Chapter 4: EXTINGUISHMENT OF OBLIGATIONS
to render service is not understood to have
GENERAL PROVISIONS
ART. 1231
Obligations are extinguished:
 By payment or performance
 By the loss of the thing due
 By the condonation or remission of the debt
 By the confusion or merger of the rights of
creditor and debtor
 By compensation
 By novation
Other causes of extinguishment of obligations:
 annulment, rescission, fulfillment of a resolutory
condition, and prescription
Causes of extinguishment of obligations
Other causes:
 Death of a party in case the obligation is a
personal one
 Mutual desistance or withdrawal
 Arrival of resolutory period
 Compromise
 Impossibility of fulfillment
 Happening of a fortuitous event.
SECTION 1. — Payment or Performance
ART. 1232
Payment
 Ordinary parlance - refers only to the delivery of
money
 Legal mode of extinguishing an obligation:
o the delivery of money
o the giving of a thing (other than money)
o the doing of an act
o not doing of an act
o When a debtor pays damages or penalty
in lieu of the fulfillment of an obligation
 In law, payment and performance are
synonymous
ART. 1233
When debt considered paid
Debt - refer to an obligation to deliver money, to
deliver a thing (other than money), to do an act, or
not to do an act.
1. Integrity of the prestation
 A debt to deliver a thing (including money) or
been paid unless the thing or service has been
completely delivered or rendered
 GENERAL RULE: Partial or irregular
performance will not produce the
extinguishment of an obligation
2. Identity of the prestation
 This second requisite means that the very
prestation due must be delivered or
performed
Burden of proving payment
 When the existence of a debt is admitted by the
debtor or established by the evidence of the
creditor, the burden of proving extinguishment of
payment devolves upon the DEBTOR WHO
CLAIMS PAYMENT.
 Only when the debtor introduces evidence that
his obligation has been paid or extinguished does
the burden shift to the creditor.
ART. 1234
Recovery allowed in case of substantial performance
in good faith
 Article 1234 is the first exception to the rule laid
down in Article 1233.
 Reason given by the Code Commission:
“The above rule (Art. 1234.) is adopted from
American Law. Its fairness is evident. In case of
substantial performance, the obligee is benefited.
So the obligor should be allowed to recover as if
there had been a strict and complete fulfillment
less damages suffered by the obligee. This last
condition affords a just compensation for the
relative breach committed by the obligor.”
Requisites for the application of Article 1234
 Requisites:
o There must be substantial performance
o The obligor must be in good faith
 Article 1234 embodies the doctrine of substantial
performance
 Substantial performance – when the important or
essential part of the contract has been performed
and only a small or minor part thereof has not
been carried out
 Article 1234 allows only a proportionate reduction
in the amount recoverable by the obligor
 Good faith is ALWAYS PRESSUMED in the absence
of proof to the contrary
ART. 1235 o The payer can recover from the debtor only
Recovery allowed when incomplete or irregular insofar as the payment has been beneficial to
performance waived the latter.
Art. 1235 is the other exception to Article 1233. It is o The recovery is only up to the extent or
founded on the principle of estoppel amount of the debt at the time of payment.
 If the payment is incomplete or irregular, the  If made with the knowledge of the debtor
creditor may properly reject it o The payer shall have the rights of
 In case of acceptance, the law considers that he reimbursement and subrogation, that is, to
waives his right. The whole obligation is recover what he has paid (not necessarily the
extinguished. amount of the debt) and to acquire all the
rights of the creditor.
Requisites for the application of Article 1235
 The obligee knows that the performance is
incomplete or irregular
ART. 1237
 He accepts the performance without expressing
Right of third person to subrogation
any protest or objection
 Whoever pays on behalf of the debtor is entitled
to subrogation if the payment is with the consent
of the latter.
ART. 1236
 If the payment is without the knowledge or
Persons from whom the creditor must accept
against the will of the debtor, the third person
payment
cannot compel the creditor to subrogate him in
 The debtor
the latter’s accessory rights of mortgage,
 Any person who has an interest in the obligation
guaranty, or penalty.
(like a guarantor)
 May there be subrogation, if the creditor willingly
 A third person who has no interest in the
permits the payor to be subrogated in his rights?
obligation when there is stipulation that he can
o Since the provision of Article 1237 is for the
make payment
benefit of the debtor, the subrogation can
Creditor may refuse payment by a third person only take place with his consent.
Old Civil Code - the creditor cannot refuse payment by o The third person who without necessity paid
a third person under such condition is amply protected by
his right to reimbursement.
 Commission - believes that the creditor should
 Legal subrogation by operation of law is presumed
have a right to insist on the liability of the debtor.
in certain cases
 The creditor should not be compelled to accept
payment from a third person whom he may dislike Subrogation Reimbursement
or distrust. The person who pays for The third person
 The creditor may not, for personal reasons, desire the debtor is put into entitled by reason of
to have any business dealings with a third person; the shoes of the payment has merely the
or the creditor may not have confidence in the creditor. bare right to be
honesty of the third person who might deliver a refunded to the extent
The payer acquires: provided in the second
defective thing or pay with a check which may not
(1) right to be paragraph of Article
be honored
reimbursed for what he 1236 without the right
 Or he might be the creditor’s bitter enemy. has paid to the guarantees and
 How could the creditor be absolutely sure that the (2) all other rights which securities of the original
thing delivered is in accordance with the contract? the creditor could have obligation
exercised pertaining to
Effect of payment by a third person
the credit either against
Payment or performance may be made by any person
the debtor or against
not incapacitated, even without the knowledge or third persons, be they
against the will of the debtor, and although he has guarantors or
absolutely no interest in the obligation. possessors of mortgages
 If made without the knowledge or against the will
of debtor There is NO real
 extinction of the
obligation, but only a
change of creditor.
