
performance will not extinguish an obligation.
EXCEPTIONS TO INTEGRITY OF THE PRESTATION.
(1) Substantial compliance in good faith (Article 1234)
(2) Waiver (Article 1235)
(3) Application of payments if the debts are equally
onerous (Article 1254)

BURDEN OF PROVING PAYMENT.

Creditor = who makes obligation exist

Debtor = one who makes and proves payment

ART. 1234. (Substantial Performance in Good Faith.)
“ 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.”
WHAT ARE THE REQUISITES?
(1) There must be substantial performance; and
(2) The obligor must be in good faith.

EXAMPLE.
Altair obliged himself to sell 1,000 bags of cement through Blackbeard
for a certain price. Despite diligent effort on the part of Altair, he
couldn’t deliver the entire 1,000 bags and instead delivered 950 bags
due to supply shortage.
Blackbeard complies to the rule and proceeds to pay the price of 950
bags, less the price proportionate to the remaining bags not delivered
to him.
ART. 1235. (Waiver.)
“ 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.”
RECOVERY ALLOWED WHEN INCOMPLETE OR
IRREGULAR PERFORMANCE IS WAIVED.
The above provision is the other exception to Article 1233. It is founded on
the principle of estoppel.
(1) If the payment is incomplete or incomplete or irregular, the creditor
may properly reject it. (2) In case of acceptance, the law considers that he
waives his right. The whole obligation is extinguished.

WHAT ARE THE REQUISITES?

(1) The obligee knows that the performance is incomplete or irregular; and
(2) He accepts the performance without expressing any protest or objection.
EXAMPLE.
Altair agreed to paint the house of Blackbeard.
According to their stipulation, Altair would use a particular brand of
paint.
If Blackbeard accepted the performance of Altair, knowing that the
paint used was another brand and without expressing any protest or
objection, the obligation is deemed complied with.

Unlike in Article 1234, where there is substantial performance, Altair

is not liable for damages that may be suffered by Blackbeard. The
reason is that the performance is considered complete or regular.
ART. 1236.
“ The credit 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.”
WHO ARE THE PERSONS FROM WHOM THE CREDITOR
MUST ACCEPT PAYMENT OR PERFORMANCE?
(1) The debtor;
(2) Any person who has an interest in the obligation (like a guarantor); or
(3) A third person who has no interest in the obligation when there is
stipulation that he can make payment.
CAN CREDITOR REFUSE PAYMENT BY A THIRD PERSON?
“Under the old Civil Code, the creditor cannot refuse payment by a
third person but the Commission believes that the creditor should
have a right to insist on the liability of the debtor. Moreover, the
creditor should not be compelled to accept payment from a third
person he may dislike or distrust. The creditor may not, for personal
reasons, desire to have any business dealings with a third person or
the creditor may not have confidence in the honesty of the third
person who might deliver a defective thing or pay with a check
which may not be honored.”

In other words…
EFFECT OF PAYMENT BY A THIRD PERSON.
(1) Without the knowledge or against the will of the debtor.
Beneficial reimbursement – The payor can recover only payment to
that extent that the debtor was benefitted. In other words the
recovery is only up to the extent or amount of the debt at the time
of payment.
(2) Made with the knowledge of the debtor.
The payor shall have the rights of:
I. Reimbursement – The payor can recover what he has paid (not
necessarily the amount of the debt); and
II. Subrogation – The payor can also acquire all the rights (including
mortgage, guaranty or penalty in accessory obligations) to the debtor
if the latter consents. In subrogation, the payor steps into the
shoes of the creditor.

Distinctions between reimbursement and subrogation are explained in Article 1237.

 EXAMPLES.
A owes B the sum of P1,000,000. If C, a stranger to the obligation,
offers to pay B, the latter may or may not accept the offer of
payment.
Suppose B accepts, the right of C to recover from A depends upon
whether the payment is with or without the knowledge of A.

QUESTION: Can C recover from A?

If, WITHOUT KNOWLEDGE OF DEBTOR. If, WITH KNOWLEDGE OF DEBTOR.