ART. 1238
Payment by a third person who does not intend to be
reimbursed
 Article 1238 “embodies the idea that no one
should be compelled to accept the generosity of
another.”
 If the paying third person does not intend to be
reimbursed the payment is deemed a donation
which requires the debtor’s consent to be valid.
 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.
ART. 1239
Free disposal of the thing due - the thing to be
delivered must not be subject to any claim or lien or
encumbrance of a third person
Capacity to alienate - the person is not incapacitated
to enter into contracts and for that matter, to make a
disposition of the thing due
Free disposal of thing due and capacity to alienate
required
 GENERAL RULE: In obligations to give, payment by
one who does not have the free disposition of the
thing due or capacity to alienate it is not valid.
This means that the thing paid can be recovered
 Exception:
Article 1427. When a minor between eighteen
and twenty-one years of age, who has entered
into a contract without the consent of the parent
or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the
same from the obligee who has spent or
consumed it in good faith.
 The creditor cannot be compelled to accept
payment where the person paying has no capacity
to make it.
ART. 1240
Person to whom payment shall be made
 Creditor or obligee (person in whose favor the
obligation has been constituted)
o Must be the creditor at the time the payment
is to be made
o If a person is subrogated to the right of the
creditor, payment should be made to the
new creditor
 His successor in interest (like an heir or assignee)
 Any person authorized to receive it
Meaning of “any person authorized to receive it.”
 Article 1240:
o A person authorized by the creditor
o A person authorized by law to receive the
payment (guardian, executor or
administrator of the estate of a deceased,
and assignee or liquidator of a partnership or
corporation as well as any other person who
may be authorized to do so by law)
 Article 1242: Payment in good faith to any person
in possession of the credit, is VALID although such
person may not be authorized to receive the
payment.
ART. 1241
Effect of payment to an incapacitated person
 Payment to a person incapacitated to administer
or manage his property is NOT VALID UNLESS such
incapacitated person kept the thing paid or
delivered or was benefited by the payment.
 In the absence of this benefit, the debtor may be
made to pay again by the creditor’s guardian or by
the incapacitated person himself when he
acquires or recovers his capacity.
 Proof of such benefit is incumbent upon the
debtor who paid.
Effect of payment 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.
 That the creditor was 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 deprive the
creditor of his right to demand payment
When benefit to creditor need not be proved by
debtor
 Subrogation of the payer in the creditor’s rights
 Ratification by the creditor
 Estoppel on the part of the creditor
ART. 1242
Payment to third person in possession of credit
 “Possession” - possession of the credit itself and
NOT merely of the document or instrument
evidencing the credit
 Mere possession of the instrument (unless
transferable by delivery) does not entitle the
holder to payment nor does payment release the
debtor
 Payer must act in good faith, that is, in the honest
belief that he is making a valid payment and that
the payee is the owner of the credit.
 Good faith is presumed
ART. 1243
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.
 Payment made subsequently by the debtor-
stranger shall NOT BE VALID if the plaintiff wins
the case and cannot collect from the debtor to
whom the payment is made.
 Such payment is considered as made in BAD
FAITH.
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.
Very prestation due must be complied with
First paragraph:
 Refers to a real obligation to deliver a specific
thing.
 A thing different from that due cannot be offered
or demanded against the will of the creditor or
debtor, as the case may be.
Second paragraph:
 Refers to personal (positive and negative)
obligations.
 The act to be performed or the act prohibited
cannot be substituted against the obligee’s will.
When prestation may be substituted
 Substitution can be made if the obligee consents
 Facultative obligations - debtor is given the right
to render another prestation in substitution
 Article 1244 will NOT apply:
o Waiver by the creditor
o Substitution is allowed by stipulation with the
consent of the creditor
ART. 1245
Special forms of payment
 Dation in payment
 Application of payments
 Payment by cession
 Tender of payment and consignation
Dation in payment (adjudication or dacion en pago)
 Is the conveyance of ownership of a thing by the
debtor to creditor as an accepted equivalent of
performance of a monetary obligation
 A special form of payment because it is not the
ordinary way of extinguishing an obligation.
 An existing debt in money is satisfied by the
alienation of property
Governing law
The law of sales governs because dation in payment
may be considered a specie of sale in which the
amount of the money debt becomes the price of the
thing alienated
ART. 1246
Rule of the medium quality
 If the obligation is to deliver a generic thing, the
purpose of the obligation and other circumstances
shall be taken into consideration to determine the
quality or kind of thing to be delivered
 Article 1246 is a principle of equity in that it
supplies justice in cases where there is lack of
precise declaration in the obligation of the quality
or kind of thing to be delivered.
 The benefit of this article may be waived:
o by the creditor by accepting a thing of
inferior quality
o by the debtor by delivering a thing of
superior quality.
ART. 1247
Debtor pays for extrajudicial expenses
 The extrajudicial expenses of payment are for the
account of the debtor.
 Reason: The obligation is extinguished when
payment is made and it is the debtor who is
primarily benefited.
 If the parties have made a stipulation as to who
will bear the expenses, then their stipulation shall
be followed.
 Article 1247 does not apply to expenses incurred
by the creditor in going to the debtor’s domicile to
collect.
Losing party generally pays judicial costs
 Judicial costs - are the statutory amounts allowed
to a party to an action for his expenses incurred in
the action
 Under the Rules of Court the costs of an action
shall, as a rule, be paid by the losing party
 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
 No costs are allowed against the Government,
unless otherwise provided by law
ART. 1248
Performance of obligation should be complete
 The provision contemplates obligations where
there is only 1 creditor and only 1 debtor.