REIMBURSEMENT ONLY RECOVER FROM A AND STEPPING INTO

(1) C can ask reimbursement for the
whole amount.
(2) Unknown to C, if A had previously
paid a certain amount, C can only be
reimbursed the debt amount of the
remaining sum from B. (case of solutio
indebiti)
THE SHOES OF THE DEBTOR
-C can recover from A P1,000,000 with
all the rights of subrogation to
accessory obligations such as mortgage,
guaranty, or penalty.
ART. 1237.
“ Whoever pays on behalf of the debtor without the knowledge or
against the will of the debtor, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage, guaranty, or penalty.”

DISTINCTIONS BETWEEN REIMBURSEMENT AND SUBROGATION

REIMBURSEMENT SUBROGATION
-There is NO recourse. -Recourse can be had to the mortgage
or guaranty or penalty

-The new creditor has different rights. -The debt is extinguished in one
sense, but a new creditor, with
exactly the same right as the old
creditor, arrives on the scene.

-There is only a personal action to -There is MORE than personal action

recover the amount. of recovery.
SIMILARITY: In both, there can be recovery of what the third person has paid.
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.”

THE IDEA.
The above article “embodies the idea that no one should be compelled to
accept the generosity of another”. If the paying third person has no
intention to be reimbursed, the payment is deemed a donation which
requires the debtor’s consent to be valid.
If it is instead the creditor who accepts the payment, it shall be valid as to
him, although the debtor did not give his consent to the donation.

The idea is that donation may extinguish debt, but the payor, without the
intention to be reimbursed, cannot recover from payee should the payment
be accepted by either the debtor or creditor.
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 of
Natural Obligations.”

THE MEANING.
(1) Free disposal of the thing due means that the thing to be delivered must
not be subject to any claim or lien or incumbrance (e.g., mortgage,
pledge) of a third person.
(2) Capacity to alienate means that the person is not incapacitated to enter
into contracts and for that matter, to make a disposition of the thing.

END OF CHAPTER I.
CHAPTER 2
ART. 1240 to ART. 1251
Image from: Riot Games, Google Photos
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 constituting
it.”

TO WHOM SHALL PAYMENT BE MADE?

(1) The creditor or oblige (person in whose favor obligation has been
constituted) [at the time of the payment, not at the constitution of the
obligation];
(2) His successor in interest (like an heir or assignee); or
(3) Any person authorized to receive it. (Any person not only authorized by
the creditor, but also authorized by law.)
WHAT IF PAYMENT IS MADE TO THE WRONG PERSON?
The payment made to the wrong person is NOT VALID, and
the obligation is NOT EXTINGUISHED.

Exceptions do apply to incapacitated and unauthorized person(s), however… (Art. 1241)

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 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.”
EFFECT OF PAYMENT.
To an incapacitated person…
Payment to a person incapacitated to
administer/manage his property is not
valid or delivered unless he kept the
thing paid or delivered, or was benefited
by the payment.
In absence of this benefit, the debtor
may be made to pay again by the
creditor’s guardian or by the
incapacitated person himself after he
recovers his capacity.
Proof of benefit is imposed upon the
debtor who paid.
WHEN BENEFIT TO CREDITOR NEED NOT BE PROVED BY DEBTOR.
(1) Subrogation of the payor in the creditor’s rights;
(2) Ratification by the creditor; or
(3) Estoppel on the part of the creditor.
To a third person…
Payment to a third person or wrong party
is NOT VALID except insofar as it has
redounded to the benefit of the creditor.
The payee benefited by the payment
made by the debtor to a third person is
not presumed and must, therefore, be
satisfactorily established by the person
interested in proving this fact.
In the absence of such proof, the payment
thereof in error and in good faith will not
take away the creditor’s right to demand
payment.
EXAMPLE.
In January 2021, Altair owe Blackbeard P500 for the Oblicon
book but when he is about to pay, Blackbeard has become
insane. Fortunately, he has kept the book supposed to be
delivered this month before the payment is made.
This obligation is extinguished because this example follows the
first paragraph of Article 1241.

QUESTIONS.
But, what if in some case Blackbeard was asked by Swindle Tom (third
person) to be paid the same amount in exchange for a fake Oblicon book for
dummies worth P100?
(1) Is the payment still valid?
(2) Who shoulders the burden of proving that the payee benefited?
(3) What if in some instance the payment did not redound to the
benefit of the payee?
ART. 1242.
“ Payment made in good faith to any person in possession of
the credit shall release the debtor.”
WHAT ARE THE REQUISITES?
(1) Payment must be made in good faith; and
(2) Payee must be in possession of the credit itself.
EXAMPLE.
A is indebted to B in the amount of P2,000 which indebtedness is evidenced by a
promissory note signed by B. B lost the promissory note which was later found by C,
who demanded payment from D.
Payment to C is not valid because C is the possessor of merely the document
evidencing the credit and not of the credit itself.
If the promissory note is payable to bearer or holder, the obligation will be
extinguished if D pay C in good faith.
Similarly, if the promissory note was indorsed by B to C, under a private agreement
that C would not collect from D, payment by D in good faith will also extinguish the
debt. The right of B will be against C.
ART. 1243.
“ Payment made to the creditor by the debtor after the latter
has been judicially ordered to retain the debt shall be valid.”
THE IDEA.
The above article explains that during the pendency of the case,
the debtor is juridically ordered not to pay by the court (or any
competent authority, though be it administrative) to retain the
debt until the creditor’s right in the main litigation is resolved.
The judicial order may have been prompted for order for
attachment, injunction or garnishment.
EXAMPLE.
Altair owes Blackbeard P1,000,000, and Blackbeard owes Miss Fortune
the same amount of debt. The latter files an action against Blackbeard.
Blackbeard claims insolvency, but he admitted that Altair also owes him
the said amount.
Meanwhile, before Altair can pay the debt to Blackbeard, he was
summoned to the court proceedings and was asked by the court to retain
the money in the meantime, resulting in the debt garnished.

During that time, the decision is currently pending, and is determined by

the court whether Blackbeard is indebted to Miss Fortune or not. Any
payment by Altair to Blackbeard or Miss Fortune is not valid.

Other judicial orders falls into the similar scenarios.

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 that that which is due.
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.”
THE MEANING AND THE EXCEPTIONS.
(1) The first paragraph refers to a real obligation to deliver a specific
thing. (2) The second paragraph refers to personal (positive and negative)
conditions.
But since this rule is not absolute, there are exceptions in (1) facultative
obligations, which the debtor is given a right to render another prestation
in substitution; (2) when there is a waiver by the creditor whether
expressly or impliedly; and (3) other agreements resulting in I.) dation in
payment, or II.) novation.
ART. 1245. (Adjudication or dacion en pago.)

“ 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.”
SPECIAL FORMS OF PAYMENT UNDER THE CIVIL CODE.
(1) Dation in payment (this article, obviously);
(2) Application of payments (Art. 1253.);
[strictly speaking, this is not a special form of payment]
(3) Payment by cession (Art. 1255.); and
(4) Tender of payment and consignation (Arts. 1256-1261.)

WHAT IS DATION IN PAYMENT?

A conveyance of ownership of a thing as an accepted equivalent of
performance. It is a special form of payment because it is not the ordinary
way of extinguishing an obligation. An existing debt in money is satisfied,
not by payment of money but by the alienation of property.
DISTINGUISHMENTS BETWEEN SALE AND DATION...
SALE
No pre-existing credit
Obligations are created
The cause is the price paid from the
viewpoint of the seller, or the
acquisition of the thing sold, from the
viewpoint of the buyer
The buyer has still to pay the price
The parties deliver and receive the
thing as seller and buyer
The giving of the price may generally
end the obligation
DATION IN PAYMENT
There is pre-existing credit
Obligations are extinguished
The extinguishment of the debt, from
the viewpoint of the debtor, or the
acquisition of the object in lieu of the
credit, from the viewpoint of the
creditor
The payment is received before the
contract is perfected which is to be
charged against the debtor’s debt
As debtor and creditor
The giving of the object in lieu of the
credit may extinguish completely or
only partially the credit (depending on
the agreement)
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.”