 In order that payment may extinguish an
obligation, it is necessary that there be complete
performance of the prestation
 The creditor may accept but he cannot be
compelled to accept partial payment or
performance
 The debtor has the duty to comply with the whole
of the obligation but he cannot be required to
make partial payments if he does not wish to do
so
When partial performance allowed
 when there is an express stipulation to that effect
 when the debt is in part liquidated (definitely
determined or determinable) and in part
unliquidated
 when the different prestations in which the
obligation consists are subject to different terms
or conditions which affect some of them. In
obligations which comprehend several distinct
prestations, it is evident that the prestations need
not be executed simultaneously but each
successive execution thereof must be complete
ART. 1249
Legal tender - is that currency which a debtor in the
right amount, the creditor must accept in payment of
a debt in money
Legal tender in the Philippines
 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.
 Coins are legal tender for amounts:
o not exceeding P50.00 for denominations of
P0.25 and above
o not exceeding P20.00, for denominations of
P0.10 or less
 All coins and bills above P1.00 are valid legal
tenders for any amount
Payment by means of instruments of credits
Right of creditor to refuse or accept
 Promissory notes, checks, bills of exchange and
other commercial documents 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.
o 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
o 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.
Effect on obligation
 Payment by means of mercantile documents does
not extinguish the obligation
o until they have been cashed
o unless they have been impaired through the
fault of the creditor
ART. 1250
Inflation - is a sharp sudden increase of money or
credit or both without a corresponding increase in
business transactions. It causes a drop in the value of
money, resulting in 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.
Basis of payment in case of extraordinary inflation or
deflation
 The purchasing value of the currency at the time
of the establishment of the obligation shall be the
basis of payment, in case of any extraordinary
increase or decrease in the purchasing power of
the currency which the parties could not have
reasonably foreseen.
 This is subject to the agreement of the parties to
the contrary
ART. 1251
Place where obligation shall be paid
 If there is a stipulation, the payment shall be
made in the place designated
 If there is NO 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
 If there is NO stipulation and the thing to be
delivered is generic, the place of payment shall be
the domicile of the debtor. In this case, the
creditor bears the expenses in going to the
debtor’s place to accept payment
The order as above enumerated is SUCCESSIVE AND
EXCLUSIVE as may be gleaned from the provision
itself.
Venue - is the place where a court suit or action must
be filed or instituted
Domicile (legal residence)
o is the place of a person’s habitual residence
o the place where he has his true fixed
permanent home and to which place he,
whenever he is absent, has the intention of
returning
o requires bodily presence in that place and also
an intention to make it one’s domicile
o Art. 1251 connotes “actual” as distinguished
from “legal” residence
Residence - simply requires bodily presence as an
inhabitant in a given place
SUBSECTION 1. — Application of Payments
ART. 1252
Application of payments - is the designation of the
debt to which should be applied the payment made
by a debtor who has various debts of the same kind in
favor of 1 and the same creditor
Requisites of application of payments
 There must be 1 debtor and 1 creditor
 There must be 2 or more debts
 The debts must be of the same kind
 The debts to which payment made by the debtor
has been applied must be due
 The payment made must not be sufficient to cover
all the debts
Application as to debts not yet due
The application of payments as to debts not yet due
cannot be made UNLESS:
 there is a stipulation that the debtor may so apply
 it is made by the debtor or creditor, as the case
may be, for whose benefit the period has been
constituted
Rules on application of payments
 The debtor has the first choice; he must indicate
at the time of making payment, and not
afterwards, which particular debt is being paid. If,
in making use of his right, the debtor applied the
payment to a debt, he cannot later claim that it
should be applied to another debt.
 The right to make the application once exercised
is irrevocable unless the creditor consents to the
change
 If the debtor does not apply payment, the creditor
may make the designation by specifying in the
receipt which debt is being paid
 If the creditor has not also made the application,
or if the application is not valid, 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
ART. 1253
Interest earned paid ahead of principal
Rule in Article 1253 mandatory
 The rule laid down in the article is MANDATORY
 The debtor cannot choose to credit his payment
to the principal before the interest is paid.
 The payment must be applied first to the interest
and whatever balance is left, must be credited to
the principal.
 The creditor can refuse an application of the the properties of the debtor for the benefit of his
debtor made contrary to the provision of Article creditors in order that the latter may sell the same
1253. and apply the proceeds thereof to the satisfaction of
their credits.
Rule subject to agreement or waiver
 The rule is subject to any agreement between the Requisites of payment by cession
parties, or to waiver by the creditor  There must be 2 or more creditors
 Article 1253 is merely directory  The debtor must be (partially) insolvent
 The assignment must involve all the properties of
the debtor
ART. 1254  The cession must be accepted by the creditors
Application of payment to more onerous debts
Effect of payment by cession
In case no application of payment has been made by
 Unless there is a stipulation to the contrary, the
the debtor and the creditor, then the payment shall
assignment does NOT make the creditors the
be applied to the MOST ONEROUS DEBT, and if the
owners of the property of the debtor
debts are of the same nature and burden, to all of
 The debtor is released from his obligation only up
them PROPORTIONATELY.
to the net proceeds of the sale of the property
When a debt more onerous than another assigned
 A debt is more onerous than another when it is  The debtor is still liable if there is a balance
more burdensome to the debtor.