THE EXPLANATION.
The above article explains the rule of medium quality. If the obligation
consists of an indeterminate or generic thing to give without any defined
quality and circumstances, the creditor can accept a thing of superior quality
if he wishes, but not demand it.
In debtor’s case, he can deliver a thing of medium or superior quality, but not
inferior quality.
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.”

TO SIMPLIFY EXTRAJUDICIAL COSTS.

The above article explains that the debtor has an obligation to pay for
extrajudicial expenses. If the parties have made a stipulation as to who
will bear the expenses, then their stipulation shall be followed.

TO SIMPLIFY JUDICIAL COSTS.

It is the general rule that the losing party pays for the judicial costs.
The court may, however, for special reasons, adjudge that either party
shall pay the costs or that the same be divided as may be equitable.
Judicial costs are under discretion by the court.
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 effect
the payment of the former without waiting for the liquidation of
the latter.”
ON WHICH CASES ARE PARTIAL PAYMENT PERFORMANCE BE
ALLOWED OR REQUIRED?
(1) When there is an express stipulation to that effect;
(2) When the debt is part liquidated and in part unliquidated; and
(3) When the different prestations in which the obligation consists are
subject to different terms or conditions which affect some of them.
EXAMPLES.
Altair obliged himself to deliver Miss Fortune 2,000 cannon balls to her
ship. The former makes the first delivery of 500 cannon balls informing
Miss Fortune that continuous deliveries will follow.
In the latter’s side, she cannot, in good faith refuse to accept the partial
deliveries as long as they are sufficient for future sea battles.

In another instance, Altair owes Miss Fortune P50,000 plus damages after
the former damaged the hull of the ship during his time as a crewmate.
At this point, the damages are unknown to Altair, but he knows the amount
of debt he must pay. In Miss Fortune’s case, she will decide how much will
the former pay in damages.
Here, once the former decides the damages to be P100, since she is used to
have her ship damaged a lot, the defined amount will become a liquidated
debt.
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 abeyance.”
MEANING OF LEGAL TENDER AND CONSTITUTION.
Legal tender is that currency which if offered by the debtor in
the right amount, the creditor must accept in payment of a
debt in money. In the Philippines, all coins and notes issued by the
Bangko Sentral ng Pilipinas (BSP) constitute legal tender for all
debts, both public or private. (continued in next slide)
CONTINUED…

Unless otherwise fixed by the Monetary Board of the BSP, coins are
legal tender for amounts not exceeding P50.00 for denominations of
P0.25 and above, and in 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.
PAYMENT BY MEANS OF INSTRUMENTS OF CREDITS.
(1) Right of creditor to refuse or accept. – Promissory notes, checks, bills of
exchange and other commercial instruments are not legal tender and,
therefore, the creditor cannot be compelled to accept them. This is true even
though the check is certified or is a manager’s check.
(a) The creditor, if he chooses, may accept them, without the acceptance
producing the effect of payment. In the meantime, the demandability of
the original obligation is suspended.
(b) The creditor must cash the instrument, and it is only when it is dishonored
that he can bring an action for non-payment of the debt.
(2) Effect on obligation. – Payment by means of mercantile documents does not
extinguish the obligation (a) until they have been cashed; or unless they have
been impaired through the fault of the creditor.
RULE ON PAYMENT IN CHECK AND ITS EXCEPTIONS.
A check is not a legal tender, whether it is an ordinary check or manager’s
check. The rule applies even if the check was consigned in
court. However, there are exceptions to this rule.
1. When a manager’s check was consigned with the court which the clerk of
court endorsed to the Provincial Treasurer and which then honored by the
bank and credited to the treasurer’s account;
2. When the creditor has accepted the debtor’s check for the repurchase of
the latter’s property, the former cannot, the following day refuse to accept
the check anymore as payment;
3. When after the payment of the check in court the vendor a retro, the
vendee a retro petitioned the court to allow him to withdraw the amount in
deposit, the payment in check is valid;
4. When the check had lost its value due to the fault of the creditor, such
when he unreasonably delayed the presentation of the check with the
drawee bank for payment, the payment in check is valid;
5. When the foreign bill of exchange lost its value for the reason that the
creditor had neglected to make a protest.
EXAMPLE WITH QUESTIONS.
Lucian owes Senna P50,000 payable on December 25, 2020. Lucian is
paying a promissory note of P50,000.

(1) Can Senna refuse to accept?

(2) Can Senna accept?
(3) If she accepts, does this mean that payment has been effected?
(4) Supposing, Senna consented that Lucian’s payment is a promissory
note payable 2 months later. Now, during the intervening period, may
Senna bring an action to recover from Lucian?
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.”

THE MEANING.
(1) Inflation is a sharp sudden increase of money or credit or both without a
corresponding increase in business transactions. Inflation causes a drop in the
value of money, resulting in the rise of the general model.
(2) 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.
WHAT ARE THE REQUISITES?
(1) There must be an official declaration of extraordinary inflation or deflation
from the BSP; and
(2) The obligation is contractual in nature.
The parties must agree to recognize the effects of extraordinary inflation or
deflation.
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.”

END OF CHAPTER 2.
CHAPTER 3
ART. 1252 to ART. 1261
Image from: Mad Max Fury Road, Google Photos
 SPECIAL FORMS OF PAYMENT.
1. SUBSECTION 1. Application of payment or imputation of payment
SUBSECTION 2. Payment by cession (article 1255)
2. Dation of payment (article 1245)
3. SUBSECTION 3. Tender of payment and consignation (articles 1256-61)
 APPLICATION OF PAYMENTS.
Application of payments is a designation of the debt to which
should be applied when payment is made by a debtor who owes
several debts in favor of the same creditor.

WHAT ARE THE REQUISITES?

(1) There must be one debtor and one creditor;
(2) There must be two or more debts;
(3) The debts must be of the same kind;
(4) All debts must be due; and
(5) The payment must not be enough to extinguish all the debts.
ART 1252 (Application of payment or imputation of payment.)
“ He who has various debts of the same kind in favor of one and
the same creditor, may declare at the time of making the
payment, to which of them the same must be applied. Unless the
parties so stipulate, or when the application of payment is made by
the party for whose benefit the term has been constituted,
application shall not be made as to debts which are not due.

If the debtor accepts from the creditor a receipt in which an

application of the payment is made, the former cannot complain of
the same, unless there is a cause for invalidating the contract.”
RULES ON APPLICATION OF PAYMENTS.
(1) The debtor has the first choice (the former cannot be compelled by the
creditor to give the choice to him.) He must indicate at the time of
making payment, and not afterwards, which particular debt is being paid.
After he uses his right to apply the payment to a debt, he cannot later
claim that it should be applied to another debt;

(2) The right to make the application once exercised is irrevocable unless
the creditor consents to the change;

(3) If the debtor does not apply payment, the creditor may make the
designation by specifying in the receipt which debt is being paid;

(4) If the creditor has not also made the application, or if the application
is not valid, the debt, which is the most onerous to the debtor among
those due, shall be deemed to have been satisfied; and

(5) If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately.
POINTS TO REMEMBER.
 All debts must be due, unless the parties stipulated otherwise or when
the application is made by the party for whose the benefit the term has
been constituted.
 Payment must first be applied in the interest before the principal.
(article 1253)
 Presumption: Apply to the debt which is most onerous to the debtor.

WITH THAT BEING SAID...

(1)Apply in accordance to the agreement.

(2)If there is no agreement, the debtor has the right to apply payment.

(3)If the debtor does not choose, the creditor can choose.

(4)If the creditor will not choose, apply the payment to the debt that is
most onerous to the debtor.

(5)If equally onerous, apply the payment proportionately.