Dation in payment Cession
 No fixed rule can be laid down in determining
Only one creditor Several creditors
which debt is more onerous to the debtor since
Does not presuppose Debtor is insolvent at the
the condition of being more burdensome is a
the insolvency of the time of assignment
question of relative appreciation. debtor
 The Supreme Court, however, in various decisions Does not involve all the Extends to all the
has given some rules which can be followed or property of the debtor property of the debtor
used as a guide to determine whether one debt is subject to execution
more burdensome than another The creditor becomes The creditors only
o An interest-bearing debt is more onerous the owner of the thing acquire the right to sell
than a non-interest bearing debt even if the given by the debtor the thing and apply the
latter is an older one proceeds to their credits
o A debt as a sole debtor is more onerous than proportionately
as a solidary debtor. An act of novation Not an act of novation
o Debts secured by a mortgage or by pledge Substitute forms of payment or performance
are more onerous than unsecured debts
o Of two interest-bearing debts, the one with a SUBSECTION 3. — Tender of Payment and
higher rate is more onerous. Consignation
o An obligation with a penalty clause is more
ART. 1256
burdensome than one without penalty clause
If the creditor to whom tender of payment
Where debts subject to different burdens has been made refuses without just cause to accept it,
 When debts are subject to different burdens that the debtor shall be released from responsibility by the
it cannot be definitely determined which debt is consignation of the thing or sum due.
most onerous to the debtor Consignation alone shall produce the same effect
 The payment should be applied to all of them in the following cases:
PROPORTIONATELY (1) When the creditor is absent or unknown, or
does not appear at the place of payment;
(2) When he is incapacitated to receive the
SUBSECTION 2. — Payment by Cession payment at the time it is due;
(3) When, without just cause, he refuses to give a
ART. 1255 receipt;
Payment by cession - is another special form of (4) When two or more persons claim the same
payment. It is the assignment or abandonment of all right to collect;
 (5) When the title of the obligation has been lost.
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
Consignation - is the act of depositing the thing or
amount due with the proper court when the creditor
does not desire, or refuses to accept payment, 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. It is always
judicial and it generally requires a prior tender of
payment which is by its very nature, extrajudicial.
Requisites of a valid consignation
 existence of a valid debt which is due
 valid prior payment by the debtor and refusal
without justifiable reason by the creditor to
accept it
 previous notice of consignation to persons
interested in the fulfillment of the obligation
 consignation of the thing or sum due
 subsequent notice of consignation made to the
interested parties
When tender of payment not required
 In the 5 cases mentioned in the second paragraph
of Article 1256, tender of payment is not
necessary before the debtor can consign the thing
due with the court
 A creditor who, without legal justification, informs
his debtor that payment of a debt will not be
accepted, thereby waives payment on the date
when the payment will be due; and as a
consequence, the debtor is, in such case, excused
from making a formal tender of the money on
such date. A debtor does not incur default by
failing to make a fruitless tender after notification
from the creditor that the money will not be
received.
Requirements for valid tender of payment
 Tender of payment must comply with the rules on
payment or with the terms required by the
contract in making such tender. The tender, even
if valid, does not by itself produce legal payment,
unless it is completed by consignation.
 It must be unconditional and for the whole
amount due and in legal tender
 It must be actually made. The manifestation of a
desire or intention to pay is not enough. The
debtor must show present ability to perform by
an actual offer of the thing or money due.
ART. 1257
Prior notice to persons interested required
 In the absence of prior notice to the persons
interested in the fulfillment of the obligation the
consignation, as payment, shall be VOID.
 Purpose of the notice: To give the creditor a
chance to reflect on his previous refusal to accept
payment considering that the expenses of
consignation shall be charged against him and
that in case of loss of the thing consigned, he shall
bear the risk thereof.
Consignation must comply with provisions on
payment
 Consignation, to amount to a valid payment, must
also comply with the provisions which regulate
payment.
 One of the rules is that payment should be made
in legal tender.
 General Rule: 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
ART. 1258
Consignation must be with proper judicial authority
 Consignation, by depositing the thing or sum due
with the proper judicial authority, is necessary to
effect payment.
 As tender of payment must PRECEDE
consignation, the tender must be proved by the
debtor in the proper case
 In other cases when tender is not required, only
prior notice to interested persons of the
consignation needs to be proved
Notice to be given to interested parties of
consignation made
 After the consignation has been made, the
interested parties must also be notified thereof.
 In a case, this requirement was held fulfilled by
the service of summons upon the defendants
together with a copy of the complaint.
 The purpose of the second notice is to enable the
creditor to withdraw the thing or sum deposited
or take possession in case he accepts the
consignation

ART. 1259
Creditor bears expenses of consignation
 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 that the
expenses should be charged against him.
 The expenses are chargeable to the debtor if the
consignation is not properly made.
When consignation deemed properly made
 When the creditor accepts the thing or sum
deposited, without objection, as payment of the
obligation
 When the creditor questions the validity of the
consignation, and the court, after hearing,
declares that it has been properly made
 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
Withdrawal by debtor of thing or sum deposited
 The observance of all the requisites of
consignation operates as a valid payment; hence,
the debtor can move for the cancellation of the
obligation by the court.
 The debtor, however, may withdraw as a matter
of right the thing or sum deposited:
o before the creditor has accepted the
consignation, or
o before a judicial declaration that the
consignation has been properly made, as he
is still the owner of the same.
 In such a case, the obligation shall continue to
remain in force. All expenses are paid by the
debtor
ART. 1261
Effect of withdrawal with authority of creditor
 Since consignation is for the benefit of the
creditor, he may authorize the debtor to withdraw
the deposit after he has accepted the same or
after the court has issued an order cancelling the
obligation
 The relation between the debtor and the creditor
will remain as they were before acceptance or
cancellation. However, the creditor shall lose
every preference which he may have over the
thing, and the co-debtors, guarantors, and
sureties shall be released
 The solidary debtors are released only from their
solidary liability, but not from their shares of the
obligation, since unlike guarantors and sureties,
they are also principal debtors
SECTION 2. — Loss of the Thing Due
ART. 1262
When a thing considered lost
 Thing is lost - when it perishes, or goes out of
commerce or disappears in such a way that its
existence is unknown or it cannot be recovered
 Loss of a determinate thing - is the equivalent of
impossibility of performance in obligations to do
 Loss of the thing due - extends to both obligations
to give and obligations to do
When loss of thing will extinguish an obligation to give
 The obligation is to deliver a specific or
determinate thing
 The loss of the thing occurs without the fault of
the debtor
 The debtor is not guilty of delay
When loss of thing will not extinguish liability
 when the law so provides
 when the stipulation so provides
 when the nature of the obligation requires the
assumption of risk
 when the obligation to deliver a specific thing
arises from a crime
ART. 1263
Effect of loss of a generic thing
 The debtor is liable even for a fortuitous event
because the law says so
 It is based on the principle that a generic thing
never perishes (genus nunquam perit)
 The debtor can still be compelled to deliver a
thing of the same kind.