EXAMPLE.
Noctis owes Ardyn as follows: (a) P50,000 payable on April 28; (b) P25,000
payable on April 29; (c) the Ring of the Lucii worth P1,000,000 and (d)
P12,000 payable on May 1. On April 29, Noctis pays Ardyn the amount of
P24,000.
There is no application of payment here because Noctis had an
insufficient amount to pay any of the debts specifically on the date due.
Neither when he so pays the total amount of debt of P1,087,000.

In some instance when Noctis pays Ardyn a sufficient amount of P62,000,

there is an application of payment. He can choose which particular debt
will he pay. Once the payment is made, the former cannot revoke it back
to another debt.
ART. 1253.
“If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.”

THE MEANING.
The above article explains the mandatory rule which is, the interest must
be paid ahead of the principal amount. The debtor cannot choose to credit
the payment first before the interest is paid.
There rule is subject, however, to any agreement between the parties, or
to waiver by the creditor.
ART. 1254.
“ When the payment cannot be applied in accordance with the preceding
rules, or if application cannot be inferred from other circumstances, the
debt which is most onerous to the debtor, among those due, shall be
deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be
applied to all of them proportionately.”
MEANING OF ONEROUS DEBT.
A debt is more onerous than another when it is more burdensome to the
debtor.
HOW TO DETERMINE IF A DEBT IS MORE BURDENSOME?
There is no fixed rule to determine which debt is more onerous to the
debtor since the condition of being more burdensome is a matter
dependent upon the circumstances.
EXAMPLES OF MORE ONEROUS DEBT.
• An interest-bearing debt than a non-interest bearing debt
• A debt as a sole creditor than as a solidary debtor
• Debts secured by a mortgage or a pledge than unsecured debts
• Obligation with a penal clause than one without penal clause

RULES IN CASE NO APPLICATION OF PAYMENT HAS BEEN

VOLUNTARILY MADE.
(1) Apply to the most onerous debts.
(2) If debts are of the same nature and burden, application shall be made
to all, proportionately.
ART. 1255. (Payment by cession, cession in payment, voluntary assignment...)

“ The debtor may cede or assign his property to his creditors in payment
of debts. This cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession, are made
between the debtor and his creditors shall be governed by special laws.”

WHAT ARE THE REQUISITES?

(1) There must be two or more creditors;
(2) The debtor must be (partially) insolvent;
(3) The assignment must involve all the properties of the debtor; and
(4) The cession must be accepted by the creditors.
EFFECTS OF PAYMENT BY CESSION.
Unless there is stipulation to the contrary,
(1) The assignment does not make the creditors the owners of the property
of the debtor; and (2) the debtor is released from his obligation only up to
the amount of the net proceeds of the sale of the property assigned to.
Unless there is stipulation to the contrary.
DISTINGUISHMENTS BETWEEN DATION AND CESSION...
DATION IN PAYMENT CESSION IN PAYMENT
Both are substitute forms of payment or performance
There is usually only one creditor There are two or more debtors
Does not presuppose the insolvency of Debtor is (partially) insolvent at the
the debtor or a situation in financial time of assignment
difficulties
Dation does not involve all the property Extends to all the property of the
of the debtor debtor subject to execution
The creditor becomes the owner of the The creditors only acquire the right to
thing given by the debtor sell the thing and apply the proceeds to
their credits pro rata
ART. 1256. (Tender of Payment and Consignation.)

“ If the creditor to whom tender of payment has been refused without just
cause to accept it, the debtor shall be released from responsibility by the
consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear in the place
of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.”
WHAT IS TENDER OF PAYMENT?
Tender of payment is the act on the part of the debtor, of offering to the
creditor the thing or amount due. The debtor must show that he has in his
possession the thing or money to be delivered at the time of the offer.

WHAT IS CONSIGNATION?
Consignation is the act of depositing the thing or amount due with the
proper court when the creditor does not desire or cannot receive it, after
complying with the formalities required by law. Consignation is applicable
when there is a debt or an obligation to pay. The general rule is that there
must be a prior tender of payment before the consignation may be allowed
except in cases stated in the second paragraph of the article:
(1) When the creditor is absent or unknown, or does not appear in the
place of payment;
(2) When he is incapacitated to receive the payment at the time it is
due;
(3) When without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
ART. 1257.
“ In order that the consignation of the thing due may release the obligor,
it must first be announced to the persons interested in the fulfillment of
the obligation.

The consignation shall be ineffectual if it is not made strictly in

consonance with the provisions which regulate payment.”
PRIOR NOTICE
ESSENTIAL TO PERSONS
REQUISITES OFINTERESTED REQUIRED.
CONSIGNATION
Without prior noticeof
(1) Existence to the personsdebt;
a valid interested in the fulfillment of the obligation, the
consignation, as well as payment, shall be void. The purpose of the notice is to give the
creditor a chance to reflect on his previous refusal to accept payment considering that
(2)expenses
the Valid prior tender,
of consignation unless
shall tender
be charged ishim
against excused;
and that in case of loss of
the thing consigned, he shall bear the risk thereof.

CONSIGNATION MUST
(3) Prior notice of COMPLY WITH PROVISIONS...
consignation;
Consignation, to amount to a valid payment, must also comply with the provisions which
regulate payment. (see Arts. 1233, 1239, 1244, 1246, 1248, 1249, 1253). One of these rules is
(4) payment
that Actualshould
consignation accompanied
be made in legal tender. The generalby proof;
rule is that an offer of a bank
check for the amount due is not a good tender and this is true even though the check is
certified or is a manager’s check, except where no objection is made on that ground.
(5) Subsequent notice of consignation (mandatory).
ART. 1258.
“ Consignation shall be made by depositing the things due at the disposal
of judicial authority, before whom the tender of payment shall be proved,
in a proper case, and the announcement of the consignation in other
cases.
The consignation having been made, the interested parties shall also be
notified thereof.”

THE JUDICIAL AUTHORITY. CONSIGNATION…

…by depositing the thing or sum due with proper judicial authority, is
necessary to effect payment.
Once the payment has been effected, there must be proof that tender had
been previously made and there must be notice to the interested persons
that consignation shall be made, and also after the consignation must
made.
ART. 1259.
“ The expenses of consignation, when properly made, shall be charged
against the creditor.”
THE MEANING.
The consignation is made necessary because of the fault or unjust refusal
of the creditor to accept payment. That being the case, it is but just, the
expenses should be charged against him unless the consignation is not
properly made, the expenses will instead be charged to the debtor.

WHEN DO YOU DEEM CONSIGNATION PROPERLY MADE?

(1) When the creditor accepts the thing or sum deposited without
objection, as payment of the obligation;
(2) When the creditor questions the validity of the consignation, and the
court, after hearing, declares that it has been properly made; and
(3) When the creditor neither accepts nor questions the validity of the
consignation, and the court after hearing, orders the cancellation of
the obligation.
ART. 1260.
“ Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial

declaration, that the consignation has been properly made, the debtor
may withdraw the thing or the sum deposited, allowing the obligation to
remain in force.”

WHAT ARE THE REQUISITES?

The observance of all the requisites of consignation operates as a valid
payment; hence, the debtor can move for cancellation of the obligation by
the court.

The debtor, however, may withdraw as a matter of right the thing or sum
deposited (1) before the creditor has accepted the consignation or (2)
before a judicial declaration that the consignation has been properly
made, as he is still the owner of the same. In this case, the obligation still
remains in force. All expenses are paid by the debtor.
ART. 1261.
“ If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which
he may have over the thing. The co-debtors, guarantors and sureties shall
be released.”

EXAMPLE.
On the due date of the obligation, Altair tendered payment. But Blackbeard
refused to accept payment. The former made a consignation to Lux, the
guarantor, and complied to the legal requirements granting he made a
proper consignation.
After the court cancelled the obligation, Altair withdrew the payment
deposited after securing the consent of Blackbeard.
Later on, Altair became insolvent.
Under article 1261, Blackbeard, as creditor, shall lose whatever preference
he has over the amount, and Lux, as guarantor, shall be released.

END OF CHAPTER 3.
THANK YOU…
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