 The creditor cannot demand a thing of superior  The impossibility must take place after the
quality and neither can the debtor deliver a thing constitution of the obligation.
of inferior quality  If the obligation is impossible from the very
beginning, the obligation is VOID. In such case,
there is no obligation to be extinguished, and the
ART. 1264 parties would be entirely discharged
Effect of partial loss of a specific thing
Kinds of impossibility
 Partial loss:
 Physical impossibility - takes place when, for
o When only a portion of the thing is lost or
example, the obligor dies or becomes physically
destroyed or when it suffers depreciation or
incapacitated to perform the obligation.
deterioration
 Legal impossibility - occurs when the obligation
o Is the equivalent of difficulty of performance
cannot be performed because it is rendered
in obligations to do
impossible by provision of law, although physically
 The court is given the discretion, in case of
it may be possible of performance.
disagreement between the parties, to determine
whether under the circumstances it is so
important in relation to the whole as to extinguish
ART. 1267
the obligation.
Effect of difficulty of performance
 The court will decide whether the partial loss is
 GENERAL RULE: Impossibility of performance
such as to be equivalent to a complete or total
releases the obligor
loss
 When the performance of the service has become
so difficult as to be manifestly beyond the
contemplation of both parties, the court is
ART. 1265
authorized to release the obligor in whole or in
Presumption of fault in case of loss of thing in
part.
possession of the debtor
 It would be doing violence to the intention of the
 The article establishes a disputable presumption
parties to hold the obligor still responsible
of fault whenever the thing to be delivered is lost
in the possession of the debtor.
 This presumption is reasonable because the
ART. 1268
debtor who has the custody and care of the thing
Effect of fortuitous event where obligation proceeds
can easily explain the circumstances of the loss.
from a criminal offense
 The creditor has no duty to show that the debtor
 The obligation subsists except when the creditor
was at fault.
refused to accept the thing (e.g., property stolen
 Article 1165 - the obligor who is not at fault is still
from him), without justification, after it had been
liable in case he is guilty of delay or has promised
offered to him.
to deliver the same thing to two or more persons
 Consignation is not necessary. The debtor,
who do not have the same interest.
however, must still exercise due diligence.
When presumption not applicable
In case of natural calamities, the presumption of fault
does not apply. Lack of fault on the part of the debtor ART. 1269
is more likely. So it is unjust to presume negligence on Right of creditor to proceed against third persons
his part  The creditor is given the right to proceed against
the third person responsible for the loss.
 There is no need for an assignment by the debtor.
ART. 1266  The rights of action of the debtor are transferred
Effect of impossibility of performance to the creditor from the moment the obligation is
 A case when, without the obligor’s fault, an extinguished, by operation of law to protect the
obligation to do becomes legally or physically interest of the latter by reason of the loss.
impossible. The impossibility of performance will
SECTION 3 - CONDONATION OR REMISSION OF DEBT
result in the extinction of the obligation
Condonation/ Remission
 - Gratuitous abandonment by the creditor of
his right against the debtor
- A form of donation
REQUISITES OF CONDONATION OR REMISSION
1. Must be gratuitous
2. Must be accepted by the obligor
3. The parties must have capacity
4. It must not be inofficious
5. If made expressly, it must comply with the
forms of donations
KINDS OF REMISSION
1. As to extent
a. Complete
i. Covers entire obligation
b. Partial
i. Does not cover the entire
obligation
2. As to its form
a. Express
i. Verbally or in writing
b. Implied
i. Inferred from conduct
3. As to its date of effectivity
a. Inter vivos
i. During the lifetime of the
donor
b. Mortis Causa
i. It will become effective upon
the death of the donor
ii. Must comply with formalities
of a will
EFFECT OF INOFFICIOUS REMISSION
Legitimate
- Part of the testator’s property which he
cannot dispose of because the law has
reserved it for certain heirs
- Compulsory heirs
o Children as to their parents
Testamentary Dispositions
- If will impair the legitimate shall be reduced
on petition of the heirs insofar as they are
inofficious or excessive
- Excess will be inofficious and can be reduced
by the court accordingly
NOTE: No once can give more than that which he can
give by will.
PRESUMPTION IN CASE OF VOLUNTARY DELIVERY OF
DOCUMENT OF INDEBTEDNESS BY CREDITOR
1. Presumption of implied remission
a. Implied or tacit remission
b. Creditor would need the document to
prove that he has right to collect
c. If the creditor delivers the said
document to the debtor, the logical
inference is that he is renouncing his
right
2. Contrary Evidence
a. The presumption is prima facie or
rebuttable by contrary evidence
b. Evidence is admissible to show
otherwise
i. E.g. When document was only
delivered for the examination
of the debtor
3. Extent of remission
a. If joint
i. Pertains only to the debtor in
possession of the document
b. If solidary
i. Pertains to the total
obligation
4. Presumption applicable only to private
document
a. Does not apply in case of public
document because copies of those
are easy to obtain
PAYMENT, NOT REMISSION OF DEBT
Remission
- Becomes null and void upon proof that it is
inofficious
- Debtor and his heirs may prove that delivery
of the document was really made in virtue of
payment of the debt, not remission
PRESUMPTION IN CASE DOCUMENT FOUND IN
POSSESSION OF DEBTOR
Document
- If in the possession of debtor and it is
unknown how it came to be in his possession,
presume:
1. Presume that it was voluntarily delivered,
unless proven otherwise
2. Presumption of payment
3. If no payment, presumption of remission
EFFECT OF RENUNCIATION OF THE PRINCIPAL DEBT
OF THE ACCESSORY OBLIGATION
Accessory
- Follows the principal
- Renunciation of principal extinguishes the
accessory but not vice versa
PRESUMPTION ON CASE THING PLEDGED FOUND IN
POSESSION OF DEBTOR
Accessory obligation of the pledge
 - Presumed to have been remitted when the it is also a merger in the other solidary
thing pledged, after delivery to creditor, is debtors
found in possession of the debtor or third - Solidary obligations have only one obligation,
person each debtor is liable to pay the entire
- Accessory only, not including the obligation obligation
itself o He who makes payment may claim
- Yields to contrary evidence reimbursement from his co-debtors
- Does not arise if the third person in for the shares which correspond to
possession of the thing pledged does not own them
the same
SECTION 5 – COMPENSATION
SECTION 4 – CONFUSION OR MERGER OF RIGHTS Compensation
Confusion or Merger - Extinguishment to the concurrent amount of
- Meeting in one person of the characters of the debts of two persons who, in their own
the creditor and debtor with respect to the right, are debtors and creditors of each other
same obligation - Simultaneous balancing of two obligations
- Causes extinguishment of the obligation - One cancels the other to the extent of their
equal value
REASON OR BASIS FOR CONFUSION - Excess is still demandable
1. If a debtor is his own creditor, enforcement of
the obligation becomes absurd; a person OBJECT OF COMPENSATION
cannot claim payment from himself Object
2. Purposes for which the obligation may have - The prevention of unnecessary litigations and
been created are deemed realized payments
- Done through mutual extinguishment by
REQUISITES OF CONFUSION operation of law of concurring debts of two
1. Must take place between the principal debt persons
and the creditor
2. Must be complete Compensation
- AKA simplified payment
EFFECT OF MERGER IN THE PERSON OF PRINCIPAL - Provides more convenient, lets expensive
DEBTOR OR CREDITOR effectuation of payments between 2 persons
Merger who are reciprocally debtors and creditors
- In the person of the principal debtor or
creditor extinguishes the obligation COMPENSATION CONFUSION
- Accessory is also extinguished There is only one person Two persons, each of
who is a creditor and whom is a debtor and
EFFECT OF MERGER IN THE PERSON OF GUARANTOR debtor of himself creditor of the other
Merger There is but one There are two
- If takes place in the person of the guarantor, obligation obligations
while it extinguishes guaranty, leaves the There is impossibility of There is indirect
principal obligation in force payment payment
- Extinguishment of accessory does not
extinguish the principal KINDS OF COMPENSATION
1. By its effect or extent
CONFUSION IN A JOINT OBLIGATION a. Total
Joint obligation i. Both obligations are of the
- There are as many debts as there are debtors, same amount
and as many credits as there are creditors b. Partial
- Debts and credits are distinct from each other i. Obligations are of different
- Confusion taking place in the person of any amounts and a balance
debtor or creditor does not affect the others remains
ii. Partial only as to the larger
CONFUSION IN A SOLIDARY OBLIGATION debt
Merger 2. By its cause or origin
- If in the person of one of the solidary debtors a. Legal
shall extinguish the entire obligation because
 i. By operation of law, without
the knowledge of the parties
b. Voluntary
i. By agreement of the parties
c. Judicial
i. When it takes place by order
from court in litigation
ii. Merely a form of both prior,
when declared by courts by
virtue of an action by one of
the parties, who refuses to
admit it, and by the defense
of the other who invokes it
d. Facultative
i. When it can only be set up by
one of the parties
REQUISITES OF LEGAL COMPENSATION
1. The parties are principal creditors and
principal debtors of each other
2. Both debts consist in a sum of money, or of
consumable things of the same kind and
quality
3. Two debts are due and demandable
4. The two debts are liquidated
5. No retention or controversy commenced by a
third person
COMPENSATION BENEFITS GUARANTOR
Guarantor
- Is an exception to the previous rules
- Even though is only subsidiarily bound, he is
given the right to set up compensation
- The extinguishment of the principal obligation
as a consequence of comspensation carries
with it the accessory obligation such as
guaranty
TOTAL AND PARTIAL COMPENSATION
Total or Partial Compensation
- Applies to all the different types of
compensation
- Total Compensation
o When the two debts are of the same
amount
o If one is larger than the other, then it
is total as regards the smaller debt,
and partial as regards the larger debt
VOLUNTARY COMPENSATION
Voluntary Compensation
- Exception to the rule that only those due and
demandable can be compensated
- Voluntary or Conventional compensation has
no special requisites
o What is needed is the valid contract of
the parties
JUDICIAL COMPENSATION
Judicial Compensation
- A party may set off his claim for damages
against his obligation to the other party by
proving his right to said damages and the
amount thereof
COMPENSATION OF RESCISSIBLE OR VOIDABLE DEBTS
Rescissible or Voidable Debts
- May be compensated against each other
unless they are judicially rescinded or avoided
WHERE COMPENSATION HAS TAKEN PLACE
Operation of Law
- Debts are extinguished to the concurrent
amount
- If the extinguished debt is assigned by the
creditor to the third person, the debtor can
raise the defense of compensation with
respect to the debt
- Right to compensation may be waived by the
debtor before or after the assignment,
reversing the aforementioned
WHERE COMPENSATION HAS TAKEN PLACE AFTER
ASSIGNMENT
1. Assignment is made with consent of the
debtor
2. Where the assignment is made without the
consent but the knowledge of the debtor
3. Where the assignment is without the
knowledge of the debtor
COMPENSATION WHERE DEBTS PAYABLE AT
DIFFERENT PLACES
Legal Compensation
- Debts payable at different places are only
applicable for legal compensation
- The one who claims compensation must be
liable for indemnity as to expenses of
exchange and transportation
INSTANCES WHEN LEGAL COMPENSATION IS NOT
ALLOWED BY LAW
1. Where one of the debts arises from a
depositum
a. Deposit
i. Constituted from the moment
a person receives a thing
belonging to another with the
obligation of safely keeping it
and returning the same
ii. A loan which create the
relationship of a debtor and
creditor
 iii. Bank and Depositor have right
to set off deposit with loans
2. Where one of the debts arises from a
commodatum
a. Commodatum
i. Gratuitous contract whereby
one of the parties delivers to
another something not
consumable so that the latter
may use it for a time and
return it
b. This is to prevent breach of trust
3. Where one of the debts arises from a claim
for support due by gratuitous title
a. Support
i. Everything that is
indispensable for sustenance,
dwelling clothing, medical
attendance, education, and
transportation in keeping with
the financial capacity of the
family
4. Where one of the debts consists in civil
liability arising from penal offense
a. Compensation would be improper
and inadvisable because the
satisfaction of such obligation is
imperative
RULES ON APPLICATION OF PAYMENTS APPLY TO
ORDER OF COMPENSATION
Compensation
- Similar to payment
- Debtor must inform the creditor which of
them (debts) shall be the object of
compensation, in case he doesn’t do so,
compensation shall be applied to the most
onerous obligation
CONSENT OF PARTIES NOT REQUIRED IN LEGAL
COMPENSATION
1. Compensation takes place automatically by
mere operation of law
a. Compensation takes place
automatically even in the absence of
agreement between the parties, and
extinguishes reciprocally both debts
to the amount of their respective
sums
b. Takes place by operation of law when
all requirements are available
i. No need for consent of
parties
2. Full legal capacity of parties not required
a. No need for full legal capacity to give
or receive as the case may be
SECTION 4 – NOVATION
ART. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor.
Meaning of novation.
- Novation is the total or partial extinction of an
obligation through the creation of a new one
which substitutes it.
- It is the substitution or change of an
obligation by another, which extinguishes or
modifies the first, either by changing its object
or principal conditions, or by substituting
another in place of the debtor, or by
subrogating a third person in the rights of the
creditor.
Dual function of novation.
- Novation is a contract containing two (2)
stipulations: one to extinguish or modify an
existing obligation, the other to substitute a
new one in its place.
- It does not operate as an absolute but only as
a relative extinction of an obligation which is
only "modified." The novation is actually a
new obligation (or contract) based upon a
former one, but containing one (1) or more
material changes.
Kinds of novation.
1. According to origin:
a. Legal. - that which takes place by
operation of law; or
b. Conventional. that which takes place
by agreement of the parties.
2. According to how it is constituted:
a. Express. when it is so declared in
unequivocal terms; or
b. Implied. - when the old and the new
obligations are essentially
incompatible with each other.
3. According to extent or effect:
a. Total or extinctive. when the old
obligation is completely extinguished;
or
b. Partial or modificatory. when the old
obligation is merely modified, i.e., the
 change is merely incidental to the
main obligation.
4. According to the subject:
a. Real or objective. - when the object
(or cause) or principal conditions of
the obligation are changed;
b. Personal or subjective. when the
person of the debtor is substituted
and/or when a third person is
subrogated in the rights of the
creditor; or
c. Mixed. when the object and/or
principal conditions of the obligation
and the debtor or the creditor, or
both the parties, are changed. It is a
combination of real and personal
novations.
ART. 1292. In order that an obligation may be
extinguished by another which substitutes the same,
it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on
every point incompatible with each other.
In novation, there are four (4) essential requisites,
namely:
1. A previous valid obligation;
2. Capacity and intention of the parties to
modify or extinguish the obligation;
3. The modification or extinguishment of the
obligation; and
4. The creation of a new valid obligation.
Novation is not presumed.
- never presumed.
- It must be clearly and unmistakably
established either by the express agreement
of the parties or acts of equivalent import or
by the incompatibility of the two (2)
obligations with each other in every material
respect.
- The burden of showing novation is on the
party who claims its existence.
Test of incompatibility between two obligations or
contracts.
- The test is whether they can stand together,
each one having an independent existence.
- If they cannot, they are incompatible, and the
subsequent obligation novates the first.
- Upon such novation, the former obligation
loses all its force and effect and only the new
obligation can be enforced.
ART. 1293. Novation which consists in incl substituting
a new debtor in the place of the original one, may be
made even without the knowledge or against the will
of the latter, but not without the au or consent of the
creditor. Payment by the new debtor the gives him
the rights mentioned in Articles 1236 and 1237.
Kinds of personal novation.
1. Substitution. when the person of the debtor is
substituted; or
2. Subrogation. - when a third person is
subrogated in the rights of the creditor.
Kinds of substitution.
(1) Expromision or that which takes place when a
third person of his own initiative and without
the knowledge or against the will of the
original debtor assumes the latter's obligation
with the consent of the creditor. It logically
requires the consent of the third person and
the creditor.
(2) Delegacion or that which takes place when
the creditor accepts a third person to take the
place of the debtor at the instance of the
latter. The creditor may withhold approval. In
delegacion, all the parties, the old debtor, the
new debtor, and the creditor must agree.
Consent of creditor necessary.
- In either of the two (2) modes of substitution,
the consent of the creditor is an indispensable
requirement.
- substitution implies a waiver by the creditor
of his credit and it may be prejudicial to him.
Right of new debtor who pays.
(1) In expromision, payment by the new debtor
gives him the right to beneficial
reimbursement under the second paragraph
of Article 1236.
(2) If the payment was made with the consent of
the original debtor or on his own initiative
(delegacion), the new debtor is entitled to
reimbursement and subrogation under Article
1237.
Effect of new debtor's insolvency or non-fulfillment of
the obligation in expromision.
- In expromision, the new debtor's insolvency
or nonfulfillment of the obligation will not
revive the action of the creditor against the
old debtor whose obligation is extinguished by
the assumption of the debt by the new
debtor.
- Remember that in expromision, the
replacement of the old debtor is not made at
his own initiative.
ART. 1295. The insolvency of the new debtor, who has
been proposed by the original debtor and accepted by
the creditor, shall not revive the action of the latter
against the original obligor, except when said
insolvency was already existing and of public
knowledge, or known to the debtor, when he
delegated his debt.
Effect of new debtor's insolvency or non-fulfillment of
the obligation in delegacion.
- This article refers to delegacion. It must be
noted that the article speaks only of
insolvency. If the non-fulfillment of the
obligation is due to other causes, the old
debtor is not liable.
- general rule - the old debtor is not liable to
the creditor in case of the insolvency of the
new debtor.
- exceptions are:
1. The said insolvency was already existing
and of public knowledge (although it was
not known to the old debtor) at the time
of the delegacion; or
2. The insolvency was already existing and
known to the debtor (although it was not
of public knowledge) at the time of the
delegacion.
The exceptions are intended to prevent fraud on the
part of the old debtor.
ART. 1296. When the principal obligation is
extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may
benefit third persons who did not give their consent.
Effect of novation on accessory obligations.
- The above article follows the general rule that
the extinguishment of the principal obligation
carries with it that of the accessory
obligations.
- It provides, however, an exception in the case
of an accessory obligation created in favor of
a third person which remains in force unless
said third person gives his consent to the
novation.
- This is so because a person should not be
prejudiced by the act of another without his
consent.
ART. 1297. If the new obligation is void, the original
one shall subsist, unless the parties intended that the
former relation should be extinguished in any event.
Effect where the new obligation void.
- stresses one of the essential requirements of
a novation, to wit: the new obligation must be
valid.
- general rule - there is no novation if the new
obligation is void and, therefore, the original
one shall subsist for the reason that the
second obligation being inexistent, it cannot
extinguish or modify the first.
- Exception - the case where the parties
intended that the old obligation should be
extinguished in any event.
Effect where the new obligation voidable.
- If the new obligation is only voidable,
novation can take place.
- But the moment it is annulled, the novation
must be considered as not having taken place,
and the original one can be enforced, unless
the intention of the parties is otherwise.
ART. 1298. The novation is void if the original
obligation was void, except when annulment may be
claimed only by the debtor, or when ratification
validates acts which are voidable.
Effect where the old obligation void or voidable.
This article has its basis also on the requisites of a
valid novation.
- Avoid obligation cannot be novated because
there is nothing to novate.
 - However, if the original obligation is only
voidable or if the voidable obligation is
validated by ratification, the novation is valid.
ART. 1299. If the original obligation was ed subject to
a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it
is otherwise stipulated.
Presumption where original obligation subject to a
condition.
- If the first obligation is subject to a suspensive
or resolutory condition, the second obligation
is deemed subject to the same condition
unless the contrary is stipulated by the parties
in their contract.
- The reason is that the efficacy of the new
obligation depends upon whether the
condition which affects the old obligation is
complied with or not.
- If the condition is suspensive, and it is not
complied with, no obligation arises; and if it is
resolutory and it is complied with, the old
obligation is extinguished.
- In either case, one requisite of novation, i.e., a
previous valid obligation, would be wanting.
ART. 1300. Subrogation of a third person in the rights
of the creditor is either legal or conventional. The
former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly
established in order that it may take effect.
Meaning of subrogation.
- Subrogation is the substitution of a third
person (subrogee) in the place of a creditor
(subroger) with reference to a lawful claim or
right, giving the former all the rights of the
latter, including the right to employ all
remedies to enforce payment.
Kinds of subrogation.
- Conventional. - when it takes place by express
agreement of the original parties (the debtor
and the original creditor) and the third person
(the new creditor) (Art. 1301.); or
- Legal. - when it takes place without
agreement but by operation of law. (Art.
1302.)
 Conventional subrogation must be clearly
established in order that it may take place.
 Legal subrogation is not presumed except in
the cases expressly provided by law.
ART. 1301. Conventional subrogation of a third person
requires the consent of the original parties and of the
third person.
In conventional subrogation, the consent of all the
parties is an essential requirement.
- the debtor. - because he becomes liable under
the new obligation to a new creditor.
- the old creditor. - because his right against the
debtor is extinguished.
- the new creditor. - because he may dislike or
distrust the debtor.
ART. 1302. It is presumed that there is legal
subrogation:
(1) When a creditor pays another creditor who mini is
preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the
obligation, pays with the express or tacit approval of
the debtor;
(3) When, even without the knowledge of the debtor,
a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as
to the latter's share.
Cases of legal subrogation.
In the three (3) cases enumerated, subrogation takes
place by operation of law even without the consent of
the parties. Note that the subrogation is produced
from payment:
- When a creditor pays another creditor who is
preferred. -
- When a third person without interest in the
obligation pays with the approval of the
debtor
- When a third person with interest in the
obligation pays even without the knowledge
of the debtor.
ART. 1303. Subrogation transfers to the person
subrogated the credit with all the rights thereto
appertaining, either against the debtor or against
third persons, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional
subrogation.

Effect of legal subrogation.

- is 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.
- except only for the change in the person of
the creditor, the obligation subsists in all
respects as before the novation.
- The effect of legal subrogation as provided in
Article 1303 may not be modified by
agreement. The effects of conventional
subrogation are governed by the stipulation of
the parties.

ART. 1304. A creditor, to whom partial payment has

been made, may exercise his right for the remainder,
and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial
payment of the same credit.

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.
- In case of insolvency of the debtor, he is given
a preferential right under the above article to
recover the remainder as against the new
creditor.